PENN MUTUAL VARIABLE ANNUITY ACCOUNT III, N-4, 1998-09-03

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
N-4, 1998-09-03

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<PAGE>

As filed with the Securities and Exchange Commission on September 3, 1998

FILE NO. _____

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

________________________

FORM N-4

REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 /X/
-

PRE-EFFECTIVE AMENDMENT NO. ___ /_/

POST-EFFECTIVE AMENDMENT NO. ___ /_/

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT of 1940 /_/

AMENDMENT NO. 22 /X/
-
_____________

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
(Exact Name of Registrant)

__________________________

THE PENN MUTUAL LIFE INSURANCE COMPANY
(Name of Depositor)

__________________________
600 Dresher Road
Horsham, Pennsylvania 19044
(Address of Principal Executive Offices of Depositor)
Depositor's Telephone Number: 215-956-8000
__________________________

Richard F. Plush
Vice President
The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044
(Name and Address of Agent for Service)

Copy to:
Richard W. Grant
C. Ronald Rubley
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993

_______________

Approximate date of public offering: As soon as practicable after effectiveness
of the Registration Statement

Title of Securities Being Registered:

Individual Variable and Fixed Annuity Contract - Flexible Purchase Payments

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
<PAGE>

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- -------------------------- ----------------------
<S> <C> <C>
Item 1. Cover Page Cover Page N/A

Item 2. Definitions Special Terms N/A

Item 3. Synopsis Cover Page; Expenses N/A
or Highlights

Item 4. Condensed N/A N/A
Financial
Information

Item 5. General The Penn Mutual Life N/A
Description Insurance Company;
of Registrant, The Separate Account
Depositor and
Portfolio
Companies

Item 6. Deductions The Contract - Charges N/A
and Expenses

Item 7. General The Contract N/A
Description
of Variable
Annuity
Contracts

Item 8. Annuity Period The Contract - Annuity N/A
Options Payments

Item 9. Death Benefit The Contract - Death N/A
On Death Benefit

Item 10. Purchases and The Contract - Purchases; N/A
Contract The Contract - Accumulation
Value Units

Item 11. Redemptions The Contract - Withdrawals N/A

Item 12. Taxes Federal Income Tax N/A
Considerations

Item 13. Legal N/A N/A
Proceedings
</TABLE>
<PAGE>

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
Location in Statement of
Form N-4 Item Number Location in Prospectuses Additional Information
- -------------------- ------------------------- ----------------------
<S> <C> <C>
Item 14. Table of Table of Contents of N/A
Contents of Statement of Additional
Statement of Information
Additional
Information

Item 15. Cover Page N/A Cover Page

Item 16. Table of N/A Cover Page
Contents

Item 17. General N/A N/A
Information
and History

Item 18. Services N/A Administrative and
Recordkeeping
Services; Custodian;
Independent Auditors

Item 19. Purchase of The Contract - Purchases; Distribution of
Securities The Contract - Transfers; Contracts
Being Offered The Contract - Charges
and Expenses

Item 20. Underwriters N/A Distribution of
Contracts

Item 21. Calculation of N/A Performance Data
Performance
Data

Item 22. Annuity N/A Variable Annuity
Payments Payments

Item 23. Financial N/A Financial Statements
Statements
</TABLE>
<PAGE>

PROSPECTUS -- JANUARY 1, 1999
Individual Variable and Fixed Annuity Contract -- Flexible Purchase Payments
- --------------------------------------------------------------------------------

LOGO

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, Pennsylvania 19172 . Telephone (215) 956-8000
- --------------------------------------------------------------------------------
This prospectus describes a combination variable and fixed annuity contract
offered by The Penn Mutual Life Insurance Company (the "Company"). Through Penn
Mutual Variable Annuity Account III (the "Separate Account"), you may allocate
amounts invested under the Contract among one or more of the funds as set forth
below:

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. MANAGER
Growth Equity Fund Independence Capital
Management, Inc. (a
wholly owned subsidiary
of The Penn Mutual Life
Insurance Company)
Value Equity Fund OpCap Advisors
Small Capitalization Fund OpCap Advisors
Emerging Growth Fund RS Investment Management,
Inc.
Flexibly Managed Fund T. Rowe Price Associates,
Inc.
International Equity Fund Vontobel USA, Inc.
Quality Bond Fund Independence Capital
Management, Inc.
High Yield Bond Fund T. Rowe Price Associates,
Inc.
Money Market Fund Independence Capital
Management, Inc.
- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. MANAGER
Capital Appreciation Portfolio American Century
Investment Management,
Inc.
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST MANAGER
Balanced Portfolio Neuberger & Berman
Management Incorporated
Limited Maturity Bond Portfolio Neuberger & Berman
Management Incorporated
Partners Fund Portfolio Neuberger & Berman
Management Incorporated
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND MANAGER
Equity-Income Portfolio Fidelity Management and
Research Company
Growth Portfolio Fidelity Management and
Research Company
- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II MANAGER
Asset Manager Portfolio Fidelity Management and
Research Company
Index 500 Portfolio Fidelity Management and
Research Company
- --------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Morgan Stanley Asset
Portfolio Management Inc.
- --------------------------------------------------------------------------------
<PAGE>

In addition, you may also invest in a fixed account. The fixed account is
funded through and is backed by the Company's general asset account.

For many persons, a combination variable and fixed annuity contract may
be an attractive long-term investment vehicle. Its benefits include the manner
in which earnings on accumulated funds are taxed, the availability of multiple
investment options, and the provision of annuity and death benefit guarantees.

A Contract may be returned within ten days of receipt for a full refund
of the Contract Value (or purchase payments, if required under applicable law).
Longer free look periods apply in some states.

This prospectus sets forth concisely the information a prospective
investor should know before investing. It should be retained for future
reference.

A statement of additional information dated the same as this prospectus
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. It is available, at no charge by writing The Penn Mutual
Life Insurance Company, Customer Service Group, Philadelphia, PA 19172. Or, you
can call (215) 956- 8000. In addition, the Securities and Exchange Commission
maintains a Web site (http://www.sec.gov) that contains the Statement of
Additional Information, material incorporated by reference, and other
information regarding registrants that file electronically with the Commission.
The table of contents of the statement of additional information is at the end
of this prospectus.

THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR
EACH APPLICABLE FUND.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>

- --------------------------------------------------------------------------------
PROSPECTUS CONTENTS

- --------------------------------------------------------------------------------
SPECIAL TERMS...................................................................

- --------------------------------------------------------------------------------
EXPENSES........................................................................

- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES...................................................

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY..........................................

- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT............................................................
Penn Series Funds, Inc. ...............................................
American Century Variable Portfolios, Inc. ............................
Neuberger & Berman Advisers Management Trust...........................
Fidelity Investments' Variable Insurance Products Fund.................
Fidelity Investments' Variable Insurance Products Fund II..............
Morgan Stanley Universal Funds, Inc. ..................................
- --------------------------------------------------------------------------------
THE CONTRACT....................................................................
Purchases..............................................................
Accumulation Units.....................................................
Annuity Payments.......................................................
Death Benefit..........................................................
Transfers..............................................................
Dollar Cost Averaging.........................................
Automatic Rebalancing.........................................
Withdrawals............................................................
Systematic Withdrawals........................................
403(b) Withdrawals............................................
Deferment of Payments and Transfers....................................
Charges................................................................
Administration Charges........................................
Mortality and Expense Risk Charge.............................
Contingent Deferred Sales Charge..............................
Free Withdrawals..............................................
Enhanced Variable Account Death Benefit.......................
Premium Taxes.................................................
Performance Information................................................
- --------------------------------------------------------------------------------

THE FIXED ACCOUNT...............................................................
General Information....................................................
Loans Under Section 403(b) Contracts...................................

- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS...............................................

- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS............................................................

- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS....................................

- --------------------------------------------------------------------------------

1
<PAGE>

- --------------------------------------------------------------------------------
SPECIAL TERMS

As used in this prospectus, the following terms have the indicated meanings:

ACCUMULATION UNIT: A unit of measure used to compute the Variable
Account Value under the Contract prior to the Annuity Date.
ANNUITANT: The person during whose life annuity payments are made.
ANNUITY DATE: The date on which annuity payments start.
ANNUITY UNIT: A unit of measure used to calculate the amount of each
variable annuity payment.
BENEFICIARY: The person(s) named by the Contract Owner to receive the
death benefit payable upon the death of the Contract Owner or Annuitant.
CONTRACT: The combination variable and fixed annuity contract described
in this prospectus.
CONTRACT OWNER: The person specified in the Contract as the Contract
Owner.
CONTRACT VALUE: The sum of the Variable Account Value and the Fixed
Account Value.
FIXED ACCOUNT VALUE: The value of amounts held under the Contract in
the fixed account.
SEPARATE ACCOUNT: Penn Mutual Variable Annuity Account III, a separate
account of The Penn Mutual Life Insurance Company that is registered as
a unit investment trust under the Investment Company Act of 1940.
VARIABLE ACCOUNT VALUE: The value of amounts held under the Contract in
all subaccount of the Separate Account.
VALUATION PERIOD: The period from one valuation of Separate Account
assets to the next. Valuation is performed on each day the New York
Stock Exchange is open for trading.
WE OR US: A reference to "we" or "us" denotes The Penn Mutual Life
Insurance Company.
YOU: A reference to "you" denotes the Contract Owner or prospective
Contract Owner.

