HEARTLAND GROUP INC, N-30D, 1996-03-06

HEARTLAND GROUP INC
N-30D, 1996-03-06

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<PAGE> 1
[logo] Heartland Funds
Annual Report
December 31, 1995

[photo of people]

Small Cap Contrarian Fund
Value Fund
Value & Income Fund
U.S. Government Securities Fund

<PAGE> 2

FROM THE PRESIDENT...

[photo of Bill Nasgovitz]

Dear Fellow Heartland Investor,

Mutual fund shareholders enjoyed one of the strongest bull
markets in history in 1995. The upsurge was led by blue-chip
stocks, the technology sector and long-term quality bonds. In
our view, this tremendous increase in both stocks and bonds
was due to a number of factors including:

- a low rate of inflation and a steep decline in interest rates
- sharply higher corporate profits
- record breaking equity mutual fund inflows
- speculative fervor in equities, particularly IPO's

I am pleased to report that all four of our national Funds produced
outstanding returns for the year as outlined below:

<TABLE>

5-yr. 10-yr.
1995 avg. avg. annual
return annual or life of fund
------ ------ ---------------
<S> <C> <C> <C>
SMALL CAP CONTRARIAN 20.8% since 20.8%
Maximum long-term growth through inception
value investing in small stocks. 4/27/95
Utilizes aggressive strategies to
take advantage of both rising and, to
a lesser degree, declining markets.

VALUE (closed to new investors 7/1/95) 29.8 27.3% 14.3
Seeks long-term capital appreciation
through investment in small company
stocks selected on a value basis.

VALUE & INCOME 24.4 n/a 10.6
Value stocks and bonds to provide
current income and capital growth.

U.S. GOVERNMENT SECURITIES 19.0 10.3 9.3
Seeks high current income, liquidity
and safety of principal through a
bond portfolio actively managed for
total return.

</TABLE>

The performance data quoted represents past performance. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.

<PAGE> 3

FEBRUARY 16, 1996

Last year investors were handsomely rewarded, but we should realize that
today's bull market in stocks is exceptional:

- It has been over five years since the Dow Jones Industrial Average
has experienced a correction of 12% or more, the longest such period in
market history.

- The S&P 500's 37.5% gain last year was the best in 38 years.

The past does not predict the future, but a review of historical rates of
return should provide guidance. The long-term return on common stocks since
1926 has averaged 10.5%, but over the past 15 years the stock market has
returned 14.8% per year. Going forward I believe we are likely to experience
returns closer to the long-term average.
Given these considerations, it seems clear the financial markets are
currently offering up more than their usual degree of risk. My intention is not
to alarm you, but rather to encourage you to BE REALISTIC IN YOUR EXPECTATIONS
FOR FUTURE INVESTMENT RETURNS.
For the years ahead I believe A WELL DIVERSIFIED PORTFOLIO OF COMMON
STOCKS AND BONDS SELECTED ON A VALUE BASIS should provide the strength and
resilience necessary to combat more difficult market conditions.
Our family of mutual funds has been assembled to provide a sensible
diversification, and outlined below is my perception of the relative
risk/reward of each Fund.

[graphic -- A bar diagram displays Funds available through Heartland in the
context of a risk/reward spectrum. The left side of the diagram shows the
Portico Money Market followed by the U.S. Government Securities Fund below
"lower risk/reward." The Value & Income Fund falls in the middle of the
spectrum, with the Value Fund followed by the Small Cap Contrarian Fund
appearing on the right of the diagram beneath "higher risk/reward."]

In today's climate, many of our shareholders have chosen to diversify
their assets across the entire group. I encourage you to examine each of our
Funds carefully and select those that meet your specific investment needs.
As always your Heartland Representatives are ready to provide you further
information on any of our Funds or services. Thank you for your continued trust
and confidence.

Sincerely,

William J. Nasgovitz
William J. Nasgovitz

* Source: Ibbotson Associates, Chicago. Based on historic performance of the S&P
500, an unmanaged index of common stocks.

2
<PAGE> 4

SMALL CAP CONTRARIAN FUND

[graphic - A line chart illustrates the performance of an assumed investment of
$10,000 in the Heartland Small Cap Contrarian Fund and the Russell 2000 Index
beginning on April 27, 1995 as follows:

<TABLE>
<CAPTION>
Heartland Small
Cap Contrarian Fund Russell 2000
<S> <C> <C>
9/30/95 $11,690 $11,789
12/31/95 12,082 12,045

</TABLE>

Legend in graph states that Past Performance is not predictive of future
returns.

A box in the graph states Total Return as of 12/31/95 of 20.8% since inception
4/27/95 (not annualized).]

- -MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

Our newest Fund was up 20.8% since inception on April 27, 1995. This total
return exceeded the Russell 2000, an unmanaged small-cap index, but trailed
slightly the widely followed S&P 500 Index for the period.

<TABLE>
<CAPTION>
SINCE INCEPTION 4/27/95 TO 12/31/95
<S> <C>
SMALL CAP CONTRARIAN FUND 20.8%
Russell 2000 Index 20.4
S&P 500 Index 22.3
</TABLE>

Management is pleased with this performance since the Fund took a somewhat
defensive posture in reaction to what we consider an overvalued market and held
a large percentage of assets, averaging 25% for the year, in cash equivalents.
Our strategy on the long side is to focus our research efforts on
small-cap stocks with market values of less than $500 million. We believe over
the long-term this asset class offers the best capital appreciation potential.
Most of these small stocks are not widely known, undiscovered by "Wall Street"
analysts, and therefore, in our view, tend to be inefficiently priced, offering
exceptional opportunity.
The Fund's largest position, Campbell Resources, now 4% of assets, is a
good example. Campbell, a Canadian based gold producer, was acquired at less
than 10X earnings and at book value. Although listed on the New York Stock
Exchange, we felt Campbell was underfollowed by the "Street," having no major
research coverage. As of February 12, 1996, the Fund's 3.4 million share
position has appreciated nearly 50% as Campbell's profitability and prospects
have become more widely known.
At year's end we have assembled a well diversified portfolio of over 60
value stocks selling at low prices to

<PAGE> 5

Management's Discussion of Fund Performance - cont'd.

earnings, cash flows and book values. At the same time, the Fund has sold
short about a dozen stocks which we feel are grossly overpriced in relation to
their intrinsic worth. These are Wall Street's "high flyers," in our opinion
overvalued, where investor expectations are in the stratosphere leaving little
room for error.
This two-pronged strategy of buying small cap value for potential
appreciation and selling short over-priced growth issues worked well in 1995
and we believe it should contribute to positive performance in the years ahead.

- -HEARTLAND SMALL CAP CONTRARIAN FUND

THE FUND UTILIZES AN AGGRESSIVE INVESTMENT STRATEGY WITH SMALL COMPANY STOCKS
TO TAKE ADVANTAGE OF BOTH RISING AND, TO A LESSER DEGREE, DECLINING MARKETS.

SMALL COMPANY FOCUS
for capital appreciation potential

VALUE INVESTMENT STRATEGY
attempting to limit downside risk

AN AGGRESSIVE INVESTMENT APPROACH
The Small Cap Contrarian Fund will sell short stocks (up to 25% of the Fund's
assets) we believe to be overvalued, and make use of both futures and options
to hedge the portfolio. Furthermore, the manager has the flexibility to have up
to 25% of the Fund's assets leveraged for additional appreciation potential.
These investment techniques may involve additional risks. Please refer to the
prospectus for more details.

[graphic - A pie chart displays categories of the Small Cap Contrarian Fund's
portfolio as of 12/31/95: cash at 11.7%; shorts at 8.9%; small-cap value
stocks at 79.4%]

WHAT IS CONTRARIAN INVESTING?
At Heartland we describe "contrarian investing" as doing the opposite of what
most are doing at any particular time. It's believing that the majority is
generally wrong in its collective evaluation of a particular security or
industry. According to contrary opinion, if everyone is certain that something
is about to happen, it won't.
We believe market participants habitually overreact, led by inaccurate
expectations. For example, we find value in certain stocks that are
out-of-favor with investors who extrapolate poor past performance too far into
the future. Similarly, excellent past performance of growth stocks is often
extrapolated too far into the future by investors as they bid them to the
stratosphere. We believe both of these overzealous expectations lead to
inefficient pricing and opportunities for contrarian investors.

<PAGE> 6

VALUE FUND

[graphic - A line chart illustrates the performance of an assumed investment of
$10,000 in the Heartland Value Fund and the Russell 2000 Index beginning on
12/31/85 as follows:

<TABLE>
<CAPTION>
Heartland
Value Fund Russell 2000
---------- ------------
<S> <C> <C>

12/31/85 $14,094 $13,105
12/31/86 15,637 13,848
12/31/87 14,318 12,635
12/31/88 18,190 15,780
12/31/89 19,385 18,342
12/31/90 16,072 14,763
12/31/91 24,005 21,562
12/31/92 34,201 25,532
12/31/93 40,620 30,360
12/31/94 41,316 29,806
12/31/95 53,629 38,283

</TABLE>

Legend in graph states that Past Performance is not predictive of future
returns.

A box in the graph states Average Annual Total Returns as of 12/31/95 as
follows:

<TABLE>
<S> <C>
one year 29.8%
five year 27.3%
ten year 14.3%
since inception 12/28/84 16.5%]
</TABLE>

- -MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

The Value Fund had an excellent year in 1995, returning 29.8%. Once again, the
Fund outperformed the Russell 2000 Index of small-cap stocks, maintaining its
superior long-term performance record.
We attribute this success to superior stock selection through our "bottoms
up" investment process which seeks out what we feel are undervalued, often
out-of-favor, securities offering excellent capital appreciation prospects. Our
objective is to capture the capital appreciation potential of small stocks (as
outlined on page 11) while utilizing the defensive characteristics of our value
style to protect in more difficult market conditions.
Throughout 1995 we avoided the ups and downs of what we consider to be the
over-valued technology sector. In addition, we retained a somewhat defensive
posture with a high cash position which averaged 19%. In light of the rapid
growth in assets and our commitment to maximizing returns, we closed the Fund
to new investors on July 1, 1995.
At year's end, the Fund's portfolio was well diversified, spread across 19
industries and over 240 small-capitalization stocks. Also, we have maintained a
true small-cap portfolio with a median market cap of only $59 million at year
end.
We believe that 1996 is likely to be a good year for investors in small
stocks. Many of the positive factors that drove the market last year are still
in place; interest rates should continue to trend downward and corporate
profits should post gains, but at significantly reduced levels from 1995. In
this environment, we anticipate that investors, in search of growth, will
continue to allocate assets to the small-cap sector and the Value Fund should
be a beneficiary.

<PAGE> 7

- -HEARTLAND VALUE FUND

THE FUND COMBINES THE SUPERIOR LONG-TERM CAPITAL APPRECIATION OF SMALL COMPANY
STOCKS WITH THE DEFENSIVE NATURE OF VALUE INVESTING.

We take pride in another year of outstanding performance, but most
meaningful is our long-term record of outperforming our benchmark, the Russell
2000 Index:

<TABLE>
<CAPTION>
since
inception
AVERAGE ANNUAL TOTAL RETURNS 12/28/84 1 year 5 year 10 year
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HEARTLAND VALUE FUND . . . . . . . 16.5% 29.8% 27.3% 14.3%
Russell 2000 Index . . . . . . . . 13.0 28.4 21.0 11.3
S&P 500 Index . . . . . . . . . . . 16.2 37.5 16.6 14.8
</TABLE>

In addition, according to Lipper Analytical Services, of 486 equity funds
in existence since December of 1984, ONLY 79, OR 16%, OUTPERFORMED THE S&P 500
INDEX THROUGH DECEMBER 31, 1995.* WE ARE PROUD TO BE IN THAT ELITE GROUP. We
attribute our record of outperformance to our disciplined, systematic
investment approach which puts every stock under consideration though a ten
point value test which includes:

LOW PRICE-TO-EARNINGS

A low price-to-earnings ratio (P/E) not only provides the opportunity for
substantial price appreciation from upside earnings surprises, it can also act
to support a stock during weak markets. Low P/E is the cornerstone of
Heartland's value philosophy.

LOW PRICE-TO-CASH-FLOW

Strong cash flows allow a company to generate greater wealth over the
long-term. Companies that generate excess cash flow can use it to augment
working capital, increase dividends or repurchase shares.

LOW PRICE-TO-BOOK VALUE

Low price-to-book values can suggest that a stock is trading at a discount to
its tangible value, and can offer considerable support in a poor market. While
the S&P 500 is currently trading at a record 4X book, Heartland's research team
searches for small company stocks selling at or below book value.

* The S&P 500 Index is an unmanaged index of 500 stocks representing major U.S.
industries. Small company stocks may be more volatile than those of the S&P
500.

<PAGE> 8

VALUE & INCOME FUND

[graphic - A line chart illustrates the performance of an assumed investment of
$10,000 in the Heartland Value & Income Fund, S&P 400 Mid-Cap Index and the
Lehman Intermediate Corporate Bond Index beginning on 10/26/93 as follows:

<TABLE>
<CAPTION>
Heartland
Value & Income Fund S&P 400 Lehman Corporate
------------------- ------- ----------------
<S> <C> <C> <C>
12/31/93 $10,522 $10,386 $ 9,984
12/31/94 10,000 10,013 9,718
12/31/95 12,441 13,112 11,564
</TABLE>

Legend in graph states that Past Performance is not predictive of future
returns.
A box in the graph states Average Annual Total Returns as of 12/31/95
as follows:

<TABLE>
<S> <C>
one year 24.4%
since inception 10/26/93 10.6%]
</TABLE>

- -MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

The Fund had a good year in 1995, producing a total return of 24.4%. This
trailed that produced by the S&P Mid-Cap Index, but handsomely outperformed the
Lehman Intermediate Corporate Bond Index. Since the Fund invests in stocks and
bonds, with the allocation based on our assessment of economic conditions and
investment opportunities, we are comparing our results to both of these
indices.
The Fund paid dividends totaling $0.41 per share, ending the year with an
annualized yield of 4.6% for December.
In anticipation of lower interest rates in 1995, we positioned the
portfolio with a high exposure to intermediate bonds, utility stocks and other
interest sensitive securities. As interest rates dropped, these issues
increased in value and positively contributed to the Fund's performance. The
Fund was also invested in a diversified group of value stocks, averaging about
58% of the portfolio for the year.
We are pleased with our equity returns, especially given the Fund's
relatively low exposure to what we consider to be the overvalued technology
sector.
For 1996 we are more cautious, but believe that interest rates are likely
to fall further over the next several months and, if correct, the bond portion
of our portfolio should perform admirably. Equities could have a somewhat
bumpier ride if the current economic slowdown begins to reduce corporate
profitability. However, the portfolio is conservatively balanced between bonds
and low P/E common stocks with high cash reserves. We believe this
diversification, coupled with our value approach to stock selection, should
reduce risk while providing appreciation potential in the year ahead.

<PAGE> 9

- -HEARTLAND VALUE & INCOME FUND

THE FUND'S OBJECTIVE IS TWO-FOLD: TO PROVIDE CAPITAL GROWTH AND
CURRENT INCOME.

[graphic - A pie chart displays categories of the Value & Income Fund's
portfolio as of 12/31/95: cash and cash equivalents at 18.6%; common stocks at
35.2%; utilities & preferred stocks at 15.3%; and bonds at 30.9%.]

LOOKING FOR GROWTH WITH LESS RISK
Through any market cycle, there are periods that clearly favor stocks and
others in which bonds have the upper hand.
We enter 1996 with our portfolio conservatively positioned for yield with
46.2% in corporates, convertible bonds, utility stocks and high-yielding
preferreds. For potential growth we have acquired a portfolio of quality low
P/E common stocks which account for 35.2% of assets.
Finally, to stabilize the portfolio in any market downturn and to add
flexibility, cash and cash equivalents are 18.6%. For the near term we
anticipate a continuation of this careful posture, but as an actively managed
fund, this mix may change at any time based on market conditions.

STABILITY OF DIVIDENDS

Dividends tend to stabilize total return by providing an income
"cushion" for investors during market downturns. The Fund generates quarterly
income from a mix of dividend-paying stocks, preferred stocks, convertible
bonds and fixed income securities. The Value & Income Fund pays dividends
quarterly or will reinvest them at NAV.

CURRENT YIELD . . . . 4.2%

January SEC yield annualized for the 30 days commencing 1/1/96.