- --------------------------------------------------------------------------------
EXPENSES

- --------------------------------------------------------------------------------
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments.................................. None
Maximum Contingent Deferred Sales Charge..1% of purchase payments withdrawn (a)
Exchange Fee............................................................. None
MAXIMUM ANNUAL CONTRACT ADMINISTRATION CHARGE...........................$40 (b)
SEPARATE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF VARIABLE ACCOUNT VALUE)
Mortality and Expense Risk Charge......................................1.25%
Contract Administration Charge.........................................0.15%
-----
Total Separate Account Annual Expenses.................................1.40% (c)

________________________
(a) The charge does not apply to withdrawals of purchase payments which were
made more than one year prior to withdrawal. See "Charges" in this
prospectus.
(b) The charge is 2% of the Variable Account Value if less than $40. There is
no charge under Contracts with a Variable Account Value of more than
$100,000. See "Charges" in this prospectus for more information about this
charge.
(c) An enhanced Variable Account death benefit rider may be purchased with the
Contract. An annual charge for the Rider is made against the average annual
Variable Account Value at the rate of 0.25%. See "Charges" in this
prospectus.

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. (a)

UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)

2
<PAGE>

<TABLE>
<CAPTION>
ADMINISTRATIVE
MANAGEMENT AND CORPORATE TOTAL
FEES (AFTER SERVICES FEES ACCOUNTING OTHER FUND
WAIVER) (AFTER WAIVER) FEES EXPENSES EXPENSES
----------- -------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity............................. 0.50% 0.15% 0.07% 0.05% 0.77%
Value Equity.............................. 0.50% 0.15% 0.06% 0.05% 0.76%
Small Capitalization ..................... 0.50% 0.15% 0.10% 0.10% 0.85%
Emerging Growth ......................... 0.80% 0.15% 0.08% 0.12% 1.15%
Flexibly Managed.......................... 0.50% 0.15% 0.05% 0.06% 0.76%
International Equity...................... 0.75% 0.15% 0.08% 0.15% 1.13%
Quality Bond.............................. 0.45% 0.15% 0.08% 0.07% 0.75%
High Yield Bond........................... 0.50% 0.15% 0.08% 0.08% 0.81%
Money Market.............................. 0.40% 0.15% 0.08% 0.07% 0.70%
</TABLE>

__________________
(a) The expenses presented are for the last fiscal year. In the absence of fee
waivers by the investment adviser and administrator of the Fund, the total
expenses of the Emerging Growth Fund would have been 1.41%.

- --------------------------------------------------------------------------------
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)

<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEES 12B-1 FEES EXPENSES EXPENSES
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Capital Appreciation...................... 1.00% None None 1.00%
</TABLE>
- --------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST (a)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)

<TABLE>
<CAPTION>
MANAGEMENT,
ADVISORY AND
ADMINISTRATION OTHER TOTAL FUND
FEES EXPENSES EXPENSES
------------ -------- --------
<S> <C> <C> <C>
Limited Maturity Bond................ 0.65% 0.12% 0.77%
Balanced..............................0.85% 0.19% 1.04%
Partners Fund.........................0.80% 0.06% 0.86%
</TABLE>

(a) Neuberger & Berman Advisers Management Trust (the "Trust") is divided into
portfolios ("Portfolios"), each of which invests all of its net investable
assets in a corresponding series ("Series") of Advisers Managers Trust.
Expenses in the table reflect expenses of the Portfolios and include each
Portfolio's pro rata portion of the operating expenses of each Portfolio's
corresponding Series. The Portfolios pay Neuberger & Berman Management Inc.
("NBMI") an administration fee based on the Portfolio's net asset value.
Each Portfolio's corresponding Series pays NBMI a management fee based on
the Series' average daily net assets. Accordingly, this table combines
management fees at the Series level and administration fees at the
Portfolio's level in a unified fee rate. Total Annual Expenses for each
portfolio have been restated based upon current administration fees for the
Portfolio and management fees for its corresponding Series. See "Expenses"
in the Trust's Prospectus.

3
<PAGE>

- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND (a)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)

<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income.............................................. 0.50% 0.07% 0.57%
Growth.................................................. 0.60% 0.07% 0.67%
</TABLE>

- -----------
(a) The expenses presented are for the last fiscal year. A portion of the
brokerage commissions the fund paid was used to reduce its expenses.
Without this reduction, total expenses would have been 0.58% for the
Equity Income Portfolio and 0.69% for the Growth Portfolio.

- --------------------------------------------------------------------------------
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)

<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Asset Manager (a)........................................... 0.55% 0.09% 0.64%
Index 500 (b)............................................... 0.24% 0.04% 0.28%
</TABLE>

(a) The expenses presented are for the last fiscal year. A portion of the
brokerage commissions the fund paid was used to reduce its expenses.
Without this reduction, total expenses would have been 0.65% for the
Asset Manager Portfolio.

(b) The expenses presented are for the last fiscal year. In the absence of
voluntary fee waivers by the investment adviser, total expenses would
have been 0.40% for the Index 500 Portfolio.

- -------------------------------------------------------------------------------
MORGAN STANLEY UNIVERSAL FUNDS, INC.
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVG. NET ASSETS)

<TABLE>
<CAPTION>
Management Other Total Fund
Fee Expenses Expenses
---------- -------- ----------
<S> <C> <C> <C>
Emerging Markets Equity (International)...................... 1.25% 0.50% 1.75%
</TABLE>

- --------------------------------------------------------------------------------

The purpose of the foregoing table is to assist you in understanding
the various costs and expenses that you will bear directly and indirectly. The
table shows Contract expenses and underlying fund expenses. See the prospectuses
of Penn Series Funds, Inc., American Century Variable Portfolios, Inc.,
Neuberger & Berman Advisers Management Trust, Fidelity Investments' Variable
Insurance Products Fund, Fidelity Investments' Variable Insurance Products Fund
II and Morgan Stanley Universal Funds, Inc. for additional information on fund
expenses.

Premium taxes may be applicable, but are not reflected in the tables
above or the examples below. See "Charges" in this prospectus.

4
<PAGE>

- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES

The following examples illustrate the cumulative dollar amount of all
the above expenses that would be incurred on each $1,000 invested.

If you make a single purchase payment and surrender your Contract at
the end of the applicable period, you would pay the following expenses on each
$1,000 invested, assuming a 5% annual return on assets.

<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund.......................................... $33 $70 $121 $259
Penn Series Value Equity Fund........................................... $33 $70 $120 $258
Penn Series Small Capitalization Fund................................... $34 $73 $125 $267
Penn Series Emerging Growth Fund........................................ $37 $82 $140 $297
Penn Series Flexibly Managed Fund....................................... $33 $70 $120 $258
Penn Series International Equity Fund................................... $37 $81 $139 $295
Penn Series Quality Bond Fund........................................... $33 $70 $120 $257
Penn Series High Yield Bond Fund........................................ $33 $72 $123 $263
Penn Series Money Market Fund........................................... $32 $68 $117 $252
American Century Capital Appreciation Portfolio......................... $35 $77 $132 $282
Neuberger & Berman Limited Maturity Bond Portfolio...................... $33 $70 $121 $259
Neuberger & Berman Balanced Portfolio................................... $36 $79 $134 $286
Neuberger & Berman Partners Portfolio................................... $34 $73 $125 $268
Fidelity's Equity Income Portfolio...................................... $31 $64 $110 $238
Fidelity's Growth Portfolio............................................. $32 $67 $116 $249
Fidelity's Asset Manager Portfolio...................................... $32 $66 $114 $246
Fidelity's Index 500 ................................................... $28 $55 $95 $207
Morgan Stanley Emerging Markets Equity (International) Portfolio........ $43 $99 $169 $353
</TABLE>

If you make a single purchase payment and either you do not surrender
your Contract or you annuitize your Contract at the end of the period, you would
pay the following expenses on each $1,000 invested, assuming a 5% annual return
on assets:

5
<PAGE>

<TABLE>
<S> <C> <C> <C> <C>
American Century Capital Appreciation Portfolio......................... $25 $77 $132 $282
Neuberger & Berman Limited Maturity Bond Portfolio...................... $23 $70 $121 $259
Neuberger & Berman Balanced Portfolio................................... $26 $79 $134 $286
Neuberger & Berman Partners Portfolio................................... $24 $73 $125 $268
Fidelity's Equity Income Portfolio...................................... $21 $64 $110 $238
Fidelity's Growth Portfolio............................................. $22 $67 $116 $249
Fidelity's Asset Manager Portfolio...................................... $22 $66 $114 $246
Fidelity's Index 500.................................................... $18 $55 $95 $207
Morgan Stanley Emerging Markets Equity (International) Portfolio........ $33 $99 $169 $353
</TABLE>

_______________

The examples are based upon fund data for the fiscal year ended
December 31, 1997.

THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES UNDER YOUR CONTRACT; ACTUAL EXPENSES MAY BE GREATER OR LESSER
THAN THOSE SHOWN.

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY

The Penn Mutual Life Insurance Company ("Penn Mutual") is a
Pennsylvania mutual life insurance company. We were chartered in 1847 and have
been continuously engaged in the life insurance business since that date. Our
home offices are located at 600 Dresher Road, Horsham, PA 19044. Our mailing
address is Independence Square, Philadelphia, PA 19172.

- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT

Penn Mutual Variable Annuity Account III was established as a separate
account of Penn Mutual on April 13, 1982. The Separate Account is registered
with the Securities and Exchange Commission as a unit investment trust under the
Investment Company Act of 1940 and qualifies as a "separate account" within the
meaning of the federal securities laws.

The Separate Account is divided into subaccount for investment in
shares of different Funds of Penn Series Funds, Inc., American Century Variable
Portfolios, Inc., Neuberger & Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund and Variable Insurance Products
Fund II and Morgan Stanley Universal Funds, Inc. Income, gains and losses,
realized or unrealized, of a subaccount are credited to or charged against the
subaccount without regard to any other income, gains or losses of Penn Mutual.
Assets equal to the reserves and other contract liabilities with respect to each
subaccount are not chargeable with liabilities arising out of any other business
of Penn Mutual. Penn Mutual is obligated to pay all benefits and make all
payments provided under the Contracts.

Assets held in the Separate Account under the Contracts described in
this prospectus are invested, at the direction of the Contract Owner, in one or
more Funds of Penn Series Funds, Inc., Neuberger & Berman Advisers Management
Trust, American Century Variable Portfolios, Inc., Fidelity Investments;
Variable Insurance Products Fund and Variable Insurance Products Fund II and
Morgan Stanley Universal Funds, Inc.

Under the Investment Company Act of 1940, as currently interpreted,
Contract Owners and persons receiving annuity payments have the right to
instruct Penn Mutual as to the voting of the various Fund shares held in

6
<PAGE>

the Separate Account pursuant to the Contracts. The number of shares of a Fund
for which voting instructions may be given by a Contract Owner is determined by
dividing the Contract Owner's interest in the applicable subaccount of the
Separate Account by the net asset value per share of the Fund. The number of
shares of a Fund for which voting instructions may be given by a person
receiving annuity payments is determined by dividing the reserve allocated to
the applicable subaccount by the net asset value per share of the Fund. Should
the applicable law, or interpretations thereof, change so as to permit us to
vote shares of the mutual funds in our own right, we may elect to do so.
Further, we reserve the right to modify the manner in which we calculate the
weight to be given to pass through voting instructions where such a change is
necessary to comply with federal law or interpretations thereof.

Shares of Penn Series are sold not only to the Separate Account, but
also to other separate accounts of Penn Mutual and its subsidiary, The Penn
Insurance and Annuity Company, that fund benefits under variable annuity and
variable life insurance contracts. Shares of American Century Variable
Portfolios, Inc., Neuberger & Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund and Variable Insurance Products
Fund II and Morgan Stanley Universal Funds, Inc. are offered not only to
variable annuity and variable life separate accounts of Penn Mutual, but also to
such accounts of other insurance companies unaffiliated with Penn Mutual and, in
the case of Neuberger & Berman Advisers Management Trust and Morgan Stanley
Universal Funds, Inc., directly to qualified pension and retirement plans. For
information on possible conflicts involved in the Separate Account investing in
Funds that are so offered, see the accompanying Fund prospectuses.

________________________________________________________________________________
PENN SERIES FUNDS, INC.:

GROWTH EQUITY FUND -- seeks long term growth of capital and increase of
future income by investing primarily in common stocks of well established growth
companies;

VALUE EQUITY FUND -- seeks to maximize total return (capital
appreciation and income) primarily by investing in equity securities of
companies believed to be undervalued considering such factors as assets,
earnings, growth potential and cash flows;

SMALL CAPITALIZATION FUND -- seeks capital appreciation through
investment in a diversified portfolio of securities consisting primarily of
equity securities of companies with market capitalizations under $1 billion;

EMERGING GROWTH FUND -- seeks capital appreciation by investing
primarily in common stocks of emerging growth companies with above-average
growth prospects;

FLEXIBLY MANAGED FUND -- seeks to maximize total return (capital
appreciation and income) by investing in common stocks, other equity securities,
corporate debt securities, and/or short term reserves, in proportions considered
appropriate in light of the availability of attractively valued individual
securities and current and expected economic and market conditions;

INTERNATIONAL EQUITY FUND -- seeks to maximize capital appreciation by
investing in a carefully selected diversified portfolio consisting primarily of
equity securities. The investments will consist principally of equity securities
of European and Pacific Basin countries;

QUALITY BOND FUND -- seeks the highest income over the long term
consistent with the preservation of principal through investment primarily in
marketable investment grade debt securities;

HIGH YIELD BOND FUND -- seeks high current income by investing
primarily in a diversified portfolio of long term high-yield/high-risk fixed
income securities in the medium to lower quality ranges; capital appreciation is

7
<PAGE>

a secondary objective; such securities, which are commonly referred to as "junk"
bonds, generally involve greater risks of loss of income and principal than
higher rated securities (see accompanying Penn Series prospectuses);

MONEY MARKET FUND -- seeks to preserve capital, maintain liquidity and
achieve the highest possible level of current income consistent therewith, by
investing in high quality money market instruments; an investment in the Fund is
neither insured nor guaranteed by the U.S. Government and there can be no
assurance that the fund will be able to maintain a stable net asset value of
$1.00 per share.

Independence Capital Management, Inc., Horsham, Pennsylvania is
investment adviser to each of the Funds. OpCap Advisors, New York, New York, is
investment sub-adviser to the Value Equity and Small Capitalization Funds. T.
Rowe Price Associates, Baltimore, Maryland, is investment sub-adviser to the
Flexibly Managed and High Yield Bond Funds. Vontobel USA, Inc., New York, New
York, is investment sub-adviser to the International Equity Fund. RS Investment
Management, Inc., San Francisco, California, is investment sub-adviser to the
Emerging Growth Fund.

________________________________________________________________________________
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.:

CAPITAL APPRECIATION PORTFOLIO -- seeks capital growth by investing
primarily in common stocks believed to have better-than-average prospects for
appreciation.

American Century Investment Management, Inc., Kansas City, Missouri, is
investment adviser to the Capital Appreciation Portfolio.

________________________________________________________________________________
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST:

LIMITED MATURITY BOND PORTFOLIO -- seeks highest current income
consistent with low risk to principal and liquidity, primarily by investing in a
diversified portfolio of limited maturity debt securities. A secondary objective
is capital appreciation.

BALANCED PORTFOLIO -- seeks long-term capital growth and reasonable
current income without undue risk to principal through investment of a portion
of its assets in common stock and a portion in debt securities.

PARTNERS PORTFOLIO -- seeks capital growth by investing primarily in
common stocks of established companies, using the value oriented investment
approach. Neuberger & Berman reserves the right to make changes in the
investment objective, but will notify shareholders thirty days in advance of any
proposed material change.

Neuberger & Berman Management Incorporated, New York, New York, is
investment adviser to the Limited Maturity Bond Portfolio, the Balanced
Portfolio and the Partners Portfolio.

________________________________________________________________________________
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND:

EQUITY-INCOME PORTFOLIO -- seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these securities,
the fund will also consider the potential for capital appreciation. The fund's
goal is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index.

8
<PAGE>

GROWTH PORTFOLIO -- seeks to achieve capital appreciation. The fund
normally purchases common stocks, although its investments are not restricted to
any one type of security. Capital appreciation may also be found in other types
of securities, including bonds and preferred stocks.

Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Equity- Income Portfolio and the Growth Portfolio.

________________________________________________________________________________
FIDELITY INVESTMENTS' VARIABLE INSURANCE PRODUCTS FUND II:

ASSET MANAGER PORTFOLIO -- seeks high total return with reduced risk
over the long-term by allocating its assets among domestic and foreign stocks,
bonds and short-term fixed income investments.

INDEX 500 PORTFOLIO -- seeks to match the total return of the S&P 500
while keeping expenses low. The S&P 500 is an index of 500 common stocks, most
of which trade on the New York Stock Exchange.

Fidelity Management & Research Company, Boston, Massachusetts, is
investment adviser to the Asset Manager Portfolio and the Index 500 Portfolio.