WHO SHOULD OWN THE VALUE & INCOME FUND?
More conservative investors who want the benefits of both common stocks and
bonds, but prefer that professional management determine the allocations.

"PRUDENT INVESTORS MAINTAIN A BALANCE OF STOCKS AND BONDS IN THEIR PORTFOLIOS."

- -- Bill Nasgovitz

<PAGE> 10

U.S. GOVERNMENT SECURITIES FUND

[graphic - A line chart illustrates the performance of an assumed investment
of $10,000 in the Heartland U. S. Government Securities Fund, Lehman
Intermediate Treasury Index and the Lipper Average U.S. Government Fund
beginning on 4/9/87 as follows:

<TABLE>
<CAPTION>
Heartland Lehman Lipper
Fund Treasury Average
--------- -------- -------
<S> <C> <C> <C>
12/31/87 $10,191 $10,241 $9,944
12/31/88 10,847 10,883 10,731
12/31/89 12,072 12,264 12,055
12/31/90 13,276 13,423 13,035
12/31/91 15,529 15,315 14,934
12/31/92 17,096 16,377 15,867
12/31/93 20,142 17,725 17,343
12/31/94 18,200 17,272 16,537
12/31/95 21,656 19,761 19,406
</TABLE>

Legend in graph states that Past Performance is not predictive of future
returns.

A box in the graph states Average Annual Total Returns as of 12/31/95 as
follows:

<TABLE>
<S> <C>
one year 19.0%
five year 10.3%
since inception 4/9/87 9.3%]

</TABLE>

- -MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE

The Heartland U.S. Government Securities Fund had the best year in its history,
with a return of 19.0%. As you can see from the graph above, the Fund
outperformed by a significant margin both the Lehman Brothers Intermediate
Treasury Index (up 14.4%) and the Lipper Average U.S. Government Fund (up
17.3%).
Nineteen ninety-five saw a rebound in the bond market after a dismal 1994.
The yield on the 30-year Treasury bond dropped from 7.88% at the end of 1994 to
5.95% at the end of 1995, resulting in substantially higher prices for
intermediate and long term bonds. We believe the drop in long-term interest
rates was due to a slowing economy, low inflation and the stabilization of the
U.S. dollar versus other major currencies.
Under our active management strategy, we lengthened the average maturity
of the Fund in anticipation of rallies in the bond market and shortened
maturities when we believed the market was due for a correction. Our average
maturity was as long as 15.7 years in July and as short as 0.4 years in April.
During the year, we decreased our holdings of intermediate term Treasuries and
cash equivalents in order to invest in long term zero coupon Treasuries and
mortgage-backed securities. The mortgage-backed securities were selected to
generate attractive yield as well as present substantial capital gain
potential. Zero coupon bonds, on the other hand, were purchased solely for
capital gain purposes as they pay no interest, but their prices tend to
increase dramatically when interest rates decline substantially. In fact, the
value of the Fund's zero coupon bonds did rise as interest rates fell during
the year.
These strategies worked well for our shareholders in 1995. During 1996, we
expect interest rates to continue moving lower and believe the Fund is well
positioned to benefit from these lower rates.

<PAGE> 11

- -HEARTLAND U.S. GOVERNMENT SECURITIES FUND

THE FUND'S INVESTMENT OBJECTIVES ARE A HIGH LEVEL OF CURRENT INCOME,
LIQUIDITY AND SAFETY OF PRINCIPAL.

WHY SETTLE FOR AN "ORDINARY" BOND FUND?
The Heartland U.S. Government Securities Fund is ACTIVELY MANAGED to provide
ATTRACTIVE MONTHLY INCOME and EXCELLENT TOTAL RETURN POTENTIAL. We believe this
sets it apart from most government securities funds.

ATTRACTIVE MONTHLY INCOME
With a January yield of 5.9%,* the U.S. Government Securities Fund provides
attractive, dependable monthly income which can be paid out or automatically
reinvested in the Fund.

EXCELLENT TOTAL RETURN
The story doesn't end with monthly income. In addition to an attractive yield,
we strive to provide additional return in the form of a higher share price or
capital gains distributions.
The Fund's average annual total returns through December 31, 1995 are 19.0%,
10.3% and 9.3% for one-year, five years and since inception on April 9, 1987.

ACTIVE MANAGEMENT
We seek to provide attractive monthly income and excellent total return by
actively managing the Fund to take advantage of opportunities in the bond
market. This active management strategy has three major components:

- - We shorten or extend the average maturity of the Fund based on our
interest rate outlook.

- - We emphasize those sectors of the bond market that we feel offer the
best value - Treasuries, agencies, mortgage-backed securities, zero
coupon bonds, etc.

- - We invest a small portion of the Fund in corporate bonds that we believe
offer bargain yields and compelling total return potential.

HOW DO WE COMPARE TO OTHER GOVERNMENT SECURITIES FUNDS?

[graphic - A bar graph compares the Average Annual Total Returns of the
Heartland U. S. Government Securities Fund with the Lipper Average U.S.
Government Fund benchmark through 12/31/95 as follows:

<TABLE>
<CAPTION>
Heartland Fund Lipper Average
<S> <C> <C>
one year 19.0% 17.3%
five year 10.3% 8.4%
since inception 4/9/87 9.3% 7.9%]
</TABLE>

The Lipper Average U.S. Government Fund benchmark reflects the performance
of 191 general U.S. government funds as tracked by Lipper Analytical Services,
Inc.

* SEC yield annualized for the 30 days commencing 1/1/96.

<PAGE> 12

WHY SMALL STOCKS?

WE BELIEVE EVERY
INVESTOR LOOKING
FOR CAPITAL
APPRECIATION
SHOULD
HAVE A PORTION
OF THEIR HOLDINGS
IN SMALL-CAP
FUNDS.

At Heartland, we believe a diversified portfolio of small company stocks offers
investors the potential to achieve superior returns. As illustrated by the
chart below, a Merrill Lynch study shows that since 1973, $1 invested in small
company stocks (those with market caps between $50 and $500 million) would have
grown to $22, almost twice the performance of large company stocks. Over the
same twenty-two years, a $1 investment in micro-cap stocks (those with market
caps less than $50 million) grew to $43, nearly four times greater than an
investment in large stocks.
In our view, the markets for small and micro-cap stocks are inefficient.
By this we mean that most "Wall Street" analysts spend their time researching
only the largest publicly traded companies in the U.S. As a result, a large
number of smaller companies with solid fundamentals have yet to be discovered.
For the Heartland Value and Small Cap Contrarian Funds, we search for
bargains within the universe of over 10,000 companies we believe are neglected
by Wall Street. In addition to extensive research and financial review, our
analysts visit over 500 companies a year. We feel Heartland's disciplined value
approach to small company investing leads us to stocks that others have not yet
found, but are ripe for discovery. We believe in the power of long-term
investing in small stocks.

- -FOR OVER 20 YEARS, SMALL STOCKS HAVE OUTPERFORMED LARGE

[graphic - A line graph compares the relative U.S. equity performance by size
by charting the total return for every $1 invested from 12/73 through 12/95 in
different market sectors:

<TABLE>
<S> <C>
Micro-cap $43
Small-cap $22
Mid-cap $18
Large-cap $12]
</TABLE>

Micro and small-cap stocks may be more volatile than large-cap stocks. Past
performance is no indication of future results and the illustrated returns are
not indicative of the performance of a Heartland Fund.

<PAGE> 13

SHAREHOLDER SERVICES

- -PERSONAL HEARTLAND REPRESENTATIVE
You can speak to a personal Heartland representative between the hours of 7:00
a.m. and 6:30 p.m. CST, Monday through Friday and 8:30 a.m. to 12:30 p.m. CST
on Saturday.

- -FREQUENT UPDATES BY PORTFOLIO MANAGERS
Concerned about the financial markets? Wondering how your Fund is currently
positioned? Heartland shareholders have free access to regular updates recorded
by each Fund's portfolio manager. Call 24 hours a day.

- -LOW MINIMUM INVESTMENT
Open a regular account with a low initial investment of $1000, or an IRA with
$500. Monthly automatic investment plans begin with no initial minimum and $50
a month minimum thereafter.

- -AUTOMATED SERVICES
Automated options include daily prices, account information including your last
two transactions, and prospectus and literature requests. Call 24 hours a day.

[photo of Shareholder Services Team]

- -AUTOMATIC INVESTMENT PLAN
Make automatic regular investments into any Heartland Fund directly from your
checking account on a monthly or twice-monthly basis.

- -FREE INVESTMENT SEMINARS
Heartland sponsors both local and national investment seminars. You can request
free tickets to the various ISI Money Shows we sponsor. They are a great
opportunity to meet your portfolio managers and visit with other nationally
recognized financial advisors.

1-800-432-7856
(1-800-HEARTLN)

<PAGE> 14

SCHEDULES OF INVESTMENTS
AND FINANCIAL STATEMENTS

PAGE FUND
---- -------------------------------
14 Small Cap Contrarian Fund
22 Value Fund
36 Value & Income Fund
42 U.S. Government Securities Fund

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of Heartland Small Cap Contrarian
Fund, Heartland Value Fund, Heartland Value & Income Fund, and Heartland U.S.
Government Securities Fund:

We have audited the accompanying schedule of investments, including the
statements of assets and liabilities, of Heartland Small Cap Contrarian Fund,
Heartland Value Fund, and Heartland Value & Income Fund, and the statement of
net assets of Heartland U.S. Government Securities Fund (collectively the
"Funds," four of the series comprising Heartland Group, Inc., a Maryland
corporation) as of December 31, 1995 and the related statements of operations
for the period then ended, the statements of changes in net assets for each of
the periods presented, and the financial highlights for the periods then ended.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Funds as of December 31, 1995, the results of operations for the periods then
ended, the changes in net assets for each of the periods presented, and the
financial highlights for each of the periods then ended in conformity with
generally accepted accounting principles.

Milwaukee, Wisconsin Arthur Andersen LLP
February 9, 1996

<PAGE> 15
HEARTLAND SMALL CAP CONTRARIAN FUND
(A Series of Heartland Group, Inc.)
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1995

SHARES QUOTED
HELD COMMON STOCKS - 80.1% MARKET VALUE
NOTE 1 (a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS - 9.8%
8,000 Beverly Bancorporation - Community bank serving southwest Chicago............................ $ 520,000
5,000 Cardinal Bancshares, Inc. - Banking company in KY operates a consumer finance company ........ 295,000
10,000 * CB Bancorp, Inc. - Holding company for Community Bank in IN .................................. 172,500
50,000 * Community Financial Corporation - Holding company in southern IL ............................. 650,000
25,000 Foothill Independent Bancorp - Holding company operating in suburban Los Angeles ............. 200,000
104,167 * Highland Federal Bank - Real estate mortgage lender .......................................... 1,614,588
5,000 Home Federal Bancorp - Holding company for Home Federal Savings Bank ......................... 132,500
7,500 * Homecorp, Inc. - A thrift with nine offices in northern IL ................................... 123,750
50,000 * Imperial Thrift & Loan Association - Provides lending and deposit services in CA ............. 612,500
45,000 * Mountain Parks Financial Corporation - Holding company which owns two banks in CO ............ 1,001,250
17,500 * Professional Bancorp, Inc. - A bank specializing in servicing the medical industry ........... 218,750
35,000 Security Capital Corporation - Holding company for Security Bank S.S.B. in WI ................ 2,108,750
60,000 * Union Bankshares, Ltd. - Offers commercial banking services to the Denver area (Note 6) ...... 705,000
---------
8,354,588

COMMUNICATIONS - 4.3%
120,600 * Communications Central, Inc. - Provides pay phones and inmate phones .......................... 542,700
50,000 * NTN Canada, Inc. - Offers 24 hour entertainment network programming throughout Canada ......... 262,500
154,500 * Ortel Corporation - Manufactures, markets, sells and supports a broad range of fiber optics.... 1,738,125
82,500 * TCI International, Inc. - Manufactures special purpose communications equipment ............... 680,625
29,000 * Tollgrade Communications, Inc. - Telecommunications supplier .................................. 435,000
---------
3,658,950

ENERGY & NATURAL RESOURCES - 11.2%
210,000 * Alta Gold Company - Gold producer ............................................................. 328,125
3,000,000 * Campbell Resources, Inc. - Explores for and produces gold and minerals in N. America .......... 3,000,000
54,000 * Callon Petroleum Company - Operates 1,500 oil wells ........................................... 540,000
150,000 * Lomak Petroleum, Inc. - Ohio-based natural gas company ........................................ 1,462,500
100,000 * Solid State Geophysical, Inc. - Markets its services to the petroleum industry ................ 231,290
446,400 * Serv-Tech, Inc. - Offers maintenance services to petroleum refining industry (Note 6) ......... 2,622,600
250,000 * Tuboscope Vetco International Corporation - Services, products to the oil and gas industry .... 1,421,875
---------
9,606,390
ENTERTAINMENT - 1.1%
125,000 * Acres Gaming, Inc. - Manufactures and markets electronic casino games ......................... 640,625
107,500 * Quality Dino Entertainment, Ltd. - International music producer ............................... 309,063
---------
949,688

ENVIRONMENTAL SERVICES - 3.8%
138,000 * GNI Group, Inc. - Recycles, reclaims, treats and disposes hazardous wastes .................... 914,250
200,000 * Harding Associates, Inc. - Remediator of contaminated waste sites ............................. 1,200,000
502,000 * Vectra Technologies, Inc. - Provider of services to nuclear facilities (Note 6) ............... 1,129,500
3,243,750
FINANCE - 0.4%
100,000 * Autoinfo, Inc. - Provides information services to the repair industry ......................... 337,500
15,000 * Olympic Financial, Ltd. - Sells and services retail automobile installment loans .............. 243,750
(15,000) * Olympic Financial, Ltd. ....................................................................... (243,750)
---------
337,500

FOOD & BEVERAGE - 0.3%
360,000 * Family Steak Houses of Florida, Inc. - Operates 28 restaurants in northern and central Florida. 281,268
---------
281,268
HEALTH CARE SERVICES - 10.9%
181,100 ICN Pharmaceuticals, Inc. - Develops, mfg. pharmaceutical/nutritional products ................. 3,486,175
516,700 * Interpore International - Manufactures bone graft material for the orthopedic mkt. (Note 6) .... 2,648,087
468,000 * Syncor International Corporation - Distributes radio-pharmaceuticals to hospitals and clinics .. 3,159,000
---------
9,293,262
</TABLE>

1
<PAGE> 16

HEARTLAND SMALL CAP CONTRARIAN FUND
(A Series of Heartland Group, Inc.)
SCHEDULE OF INVESTMENTS - [CONT'D] - December 31, 1995

<TABLE>
<CAPTION>
QUOTED
SHARES MARKET VALUE
HELD COMMON STOCKS - [CONT'D] NOTE 1 (a)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE - 3.9%
150,000 * American Physicians Service Group, Inc. - Management services for doctors and hospitals ............. $ 1,443,750
37,250 Cotton States Life & Health Insurance - Underwrites life, accident and health insurance ............. 335,250
38,700 * Transport Holdings, Inc. (Class A) - Underwrites, distributes supplemental health insurance ......... 1,577,025
-----------
3,356,025
LEISURE - 1.1%
180,000 * Vacation Break USA, Inc. - Vacation ownership interests in premium resorts .......................... 967,500
-----------
967,500
MANUFACTURING - 8.1%
50,000 * Align-Rite International, Inc. - Photo masks used to produce integrated circuits .................... 575,000
135,000 * Ceradyne, Inc. - Manufactures technical ceramic products ............................................ 767,813
100,000 * Consep, Inc. - Develops and produces environmentally safe pest control products ..................... 275,000
20,000 * Dynamic Materials Corporation - Produces chemical processing materials .............................. 55,000
100,000 * Northwest Pipe Company - Manufactures and markets welded steel pipe ................................. 1,098,440
75,000 * Portec, Inc. - Produces railroad, construction and materials handling equipment ..................... 721,875
300,000 * Winsloew Furniture, Inc. - Designs, distributes and manufactures casual furniture ................... 1,762,500
100,000 Shelter Components Corp. - Manufactured housing products and distribution ........................... 1,637,500
5,000 * Shiloh Industries, Inc. - Steel processor supplying to automotive and other industries .............. 60,625
-----------
6,953,753
MARKETING/CORPORATE SERVICES - 3.4%
55,000 LCS Industries, Inc. - Provides computer related direct response marketing services ................. 770,000
200,000 * Personnel Management, Inc. - Temporary personnel services in FL and IN (Note 6) ..................... 1,575,000
891,000 * RCM Technologies, Inc. - Provides temporary and full-time professional services (Note 6) ............ 556,875
-----------
2,901,875
MEDICAL PRODUCTS - 4.0%
30,000 * Hycor Biomedical, Inc. - Manufactures and sells medical diagnostic devices .......................... 131,250
650,000 * Mednet MPC Corporation - Pharmacy benefits and prescription mail service ............................ 1,462,500
58,000 * Moore Medical Corporation - Pharmaceutical and medical products distributor ......................... 623,500
132,100 New Brunswick Scientific, Inc. - Manufactures and markets biotechnology equipment.................... 759,575
47,000 * Sullivan Dental Products, Inc. - Distributes consumable dental supplies ............................. 446,500
-----------
3,423,325
RETAIL - 10.1%
355,400 * Allou Health & Beauty, Inc. (Class A) - Health and beauty products (Note 6) ......................... 2,132,400
10,000 Dart Group Corporation (Class A) - Diversified retailer ............................................. 935,000
250,000 * Chico's Fas, Inc. - Operates retail women's clothing stores ......................................... 1,093,750
225,200 * Coast Distribution System - Distributes recreational vehicle and marine parts and accessories ....... 1,351,200
35,700 * Crown Book Corporation - Owns and manages 247 retail book stores offering discount prices ........... 437,325
201,400 Fred's, Inc. (Class A) - Operates 188 discount general merchandise stores ........................... 1,510,500
700,000 * Harmony Brook, Inc. - Distributes and operates water filtering equipment (Note 6) ................... 612,500
25,000 * Hello Direct, Inc. - Telecommunications products to business end-users through catalog sales ........ 168,750
110,000 * Little Switzerland, Inc. - Retailer in the Caribbean Islands ........................................ 426,250
-----------
8,667,675
TECHNOLOGY - 5.1%
50,000 * Diehl Graphsoft, Inc. - Develops and publishes computer software products ........................... 325,000
410,000 * Digital Biometrics, Inc. - Produces and mkts. fingerprint recording and ID products (Note 6) ........ 2,306,250
100,000 * Forefront Group, Inc. - Markets and supports applications software over the internet ................ 837,500
20,000 * Hutchinson Technology, Inc. - Manufactures components for computer disk drives ...................... 845,000
-----------
4,313,750
TRANSPORTATION - 2.6%
3,500 * Midwest Express Holdings, Inc. - All first-class airline from Omaha and Milwaukee.................... 97,125
310,000 Tower Air, Inc. - Provider of scheduled passenger air services ...................................... 2,092,500
-----------
2,189,625
-----------
TOTAL COMMON STOCKS (Cost $67,471,572)............................................................... $68,498,924
</TABLE>

2
<PAGE> 17

HEARTLAND SMALL CAP CONTRARIAN FUND
(A Series of Heartland Group, Inc.)
SCHEDULE OF INVESTMENTS - [CONT'D] - December 31, 1995

PAR AT COST
AMOUNT SHORT-TERM INVESTMENTS - 19.8% COUPON MATURITY NOTE 1 (a)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISCOUNT NOTES - 17.5%
$5,000,000 Federal Home Loan Mortgage Corporation ............ 5.640% 01/02/1996 $ 4,999,217
10,000,000 Federal Home Loan Mortgage Corporation ............ 5.640 01/08/1996 9,989,034
----------
14,988,251

VARIABLE RATE DEMAND NOTES - 2.3%
968,000 Eli Lilly and Company ............................. 5.315 01/02/1996 968,000
315,000 Sara Lee Corporation .............................. 5.467 01/02/1996 315,000
325,000 Southwestern Bell Telephone Company ............... 5.720 01/02/1996 325,000
381,000 Warner-Lambert Company ............................ 5.458 01/02/1996 381,000
----------
1,989,000
----------
SHORT-TERM INVESTMENTS (Cost $16,977,251) .......................................................... 16,977,251
----------
TOTAL INVESTMENTS - 99.9% (Cost $84,448,823) (+) ..................................................$ 85,476,175
==========
<CAPTION>

QUOTED
MARKET VALUE
SHARES SHORT SALES NOTE 1 (a)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
30,000 America Online, Inc. - Provides on-line services to consumers in the U.S...........................$ 1,125,000
20,000 Baby Superstore, Inc. - Retailer of non-food baby and young children's products.................... 1,140,000
4,000 Eastbay, Inc. - Markets athletic products through catalogs ......................................... 79,000
25,000 Incomnet, Inc. - Develops software and hardware for interactive networks ........................... 114,063
30,000 Informix Corporation - Develops and markets computer software ...................................... 900,000
30,000 Oracle Corporation - Designs, develops, markets and supports computer software products............. 1,271,250
25,000 Picturetel Corporation - Manufactures and markets visual telecommunications systems................. 1,078,125
10,000 Sensormatic Electronics Corporation - Manufactures electronic surveillance equipment............... 173,750
25,000 Starbucks Corporation - Purchases and sells high-quality whole bean coffees ........................ 525,000
35,000 Summit Technology, Inc. - Medical devices used in ophthalmic laser ................................. 1,181,250
----------
TOTAL SHORT SALES (Proceeds $7,563,358)............................................................$ 7,587,438
==========
</TABLE>

* Non-income producing security.
(+) Percentages for the various classifications relate to total net assets.

The accompanying notes to financial statements are an integral
part of this schedule.

3
<PAGE> 18

HEARTLAND SMALL CAP CONTRARIAN FUND
(A Series of Heartland Group, Inc.)
STATEMENT OF ASSETS AND LIABILITIES - December 31, 1995

<TABLE>
<S> <C>
ASSETS:
Investments in securities, at quoted market value
-- non-affiliated companies (cost $69,496,375) ....................... $71,187,962
-- affiliated companies (cost $14,952,448) ........................... 14,288,213
Cash ..................................................................... 568,360
Deposits with brokers for investments sold short ......................... 1,123,725
Receivable from fund shares sold ......................................... 827,617
Receivable from investments sold ......................................... 1,001,250
Receivable from investments sold short ................................... 7,879,870
Accrued dividends and interest ........................................... 15,158
Deferred organization expense (Note 3) ................................... 42,729
----------
Total assets ......................................................... 96,934,884
----------

LIABILITIES:
Securities sold short, at current market value (proceeds $7,563,358) ..... 7,587,438
Payable for investments purchased ........................................ 3,331,467
Payable for fund shares redeemed ......................................... 387,399
Payable for distributions ................................................ 1,163
Payable to transfer agent ................................................ 13,367
Variation margin on open futures contracts (Note 1) ...................... 22,750
Payable to Advisor for deferred organization expense (Note 3) ............ 42,729
----------
Total liabilities .................................................... 11,386,313
----------

NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 7,256,249 shares
outstanding) ............................................................. $85,548,571
==========

NET ASSET VALUE PER SHARE
Net asset value and offering price per share ($.001 par value, 100,000,000
shares authorized [$85,548,571/7,256,249 shares outstanding]).. .......... $11.79
==========
</TABLE>

STATEMENT OF OPERATIONS
For the period from April 27, 1995 (commencement of operations)
to December 31, 1995

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest .................................................................. $527,254
Dividends ................................................................. 51,682
----------
Total investment income ............................................... 578,936
----------
EXPENSES:
Management fees (Note 2) .................................................. 172,583
Transfer agent fees ....................................................... 59,148
Distribution fees (Note 2) ................................................ 57,402
Custodian fees ............................................................ 11,165
Registration fees ......................................................... 10,697
Postage ................................................................... 9,084
Amortization of organization expenses (Note 3) ............................ 6,003
Printing and communications ............................................... 5,851
Legal fees ................................................................ 2,665
Directors' fees ........................................................... 667
Other operating expenses .................................................. 5,148
----------
Total expenses ........................................................ 340,413
----------
Net investment income ..................................................... 238,523
----------

REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS-NET:
NET REALIZED GAINS ON INVESTMENTS (Long transactions) ..................... 2,000,801
NET REALIZED LOSSES ON INVESTMENTS (Short transactions) ................... (199,675)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS FOR THE PERIOD...... 1,027,647
----------
NET GAINS ON INVESTMENTS .............................................. 2,828,773
----------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................... $ 3,067,296
==========
</TABLE>

The accompanying notes to financial statements are an integral
part of these statements.

4
<PAGE> 19

HEARTLAND SMALL CAP CONTRARIAN FUND
(A Series of Heartland Group, Inc.)
STATEMENT OF CHANGES IN NET ASSETS
For the period from April 27, 1995 (commencement of operations)
to December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATIONS:
Net investment income .................................................... $ 238,523
Net realized gains on investments ........................................ 1,801,126
Net increase in unrealized appreciation on investments ................... 1,027,647
---------------
Net increase in net assets resulting from operations ................ 3,067,296
---------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income ($.03 per share) ................ (238,523)
Distributions from net realized gains on investments ($.26 per share) .... (1,801,125)
---------------
Total distributions ................................................. (2,039,648)
---------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (7,979,895 shares) ........................... 92,981,836
Net asset value of shares issued in reinvestment of distributions from net
investment income and net realized gains (165,607 shares) ................ 1,950,847
Cost of shares redeemed (889,253 shares) ................................. (10,411,760)
---------------
Net increase in net assets derived from Fund share activities ....... 84,520,923
---------------

TOTAL INCREASE AND NET ASSETS AT DECEMBER 31, 1995 ........................... $ 85,548,571
===============

</TABLE>

FINANCIAL HIGHLIGHTS

For the period from April 27, 1995 (commencement of operations)
to December 31, 1995
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
Net asset value, beginning of period ..................................... $ 10.00

Income from investment operations:
Net investment income ................................................. 0.03
Net realized and unrealized gains on investments ...................... 2.05
---------------

Total from investment operations ...................................... 2.08
Less distributions:
Dividends from net investment income .................................. (0.03)
Distributions from net realized gains ................................. (0.26)
---------------

Total distributions ................................................... (0.29)

Net asset value, end of period ........................................... $ 11.79
===============
Total return ............................................................. 20.8% (1)

Supplemental data and ratios:
Net assets, end of period (in thousands) .............................. $ 85,549
Ratio of expenses to average net assets ............................... 1.44% (2)
Ratio of net investment income to average net assets .................. 1.01% (2)
Portfolio turnover rate ............................................... 45% (1)
</TABLE>

(1) Not annualized (2) Annualized

The accompanying notes to financial statements are an integral
part of these statements.

<PAGE> 20
HEARTLAND SMALL CAP CONTRARIAN FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The Heartland Small Cap Contrarian Fund ("The Fund") is a separate series
of Heartland Group, Inc. The assets and liabilities of each portfolio of
Heartland Group, Inc. are segregated with a shareholder's interest limited
to the portfolio in which the shareholder owns shares. The Fund's
investment objective is maximum long-term growth. The Fund seeks to
achieve its objective through aggressive, yet flexible, value investing in
small company stocks. The following is a summary of significant
accounting policies of the Fund:

(a) Each security is valued at the last sale price reported by the
principal security exchange on which the issue is traded, or if no
sale is reported, the latest bid price. Net realized gains and losses
on investments are computed on the first-in, first-out cost method.
Short-term investments are recorded at cost which approximates
market. Debt securities having maturities of 60 days or less may be
valued at acquisition cost, plus or minus any amortized discount OR
or premium.

(b) Provision has not been made for Federal income taxes since the
Fund has elected to be taxed as a "regulated investment company" and
intends to distribute substantially all income to its shareholders
and otherwise comply with the provisions of the Internal Revenue
Code applicable to regulated investment companies.

(c) Net investment income and undistributed capital gains are distributed
to shareholders annually and recorded on the ex-dividend date. The
amount of dividends and distributions from net investment income and
net realized capital gains is determined in accordance with Federal
income tax regulations, which may differ from generally accepted
accounting principles. To the extent these book and tax differences
are permanent in nature, such amounts are reclassified to paid-in
capital in excess of par value.

(e) The Fund may enter into futures contracts to provide protection
against adverse movements in the prices of securities in the
portfolio. Upon entering into futures contracts, the Fund pledges to
the broker stock or U.S. government securities equal to the minimum
"initial margin" requirements of the exchange. Additionally, the
Fund receives from or pays to the broker an amount of cash equal to
the daily fluctuation in value of the contract. Such receipts or
payments are known as "variation margin," and are recorded by the
Fund as unrealized gains or losses. When the futures contract is
closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was
opened and the value at the time it was closed.

The use of futures contracts involves, to varying degrees, elements
of market risk in excess of the amount recognized in the statements
of assets and liabilities. The predominant risk is that the movement
of the futures contracts price may result in a loss which could
render the portfolio's hedging strategy unsuccessful. Futures
contracts open at December 31, 1995, were as follows:

Collateral Contracts Expiration Unrealized Appreciation
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10,500 Security Capital Corp. 45 S&P 500 short Mar. 1996 $16,875
15,000 Shelter Components 20 S&P 500 short Mar. 1996 7,500
</TABLE>

(f) The Fund may enter into transactions where it will sell a security
short (sell a security which the Fund does not then own for delivery
at a future date) and borrow the same security from a broker or other
institution to complete the sales. The predominant risk is that the
market price may decrease or increase between the date of the short
sale and the date on which the Fund must replace the borrowed
security. As collateral for its short positions, the Fund is required
under the 1940 Act to maintain segregated assets consisting of cash
or equity securities. These segregated assets are required to be
adjusted daily to reflect changes in the value of the securities sold
short.

<PAGE> 21
HEARTLAND SMALL CAP CONTRARIAN FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONT'D) - DECEMBER, 31, 1995

The Fund may also engage in "short sales against the box",
transactions which involve selling a security that the Fund owns (or
has an unconditional right to purchase) for delivery at a specified
date in the future. Similarly, the Fund may also engage in short
sales of securities of an issuer ("acquiror") that has publicly
announced a proposed or pending transaction in which a portfolio
security of the Fund will be converted into securities of the
acquiror. These techniques are intended to hedge protectively against
anticipated declines in the market price of the Fund's portfolio
securities or to defer any unrealized gain.

(g) The preparation of financial statements in conformity with
generally accepted accounting principles 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 amount of
revenues and expenses during the reporting period. Actual results
could differ from the estimates.

2) INVESTMENT ADVISOR, MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES.
The Fund has a management agreement with Heartland Advisors, Inc. (the
"Advisor") with whom certain officers and directors of the Fund are
affiliated, to serve as investment advisor and manager. Under the terms of
the agreement, the Fund will pay the Advisor a monthly management fee at
the annual rate of .75% of the daily net asset value of the Fund.

The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Distributor is
Heartland Advisors, Inc. (the "Distributor") with whom certain officers
and directors of the Fund are affiliated. The Plan requires the Fund to
pay the Distributor a quarterly distribution fee on an annual basis up to
.25% of its daily net assets. In addition, for the period from April 27,
1995 (commencement of operations) to December 31, 1995, the
Distributor received $43,741 from the Fund for brokerage fees on the
execution of purchases and sales of portfolio investments.

As permitted under Rule 10f-3 of the Investment Company Act of 1940, the
Board of Directors of the Fund has adopted a plan which will allow the
Fund, under certain conditions described in the Rule, to acquire
newly-issued securities from syndicates in which the Distributor is a
member.

3) DEFERRED ORGANIZATION EXPENSES.
Organization expenses have been deferred and are being amortized on a
straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor who will be reimbursed by the Fund over the same
period. The proceeds of any redemption of the initial shares by the
original shareholders will be reduced by a pro-rata portion of any then
unamortized expenses. Unamortized deferred organization expenses and the
related payable to the Advisor at December 31, 1995 were $42,729.

4) INVESTMENT TRANSACTIONS.
For the period from April 27, 1995 (commencement of operations) to
December 31, 1995, the cost of purchases and the proceeds from sales of
investment securities (excluding short-term securities) were $78,619,737
and $9,278,828, respectively.

5) SOURCES OF NET ASSETS.