________________________________________________________________________________
MORGAN STANLEY UNIVERSAL FUNDS, INC.:

EMERGING MARKETS EQUITY (INTERNATIONAL) PORTFOLIO -- seeks long term
capital appreciation by investing primarily in equity securities of emerging
market country issuers. The Portfolio will focus on economies which are
developing strongly and in which the markets are becoming more sophisticated.

Morgan Stanley Asset Management Inc. , New York, New York, is
investment adviser to the Emerging Markets Equity (International) Portfolio.

________________________________________________________________________________

FOR MORE INFORMATION ON THE MUTUAL FUNDS IN WHICH THE SUBACCOUNT INVEST, SEE THE
PROSPECTUSES FOR PENN SERIES FUNDS, INC., AMERICAN CENTURY VARIABLE PORTFOLIOS,
INC., NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST, FIDELITY INVESTMENTS'
VARIABLE INSURANCE PRODUCTS FUND, FIDELITY INVESTMENTS' VARIABLE INSURANCE
PRODUCTS FUND II, AND MORGAN STANLEY UNIVERSAL FUNDS, INC. YOU SHOULD READ THE
PROSPECTUSES FOR THE FUNDS IN WHICH YOU ARE INTERESTED BEFORE INVESTING.

________________________________________________________________________________
THE CONTRACT

The Contract described in this prospectus is a combination variable and
fixed annuity contract. The Contract provides for investment, through subaccount
of the Separate Account, in one or more of the available funds of Penn Series
Funds, Inc., American Century Variable Portfolios, Inc., Neuberger & Berman
Advisers Management Trust, Fidelity Investments' Variable Insurance Products
Fund, Fidelity Investments' Variable Insurance Products Fund II and Morgan
Stanley Universal Funds, Inc. It also provides for investment in a fixed
account. The Fixed Account is guaranteed and funded by the Company through its
general account. See THE FIXED ACCOUNT in this prospectus. Currently, over the
life of the Contract, amounts may be allocated or transferred to one or more of
the 18 Funds and the fixed account.

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<PAGE>

As the Contract Owner, you determine, within Contract limits (1) the
amount and frequency of the purchase payments to be made to the Company, (2) the
investment options to which the purchase payments are to be allocated, (3)
transfers among investment options, (4) the form of annuity to be paid after the
accumulation period and the person to whom it is to be paid, (5) the beneficiary
to whom death benefits are to be paid, and (6) the amount and frequency of
withdrawals from the Contract Value.

During the variable annuity payout period, you (or the beneficiary in
the event of your death or the Annuitant's death) may transfer Annuity Unit
values among up to four subaccounts of the Separate Account that must be
selected at the time of annuitization.

Upon the earlier of the death of the Contract Owner or Annuitant prior
to the Annuity Date, the beneficiary may elect to receive a death benefit in a
lump sum or in the form of an annuity. A spousal beneficiary may elect to become
the Owner of the Contract.

The Contract may be amended at any time to conform to applicable laws
or governmental regulations. If, in our judgment, investment in any of the
mutual funds becomes inappropriate to the purposes of the Contract, we may, with
approval of the Securities and Exchange Commission and the governing state
Ginsurance department, substitute another fund for existing and future
investments.

The Contracts are available to individuals and institutions for
retirement and other funding purposes. The Contracts may also be issued as
individual retirement annuities under Section 408(b) of the Internal Revenue
Code (the "Code") in connection with IRA rollovers and as tax-deferred annuities
under Section 403(b) of the Code (often referred to as qualified Contracts).

Contract Owner inquiries may be made by writing The Penn Mutual Life
Insurance Company, Customer Service Group, Philadelphia, PA 19172. Or, you may
call (215) 956-8000.

________________________________________________________________________________
PURCHASES

To purchase a Contract, your completed application, together with a
check for the first purchase payment, should be forwarded to our administrative
office in Horsham, Pennsylvania. Normally, a completed application form received
at our administrative office will be accepted within two business days. If an
incomplete application is not completed and acted upon within five business
days, the purchase payment will be returned to you unless you request that we
retain it while you complete the application. All subsequent purchase payments
are sent directly to our administrative office.

The minimum initial purchase payment is $25,000. The minimum subsequent
purchase payment that will be accepted is $25,000. We may, in our discretion,
reduce the minimum requirements for initial and subsequent purchase payments. We
will accept total purchase payments under your Contract of up to $1 million.
Total purchase payments in excess of $1 million require our prior approval.

Purchase payments allocated to the Separate Account are credited in the
form of Accumulation Units of the subaccount selected. The number of
Accumulation Units credited is determined by dividing the purchase payment
allocated to the Separate Account by the value of the Accumulation Unit at the
end of the valuation period in which the purchase payment is received at our
administrative office or, in a case of the first purchase payment, is accepted
by us.

The principal underwriter of the Contract (under federal securities
laws) is Hornor, Townsend & Kent, Inc., 600 Dresher Road, Horsham, PA 19044, a
wholly-owned subsidiary of Penn Mutual.

10
<PAGE>

________________________________________________________________________________
ACCUMULATION UNITS

For each subaccount of the Separate Account available under the
Contract, the value of an Accumulation Unit will be $10 when the subaccount
commences operation. The value of an Accumulation Unit may increase or decrease
from one valuation period to the next.

The value of an Accumulation Unit for a valuation period is determined
by multiplying the value of an Accumulation Unit for the prior valuation period
by the net investment factor for the subaccount for the current valuation
period.

The net investment factor is a measure of (1) investment performance of
mutual fund shares held in the subaccount, (2) any taxes on income or gains from
investments held in the subaccount, if applicable, and (3) the mortality and
expense risk charge at an annual rate of 1.25% and the contract administration
charge at an annual rate of 0.15% assessed against the subaccount. Under current
law, no taxes are levied against income or gain from investments held in a
subaccount.

________________________________________________________________________________
ANNUITY PAYMENTS

You may choose one of the following forms of annuity: (1) an annuity
for a specified number of years, (2) a life annuity, (3) a life annuity with
payments guaranteed for 10 or 20 years, (4) a joint and survivor life annuity or
(5) such other form of annuity as we may agree upon. You may select any one of
these forms of annuity as a variable annuity (except for a specified number of
years), a fixed annuity, or a combination of both.

The level of the variable annuity payments is determined by various
factors, including the amount accumulated and applied under the Contract to the
variable annuity, the form of annuity chosen, the expected duration of the
annuity period, the performance of the applicable investment options, and the
annuity purchase rates and charges specified in the Contract.

You may choose annuity purchase rates based on an assumed interest rate
of 3% or based on an assumed interest rate of 5%. If the annual net investment
return during the annuity payout period is greater than the rate chosen, the
level of the annuity payment increases. If the annual net investment return is
less than the rate chosen, the level of the annuity payments decreases. The
choice of a higher assumed interest rate would mean a higher first annuity
payment but more slowly rising or more rapidly falling subsequent payments. The
choice of a lower assumed interest rate would have the opposite effect.

The level of fixed annuity payments under a Contract is determined by
various factors, including the amount accumulated and applied under the Contract
to the fixed annuity, the form of annuity chosen, the expected duration of the
annuity period, and a guaranteed 3% rate of return.

Unless you specify otherwise, you or such other person you designate
will receive a life annuity with payments guaranteed for 10 years except for tax
deferred annuities under Section 403(b) of the Code and pension or profit
sharing plans under Section 401 of the Code. Annuitants under those Contracts
will receive a joint and survivor annuity. Unless you specify otherwise, the
annuity will be split between fixed and variable in the same proportions as the
Contract Value on the Annuity Date.

Unless you specify otherwise, the Annuity Date will be the later of (1)
the first day of the next month after the Annuitant's 95th birthday or (2) 10
years after the contract date, unless state law requires an earlier Annuity
Date. The Annuity Date under the Contract must be on the first day of a month.

11
<PAGE>

You may change the Annuity Date or annuity option by giving written
notice at our administrative office at least 30 days prior to the current
Annuity Date. If the Contract Value of a Contract is less than $5,000, we may
elect to pay such amount in a lump sum in place of an annuity. Annuity payments
are generally monthly, starting with the Annuity Date, but may also be made
quarterly, semiannually or annually at your request. However, if any payment
would be less than $50, we may change the frequency of annuity payments so that
payments are at least $50 each.

For information on the tax treatment of annuity payments, see FEDERAL
INCOME TAX CONSIDERATIONS in this Prospectus.

________________________________________________________________________________
DEATH BENEFIT

We will pay a death benefit upon the earlier of the death of the
Contract Owner or the Annuitant.

If the Contract Owner dies prior to the Annuity Date, we will pay the
beneficiary the Contract Value for the valuation period in which proof of death
is received at our administrative office.