As of December 31, 1995, the sources of net assets were as follows:

<TABLE>
<S> <C>
Fund shares issued and outstanding ................................ $84,520,924
Net unrealized appreciation on investments and futures ............ 1,027,647
----------
$85,548,571
==========
</TABLE>

Aggregate gross unrealized appreciation (depreciation) as of December 31,
1995, based on investment cost for Federal income tax purposes is as
follows:

<TABLE>
<S> <C>
Aggregate gross unrealized appreciation ........................... $ 5,037,235
Aggregate gross unrealized depreciation ........................... (4,033,963)
Unrealized appreciation on open futures contracts ................. 24,375
----------
Net unrealized appreciation on investments and futures contracts .. $1,027,647
==========
</TABLE>

7
<PAGE> 22
HEARTLAND SMALL CAP CONTRARIAN FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS (CONT'D) - DECEMBER 31, 1995

6) Transactions with Affiliates.
The following companies are affiliated with the Fund; that is, the Fund
holds 5% or more of the outstanding voting securities. Such companies are
defined in Section (2)(a)(3) of the Investment Company Act of 1940.

<TABLE>
<CAPTION>
Share Balance Dividends Realized
Security Name Purchases Sales at Dec. 31, 1995 Received Gains (Losses)
- -------------------------- --------- ----- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C>

Allou Health & Beauty (Class A) 355,400 0 355,400 $0 $0
Digital Biometrics, Inc. 410,000 0 410,000 0 0
Harmony Brook, Inc. 700,000 0 700,000 0 0
Interpore International 516,700 0 516,700 0 0
Personnel Management, Inc. 200,000 0 200,000 0 0
RCM Technologies, Inc. 891,000 0 891,000 0 0
Serv-Tech, Inc. 446,400 0 446,400 0 0
Union Bankshares, Ltd. 60,000 0 60,000 0 0
Vectra Technologies, Inc. 502,000 0 502,000 0 0

</TABLE>

8
<PAGE> 23

HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1995

QUOTED
SHARES MARKET VALUE
HELD COMMON STOCKS - 79.4% NOTE 1 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AEROSPACE - 1.6%
214,800 * Banner Aerospace, Inc - Distributes replacement parts to aviation/aerospace industries ................ $1,235,100
504,900 * ECC International Corp. - Mfg. flight simulators and vending machines (Note 5) ........................ 5,553,900
155,600 * FLIR Systems, Inc. - Manufactures thermal imaging systems that detect infrared radiation .............. 1,906,100
212,300 Mercury Air Group, Inc. - Ground services to commercial airlines and the military ..................... 1,857,625
266,300 * Sifco Industries, Inc. - Metal working processes for aerospace and auto industries (Note 5) ........... 1,431,363
1,100,000 * UNC, Inc. - Manufactures engine and airframe parts (Note 5) ........................................... 6,600,000
----------
18,584,088
BANKS AND SAVINGS & LOANS - 7.4%
100,000 Alabama National Bancorporation - Rural Alabama bank .................................................. 1,350,000
42,025 Beverly Bancorporation - Community bank serving Southwest Chicago (Note 5) ............................ 2,731,625
30,000 BSB Bancorp, Inc. - Savings bank in the southern tier of New York ..................................... 742,500
78,900 * Calumet Bancorp, Inc. - Chicago thrift that generates residential mortgages in several states ......... 2,189,475
200,000 Coastal Bancorp, Inc. - Texas-based savings and loan association ...................................... 3,500,000
100,000 Conservative Savings Corp. - Thrift serving Omaha, NE area (Note 5) ................................... 1,400,000
169,600 D & N Financial Corp. - Operates full service branch offices in central and N. MI ..................... 2,056,400
110,500 Eagle Financial Corp. - Savings bank operating 24 offices in Connecticut .............................. 2,900,625
204,500 First Federal Bancshares of Eau Claire - Operates 13 retail banking offices in central Wisconsin....... 3,118,625
67,800 First Federal of Alabama F.S.B. - Operates four branches in Central and S.E. Alabama (Note 5).......... 1,220,400
500,000 First Financial Corp. - Serves WI and S. IL from approximately 124 locations .......................... 11,500,000
74,000 First Northern Savings Bank, S.A. - Green Bay, WI savings bank, assets of $558 million ................ 1,221,000
135,000 Franklin Bank National Association - Business bank serving suburbs of Detroit, MI ..................... 1,755,000
105,000 * Hallmark Capital Corp. - One bank holding company in West Allis, WI (Note 5) .......................... 1,627,500
250,000 * HMN Financial, Inc. - Recently converted thrift serving Rochester, MN market .......................... 4,000,000
104,568 * Investors Financial Services, Inc. - Administration services for the financial services industry ...... 2,169,786
17,216 * Investors Financial Services, Inc. (Class A) .......................................................... 357,232
24,500 Leader Financial Corp. - Banking services through 22 retail branch offices in TN ...................... 915,688
75,000 MAF Bancorp, Inc. - Market share leader in Dupage County, IL. ......................................... 1,875,000
180,000 N.S. Bancorp, Inc. - Savings & Loan operating six branches in Cook County, IL ......................... 6,975,000
100,000 Massbank Corp. - Serves customers in the Middlesex County area in E. MA ............................... 3,175,000
327,100 * Metropolitan Bancorp - Holding co. for Seattle-based Metropolitan Federal S & L (Note 5) .............. 4,252,300
24,000 National City Bancorp. - Bank svcs. commercial/personal/installment loans and mortgages ............... 510,000
100,000 Northwest Equity Corp. - WI holding company for Northwest Savings Bank (Note 5) ....................... 1,087,500
224,000 * Redwood Empire Bancorp - Holding co. for a bank and thrift in N. San Francisco (Note 5) ............... 1,792,000
36,500 SJNB Financial Corp. - General commercial banking services in San Francisco area ...................... 488,188
154,000 St. Francis Capital Corp. - WI holding company for St. Francis Bank ................................... 3,580,500
(20,000) St. Francis Capital Corp. ............................................................................. (465,000)
68,000 State Financial Services Corp. - Milwaukee area multi-bank holding company ............................ 1,173,000
275,000 * Sterling Financial Corp. - Multi-branch savings bank serving WA and OR (Note 5) ....................... 3,781,250
141,420 * Transworld Bancorp - Commercial bank serving N. Los Angeles with 11 offices (Note 5) .................. 2,121,300
205,600 Trans Financial, Inc. - Bank holding company operating 54 branch offices in KY and TN ................. 3,675,100
39,200 United Federal Savings Bank - Commercial banking services in South Carolina ........................... 294,000
136,300 * United Security Bancorp - General banking services through eight branches in E. WA .................... 1,874,125
264,000 Virginia First Financial Corp. - Banking services through 8 offices in Spokane area ................... 3,003,000
100,000 Webster Financial Corp. - Serves over 140,000 customers through its offices located in CT ............. 2,950,000
67,000 Westerfed Financial Corp. - Thrift holding company in Montana ......................................... 1,113,875
----------
88,011,994
COMMUNICATION/SECURITY - 1.4%
2,000,000 * Automated Security Holdings, PLC. (ADR) - Sells and services electrical security systems ............. 1,500,000
481,000 * Cobra Electronics - Designs/markets communications and audio electronics (Note 5) .................... 1,443,000
276,000 * Norstan, Inc. - Distributes and services private telephone systems (Note 5) ........................... 6,969,000
</TABLE>

9
<PAGE> 24
HEARTLAND VALUE FUND
(A SERIES OF HEARLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1995

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
QUOTED
SHARES MARKET VALUE
HELD COMMON STOCKS - 79.4% NOTE 1 (A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATION/SECURITY - [CONT'D]
1,500,000 * Peoples Telephone Company, Inc. - Privately-owned pay telephones (Note 5) .....................$ 3,468,750
144,500 * Total-Tel USA Communications, Inc. - A discount long distance telephone company (Note 5) ....... 3,540,250
-----------
16,921,000

CONSTRUCTION/HOUSING - 3.4%
75,000 * Belmont Homes, Inc. - Produces and markets single and double section manufactured homes ........ 1,359,375
200,000 * Crossmann Communities, Inc. - Builds single family homes in Indianapolis/Lafayette, IN ......... 3,750,000
500,000 Engle Homes, Inc. - FL homebuilder and developer (Note 5) ...................................... 4,250,000
356,600 * Greiner Engineering, Inc. - Engineering firm specializing in transportation projects (Note 5) .. 4,814,100
260,000 MYR Group, Inc. - Constructs transmission systems for electric utilities (Note 5) .............. 2,762,500
100,000 * Miller Building Systems, Inc. - Builder and marketer of modular structures ..................... 325,000
418,800 * Morgan Products, Ltd. - Manufactures and distributes specialty building products ............... 2,460,450
250,000 Patrick Industries, Inc. - Wholesale distributor of building products and materials ............ 3,562,500
156,500 * Rottlund Company, Inc. - Minneapolis-based single family home builder .......................... 1,095,500
100,000 Ryland Group, Inc. - National homebuilder and mortgage-related finance firm .................... 1,400,000
350,000 Schult Homes Corp. - Designs and builds manufactured homes (Note 5) ............................ 6,125,000
700,100 * URS Corp. - Architectural and engineering services to local and state governments (Note 5) ..... 4,900,700
200,000 Watsco, Inc. - Manufacturer and distributor of air conditioning equipment ...................... 3,575,000
-----------
40,380,125
EDUCATION - 0.1%
405,000 * American Educational Products, Inc. - Sells educational materials to teachers/schools (Note 5) 708,750
-----------
708,750
ENERGY/NATURAL RESOURCES - 4.1%
500,000 * American Oilfield Divers, Inc. - Undersea construction/repair for oil/gas industry (Note 5) .... 3,562,500
250,000 * Chieftain International, Inc. - Explores/produces oil and natural gas in Gulf of Mexico ........ 4,437,500
505,000 * Clayton Williams Energy, Inc. - Acquires, explores, and produces oil and natural gas (Note 5) 1,641,250
360,000 * Cliffs Drilling Company - Contract drilling services in TX/LA Gulf Coast region (Note 5) ....... 5,310,000
300,000 * Dreco Energy Services, Ltd. (Class A) - Mfg./markets downhole machines and equipment ........... 5,325,000
837,700 * ERC Industries, Inc. - Manufactures and services oilfield wellhead equipment (Note 5) .......... 732,988
518,500 * Evergreen Resources, Inc. - Gas exploration, development and production (Note 5) ............... 2,592,500
100,000 * Hallwood Consolidated Resources Corp. - Owns interest in 2,000 oil and gas wells (Note 5) ...... 2,375,000
200,000 Howell Corp. - Explores, produces and refines oil and natural gas and processes chemicals ...... 2,875,000
1,070,000 * International Colin Energy Corp. - Explores/produces oil and natural gas (Note 5) .............. 5,082,500
123,755 Mining Services International Corp. - Develops explosives technology for the mining industry 819,877
490,000 St. Mary Land & Exploration - Oil and gas exploration (Note 5) ................................. 6,860,000
300,000 * Tipperary Corp. - Explores, develops and produces oil and gas .................................. 1,462,500
750,000 * Tuboscope Vetco International Corp. - Services and products to the oil and gas industry ....... 4,265,625
200,000 * Unit Corp. - Oil and gas contract drilling company ............................................. 950,000
370,000 * Universal Seismic, Inc. - Provides scientific seismic data to oil and gas companies (Note 5) ... 1,017,500
-----------
49,309,740

ENVIRONMENTAL SERVICES - 2.5%
2,843,300 * Allwaste, Inc. - Provides industrial waste handling, processing, and transportation (Note 5) .. 13,505,675
1,000,000 * Biosys, Inc. - Develops natural bioinsecticides for state and local governments (Note 5). ..... 2,750,000
363,300 * GZA GeoEnvironmental Technologies, Inc. - Environmental consulting services (Note 5) .......... 1,271,550
2,750,000 * Mid American Waste Systems, Inc. - Solid waste management business (Note 5) ................... 9,625,000
700,000 * Vectra Technologies - Provides products, services for nuclear facilities (Note 5) ............. 1,575,000
100,000 * Weston Roy F. (Class A) - Consulting, engineering and project management services ............. 512,500
-----------
29,239,725

FINANCE - 3.3%
322,100 * Advest Group, Inc. - Brokerage, trading, investment banking, leasing/asset management ......... 2,737,850
185,200 Atlanta/Sosnoff Capital Corp. - Investment mgmt. firm with over $3.6 billion in client assets . 2,685,400

</TABLE>

10
<PAGE> 25
HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS [CONT'D] - DECEMBER 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
QUOTED
SHARES MARKET VALUE
HELD COMMON STOCKS - [CONT'D] NOTE 1 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE - [CONT'D]
320,000 Eaton Vance Corp. - Advisor to mutual funds ........................................................ $ 9,040,000
187,500 Inter-Regional Financial Group, Inc. - Full service regional securities broker with 83 offices ..... 4,734,375
222,704 * Kinnard Investments, Inc. - Brokerage services with 22 offices, affiliated banks and S&L's ........ 807,302
943,000 * Payco American Corp. - Nationwide accounts receivable manager (Note 5) ............................. 8,487,000
210,000 Raymond James Financial, Inc. - Securities brokerage, investment banking, financial planning ....... 4,436,250
200,000 Stifel Financial Corp. - Securities brokerage with 64 offices located in Central U.S. .............. 1,325,000
107,000 Student Loan Corp. - Originates, holds and services guaranteed student loans ....................... 3,638,000
400,000 * Sunrise Resources, Inc. - Leasing of new/used electronic data processing equipment (Note 5) ........ 1,300,000
-----------
39,191,177

FOOD/BEVERAGE - 1.7%
34,500 Hanover Foods, Inc. (Class A) - Produces and markets prepared foods ................................ 1,569,750
700,000 * North Star Universal, Inc. - Holding co. w/interest in Michael Foods and Corvel Corp. (Note 5) ..... 5,425,000
430,000 * Summit Family Restaurant, Inc. - Family style restaurants (Note 5) ................................. 2,365,000
457,000 Stokely USA, Inc. - A leading domestic producer of canned and frozen vegetables .................... 2,313,563
276,100 Thorn Apple Valley, Inc. - Slaughters hogs/provides packaged meat and poultry products ............. 4,624,675
250,000 * Timber Lodge Steakhouse, Inc. - Operates restaurants in Minneapolis/St. Paul area (Note 5) ......... 687,500
490,000 * Todhunter International, Inc. - Produces citrus-based brandy, distilled spirits and wine (Note 5) .. 3,797,500
-----------
20,782,988

HEALTH CARE SERVICE - 12.7%
347,000 * AHI Healthcare Systems, Inc. - Integrates physicians into managed health care networks ............. 1,995,250
105,500 * American Healthcorp, Inc. - Offers diabetes treatment services and owns surgery centers ............ 1,002,250
700,000 Applied Bioscience International, Inc. - Conducts toxicological studies and provides R&D ........... 4,725,000
243,900 * Caretenders Healthcorp - Provides home nursing and rehabilitative services (Note 5) ................ 1,432,913
1,000,000 * Coastal Physicians Group, Inc. - Provides medical group management services ........................ 13,500,000
974,400 * Grancare, Inc. - Operates 80 long-term health care facilities ...................................... 14,128,800
242,400 * Health Power, Inc. - Managed health care holding company (Note 5) .................................. 2,030,100
424,900 Hooper Holmes, Inc. - Provides health information to the insurance industry (Note 5) ............... 3,452,313
620,000 * Hospital Staffing Services, Inc. - Provides interim duty medical staff to hospitals (Note 5) ....... 1,240,000
2,100,005 ICN Pharmaceuticals, Inc. - Develops, mfg. pharmaceutical/nutritional products (Note 5) ............ 40,425,096
300,000 * Integrated Health Services, Inc. - Operates 192 facilities for rehabilitation and pharmacy svcs .... 7,500,000
850,000 * Maxicare Health Plans, Inc. - Managed health care insurer and HMO operator in CA and IN ............ 22,843,750
(100,000) * Maxicare Health Plans, Inc. ........................................................................ (2,687,500)
532,500 * Meadowbrook Rehabilitation Group, Inc. - Provides rehabilitation services (Note 5) ................. 532,500
313,500 * Psicor, Inc. - Supplies personnel to operate heart-lung machines in hospitals (Note 5) ............. 5,427,469
916,500 * Quantum Health Resources, Inc. - Deliver alternate site therapies and services (Note 5) ............ 8,993,156
520,000 * Ramsay Health Care, Inc. - One of the largest psychiatric services companies (Note 5) .............. 1,690,000
131,283 * Ramsay Managed Health Care, Inc. - Provides managed behavioral health services ..................... 262,566
299,000 * Regency Health Services, Inc. - Operator of California healthcare facilities ....................... 3,027,375
793,800 RightChoice Managed Care (Class A) - Offers managed health care products and services .............. 10,319,400
213,802 * Star Multi Care Services, Inc. - Proprietary and custodial health care svcs. and staffing (Note 5) . 1,683,691
338,300 United Wisconsin Services, Inc. - Group health insurance and HMO operator .......................... 7,442,600
252,000 * Zynaxis, Inc. - Biotechnology company engaged in new therapeutic delivery systems .................. 220,500
-----------
151,187,229