If the Annuitant dies before the Annuity Date, we will pay a death
benefit to the beneficiary equal to the sum of the Variable Account death
benefit and the Fixed Account death benefit as of the date we receive proof of
death. The Variable Account death benefit is the greater of (1) the Variable
Account Value or (2) all purchase payments allocated and transfers made to the
Variable Account less withdrawals from the amounts so allocated and transferred.
The Fixed Account death benefit is the Fixed Account Value. The death benefit
generally will be paid within seven days after we receive proof of death and all
information necessary to make payment to the beneficiary.

If the Annuitant is 75 years of age or less, you may purchase an
enhanced guaranteed minimum death benefit as part of your Contract. The enhanced
guaranteed minimum death benefit is paid if the Annuitant dies before the
Annuity Date and the Annuitant and is less than 91 years of age. We offer two
different enhanced guaranteed minimum death benefits - a guaranteed minimum
death benefit step-up and a guaranteed minimum death benefit rising floor. You
may purchase one of them at the time you purchase your Contract.

The guaranteed minimum death benefit-step-up is the greater of the
guaranteed minimum death benefit currently in effect or the Variable Account
Value on the current contract anniversary. The guaranteed minimum death benefit
currently in effect is the guaranteed minimum death benefit on the current
contract anniversary adjusted as follows. If there were allocations or transfers
to the Variable Account after the contract anniversary, the guaranteed minimum
death benefit will be increased by such allocations and transfers. If
withdrawals or transfers were made from the Variable Account after the contract
anniversary, the guaranteed minimum death benefit will be reduced by an amount
that is in the same proportion that the amount withdrawn or transferred from the
Variable Account (including any contingent deferred sales charge) was to the
Variable Account Value on the date of the withdrawal or transfer.

The guaranteed minimum death benefit-rising floor is the sum of all
purchase payments allocated and transfers made to the Variable Account minus a
reduction (as described below) for any withdrawals or transfers made from the
Variable Account plus interest at 5%, calculated as follows. Interest is
reflected from the dates amounts are allocated to or removed from the Variable
Account to the date the guaranteed minimum death benefit is paid, or the date
the Annuitant attains 80 years of age, if earlier. If a withdrawal was made from
the Variable Account, the guaranteed minimum death benefit will be reduced by an
amount that is in the same proportion to the Variable Account Value that the
amount withdrawn or transferred from the Variable Account (including any
contingent deferred sales charge) was to the Variable Account Value on the date
of the withdrawal or transfer.

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<PAGE>

For information on the cost of the enhanced guaranteed minimum death
benefits, see "Charges" in this Prospectus.

Within one year of the date of death of the Contract Owner, the
beneficiary may elect to receive the death benefit in single sum or in the form
of an annuity. If the death benefit becomes payable upon death of the Annuitant
who is not the Contract Owner, an election to receive the death benefit in the
form of annuity must be made within 60 days of death of the Annuitant. If
payment is to be received in a single sum, it must be paid within five years of
the date of death (until paid out, the death benefit will be allocated to
subaccount of the Separate Account and/or Fixed Account as directed by the
beneficiary). If an annuity is selected, payments must commence within one year
of the date of death and must be made over the beneficiary's life or over a
period not longer than the beneficiary's life expectancy. If an election is not
made within one year of the date of death of the Contract Owner, or within 60
days of death of the Annuitant (who is not the Contract Owner), the death
benefit will be paid to the beneficiary in a single sum. If the Contract Owner
dies and the beneficiary is the Contract Owner's surviving spouse, the surviving
spouse may become the Contract Owner rather than receive the death benefit. If
there is more than one surviving beneficiary, the beneficiaries must choose
their respective portions of the death benefit, in accordance with the above
options.

If the Annuitant dies on or after the Annuity Date, the death benefit
payable, if any, will be according to the annuity option in force.

You may designate a beneficiary in your application. You may also
change the beneficiary at any time before your death or the death of the
Annuitant, whichever occurs first.

For information on the tax treatment of death benefits, see FEDERAL
INCOME TAX CONSIDERATIONS in this Prospectus.

________________________________________________________________________________
TRANSFERS

Prior to the Annuity Date, you may transfer amounts from one subaccount
of the Separate Account to another subaccount of the Separate Account. You may
also transfer amounts from the subaccount of the Separate Account to the Fixed
Account prior to the Annuity Date. You may make a transfer from the Fixed
Account to the Variable Account only at the completion of the interest period or
within 25 days thereafter.

After the Annuity Date and during an annuity payout period, you may
transfer amounts (upon which the annuity payments are based) from one subaccount
of the Separate Account to another. Upon your death or the death of the
Annuitant, a beneficiary who is receiving annuity payments may transfer amounts
among the subaccount of the Separate Account.

Transfers will be based on values at the end of the valuation period in
which the transfer request is received at our service office.

The minimum amount that may be transferred is $250 or, if less, the
amount held in the subaccount or Fixed Account. In the case of partial
transfers, the amount remaining in the subaccount or Fixed Account must be at
least $250.

A request for transfer must be received at our service office and all
other administrative requirements for transfer must be met to make the transfer.
The Separate Account and the Company will not be liable for following

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<PAGE>

instructions communicated by telephone that we reasonably believe to be genuine.
We require certain personal identifying information to process a request for
transfer made over the telephone.

DOLLAR COST AVERAGING: If you have a Contract Value of at least
$10,000, you may elect to have a fixed percentage of your initial or subsequent
purchase payments transferred monthly or quarterly from one source account to
other accounts. These transfers may be made only from one of the following
accounts: Money Market Subaccount, Limited Maturity Bond Subaccount, Quality
Bond Subaccount. The dollar cost averaging term may run up to 60 months, or
until you give notice of a change in allocation or cancellation of the feature.

AUTOMATIC REBALANCING: If you have a Contract Value of at least $10,000
you may elect to have your investments in subaccount of the Separate Account
automatically rebalanced. We will transfer funds under your Contract on a
quarterly (calendar) basis among the subaccount to maintain a specified
percentage allocation among your selected variable investment options. Dollar
cost averaging and automatic rebalancing may not be in effect at the same time.

________________________________________________________________________________
WITHDRAWALS

Prior to the Annuity Date and prior to the earlier of the death of the
Contract Owner and Annuitant, you may withdraw all or part of your Contract
Value. Withdrawals will be based on values at the end of the valuation period in
which a proper written request for withdrawal (and the Contract, in case of a
full withdrawal) is received at our administrative office. Payment will normally
be made within seven days of receipt of the written request and the Contract, if
required. A withdrawal may result in certain tax consequences, including an
additional 10% tax under certain circumstances. For information on tax treatment
of withdrawals, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.

The minimum withdrawal is $500. A minimum balance of $250 must be in
each sub-account or the Fixed Account. A partial withdrawal may be made from a
subaccount of the Separate Account or the Fixed Account only if the amount
remaining in the contract is at least $5,000 and the balance remaining in each
subaccount or the Fixed Account is at least $250. If you request a partial
withdrawal without specifying allocation of the withdrawal among investment
options, it will be taken pro rata from the variable subaccount; if the partial
withdrawal exhausts your Variable Account Value, then any remaining withdrawal
will be taken from the Fixed Account.

SYSTEMATIC WITHDRAWALS: You may make a request for a systematic
withdrawal if there is no previous withdrawal in the current contract year. The
maximum value of a systematic withdrawal request is equal to 15% of total
purchase payments. A level systematic withdrawal will begin one modal period
after the date of receipt of the request. The systematic withdrawals may be made
on a monthly, quarterly, semiannual or annual basis. The minimum Contract Value
that is eligible for a systematic withdrawal is $25,000. The minimum amount of
each withdrawal payment is $100. Payments can be made in either a fixed dollar
amount or a fixed percentage of purchase payments. The latter option provides a
convenient way to take advantage of the ability to withdraw a limited percentage
of purchase payments without incurring a contingent deferred sales charge. For
information on the tax treatment of withdrawals, see FEDERAL INCOME TAX
CONSIDERATIONS in this prospectus.

403(B) WITHDRAWALS: With respect to Contracts qualifying under Section
403(b) of the Code, there are certain restrictions on withdrawals. Withdrawals
may generally be made only if the Contract Owner is over the age of 59 1/2,
leaves the employment of the employer, dies, or becomes disabled as defined in
the Code. Withdrawals (other than withdrawals attributable to income earned on
purchase payments) may also be possible in the case of hardship as defined in
the Code. The restrictions do not apply to transfers among subaccount and may
also not apply to transfers to other investments qualifying under Section
403(b). For information on the tax treatment of withdrawals under Section 403(b)
Contracts, see FEDERAL INCOME TAX CONSIDERATIONS in this prospectus.

14
<PAGE>

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DEFERMENT OF PAYMENTS AND TRANSFERS

We reserve the right to defer a withdrawal, a transfer of values or
annuity payments funded by the Separate Account if (a) the New York Stock
Exchange is closed (other than customary weekend and holiday closings); (b)
trading on the Exchange is restricted; (c) an emergency exists such that it is
not reasonably practical to dispose of securities held in the Separate Account
or to determine the value of its assets; or (d) the Securities and Exchange
Commission by order so permits for the protection of investors. Conditions
described in (b) and (c) will be decided by, or in accordance with rules of, the
Commission.