HOME APPLIANCES - 0.8%
591,400 Toastmaster, Inc. - Makes small electrical appliances (Note 5) ..................................... 2,365,600
922,500 Windmere Corp. - Manufactures/distributes small electric appliances (Note 5) ....................... 6,572,813
-----------
8,938,413

INSURANCE - 9.1%
300,000 American Eagle Group, Inc. - Property and casualty coverage to aviation/trucking industries ........ 3,337,500
200,000 Amwest Insurance Group, Inc. - Underwrites a variety of surety bonds (Note 5) ...................... 3,050,000
</TABLE>

11
<PAGE> 26
HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS (CONT'D) - DECEMBER 31, 1995

LEISURE - 5.2%
120,500 American Recreation Centers, Inc. - Operates bowling centers ....................................... 768,188
325,000 * Baldwin Piano & Organ Company - Manufactures pianos and electric organs (Note 5) ................... 4,062,500
225,000 Barefoot, Inc. - Provides residential lawn care services ........................................... 2,362,500
116,000 * Buckhead America Corp. - Mortgage servicing and hotel management services (Note 5) ................. 739,500
170,000 * ERO, Inc. - Markets children's products which feature popular licensed characters .................. 1,020,000
1,125,750 * Grand Casinos, Inc. - Develops, manages land-based and dockside casinos, bingo facilities .......... 26,173,688
1,000,000 * Iwerks Entertainment, Inc. - Movie-based specialty theaters for the
entertainment mkt. (Note 5)....................................................................... 6,390,600
65,000 La Crosse Footwear, Inc. - Protective, industrial and recreational footwear ........................ 568,750
75,000 Marcus Corp. - Operates restaurants, theaters, hotels and motels ................................... 2,053,125
200,000 Matthews International Corp. (Class A) - Custom-made identity products ............................. 3,900,000
236,000 * Sholodge, Inc. - Franchiser of Shoney's Inn and AmeriSuites hotels ................................. 2,242,000
925,000 Stratosphere Corp. - Owns and operates the Stratosphere Tower and Casino in Las Vegas .............. 9,134,375
400,000 * Trimark Holdings, Inc. - Distributor of home videos and feature films (Note 5) ..................... 2,500,000
-----------
61,915,226
MANUFACTURING - 7.1%
268,500 Acme Cleveland Corp. - Mfg. industrial metalworking, telecommunication, electronic prod. ........... 5,034,375
1,000,000 * Alpine Group, Inc. - Mfg. industrial copper wire, cable and refractory products (Note 5) ........... 4,375,000
206,500 * Arden Industrial Products, Inc. - National distributor of specialty and standard fasteners ......... 1,006,688
1,000,000 * Astec Industries, Inc. - Asphalt plants, milling and paving equipment (Note 5) ..................... 9,875,000
100,000 Badger Meter, Inc. - Producer of fluid meters and flow valves (Note 5) ............................. 2,650,000
500,000 * Cherry Corp. (Class A) - Mfg. mechanical/electronic switches and semiconductor products ............ 4,875,000
150,500 * Dakotah, Inc. - Designs, manufactures and markets home fashion furnishings ......................... 583,188
692,500 * Devlieg-Bullard, Inc. - Precision engineered machine tools (Note 5) ................................ 1,558,125
134,200 * Encore Wire Corp. - Copper electrical building wire for commercial and residential uses ............ 1,308,450
311,500 * Gehl Company - Manufactures/markets agricultural and construction equipment (Note 5) ............... 2,219,438
100,000 * Jason, Inc. - Automotive trim products, precision components and power generation products ......... 650,000
240,000 * Kentucky Electric Steel Company, Inc - Owns and operates a mini steel mill ......................... 1,980,000
100,000 Martin Industries, Inc. - Manufactures gas space heaters, gas
logs, fireplaces and office furniture............................................................. 875,000
350,000 Masland Corp. - N. American manufacturer of automotive floor and acoustic systems .................. 4,900,000
380,000 * Medalist Industries, Inc. - Produces and distributes industrial fasteners (Note 5) ................. 2,280,000
200,000 Memtec, Ltd. (ADR) - Develops and produces membrane and other filtration products .................. 3,325,000
300,000 * MFRI, Inc. - Manufacturer and marketer of filter bags, related parts and accessories (Note 5) ...... 1,875,000
172,560 Mosinee Paper Corp. - Industrial specialty and tissue paper products producer ...................... 4,443,420
387,200 * NYCOR, Inc. - Manufactures components for heating and cooling systems (Note 5) ..................... 1,984,400
341,400 * NYCOR, Inc. (Class A) (Note 5) ..................................................................... 1,664,325
</TABLE>

12
<PAGE> 27
HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS (CONT'D) - DECEMBER 31, 1995

<TABLE>
<CAPTION>
QUOTED
SHARES MARKET VALUE
HELD COMMON STOCKS - (CONT'D) NOTE 1 (a)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
MANUFACTURING - [CONT'D]
600,000 * Powell Industries, Inc. - Designs/mfg/sells electrical power generation products (Note 5) .......... $ 4,950,000
144,100 Reliance Steel & Aluminum Co. - Full-line distributor and processor of steel and aluminum .......... 2,990,075
185,500 * Rexworks, Inc. - Manufactures and sells concrete and waste disposal equipment (Note 5) ............. 394,188
87,500 Salem Corp. - Designs and installs heavy industrial equipment ...................................... 1,837,500
426,000 * Spartech Corp. - Single and multi-layer plastic for spas, showers, and signs ....................... 2,982,000
250,000 * Specialty Paperboard, Inc. - Largest domestic supplier of heavyweight pressboard (Note 5) .......... 3,062,500
315,500 * Starcraft Corp. - Converter of custom vans, sport utility vehicle and trucks (Note 5) .............. 1,419,750
200,000 * Strattec Security Corp. - Designs, develops, manufactures and markets automotive locks ............. 3,550,000
300,000 Wescast Industries, Inc. (Class A) - Exhaust manifolds for cars and trucks to "Big 3" automakers.... 2,887,500
500,000 Winnebago Industries, Inc. - Manufactures recreational vehicles..................................... 3,875,000
------------
85,410,922
MARKETING/CORPORATE SERVICE - 2.0%
250,000 * Career Horizons, Inc. - Temporary personnel to businesses and individuals .......................... 8,437,500
(50,000) * Career Horizons, Inc. .............................................................................. (1,687,500)
368,500 LCS Industries, Inc. - Provides computer related direct response marketing services (Note 5) ....... 5,159,000
1,300,000 * Luminart, Inc. - Develops products to help achieve visual effects in signage display (Note 5) ...... 1,861,340
269,000 * M/A/R/C, Inc. - Provides market research, database marketing and counseling services (Note 5) ...... 3,934,125
150,000 * Norwood Promotional Products, Inc. - Supplies custom imprinted promotional products ................ 2,550,000
300,000 * Outlook Group Corp. - Printing/packaging/dist. of sports cards, food and printing (Note 5) ......... 1,875,000
175,000 * Varitronic Systems, Inc. - Develops electronic print-on-tape lettering systems (Note 5) ............ 1,881,250
------------
24,010,715
MEDICAL PRODUCTS - 4.5%
450,000 * Aequitron Medical, Inc. - Home health care and hospital products (Note 5) .......................... 3,431,250
181,200 Allied Healthcare Products, Inc. - Medical gas and respiratory therapy equipment ................... 2,899,200
200,000 * Gish Biomedical, Inc. - Devices for use in cardiovascular and orthopedic surgery (Note 5) .......... 1,550,000
325,000 * Hauser Chemical Research, Inc. - Processes chemicals for use in drugs .............................. 1,462,500
500,000 * MDT Corp. - Develops, mfgs., markets and services sterility assurance systems (Note 5) ............. 2,437,500
375,000 * Marquette Electronics, Inc. (Class A) - Mfg. of medical electronic monitoring equipment ............ 7,593,750
264,000 * Maxxim Medical, Inc. - Diversified medical products manufacturer and supplier ..................... 4,422,000
243,700 * Medical Graphics Corp. - Computerized diagnostic systems for heart and lung disease (Note 5) ....... 1,203,269
341,000 Mentor Corp. - Produces implantable medical devices and disposable devices ......................... 7,843,000
300,000 * OEC Medical Systems, Inc. - Manufactures computer based medical instruments ........................ 2,925,000
428,000 * Orthologic Corp. - Develops noninvasive therapeutic bone growth stimulation devices (Note 5) ...... 6,206,000
(28,000) * Orthologic Corp. - ................................................................................. (406,000)
438,000 * Rehabilicare, Inc. - Electromedical rehab. and pain management products (Note 5) ................... 1,587,750
540,000 * Sullivan Dental Products, Inc. - Consumable dental supplies, equipment to dentists (Note 5) ........ 5,130,000
400,000 Sterile Concepts Holdings - Produces surgical and clinical custom procedure trays (Note 5) ......... 5,800,000
------------
54,085,219
RETAIL - 6.5%
550,000 * Action Industries, Inc. - Merchandising programs (Note 5) .......................................... 343,750
206,900 * Amrion, Inc. - Markets dietary supplements and other consumer products ............................. 2,146,580
450,000 * Dairy Mart Convenience Stores, Inc. (Class A) - Over 1,000 convenience stores (Note 5) ............. 2,531,250
900,000 * Damark International, Inc. (Class A) - Direct marketer of brand name merchandise (Note 5) .......... 6,750,000
978,200 * Designs, Inc. - Operates 120 specialty retail stores selling Levi Strauss & Co. apparel (Note 5).... 6,847,400
290,000 * Duckwall-ALCO Stores, Inc. - Discount retailer in central United States (Note 5) ................... 2,972,500
200,000 * Funco, Inc. - Interactive home entertainment from purchase and resale of video games ............... 575,000
1,200,600 * Gibson Greetings, Inc. - Greeting cards and wrapping paper (Note 5) ................................ 19,209,600
720,000 * Harmony Brook, Inc. - Water filtering equipment (Note 5) ........................................... 630,000
365,000 * HealthRite, Inc. - Vitamins, dietary supplements, nutrition and personal care products (Note 5)..... 730,000
850,000 Hi-Lo Automotive, Inc. - Retails automotive replacement parts (Note 5) ............................. $ 4,356,250

</TABLE>

13
<PAGE> 28

HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS (CONT'D) * DECEMBER 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
QUOTED
SHARES MARKET VALUE
HELD COMMON STOCKS [CONT'D] NOTE 1(a)
- -------------------------------------------------------------------------------------------------------------------------------
RETAIL - [CONT'D]
<S> <C> <C> <C>
322,900 * Oneita Industries, Inc. - Manufactures and sells high quality blank t-shirts for screenprinting .. $ 2,098,850
400,000 * Roberds, Inc. - Operates retail outlets of home furnishing products (Note 5) ..................... 3,600,000
785,800 Shopko Stores, Inc. - Regional discount store concentrated in the upper Midwest .................. 8,840,250
700,000 * Sports & Recreation, Inc. - Sells sporting goods in "Sports Unlimited" superstores ............... 4,987,500
516,000 * Supercuts, Inc. - Nationwide franchiser of haircare stores ....................................... 4,128,000
366,500 * Trak Auto Corp. - Retail auto parts stores (Note 5) .............................................. 5,589,125
25,000 Weyco Group, Inc. - Manufacturer and retailer of quality shoes ................................... 937,500
------------
77,273,555
TECHNOLOGY - 4.8%
1,000,000 * Aura Systems, Inc. - Manufacturer of electronic components and audio loudspeakers ................. 5,625,000
50,000 * BancTec, Inc. - Manufacturer of computerized check processing systems ............................. 925,000
280,000 * CSP, Inc. - Manufacturer of array processors to enhance computer speed (Note 5) ................... 2,520,000
1,600,000 * Computer Products, Inc. - Manufactures products for industrial data processing (Note 5) ........... 18,400,000
( 100,000) * Computer Products, Inc. ........................................................................... (1,150,000)
350,000 * Effective Management Systems, Inc. - Integrated business management software (Note 5) ............. 1,575,000
75,000 * FDP Corp. - Sells and supports computer applications software systems ............................. 590,625
500,000 * GBC Technologies, Inc. - National wholesaler of microcomputer products (Note 5) ................... 4,593,750
653,100 * IEC Electronics Corp. - Complex printed circuit boards and electronic products (Note 5) ........... 5,714,625
175,000 * Mizar, Inc. - Manufactures computer subsystems used in real-time image processing ................. 1,487,500
280,000 Netframe Systems, Inc. -Specialized computer systems for local area networks ...................... 1,487,500
515,000 * Odetics, Inc. (Class A) - Intelligent machines to collect digital and analog data (Note 5) ........ 4,377,500
249,400 * Perle Systems, Ltd - Designs proprietary data communication networking hardware and software ...... 1,247,000
320,000 * PolyVision Corp. - Custom designed display products for schools, banks and offices ................ 660,000
424,400 Quixote Corp. - Manufactures compact and optical discs (Note 5) ................................... 3,289,100
500,000 Technology Research Corp. - Devices for electric power distribution (Note 5) ...................... 2,000,000
335,000 * Zytec Corp. - Designs and manufactures custom electronic power supplies (Note 5) .................. 3,852,500
------------
57,195,100
TRANSPORTATION - 1.2%
500,000 * Amtran, Inc. - Provides charter and selective scheduled airline services to leisure travelers ..... 6,375,000
212,000 * Marten Transport, Ltd. - Long-haul refrigerated motor carrier (Note 5) ............................ 3,498,000
150,000 MTL, Inc. - Transports industrial chemicals and bulk food products by tank truck .................. 2,100,000
294,700 * Trism, Inc. - Trucking co. carrying heavy machinery, explosives, radioactive materials (Note 5) ... 1,768,200
------------
13,741,200
------------
TOTAL COMMON STOCKS (Cost $797,010,288) ............................................................ $945,566,454

<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
QUOTED
SHARES MARKET VALUE
HELD PREFERRED STOCK - 0.2% NOTE 1 (a)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3,330,000 * Automated Security Holdings 6.0% - Sells and services electrical security systems.................. $ 2,422,908
-------------
TOTAL PREFERRED STOCK (Cost $1,982,004)............................................................ $ 2,422,908
</TABLE>
14
<PAGE> 29
HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS (CONT'D) - DECEMBER 31, 1995

QUOTED
PAR MARKET VALUE
AMOUNT CORPORATE BONDS - 0.6% COUPON MATURITY NOTE 1 (a)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$6,335,000 Engle Homes ........................................ 11.750% 12/15/2000 $6,113,275
400,000 Fort Bend Holding Corp ............................. 8.000 12/01/2005 400,000
1,000,000 Professional Bancorp ............................... 8.500 03/01/2004 1,053,750
----------
TOTAL BONDS (Cost $7,339,338) ...................................................................... $7,567,025

QUOTED
PAR MARKET VALUE
AMOUNT SHORT-TERM INVESTMENTS - 19.3% COUPON MATURITY NOTE 1 (a)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S TREASURY SECURITIES - 16.4%
$50,000,000 U.S. Treasury Bill ................................. 0.000% 01/04/1996 $ 49,978,083
50,000,000 U.S. Treasury Note ................................. 7.750 03/31/1996 50,312,500
45,000,000 U.S. Treasury Note ................................. 0.000 05/02/1996 44,248,275
50,000,000 U.S. Treasury Note ................................. 7.250 11/30/1996 50,875,000
-------------
195,413,858
DISCOUNT NOTES - 2.7%
32,000,000 Federal National Mortgage Association .............. 5.650 01/19/1996 31,909,600
-------------
31,909,600
VARIABLE RATE DEMAND NOTES - 0.2%
2,587,000 Warner Lambert Company ............................. 5.458 01/02/1996 2,587,000
-------------
2,587,000
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost $229,125,470) ................................................... 229,910,458
TOTAL INVESTMENTS - 99.5% (Cost $1,035,457,100)(+) ................................................$1,185,466,845
=============

QUOTED
MARKET VALUE
SHARES SHORT SALES NOTE 1 (a)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
55,600 Fedders Corporation - Air conditioner manufacturer that publicly announced a pending
merger with Nycor, Inc., a portfolio holding ....................................................... $319,700
----------
TOTAL SHORT SALES (proceeds $323,755) Note 1(f) .................................................... $319,700
==========
</TABLE>

* Non-income producing security.
(+) Percentages for the various classifications relate to total net assets.