- --------------------------------------------------------------------------------
CHARGES

ADMINISTRATION CHARGES:

Charges are assessed to reimburse us for the expenses we incur in
administering the Contract and the Separate Account. First, on an annual basis,
we deduct from the Variable Account Value a contract administration charge which
will be no greater than the lesser of $40 or 2% of the Variable Account Value.
We will not, however, deduct this charge if the Variable Account Value is
greater than $100,000. The charge is made by canceling Accumulation Units
credited to the Contract, with the charge allocated pro rata among the
subaccount comprising the Variable Account Value. Second, we deduct from the
Separate Account a daily administration charge which will not exceed an
effective annual rate of 0.15% of the daily net asset value of the Separate
Account. These administration charges are guaranteed not to increase and are
intended to cover our average anticipated administration expenses over the
periods the Contracts are in force.

MORTALITY AND EXPENSE RISK CHARGE:

We deduct a daily mortality and expense risk charge which will not
exceed an effective annual rate of 1.25% of the daily net asset value of the
Separate Account. This charge is to compensate us for the mortality-related
guarantees we make under the Contract (e.g., the death benefit and the guarantee
that the annuity factors will never be decreased even if mortality experience is
substantially different than originally assumed), and for the risk that our
administration charges will be insufficient to cover administration expenses
over the life of the Contracts. The mortality and expense risk charge is
assessed during both the accumulation and variable annuity pay-out phases of the
Contract.

CONTINGENT DEFERRED SALES CHARGE:

A contingent deferred sales charge may be deducted from withdrawals of
purchase payments prior to the Annuity Date. This charge is made to cover sales
expenses that we have incurred. Sales expenses which are not covered by the
deferred sales charge are paid from the surplus of the Company, which may
include proceeds from the mortality and expense risk charge.

A contingent deferred sales charge, if applicable, will be imposed only
on a withdrawal of a purchase payment in cases where the purchase payment was
made within one year of the date of the withdrawal. If applicable, the charge is
1% of the amount withdrawn. Purchase payments will be treated as withdrawn on a
first-in, first-out basis.

The contingent deferred sales charge may be reduced on Contracts sold
to a trustee, employer or similar party pursuant to a retirement plan or to a
group of individuals, if such sales are expected to involve reduced sales
expenses. The amount of reduction will depend upon such factors as the size of
the group, any prior or existing

15
<PAGE>

relationship with the purchaser or group, the total amount of purchase payments
and other relevant factors that might tend to reduce expenses incurred in
connection with such sales. The reduction will not be unfairly discriminatory to
any Contract Owner.

FREE WITHDRAWALS:

One Year Old Purchase Payments. You may withdraw, without incurring a
-------------------------------
contingent deferred sales charge, all purchase payments which were made more
than one year prior to the withdrawal.

Systematic Withdrawals of 15% of Purchase Payments. Once (and if no
---------------------------------------------------
previous withdrawal has been made in the contract year), you may request
systematic withdrawals totaling 15% of purchase payments as of the date of the
request. The free systematic withdrawal amount will be applied to purchase
payments on a first-in, first-out basis. With respect to any withdrawal of
purchase payments made during the same year, which are in excess of the free
systematic withdrawal limit in a contract year, the contingent deferred sales
charge schedule set forth above will apply to the remainder of the purchase
payments so withdrawn on a first-in, first-out basis.

Other Withdrawals. There is no contingent deferred sales charge imposed
------------------
upon minimum distributions under qualified contracts which are required by the
Code.

ENHANCED VARIABLE ACCOUNT DEATH BENEFIT (OPTIONAL):

If you purchase an enhanced Variable Account death benefit as part of
your Contract, we will deduct a guaranteed minimum death benefit charge from the
Variable Account Value. The charge is 0.25% of the average annual Variable
Account Value. The charge will be made on each Contract anniversary by canceling
Accumulation Units credited to your Contract, with the charge allocated pro rata
among the subaccount comprising the Variable Account Value.

PREMIUM TAXES:

Some states and municipalities impose premium taxes on purchase
payments received by insurance companies. Generally, any premium taxes payable
will be deducted upon annuitization, although we reserve the right to deduct
such taxes when due in jurisdictions that impose such taxes on purchase
payments. Currently, state premium taxes on purchase payments range from 0% to
31/2%.

- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION

The Company may advertise total return performance and annual changes
in accumulation unit values. We may also provide information on "yields" and
"effective yields" on investments in the Money Market Fund subaccount.

Information on total return performance will include average annual
rates of total return for one, five and ten year periods, or lesser periods
depending on how long the underlying fund portfolio has been in existence. Such
figures are based on the hypothetical assumption that the Separate Account
invested in the underlying portfolios from the date those portfolios were first
available to other insurance company separate accounts. Average annual total
return figures will show the average annual rates of increase or decrease in
investments in the subaccount, assuming a hypothetical $1,000 investment at the
beginning of the period, withdrawal of the investment at the end of the period,
and the deduction of all applicable fund and Contract charges. We may also show
average annual rates of total return, assuming other amounts invested at the
beginning of the period and no withdrawal at the end of the period. Average
annual total return figures which assume no withdrawals at the end of the period
will reflect all

16
<PAGE>

recurring charges, but will not reflect the contingent deferred sales charge (if
applicable, the contingent deferred sales charge would reduce the amount that
may be withdrawn under the Contracts).

The "yield" on an investment in the Money Market Fund subaccount refers
to the income generated by the investment over a 7-day period. This income is
then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" is calculated
similarly, but, when annualized, the income earned by an investment in the
subaccount is assumed to be reinvested. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.

- --------------------------------------------------------------------------------
THE FIXED ACCOUNT

BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE
COMPANY'S GENERAL ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND THE GENERAL ACCOUNT HAS NOT BEEN REGISTERED AS AN INVESTMENT COMPANY
UNDER THE INVESTMENT COMPANY ACT OF 1940. THE GENERAL ACCOUNT AND ANY INTERESTS
HELD IN THE GENERAL ACCOUNT ARE THEREFORE NOT SUBJECT TO THE PROVISIONS OF THESE
ACTS. HENCE THIS PROSPECTUS GENERALLY DISCUSSES ONLY THE VARIABLE PORTION OF THE
CONTRACT. THE COMPANY HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURE IN THIS PROSPECTUS RELATING
TO THE FIXED ACCOUNT. DISCLOSURE REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE
SUBJECT TO GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS
RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN THIS PROSPECTUS.

- --------------------------------------------------------------------------------
GENERAL INFORMATION

You may allocate or transfer all or part of the amount credited to your
Contract to the Fixed Account. We periodically declare an effective annual
interest rate applicable to allocations to the Fixed Account. For each amount
allocated to the Fixed Account, we credit interest at a rate declared by us in
the month in which the allocation is made. The declared rate of interest will
apply through the end of the 12-month period which begins on the first day of
the calendar month in which the allocation is made. We will not declare an
effective annual rate of interest of less than 3%.

You may transfer amounts in the Fixed Account to subaccount of the
Separate Account subject to the conditions and limitations in the Fixed Account
provisions of your Contract. Amounts in the Fixed Account not withdrawn or
reallocated within 25 days after the end of an interest period are rolled over
and treated as a new allocation to the Fixed Account. In accordance with state
law, we may defer a withdrawal or transfer from the Fixed Account for up to six
months if we reasonably determine that investment conditions are such that an
orderly sale of assets in the Company's general account is not feasible.

- --------------------------------------------------------------------------------
LOANS UNDER SECTION 403(B) CONTRACTS

Subject to compliance with applicable state law, Contract Owners
qualifying under Section 403(b) of the Code may be able to borrow against a
portion of the amount credited to the Fixed Account under their Contract,
provided the loan privilege has been approved in the applicable state. The loan
will be made from the general account of the Company. Because this prospectus
generally is limited to describing the variable portion of the Contract, you
should review the Contract loan endorsement or consult your Company
representative for a complete description of the terms of the loan privilege,
including minimum and maximum loan

17
<PAGE>

amounts, repayment terms, and restrictions on prepayments. The following
paragraphs describe how exercise of the loan privilege may relate to the
Variable Account Value.

First, at the time a Contract loan is made and in accordance with your
direction, an amount equal to the initial loan amount will be transferred from
the Contract's investment options to an account in the Company's general account
called the "Restricted Account." Amounts transferred from investment options to
the Restricted Account will not participate in the investment experience of
those investment options. Amounts transferred to the Restricted Account will
generally earn interest at a rate [1 1/2] percentage points less than the rate
of interest charged on the loan.

Second, on your Contract Anniversary, the accrued interest in the
Restricted Account will be transferred to your investment options in accordance
with your current payment allocation instructions.