The accompanying notes to financial statements are an integral
part of this statement.

15
<PAGE> 30

HEARTLAND VALUE FUND
(A Series of Heartland Group, Inc.)
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995

<TABLE>
<S> <C>
ASSETS
Investments in securities, at quoted market value
-non-affiliated companies (Cost $627,915,653) ........................................................... $721,758,142
-affiliated companies (Cost $407,541,447) (Note 5) ...................................................... 463,708,703
Cash ........................................................................................................ 223,038
Receivable from fund shares sold ............................................................................ 1,893,265
Receivable from investments sold short ...................................................................... 6,725,621
Accrued dividends and interest .............................................................................. 1,835,705
-------------
Total assets ........................................................................................... 1,196,144,474
-------------
LIABILITIES
Securities sold short, at current market value (proceeds $323,755) .......................................... 319,700
Payable for investments purchased ........................................................................... 4,428,510
Payable for fund shares redeemed ............................................................................ 334,569
Payable to transfer agent ................................................................................... 135,687
-------------
Total liabilities ...................................................................................... 5,218,466
-------------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 42,613,011 shares outstanding) .................................. $1,190,926,008
=============
NET ASSET VALUE PER SHARE
Net asset value, offering price and redemption price per share ($.001 par value, 100,000,000
shares authorized [$1,190,926,008/42,613,011 shares outstanding]) ................................................ $27.95
=============

STATEMENT OF OPERATIONS
For the year ended December 31, 1995

<S> <C>
INVESTMENT INCOME:
Interest ...................................................................................................... $11,775,742
Dividends-non affiliated companies ............................................................................ 3,291,569
Dividends-affiliated companies (Note 5) ....................................................................... 1,261,331
-------------
Total investment income ................................................................................... 16,328,642
-------------
EXPENSES:
Management fees (Note 2) ...................................................................................... 6,452,487
Distribution fees (Note 2) .................................................................................... 2,150,829
Transfer agent fees ........................................................................................... 1,317,437
Postage ....................................................................................................... 348,154
Custodian fees ................................................................................................ 212,465
Registration fees ............................................................................................. 181,496
Printing and communications ................................................................................... 177,374
Legal fees .................................................................................................... 107,378
Audit fees .................................................................................................... 35,064
Directors' fees ............................................................................................... 2,400
Other operating expenses ...................................................................................... 64,882
-------------
Total expenses ............................................................................................ 11,049,966
-------------
Net investment income ......................................................................................... 5,278,676
-------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS-NET:
NET REALIZED GAINS ON INVESTMENTS - non-affilated companies ................................................... 59,587,372
NET REALIZED LOSSES ON INVESTMENTS - affiliated companies (Note 5) ............................................ (4,540,550)
NET REALIZED GAINS ON INVESTMENTS - short sales (Note 1(f)) ................................................... 1,697,453
-------------
TOTAL NET REALIZED GAINS ON INVESTMENTS ....................................................................... 56,744,275
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS ........................................................ 135,718,470
-------------
NET GAINS ON INVESTMENTS .................................................................................. 192,462,745
-------------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................................................... $197,741,421
=============
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

16
<PAGE> 31

HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994

- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1995 1994
---- ----
OPERATIONS:
Net investment income (loss) ....................................................... $ 5,278,676 $ (1,368,715)
Net realized gains on investments .................................................. 56,744,275 13,857,139
Net increase in unrealized appreciation (depreciation) on investments .............. 135,718,470 (10,922,622)
-------------- --------------
Net increase in net assets resulting from operations ............................. 197,741,421 1,565,802
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($.13 per share and $.00 per share, respectively) .................................. (5,278,676) 0
Distributions from net realized gains on investments ($1.40 and $.88
per share, respectively) ........................................................... (56,744,275) (12,488,424)
-------------- --------------
Total distributions ............................................................. (62,022,951) (12,488,424)
-------------- --------------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (31,485,987 and 7,982,846 shares, respectively) ........ 818,599,002 189,998,842
Net asset value of shares issued in reinvestment of distributions from net
investment income and net realized gains (2,044,105 and 495,466 shares,
respectively) ...................................................................... 56,699,525 11,004,728
Cost of shares redeemed (5,853,677 and 1,575,199 shares, respectively) ............. (159,455,377) (37,234,761)
-------------- --------------
Net increase in net assets derived from Fund share activities ................. 715,843,150 163,768,809
============== ==============

TOTAL INCREASE ..................................................................... 851,561,620 152,846,187

NET ASSETS AT THE BEGINNING OF THE YEAR ............................................... 339,364,388 186,518,201
-------------- --------------

NET ASSETS AT THE END OF THE YEAR (Note 4) ............................................ $1,190,926,008 $339,364,388
============== ==============
</TABLE>

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------------------------------------------------
For the year ended December 31 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................ $22.72 $23.22 $20.41 $16.06 $11.32
Income from investment operations:
Net investment income (loss) ................. 0.13 (0.09) (0.12) (0.09) (0.08)
Net realized and unrealized
gains (losses) on investments ................ 6.63 0.47 3.95 6.91 5.66
------ ------ ------ ------ ------
Total from investment operations ............. 6.76 0.38 3.83 6.82 5.58
Less distributions:
Dividends from net investment income ......... (0.13) -- -- -- --
Distributions from net realized gains ........ (1.40) (0.88) (1.02) (2.47) (0.84)
------ ------ ------ ------ ------
Total distributions .......................... (1.53) (0.88) (1.02) (2.47) (0.84)
Net asset value, end of year ...................... $27.95 $22.72 $23.22 $20.41 $16.06
======= ======= ======= ====== =======
Total Return (1) .................................. 29.8% 1.7% 18.8% 42.5% 49.4%
Supplemental data and ratios:
Net assets, end of period (in thousands) ..... $1,190,926 $339,364 $186,518 $48,391 $29,880
Ratio of total expenses to average net assets. 1.29% 1.39% 1.51% 1.48% 1.69%
Ratio of net investment income
(loss) to average net assets ................ 0.61% (0.52)% (0.71)% (0.49)% (0.54)%
Portfolio turnover rate ...................... 31% 35% 51% 76% 79%
</TABLE>
(1) Contingent deferred and initial sales charges in effect for the Fund
prior to June 1, 1994 are not reflected in Total Return as set forth in
the table.
The accompanying notes to financial statements are an integral part of these
statements.

<PAGE> 32

HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995

(1) Summary of Significant Accounting Policies.

The Heartland Value Fund ("The Fund") is a separate series of Heartland
Group, Inc. The assets and liabilities of each portfolio of Heartland
Group, Inc. are segregated with a shareholder's interest limited to the
portfolio in which the shareholder owns shares. The Fund's investment
objective is long-term capital appreciation. The Fund seeks to achieve its
objective through investment in small company stocks selected on a value
basis. The following is a summary of significant accounting policies of
the Fund:

(a) Securities for which exchange quotations are readily available
are valued at the last sale price reported by the principal security
exchange on which the issue is traded, or if no sale is reported, the
latest bid price. Securities for which exchange quotations are not
readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Directors. Net realized gains and losses on investments are
computed on the specific identification cost method. Short-term
investments are recorded at cost which approximates market.

(b) Provision has not been made for Federal income taxes since the
Fund has elected to be taxed as a "regulated investment
company" and intends to distribute substantially all income to its
shareholders and otherwise comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies.

(c) Net investment income and undistributed capital gains are
distributed to shareholders annually and recorded on the
ex-dividend date. The amount of dividends and distributions from net
investment income and net realized capital gains are determined in
accordance with Federal income tax regulations, which may differ
from generally accepted accounting principles. To the extent these
book and tax differences are permanent in nature, such amounts are
reclassified to paid-in capital in excess of par value.

(e) The Fund may enter into futures contracts to provide protection
against adverse movements in the prices of securities in the
portfolio. Upon entering into futures contracts, the Fund pledges to
the broker stock or U.S. government securities equal to the minimum
"initial margin" requirements of the exchange. Additionally, the Fund
receives from or pays to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments
are known as "variation margin," and are recorded by the Fund as
unrealized gains or losses. When the futures contract is closed, the
Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at
the time it was closed.

The use of futures contracts involves, to varying degrees, elements
of market risk in excess of the amount recognized in the statement
of assets and liabilities. The predominant risk is that the movement
of the futures contracts price may result in a loss which could
render the portfolio's hedging strategy unsuccessful. No futures
contracts were open on December 31, 1995.

(f) The Fund may engage in "short sales against the box",
transactions which involve selling a security that the Fund owns (or
has an unconditional right to purchase) for delivery at a specified
date in the future. Similarly, the Fund may also engage in short
sales of securities of an issuer ("acquiror") that has publicly
announced a proposed or pending transaction in which a portfolio
security of the Fund will be converted into securities of the
acquiror. These techniques are intended to hedge protectively against
anticipated declines in the market price of the Fund's portfolio
securities or to defer any unrealized gain.

18
<PAGE> 33
HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - [CONT'D] - DECEMBER 31, 1995

(g) The Fund may write covered call options that are traded on
recognized U.S. exchanges with respect to specific securities owned,
to enhance Fund income to the extent of the premium received. A
written covered call option provides the holder of the option the
right to buy the security at a fixed price for a stated period of
time; therefore, the specific Fund would not realize any appreciation
on the security above the option price. During 1995 the fund held
options that were sold against Damark International, Inc. (Class A).
As of December 31, 1995 the fund had no open option positions. A
rollforward of option activity is as follows:

<TABLE>
<CAPTION>
Number
of contracts Premium Amount
------------ --------------
<S> <C> <C>
Balance, January 1, 1995 255 $ 51,485
Options opened 0 0
Options expired (255) (51,485)
Options exercised 0 0
----- -------
Balance, December 31, 1995 0 $0
===== =======
</TABLE>

(h) The preparation of financial statements in conformity with
generally accepted accounting principles 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 amount of
revenues and expenses during the reporting period. Actual results
could differ from the estimates.

(2) INVESTMENT ADVISOR, MANAGEMENT AGREEMENT AND TRANSACTION WITH RELATED
PARTIES.

The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Distributor is
Heartland Advisors, Inc. (the "Distributor") with whom certain officers
and directors of the Fund are affiliated. The Plan requires the Fund to
pay the Distributor a quarterly distribution fee on an annual basis up to
.25% of its daily net assets. In addition, for the year ended December 31,
1995, the Distributor received $205,943 from investors representing
commissions for Fund share redemptions and $438,094 from the Fund for
brokerage fees on the execution of purchases and sales of portfolio
investments.

(3) INVESTMENT TRANSACTIONS.

For the year ended December 31, 1995, the cost of purchases and the
proceeds from sales of investment securities (excluding short-term
securities) were $767,414,514 and $213,379,582 respectively, of which
sales and purchases of U.S. government and government agency obligations
were $75,716,406 and $5,175,781, respectively.

19
<PAGE> 34

HEARTLAND VALUE FUND

(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - [CONT'D] - DECEMBER 31, 1995

4) SOURCES OF NET ASSETS.

<TABLE>
<S> <C>
As of December 31, 1995, the sources of net assets were as follows:
Fund shares issued and outstanding .................................... $1,040,912,208
Net unrealized appreciation on investments ............................ 150,013,800
--------------
$1,190,926,008
==============
Aggregate gross unrealized appreciation (depreciation) as of
December 31, 1995, based on investment cost for Federal income
tax purposes is as follows:

Aggregate gross unrealized appreciation ............................... $199,068,835
Aggregate gross unrealized depreciation ............................... (49,055,035)
--------------
Net unrealized appreciation on investments ............................ $150,013,800
==============

</TABLE>

(5) TRANSACTIONS WITH AFFILIATES.

The following companies are affiliated with the Fund; that is, the Fund
holds 5% or more of the outstanding voting securities. Such companies are
defined in Section (2)(a)(3) of the Investment Company Act of 1940.

20
<PAGE> 35
HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - [CONT'D] - DECEMBER 31, 1995

<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Dividends Gain
Security Name Dec. 31, 1994 Purchases Sales Dec. 31, 1995 Received (Losses)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Health Power, Inc. 72,300 170,100 0 242,400 $ 0 $ 0
HealthRite, Inc. 0 365,000 0 365,000 0 0
(formerly Vitamin Specialties Corp.)
High-Lo Automotive, Inc 0 1,050,000 200,000 850,000 0 (1,041,039)
Hooper Holmes, Inc. 0 424,900 0 424,900 10,249 0
Hospital Staffing Services, Inc. 460,000 176,000 16,000 620,000 0 (11,134)
ICN Pharmaceuticals, Inc. 720,166 (3) 1,379,839 0 2,100,005 483,625 0
IEC Electronics Corp. 0 653,100 0 653,100 0 0
International Colin Energy Corp. 357,000 864,900 151,900 1,070,000 0 (909,560)
Iwerks Entertainment, Inc. 0 1,000,000 0 1,000,000 0 0
LCS Industries, Inc. 368,500 (4) 0 0 368,500 0 0
Luminart, Inc. 600,000 1,067,500 367,500 1,300,000 0 1,241,603
Marten Transport, Ltd. 212,000 0 0 212,000 0 0
MDT Corp. 641,400 0 141,400 500,000 0 (331,193)
Meadowbrook Rehab. Group, Inc. 481,500 51,000 0 532,500 0 0
Medalist Industries, Inc. 380,000 0 0 380,000 0 0
Medical Graphics Corp. 136,500 108,200 1,000 243,700 0 (375)
Metropolitan Bancorp 227,700 99,400 0 327,100 0 0
MFRI, Inc. 0 300,000 0 300,000 0 0
Mid American Waste Systems, Inc. 923,300 1,826,700 0 2,750,000 0 0
M/A/R/C, Inc. 269,000 0 0 269,000 0 0
MYR Group, Inc. 220,000 (5) 40,000 0 260,000 0 0
(formerly L.E. Myers Company Group)
Norstan, Inc. 210,000 66,000 0 276,000 0 0
Northstar Universal, Inc. 185,000 515,000 0 700,000 0 0
Northwest Equity Corp. 0 100,000 0 100,000 24,000 0
NYCOR, Inc. 546,400 182,200 0 728,600 0 0
Odetics, Inc. (Class A) 100,000 415,000 0 515,000 0 0
Orthologic Corp. 155,000 353,000 80,000 428,000 0 465,437
Outlook Group Corp. 50,500 249,500 0 300,000 0 0
Payco American Corp. 200,000 743,000 0 943,000 0 0
Peoples Telephone Company, Inc. 200,000 1,600,000 300,000 1,500,000 0 (468,956)
Picom Insurance Company 0 185,700 0 185,700 0 0
Powell Industries, Inc. 372,700 227,300 0 600,000 0 0
Presidential Life Corp. 1,279,500 420,500 0 1,700,000 160,590 0
Psicor, Inc. 294,900 18,600 0 313,500 0 0
Quantum Health Resources, Inc. 0 916,500 0 916,500 0 0
Quixote Corp. 0 424,400 0 424,400 57,750 0
Ramsay Health Care, Inc. 111,000 839,000 430,000 520,000 0 (742,321)
Redwood Empire Bancorp 104,900 149,100 30,000 224,000 0 (61,855)
Rehabilicare, Inc. 350,000 88,000 0 438,000 0 0
Rexworks, Inc. 175,500 20,000 10,000 185,500 0 (36,875)
Roberds, Inc. 79,500 320,500 0 400,000 0 0
Schult Homes Corp. 232,400 117,600 0 350,000 49,256 0
Sifco Industries, Inc. 0 266,300 0 266,300 0 0
Specialty Paperboard, Inc. 250,000 0 0 250,000 0 0
Star Multi Care Services, Inc. 90,748 (6) 123,054 0 213,802 0 0
Starcraft Corporation 350,000 75,000 109,500 315,500 0 (558,811)
Sterile Concepts Holdings 0 400,000 0 400,000 45,700 0
Sterling Financial Corp. 275,000 (7) 0 0 275,000 0 0
St. Mary Land & Exploration 0 490,000 0 490,000 19,176 0
Sullivan Dental Products, Inc. 0 540,000 0 540,000 0 0
Summit Family Restaurant, Inc. 120,000 310,000 0 430,000 0 0
(formerly JB's Restaurants, Inc.)
Sunrise Resources 202,500 197,500 0 400,000 0 0
(formerly Sunrise Leasing Corp.)
Technology Research Corp. 166,667 (8) 333,333 0 500,000 68,517 0
Timber Lodge Steakhouse, Inc. 200,000 150,000 100,000 250,000 0 (325,000)
(formerly Q-Steaks, Inc.)
Toastmaster, Inc. 325,000 266,400 0 591,400 41,234 0
Todhunter International, Inc. 82,000 425,500 17,500 490,000 0 83,825
Total Tel USA Communication, Inc. 110,000 34,500 0 144,500 0 0

</TABLE>

21
<PAGE> 36
HEARTLAND VALUE FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - [CONT'D] - DECEMBER 31, 1995

<TABLE>
<CAPTION>
Share Share Realized
Balance at Balance at Dividends Gain
Security Name Dec. 31, 1994 Purchases Sales Dec. 31, 1995 Received (Losses)
<S> <C> <C> <C> <C> <C> <C>
Trak Auto Corp. 350,000 16,500 0 366,500 $ 0 $ 0
Transworld Bancorp 141,020(9) 400 0 141,420 0 0
Trimark Holdings, Inc. 350,000 50,000 0 400,000 0 0
Trism, Inc. 25,000 306,700 37,000 294,700 0 (48,777)
UNC, Inc. 450,000 650,000 0 1,100,000 0 0
Universal Seismic, Inc. 275,000 95,000 0 370,000 0 0
URS Corp. 0 700,100 0 700,100 0 0
Varitronic Systems, Inc. 158,000 17,000 0 175,000 0 0
Vectra Technologies, Inc. 100,000 600,000 0 700,000 0 0
Westbridge Capital Corp. 0 500,000 0 500,000 0 0
Windmere Corp. 150,000 772,500 0 922,500 0 0
Zytec Corp. 79,100 255,900 0 335,000 0 0
--------- -----------
1,261,331 (4,540,550)
========= ===========
</TABLE>

(1) Adjusted for 5% stock dividend
(2) Adjusted for 1 for 10 reverse stock split
(3) Adjusted for 1.40%, 1.70%, 1.22% and 1.25% stock dividends
(4) Adjusted for 10% stock dividend and 2 for 1 stock split
(5) Adjusted for 4 for 3 stock split
(6) Adjusted for 6% and 6% stock dividend
(7) Adjusted for 10% stock dividend
(8) Adjusted for 1 for 3 reverse stock split
(9) Adjusted for 2 for 1 stock split

22
<PAGE> 37

HEARTLAND VALUE & INCOME FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1995

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
QUOTED
SHARES MARKET VALUE
HELD COMMON STOCKS - 41.9% NOTE 1 (a)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BANKS AND SAVINGS & LOANS - 1.8%
25,000 Teche Holding Company - Holding company for Teche Federal Savings Bank ............................. $ 343,750
----------
343,750
ENTERTAINMENT - 1.7%
50,000 Intrav, Inc. - Designs, markets and operates escorted, international travel programs ............... 337,500
----------
337,500
HEALTH CARE - 2.7%
100,000 * Nova Care, Inc. - Provides contract rehabilitation services to health care institutions ............ 512,500
----------
512,500
MANUFACTURING - 8.5%
35,000 Rouge Steel Company (Class A) - Hot rolled, cold rolled and electrogalvanized sheet steel .......... 831,250
24,000 Toro Company - Consumer and commercial lawn and snow removal equipment ............................. 789,000
----------
1,620,250
RETAIL - 9.4%
60,000 * Gibson Greetings, Inc. - Manufacturer and retailer of greeting cards and wrapping paper ............ 960,000
75,000 Shopko Stores, Inc. - Regional discount store concentrated in the upper Midwest .................... 843,750
----------
1,803,750
TECHNOLOGY - 11.1%
80,000 * Data General Corp. - General purpose computer and communication systems ........................... 1,100,000
30,000 * Storage Technology Corp. - Manufactures computer information systems ............................... 716,250
25,000 Technalysis Corp. - Computer software analysis, design and programming services .................... 300,000
----------
2,116,250
UTILITY - 6.7%
25,000 Minnesota Power & Light Company - Electric service in central and northern MN. ..................... 709,375
25,000 Montana Power Company - Provides electricity and gas throughout Montana ............................ 565,625
----------
1,275,000
----------
TOTAL COMMON STOCKS - (Cost $7,355,069) ............................................................ $8,009,000

<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
QUOTED
SHARES MARKET VALUE
HELD PREFERRED STOCKS - 8.6% NOTE 1 (a)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
37,500 Callon Petroleum Company - Interests in 1,500 oil wells ............................................ $1,040,625
5,000 Lomak Petroleum Company - Natural gas producer ..................................................... 137,500
28,000 NYCOR, Inc. - Manufactures components for heating and cooling systems ............................. 476,000
----------
TOTAL PREFERRED STOCKS - (Cost $1,467,555) ......................................................... $1,654,125

<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
QUOTED
PAR MARKET VALUE
AMOUNT BONDS - 30.9% COUPON MATURITY NOTE 1 (a)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 18.1%
$500,000 Chock Ful O' Nuts Corp. -
Coffees, teas, shell peanuts and peanut products ......................... 8.000% 09/15/2006 $ 470,000
500,000 Hector Communication Corp. -
Rural telephone exchange companies in WI & MN ............................ 8.500 02/15/2002 500,000
630,000 ICN Pharmaceuticals, Inc. -
Develops, mfg. pharmaceutical/nutritional products ....................... 8.500 11/15/1999 686,700
121,000 Medalist Industries, Inc. - Produces industrial fasteners ................ 7.500 07/01/2001 104,060
500,000 Professional Bancorp, Inc. -
Bank holding company, commercial banking ................................. 8.500 03/01/2004 526,875
</TABLE>

23
<PAGE> 38

HEARTLAND VALUE & INCOME FUND
(A SERIES OF HEARTLAND GROUP, INC.)
SCHEDULE OF INVESTMENTS - [CONT'D] - DECEMBER 31, 1995

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
QUOTED
PAR MARKET VALUE
AMOUNT BONDS - [CONT'D] COUPON MATURITY NOTE 1 (a)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - [CONT'D]
$ 750,000 Quantum Health Resources, Inc. -
Deliver alternate site therapies and services ................ 4.750% 10/01/2000 $ 532,500
570,000 Sierra Tahoe Bancorp -
Holding co. for Truckee River Bank in Lake Tahoe, CA ......... 8.500 02/01/2004 638,400
-----------
3,458,535
CORPORATE BONDS - 12.8%
525,000 ADT, Ltd. - Electronic security systems and auto auctions .... 9.250 08/01/2003 560,437
825,000 Engle Homes, Inc. - FL homebuilder and developer ............. 11.750 12/15/2000 796,125
600,000 Regency Health Services, Inc. -
Operator of health care facilities primarily in CA ........... 9.875 10/15/2002 595,500
500,000 UNC, Inc. - Mfg. engine and airframe parts ................... 9.125 07/15/2003 490,000
-----------
2,442,062
-----------
TOTAL BONDS - (Cost $5,740,064) ...................................................................... $5,900,597

<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
PAR AT COST
AMOUNT SHORT-TERM INVESTMENTS - 14.3% COUPON MATURITY NOTE 1 (a)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DISCOUNT NOTES - 10.5%
$2,000,000 Federal Home Loan Mortgage Corporation ....................... 5.500% 01/03/1996 $ 1,999,389
-----------
1,999,389
VARIABLE RATE DEMAND NOTES - 3.8%
475,000 Sara Lee Corporation ......................................... 5.467 01/02/1996 475,000
261,000 Warner-Lambert Company ....................................... 5.458 01/02/1996 261,000
-----------
736,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $2,735,389) ....................................................... 2,735,389
-----------
TOTAL INVESTMENTS - 95.7% (Cost $17,298,077)(Note 5)(+) .............................................. $18,299,111
===========
</TABLE>

* Non-income producing security
(+) Percentages for the various classifications relate to total
net assets.

The accompanying notes to financial statements are an integral
part of this schedule.

24
<PAGE> 39

HEARTLAND VALUE & INCOME FUND
(A SERIES OF HEARTLAND GROUP, INC.)
STATEMENT OF ASSETS AND LIABILITIES - DECEMBER 31, 1995

<TABLE>
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Investments in securities, at quoted market value (cost $17,298,077) ......... $18,299,111
Cash ......................................................................... 550,498
Receivable from fund shares sold ............................................. 25,088
Receivable from securities sold .............................................. 100,214
Accrued dividends and interest ............................................... 154,049
Deferred organization expense (Note 3) ....................................... 21,602
-----------
Total assets ............................................................ 19,150,562
-----------
LIABILITIES:
Payable for fund shares redeemed ............................................. 975
Dividends payable ............................................................ 941
Payable for expenses ......................................................... 3,539
Payable to Distributor for distribution fees (Note 2) ........................ 811
Payable to Advisor for deferred organization expense (Note 3) ................ 21,602
-----------
Total liabilities ....................................................... 27,868
-----------
NET ASSETS APPLICABLE TO OUTSTANDING SHARES
($.001 par value, 100,000,000 shares authorized, 1,712,269 shares outstanding) $19,122,694
===========
NET ASSET VALUE PER SHARE
Net asset value and offering price per share ($.001 par value, 100,000,000
shares authorized [$19,122,694/1,712,269 shares outstanding]) ................ $ 11.17
===========
</TABLE>

STATEMENT OF OPERATIONS
FOR THE YEAR ENDING DECEMBER 31, 1995

<TABLE>
- -----------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest ........................................................................ $ 504,178
Dividends ....................................................................... 290,670
----------
Total investment income ..................................................... 794,848
----------
EXPENSES:
Management fees (Note 2) ........................................................ 102,311
Distribution fees (Note 2) ...................................................... 36,684
Transfer agent fees ............................................................. 29,043
Registration fees ............................................................... 17,624
Amortization of organization expenses (Note 3) .................................. 7,626
Custodian fees .................................................................. 6,809
Postage ......................................................................... 6,698
Professional fees ............................................................... 6,301
Printing and communications ..................................................... 4,344
Legal fees ...................................................................... 3,600
Directors' fees ................................................................. 2,374
Other operating expenses ........................................................ 1,940
----------
Total expenses .............................................................. 225,354
----------
Net investment income ........................................................... 569,494
----------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS-NET:
NET REALIZED GAINS ON INVESTMENTS ............................................... 574,699
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS .......................... 1,645,292
----------
NET GAINS ON INVESTMENTS .................................................... 2,219,991
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................... $2,789,485
==========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

25
<PAGE> 40

HEARTLAND VALUE & INCOME FUND
(A SERIES OF HEARTLAND GROUP, INC.)
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDING DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
OPERATIONS: 1995 1994
<S> <C> <C>
Net investment income ........................................................... $ 569,494 $394,088
Net realized gains (losses) on investments ...................................... 574,699 (146,073)
Net increase in unrealized appreciation (depreciation)
on investments ................................................................. 1,645,292 (781,560)
--------- --------
Net increase (decrease) in net assets
resulting from operations .................................................. 2,789,485 (533,545)
--------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income ($.41 and $.41 per share, respectively). (569,494) (394,088)
Distributions from net realized gains on investments
($.25 and $.00 per share, respectively) ......................................... (420,255) --
--------- --------
Total distributions ......................................................... (989,749) (394,088)
--------- --------
FUND SHARE ACTIVITIES:
Proceeds from shares issued (1,286,133 and 713,208
shares, respectively) .......................................................... 14,200,423 7,378,306
Net asset value of shares issued in reinvestment
of distributions from net investment income and
net realized gains (81,006 and 35,004 shares, respectively) .................... 892,309 345,799
Cost of shares redeemed (691,990 and 267,351
shares, respectively) .......................................................... (7,653,916) (2,723,314)
--------- --------
Net increase in net assets derived from Fund
share activities ........................................................... 7,438,816 5,000,791
--------- --------

TOTAL INCREASE .................................................................. 9,238,552 4,073,158

NET ASSETS AT THE BEGINNING OF THE YEAR ............................................. 9,884,142 5,810,984
--------- --------
NET ASSETS AT THE END OF THE YEAR (Note 5) .......................................... $19,122,694 $9,884,142
========== =========
</TABLE>

FINANCIAL HIGHLIGHTS
For the year
ended December 31 October 26, 1993 (1)
----------------- through
1995 1994 Dec. 31, 1993
<S> <C> <C> <C>
Net asset value, beginning of period ....... $9.53 $10.45 $10.00

Income from investment operations:
Net investment income ..................... 0.41 0.41 0.07
Net realized and unrealized gains
(losses) on investments ................. 1.89 (0.92) 0.45
------ ------- -----
Total from investment operations .......... 2.30 (0.51) 0.52
Less distributions:
Distributions from net investment income .. (0.41) (0.41) (0.07)
Distributions from net realized gains ..... (0.25) -- --
------ ------- -----

Total distributions ....................... (0.66) (0.41) (0.07)

Net asset value, end of period ............. $11.17 $9.53 $10.45
====== ======= =====
Total return (2) ........................... 24.4% (4.9%) 5.2%(3)

Supplemental data and ratios
Net assets, end of period (in thousands) .. $19,123 $9,884 $5,811
Ratio of expenses to average net assets ... 1.54% 1.80% 1.30%(4)
Ratio of net investment income to

average net assets ...................... 3.90% 4.39% 6.52%(4)
Portfolio turnover rate ................... 150% 127% 6%(3)
</TABLE>

(1) Commencement of operations
(2) The contingent deferred sales charge in effect for the Fund prior to
June 1, 1994 is not reflected in Total Return as set forth in the table.
(3) Not annualized
(4) Annualized

The accompanying notes to financial statements are an integral part of these
statements.

26
<PAGE> 41

HEARTLAND VALUE & INCOME FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

The Heartland Value & Income Fund ("The Fund") is a separate series of
Heartland Group, Inc. The assets and liabilities of each portfolio of
Heartland Group, Inc. are segregated with a shareholder's interest
limited to the portfolio in which the shareholder owns shares. The Fund
seeks to obtain capital growth and current income through investment in
stocks and bonds. The following is a summary of significant accounting
policies of the Fund:

(a) Each equity security is valued at the last sale price reported
by the principal security exchange on which the issue is traded, or
if no sale is reported, the latest bid price. Each debt security is
valued using bid side market quotations, prices provided by market
makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics.
Net realized gains and losses on investments are computed on the
first-in, first-out cost method. Short-term investments are recorded
at cost which approximates market. Debt securities having maturities
of 60 days or less may be valued at acquisition cost, plus or minus
any amortized discount or premium.

(c) Net investment income is distributed on a quarterly basis and
net capital gains are distributed on an annual basis. The amount of
dividends and distributions from net investment income and net
realized capital gains is determined in accordance with Federal
income tax regulations, which may differ from generally accepted
accounting principles. To the extent these book and tax differences
are permanent in nature, such amounts are reclassified to paid-in
capital in excess of par value.

(d) The Fund records security transactions at cost no later than the
first business day after the trade date. The cost amount as reflected
in the Schedule of Investments is the same for Federal income tax
purposes. The Fund amortizes all premiums and accretes all discounts
on debt instruments utilizing the effective interest method.

(e) Dividends to shareholders are recorded on the ex-dividend date.

The use of futures contracts involves, to varying degrees, elements
of market risk in excess of the amount recognized in the statements
of assets and liabilities. The predominant risk is that the movement
of the futures contracts price may result in a loss which could
render the portfolio's hedging strategy unsuccessful. The Fund had no
open futures contracts at December 31, 1995.

27
<PAGE> 42
HEARTLAND VALUE & INCOME FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - [CONT'D] - DECEMBER 31, 1995

2) INVESTMENT ADVISOR, MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES.

The Fund has a management agreement with Heartland Advisors, Inc. (the
"Advisor"), with whom certain officers and directors of the Fund are
affiliated, to serve as investment advisor and manager. Under the terms of
the agreement, the Fund will pay the Advisor a monthly management fee at
the annual rate of .70% of the daily net asset value of the Fund.