Third, loan repayments, which are due quarterly, will result in the
transfer of an amount equal to the principal portion of the repayment from the
Restricted Account to the Money Market subaccount. You may then transfer amounts
from the Money Market subaccount to the other investment options offered under
the Contract.

Fourth, if a payment or the entire loan is in default as defined in the
Contract, the Company will report the amount of the default to the Internal
Revenue Service as a taxable distribution and, if you are then under age 59 1/2,
as a premature distribution that may be subject to a 10% penalty. Subject to
restrictions in Section 403(b) of the Code, the amount of any missed payment,
plus interest, or the entire loan balance, plus interest, if the entire loan is
in default, plus any applicable contingent deferred sales charge, will be
withdrawn by us from your investment options in accordance with your direction
in the Loan Request and Agreement. We will use the net proceeds from the
withdrawal to repay the loan. If a withdrawal is restricted under the Code, the
outstanding loan balance will continue to accrue interest and the amount due
will be withdrawn when a withdrawal becomes permissible. Thus, when an event
takes place which makes withdrawal from the Contract permissible under the Code,
such as attainment of age 59 1/2, disability, or death, we will check the
Contract to determine if there is an outstanding loan balance for which one or
more payments have been missed. If so, we will withdraw from your investment
options, in accordance with your direction in the Loan Request and Agreement,
funds necessary to pay the overdue amount, plus any applicable contingent
deferred sales charge. While a loan balance is outstanding, any withdrawal or
death benefit proceeds must first be used to pay the loan.

Loans are subject to the terms of your Contract, your Section 403(b)
plan and the Code, and, in the case of plans subject to the Employee Retirement
Income Security Act of 1974, the ERISA regulations on plan loans, all of which
may impose restrictions. The Company reserves the right to suspend, modify or
terminate the availability of loans. Where there is a plan fiduciary, it is the
responsibility of the fiduciary to ensure that any Contract loans comply with
plan qualification requirements, including ERISA.

- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS

The following brief discussion of federal income tax considerations is
based on the law in effect on the date of this prospectus, which may be changed
by legislative, judicial or administration action. The summary is general in
nature and does not consider any applicable state or local tax laws. For further
information, you should consult qualified tax counsel.

Under current law, no federal income taxes are imposed on increases in
the value of a Contract until distribution occurs, either in the form of a
withdrawal or death benefit or as annuity payment under an annuity option.

18
<PAGE>

For a withdrawal or death benefit, the taxable portion is generally the
amount in excess of the cost basis of the Contract. Amounts withdrawn by the
Contract owner or received as a death benefit by the designated beneficiary are
treated first as taxable income to the extent of the excess of the Contract
Value over the purchase payments made under the Contract. Such taxable portion
is taxed at ordinary income tax rates. Designation of a beneficiary who is
either 37 1/2 years younger than the Contract Owner or a grandchild of the
Contract Owner may have Generation Skipping Transfer Tax consequences under
Section 2601 of the Code.

In the case of a nonqualified Contract and death of an Annuitant who
was not the Contract Owner, an election to receive the death benefit in the form
of annuity payment must be made within 60 days. If such election is not made,
the gain from the Contract will generally be taxed as a lump sum payment, as
described in the preceding paragraph.

For annuity payments, the taxable portion is generally determined by a
formula that establishes the ratio of the cost basis of the Contract (as
adjusted for any refund feature) to the expected return under the Contract. The
taxable portion, which is the amount of the annuity payment in excess of the
cost basis, is taxed at ordinary income tax rates.

An additional income tax of 10% may be imposed on the taxable portion
of an early withdrawal or distribution unless one of several exceptions apply.
There will be no additional income tax on early withdrawals which are part of a
series of substantially equal periodic payments (not less frequently than
annually) made for life (or life expectancy) of the taxpayer or the joint lives
(or joint life expectancies) of the taxpayer and a beneficiary, or on
withdrawals made on or after age 59 1/2. There also will be no additional tax on
distributions made after death or on withdrawals attributable to total and
permanent disability. Further, there will be no additional tax on distributions
within certain other exceptions to the general rule.

The transfer of a Contract may result in the transferor incurring tax.
If the transfer is for less than adequate consideration, the taxable portion
would be the Contract Value at the time of transfer over the investment in the
Contract at such time. This rule does not apply to transfers between spouses or
to transfers incident to a divorce.

Subject to certain exceptions, a Contract must be held by or on behalf
of a natural person in order to be treated as an annuity contract under federal
income tax law and to be accorded the tax treatment described in the preceding
paragraphs. If a contract is not treated as an annuity contract for federal
income tax purposes, the income on the Contract is treated as ordinary income
received or accrued by the Contract Owner during the taxable year.

Section 817(h) of the Code provides that the investments of a separate
account underlying a variable annuity contract which is not purchased under a
qualified retirement plan or certain other types of plans (or the investments of
a mutual fund, the shares of which are owned by the variable annuity separate
account) must be "adequately diversified" in order for the Contract to be
treated as an annuity contract for tax purposes. The Treasury Department has
issued regulations prescribing such diversification requirements. The Separate
Account, through each of the available funds of the Penn Series Funds, Inc.,
American Century Variable Portfolios, Inc., Neuberger & Berman Advisers
Management Trust, Variable Insurance Products Fund, Variable Insurance Products
Fund II, and Morgan Stanley Universal Funds, Inc. intends to comply with those
requirements. The requirements are briefly discussed in the accompanying
prospectuses for the underlying funds.

The Treasury Department has indicated that in regulations or revenue
rulings under Section 817(d) (relating to the definition of a variable
contract), it will provide guidance on the extent to which Contract Owners may
direct their investments to particular subaccount without being treated as
owners of the underlying shares. It is possible that when such regulations or
rulings are issued, the Contracts may need to be modified to comply with them.

19
<PAGE>

The Contracts may be used in connection with certain retirement plans
that qualify for special tax treatment under the Code. The plans include
rollover individual retirement annuities qualified under Section 408(b) of the
Code (referred to as IRAs) and certain tax deferred annuities qualified under
Section 403(b) of the Code. Qualified Contracts have special provisions in order
to be treated as qualified under the Code.

For some types of qualified retirement plans, there may be no cost
basis in the Contract. In this case, the total payments received may be taxable.
Before purchasing a contract under a qualified retirement plan, the tax law
provisions applicable to the particular plan should be considered.

Distribution must generally commence from individual retirement
annuities and from contracts qualified under Section 403(b) no later than the
April 1 following the calendar year in which the Contract Owner attains age 70
1/2. Failure to make such required minimum distributions may result in a 50% tax
on the amount of the required distribution.

Generally, under a nonqualified annuity or rollover individual
retirement annuity qualified under Section 408(b), unless the Contract Owner
elects to the contrary, any amounts that are received under the Contract that
the Company believes are includable in gross income for tax purposes will be
subject to mandatory withholding to meet federal income tax obligations. The
same treatment will apply to distributions from a qualified plan or Section
403(b) annuity that are payable as an annuity for the life or life expectancy of
one or more individuals, or for a period of at least 10 years, or are required
minimum distributions. Other distributions from a Section 403(b) annuity are
subject to mandatory withholding, unless an election is made to receive the
distribution as a direct rollover to another eligible retirement plan.

It should be understood that the foregoing description of federal
income taxes is not exhaustive and that special rules and considerations may be
applicable. For further information, a prospective purchaser should consult
qualified tax counsel.

- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS

The consolidated financial statements of The Penn Mutual Life Insurance
Company at December 31, 1997, and for the year then ended, which appear in the
Statement of Additional Information, have been audited by Ernst & Young LLP,
independent auditors, and at December 31, 1996, and for each of the two years in
the period ended December 31, 1996, by PricewaterhouseCoopers LLP, independent
auditors, as set forth in their respective reports thereon, and are included in
reliance upon such reports given upon the authority of such firms as experts in
accounting and auditing. The consolidated financial statements of Penn Mutual
should be considered only as bearing upon Penn Mutual's ability to meet its
obligations under the Contracts.

New subaccounts of the Separate Account have been established under the
Contracts. There are, therefore, no financial statements for the subaccounts at
this time.