The Fund has adopted a Distribution Plan (the "Plan") pursuant to Rule
12b-1 under the Investment Company Act of 1940. The Distributor is
Heartland Advisors, Inc. (the "Distributor") with whom certain
officers and directors of the Fund are affiliated. The Plan requires the
Fund to pay the Distributor a quarterly distribution fee on an annual
basis up to .25% of its daily net assets. In addition, for the year ending
December 31, 1995, the Distributor received $12,134 from investors
representing commissions for Fund share redemptions and $29,768 from the
Fund for brokerage fees on the execution of purchases and sales of
portfolio investments.

3) DEFERRED ORGANIZATION EXPENSES.

Organization expenses have been deferred and are being amortized on a
straight-line basis over sixty months. Payments for these expenses were
advanced by the Advisor, who will be reimbursed by the Fund over the same
period. The proceeds of any redemption of the initial shares by the
original shareholders will be reduced by a pro-rata portion of any then
unamortized expenses. Unamortized deferred organization expenses and the
related payable to the Advisor at December 31, 1995 were $21,602.

4) INVESTMENT TRANSACTIONS.

For the year ending December 31, 1995, the cost of purchases and the
proceeds from sales of investment securities (excluding short-term
securities) were $21,938,897 and $18,189,577, respectively.

5) SOURCES OF NET ASSETS.

<TABLE>
<S> <C>
As of December 31, 1995, the sources of net assets were as follows:
Fund shares issued and outstanding ................................ $18,121,660
Net unrealized appreciation on investments ........................ 1,001,034
-----------
$19,122,694
-----------
Aggregate gross unrealized appreciation (depreciation) as of
December 31, 1995, based on investment cost for Federal income tax
purposes is as follows:

Aggregate gross unrealized appreciation ........................... $1,420,882
Aggregate gross unrealized depreciation ........................... (419,848)
-----------
Net unrealized appreciation on investments ........................ $1,001,034
===========
</TABLE>

<PAGE> 43

HEARTLAND U.S. GOVERNMENT SECURITIES FUND
(A SERIES OF HEARTLAND GROUP, INC.)
STATEMENT OF NET ASSETS O DECEMBER 31, 1995

<TABLE>
<CAPTION>
QUOTED
PAR MARKET VALUE
AMOUNT DESCRIPTION COUPON MATURITY NOTE 1(a)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM INVESTMENTS - 98.5%
U.S. TREASURY AND AGENCY SECURITIES - 44.0%
$6,500,000 U.S. Treasury Note .......................... 7.250% 05/15/2004 $7,219,062
30,000,000 U.S. Treasury Bond .......................... 0.000 11/15/2014 9,393,210
34,000,000 U.S. Treasury Bond .......................... 0.000 11/15/2016 9,280,368
4,000,000 Tennessee Valley Authority .................. 0.000 11/15/2029 3,240,000
-----------
29,132,640

MORTGAGE-BACKED SECURITIES - 29.5%
5,000,000 Federal Home Loan Mortgage Corporation ....... 6.400 THRU 2023 4,987,500
3,574,000 Federal Home Loan Mortgage Corporation (CMO).. 7.000 THRU 2022 3,606,248
1,225,200 Federal Housing Administration ............... 8.875 THRU 2030 1,289,523
31,280 Federal National Mortgage Association ........ 10.000 THRU 2017 34,400
1,000,000 Federal National Mortgage Association ........ 7.000 THRU 2035 1,002,813
6,000,000 Federal National Mortgage Association (CMO) .. 7.000 THRU 2020 6,053,436
2,443,666 Government National Mortgage Association ..... 9.125 THRU 2030 2,607,849
-----------
19,581,769

CORPORATE SECURITIES - 25.0%
3,895,000 ADT Limited ................................. 9.250 08/01/2003 4,157,912
4,000,000 Coleman Holdings, Inc. ...................... 0.000 05/27/1998 3,260,000
2,339,000 IMC Fertilizer Group, Inc. .................. 9.450 12/15/2011 2,540,739
3,025,000 Louis Dreyfus Natural Gas Corporation ....... 9.250 06/15/2004 3,278,833
3,000,000 Oryx Energy Company ........................ 10.000 04/01/2001 3,327,696
-----------
16,565,180
-----------
TOTAL LONG-TERM INVESTMENTS - (Cost $62,365,656) ................$65,279,589
<CAPTION>
PAR AT COST
AMOUNT DESCRIPTION COUPON MATURITY NOTE 1(a)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS - .1%
VARIABLE RATE DEMAND NOTES - .1%
$62,000 Eli Lilly and Company .......................... 5.315% 01/02/1996 $ 62,000
-----------
TOTAL SHORT-TERM INVESTMENTS (Cost $62,000) ...................... 62,000

TOTAL INVESTMENTS - 98.6% (Cost $62,427,656) ..................... 65,341,589
Cash and receivables, less liabilities - 1.4% .................... 919,209
-----------
TOTAL NET ASSETS (Note 4) (+) .................................... $66,260,798
===========
Net asset value and offering price per share ($.001 par
value, 100,000,000 shares authorized [$66,260,798/6,650,557
shares outstanding]) ........................................... $ 9.96
===========
</TABLE>

(+) Percentages for the various classifications use total net assets
as a basis.

The accompanying notes to financial statements are an integral part of
this statement.

<PAGE> 44

HEARTLAND U.S. GOVERNMENT SECURITIES FUND
(A SERIES OF HEARTLAND GROUP, INC.)
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1995

INVESTMENT INCOME:
<S> <C>
Interest ................................................ $4,818,512
----------
EXPENSES:

Management fees (Note 2) ................................ 422,661
Distribution fees (Note 2) .............................. 162,562
Transfer agent fees ..................................... 83,728
Registration fees ....................................... 32,304
Professional fees ....................................... 20,312
Custodian fees .......................................... 17,281
Postage ................................................. 14,062
Printing and communications ............................. 12,603
Legal fees .............................................. 8,823
Directors' fees ......................................... 2,400
Other operating expenses ................................ 18,450
----------
Total expenses .......................................... 795,186
Less expenses reimbursed by Advisor (Note 2) ............ (97,537)
----------
Net expenses ........................................ 697,649
----------
Net investment income ................................... 4,120,863
----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS-NET:
NET REALIZED LOSSES ON INVESTMENTS ...................... (291,019)
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS .. 7,612,595
----------
NET GAINS ON INVESTMENTS ............................ 7,321,576
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .... $11,442,439
===========
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
For the years ended December 31, 1995 and 1994

<TABLE>
<CAPTION>
1995 1994
----- ----
<S> <C> <C>
OPERATIONS:
Net investment income ........................................... $4,120,863 $4,514,130
Net realized losses on investments .............................. (291,019) (5,597,664)
Net increase in unrealized appreciation (depreciation) on
investments .................................................. 7,612,595 (6,692,365)
----------- -----------
Net increase (decrease) in net assets
resulting from operations ................................. 11,442,439 (7,775,899)
----------- -----------

DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($.60 and $.59 per share, respectively) ......................... (4,120,864) (4,514,130)
----------- -----------
Total distributions ........................................ (4,120,864) (4,514,130)
----------- -----------

FUND SHARE ACTIVITIES:
Proceeds from shares issued
(1,191,613 and 3,520,667 shares, respectively) .................. 11,219,578 35,235,340
Net asset value of shares issued in reinvestment of distributions
from net investment income and net realized gains
(299,306 and 315,395 shares, respectively) ...................... 2,843,803 2,972,736
Cost of shares redeemed (2,115,677 and
2,924,054 shares, respectively) ................................ (19,931,232) (27,899,736)
----------- -----------
Net increase (decrease) in net assets derived
from Fund share activities ................................ (5,867,851) 10,308,340
----------- -----------
TOTAL INCREASE (DECREASE). ...................................... 1,453,724 (1,981,689)

NET ASSETS AT THE BEGINNING OF THE YEAR .............................. 64,807,074 66,788,763
----------- -----------

NET ASSETS AT THE END OF THE YEAR (Note 4) ........................... $66,260,798 $64,807,074
=========== ===========
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

30
<PAGE> 45

HEARTLAND U.S. GOVERNMENT SECURITIES FUND
(A SERIES OF HEARTLAND GROUP, INC.)
FINANCIAL HIGHLIGHTS

Net asset value, beginning of period .......... $8.91 $10.50 $9.93 $9.97 $9.39
Income from investment operations:
Net investment income ..................... 0.60 0.59 0.56 0.66 0.69
Net realized and unrealized
gains (losses) on securities .............. 1.05 (1.59) 1.18 0.30 0.83
----- ----- ----- ----- -----
Total from investment operations .......... 1.65 (1.00) 1.74 0.96 1.52

Less distributions:
Dividends from net investment income ...... (0.60) (0.59) (0.56) (0.66) (0.69)
Distributions from net realized gains ..... -- -- (0.61) (0.34) (0.25)
----- ----- ----- ----- -----
Total distributions ....................... (0.60) (0.59) (1.17) (1.00) (0.94)

Net asset value, end of period ................ $9.96 $8.91 $10.50 $9.93 $9.97
===== ===== ===== ===== =====
Total return (1) .............................. 19.0% (9.6%) 17.8% 10.1% 17.0%

Supplemental data and ratios:
Net assets, end of period (in thousands) .. $66,261 $64,807 $66,789 $28,378 $29,101
Ratio of net expenses to
average net assets (2) ................... 1.07% 1.07% 1.06% 0.92% 0.92%
Ratio of net investment income
to average net assets ..................... 6.31% 6.30% 5.09% 6.71% 7.06%
Portfolio turnover rate ................... 97% 95% 200% 149% 185%
</TABLE>

(1) Contingent deferred and initial sales charges in effect for the Fund prior
to June 1, 1994 are not reflected in Total Return as set forth in the table.

(2) Heartland Advisors, Inc. voluntarily waived the management fee in its
entirety from May 7, 1988 through November 30, 1990. Effective December 1,
1990, Heartland Advisors, Inc. partially reinstated a portion of the fee at
the rate of .25 of 1% of average net assets and, effective January 20, 1992
and January 1, 1993, reinstated additional portions of the fee resulting in
a rate of .35 of 1% and .50 of 1% of average daily net assets, respectively.

The accompanying notes to financial statements are an integral part of this
statement.

31
<PAGE> 46

HEARTLAND U.S. GOVERNMENT SECURITIES FUND
(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1995
- --------------------------------------------------------------------------------

1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
The Heartland U.S. Government Securities Fund, ("the Fund") is a separate
series of Heartland Group, Inc. The assets and liabilities of each
portfolio of Heartland Group, Inc. are segregated with a shareholder's
interest limited to the portfolio in which the shareholder owns shares. The
Fund's investment objectives are a high level of current income, liquidity
and safety of principal. The following is a summary of significant
accounting policies of the Fund:

(a) Each security is valued using bid side market quotations, prices
provided by market makers or estimates of market values obtained from
yield data relating to instruments or securities with similar
characteristics. Short-term investments are recorded at cost which
approximates market. Debt securities having maturities of 60 days or
less may be valued at acquisition cost, plus or minus any amortized
discount or premium.

(b) Provision has not been made for Federal income taxes since the Fund has
elected to be taxed as a "regulated investment company" and intends to
distribute substantially all income to its shareholders and otherwise
comply with the provisions of the Internal Revenue Code applicable to
regulated investment companies. As of December 31, 1995 the Fund has a
Federal income tax capital loss carryforward of $5,888,683 expiring in
2003.

(c) The Fund declares daily and pays monthly distributions from net
investment income. Net capital gains, if any, are distributed annually
The amount of dividends and distributions from net investment income
and net realized capital gains are determined in accordance with
Federal income tax regulations, which may differ from generally
accepted accounting principles. To the extent these book and tax
differences are permanent in nature, such amounts are reclassified to
paid-in capital in excess of par value.

(d) The Fund records security transactions at cost no later than the first
business day after the trade date. Net realized gains and losses on
investments are computed on the specific identification cost method.
Interest income is recorded on the accrual basis. The cost amounts as
reflected in the Statement of Net Assets are the same for Federal
income tax purposes. The Fund amortizes premiums and accretes discounts
on investments utilizing the effective interest method.

(e) Dividends to shareholders are recorded on the ex-dividend date.

(f) The Fund may enter into futures contracts to provide protection against
adverse movements in the prices of securities in the portfolio. Upon
entering into futures contracts, the Fund pledges to the broker
securities equal to the minimum "initial margin" requirements of the
exchange. Additionally, the Fund receives from or pays to the broker an
amount of cash equal to the daily fluctuation in value of the contract.
Such receipts or payments are known as "variation margin," and are
recorded by the Fund as unrealized gains or losses. When the futures
contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was
opened and the value at the time it was closed.
The use of futures contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of
assets and liabilities. The predominant risk is that the movement of
the futures contracts price may result in a loss which could render the
portfolio's hedging strategy unsuccessful. The Fund had no open
futures contracts at December 31, 1995.

(g) The preparation of financial statements in conformity with generally
accepted accounting principles 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 amount of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.

32
<PAGE> 47

HEARTLAND U.S. GOVERNMENT SECURITIES FUND

(A SERIES OF HEARTLAND GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS - [CONT'D] - DECEMBER 31, 1995

2) INVESTMENT ADVISOR, MANAGEMENT AGREEMENT AND TRANSACTIONS WITH RELATED
PARTIES.

The Fund has a management agreement with Heartland Advisors, Inc. (the
"Advisor") with whom certain officers and directors of the Fund are
affiliated, to serve as investment advisor and manager. Under the terms of
the agreement, the Fund will pay the Advisor a monthly management fee at
the annual rate of .65% of the first $100 million of the Fund's average
daily net assets, .50% of the next $400 million of net assets, and .40% on
net assets in excess of $500 million. The Advisor voluntarily waived the
management fee in its entirety from May 7, 1988 through November 30,1990,
and effective December 1,1990, the Advisor partially reinstated a portion
of the fee at the annual rate of .25% of average daily net assets and also
effective January 20, 1992, the Advisor began collecting a partial fee at
the annual rate of .35% of the Fund's average daily net assets. As of
January 1, 1993, the Advisor began collecting a partial fee at the annual
rate of .50% of the Fund's average daily net assets. The Advisor may
reinstate any portion or all of the management fee at any time. The Fund
has adopted a Distribution Plan (the "Plan") pursuant to Rule 12b-1 under
the Investment Company Act of 1940. The Distributor is Heartland Advisors,
Inc. (the "Distributor") with whom certain officers and directors of the
Fund are affiliated. The Plan requires the Fund to pay the Distributor a
quarterly distribution fee on an annual basis up to .25% of its average
daily net assets. In addition, for the year ended December 31, 1995 the
Distributor received $82,882 from investors representing commissions for
Fund share redemptions. As permitted under Rule 10f-3 of the Investment
Company Act of 1940, the Board of Directors of the Fund has adopted a plan
which will allow the Fund, under certain conditions described in the Rule,
to acquire newly-issued securities from syndicates in which the Distributor
is a member.

3) INVESTMENT TRANSACTIONS.
For the year ended December 31, 1995, the cost of purchases and the
proceeds from sales of investment securities (excluding short-term
securities) were $60,257,914 and $64,648,495 respectively, of which sales
of U.S. government and government agency obligations aggregated
$54,049,987.

4) Sources of Net Assets.
As of December 31, 1995, the sources of net assets were as follows:

<TABLE>
<S> <C>
Fund shares issued and outstanding ................................ $ 69,235,548
Net unrealized appreciation on investments ........................ 2,913,933
Accumulated net realized losses on investments .................... (5,888,683)
----------
$ 66,260,798
==========
</TABLE>

Aggregate gross unrealized appreciation (depreciation) as of December 31, 1995,
based on investment cost for Federal income tax purposes is as follows:

<TABLE>
<S> <C>
Aggregate gross unrealized appreciation ........................... $ 3,282,292
Aggregate gross unrealized depreciation ........................... (368,359)
----------
Net unrealized appreciation on investments ........................ $ 2,913,933
==========
</TABLE>

This material may only be used when preceded or accompanied by the Fund's
prospectus.

<PAGE> 48

BACK COVER

Heartland Family of Funds

Small Cap Contrarian fund
Value Fund (closed to new investors 7/1/95)
Value & Income Fund
U.S. Government Securities Fund
Wisconsin Tax Free Fund
Nebraska Tax Free Fund
Portico Money Market

Our highest priority is our customers, who will be provided with the best
service and superior investment performance.

Heartland Funds
790 N. Milwaukee St., Milwaukee, Wisconsin 53202 1-800-432-7856