20
<PAGE>

- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS

- --------------------------------------------------------------------------------
VARIABLE ANNUITY PAYMENTS.................................................... B-
First Variable Annuity Payments..................................... B-
Subsequent Variable Annuity Payments................................ B-
Annuity Units....................................................... B-
Value of Annuity Units.............................................. B-
Net Investment Factor............................................... B-
Assumed Interest Rate............................................... B-
Valuation Period.................................................... B-

- --------------------------------------------------------------------------------
PERFORMANCE DATA............................................................. B-
Average Annual Total Return......................................... B-
Yields (Money Market Fund).......................................... B-

- --------------------------------------------------------------------------------

ADMINISTRATIVE AND RECORDKEEPING SERVICES.................................... B-

- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS.................................................... B-

- --------------------------------------------------------------------------------
CUSTODIAN.................................................................... B-

- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS......................................................... B-

- --------------------------------------------------------------------------------
LEGAL MATTERS................................................................ B-

- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS......................................................... B-

- --------------------------------------------------------------------------------

21
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION -- JANUARY 1, 1999
- --------------------------------------------------------------------------------
LOGO

PENN MUTUAL VARIABLE ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, Pennsylvania 19172 . Telephone (215) 956-8000
- --------------------------------------------------------------------------------
This statement of additional information is not a prospectus. It should be read
in conjunction with the current prospectus for the [Low CDSC] Contract dated
January 1, 1999. The Contract is funded through Penn Mutual Variable Account III
(referred to as the "Separate Account"). To obtain a prospectus you may write to
The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia, PA
19172. Or you may call (215) 956- 8000. Terms used in this statement of
additional information have the same meaning as the prospectus.
- --------------------------------------------------------------------------------
<TABLE>
TABLE OF CONTENTS

- --------------------------------------------------------------------------------
<S> <C>
VARIABLE ANNUITY PAYMENTS.................................................. B-
First Variable Annuity Payments................................... B-
Subsequent Variable Annuity Payments.............................. B-
Annuity Units..................................................... B-
Value of Annuity Units............................................ B-
Net Investment Factor............................................. B-
Assumed Interest Rate............................................. B-
Valuation Period.................................................. B-
- --------------------------------------------------------------------------------
PERFORMANCE DATA........................................................... B-
Average Annual Total Return....................................... B-
Yields (Money Market Fund)........................................ B-
- --------------------------------------------------------------------------------
ADMINISTRATIVE AND RECORDKEEPING SERVICES.................................. B-

- --------------------------------------------------------------------------------
DISTRIBUTION OF CONTRACTS.................................................. B-

- --------------------------------------------------------------------------------
CUSTODIAN.................................................................. B-

- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS....................................................... B-

- --------------------------------------------------------------------------------
LEGAL MATTERS.............................................................. B-

- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS....................................................... B-

- --------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE>

________________________________________________________________________________
VARIABLE ANNUITY PAYMENTS

- --------------------------------------------------------------------------------
FIRST VARIABLE ANNUITY PAYMENT

When a variable annuity is effected, we will first deduct applicable
premium taxes, if any, from the Contract Value. The dollar amount of the first
monthly annuity payment will be determined by applying the net Contract Value to
the annuity table set forth in the contract for the annuity option chosen. The
annuity tables show the amount of the first monthly income payment under each
annuity option for each $1,000 of value applied, based on the Annuitant's age at
the Annuity Date. The annuity tables are based on the Annuity 2000 Basic Table
with interest rates at 3% or 5%.

- --------------------------------------------------------------------------------
SUBSEQUENT VARIABLE ANNUITY PAYMENTS

The dollar amount of subsequent variable annuity payments will vary in
accordance with the investment experience of the subaccount(s) of the Separate
Account applicable to the annuity. Each subsequent variable annuity payment will
equal the number of annuity units credited, multiplied by the value of the
annuity unit for the valuation period. The Company guarantees that the amount of
each subsequent annuity payment will not be affected by variations in expense or
mortality experience.

- --------------------------------------------------------------------------------
ANNUITY UNITS

For each subaccount selected, the number of annuity units is the amount of
the first annuity payment allocated to the subaccount divided by the value of an
annuity unit for the subaccount on the Annuity Date. The number of your annuity
units will not change as a result of investment experience.

- --------------------------------------------------------------------------------
VALUE OF ANNUITY UNITS

The value of an annuity unit for each subaccount was arbitrarily set at $10
when the subaccount was established. The value may increase or decrease from one
valuation period to the next. For a valuation period, the value of an annuity
unit for a subaccount is the value of an annuity unit for the subaccount for the
last prior valuation period multiplied by the net investment factor for the
subaccount for the valuation period. The result is then multiplied by a factor
to neutralize an assumed interest rate of 3% or 5%, as applicable, built into
the annuity tables.

- --------------------------------------------------------------------------------
NET INVESTMENT FACTOR

For any subaccount, the net investment factor for a valuation period is
determined by dividing (a) by (b) and subtracting (c):

WHERE (a) IS:

The net asset value per share of the mutual fund held in the subaccount, as
of the end of the valuation period

plus
----

The per share amount of any dividend or capital gain distributions by the
mutual fund if the "ex-dividend" date occurs in the valuation period

B-2
<PAGE>

plus or minus
-------------

A per share charge or credit, as we may determine as of the end of the
valuation period, for provision for taxes (if applicable).

WHERE (b) IS:

The net asset value per share of the mutual fund held in the subaccount as
of the end of the last prior valuation period

plus or minus
-------------

The per share charge or credit for provision for taxes as of the end of the
last prior valuation period (if applicable).

WHERE (c) IS:

The sum of the mortality and expense risk charge and the daily
administration charge. On an annual basis, the sum of such charges equals
1.40% of the daily net asset value of the subaccount.

- --------------------------------------------------------------------------------
ASSUMED INTEREST RATE

Assumed annual interest rates of 3% or 5% are included in the annuity
tables in the contracts. A higher assumption would mean a higher first annuity
payment but more slowly rising or more rapidly falling subsequent payments. A
lower assumption would have the opposite effect. If the actual net investment
rate on an annual basis is equal to the assumed interest rate you have selected,
annuity payments will be level.

- --------------------------------------------------------------------------------
VALUATION PERIOD

Valuation period is the period from one valuation of underlying fund assets
to the next. Valuation is performed each day the New York Stock Exchange is open
for trading.

- --------------------------------------------------------------------------------
PERFORMANCE DATA

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN

Although the Separate Account was not available until the effective date of
this registration statement, the returns calculated below reflect a hypothetical
return as if the Separate Account had invested in the underlying funds for the
indicated periods.

Table 1 shows the average annual rates of total return on hypothetical
investments of $1,000, through the Separate Account, in funds of Penn Series
Funds, Inc., American Century Variable Portfolios, Inc., Neuberger and Berman
Advisers Management Trust, Fidelity Investments' Variable Insurance Products
Fund and Fidelity Investments' Variable Insurance Products Fund II, and Morgan
Stanley Universal Funds, Inc. for the periods ended December 31, 1997 and assume
withdrawal of the investments at the end of the period.

B-3
<PAGE>

- --------------------------------------------------------------------------------

TABLE 1

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
-----------------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity (a)................................ 06/01/83
(Independence Capital)
Value Equity (a)................................. 03/17/87
(OpCap)
Small-Cap Fund................................... 03/01/95
(OpCap)
Emerging Growth Fund (a)(g)...................... 05/01/97
(RS Investment Management)
Flexibly Managed (a)............................. 07/31/84
(T. Rowe Price)
International Equity (a)......................... 11/01/92
(Vontobel)
Quality Bond (a)................................. 03/17/87
(Independence Capital)
High Yield Bond (a).............................. 08/06/84
(T. Rowe Price)
Capital Appreciation Portfolio (b)............... 11/20/87
(American Century Investment Management)
Balanced Portfolio (c)........................... 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (c).............. 09/10/84
(Neuberger & Berman)
Partners Portfolio (c)........................... 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (d)...................... 10/09/86
(Fidelity Investments)
Growth Portfolio (d)............................. 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (e)...................... 09/06/89
(Fidelity Investments)
Index 500 (e).................................... 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International)(f)....... 10/01/96
(Morgan Stanley)
</TABLE>

________________________
* Represents the date the underlying fund was established.
(a) Penn Series Funds, Inc.
(b) American Century Variable Portfolios, Inc.
(c) Neuberger and Berman Advisers Management Trust
(d) Variable Insurance Products Fund
(e) Variable Insurance Products Fund II
(f) Morgan Stanley Universal Funds, Inc.
(g) Average Annual Total Return for period May 1, 1997 to December 31, 1997

B-4
<PAGE>

The average annual rates of total return shown in Table 1 are computed by
finding the average annual compounded rates of return over the periods shown
that would equate the initial amount invested to the withdrawal value, in
accordance with the following formula: P(1 + T)n = ERV. In the formula, P is a
hypothetical investment payment of $1,000; T is the average annual total return;
n is the number of years; and ERV is the withdrawal value at the end of the
periods shown. The annual contract administration charge is reflected assuming
an anticipated average Contract Value and assuming that the Contract Value is
allocated equally across all available subaccounts by an average contract owner.

________________________________________________________________________________

Table 2 below shows the average annual rates of return on hypothetical
initial investments of $1,000, through the Separate Account, in funds of the
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
and Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Fidelity Investments' Variable Insurance Products Fund II, and
Morgan Stanley Universal Funds, Inc. for the periods ended December 31, 1997 and
assumes the investments are not withdrawn at the end of the period.

________________________________________________________________________________

TABLE 2

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
----------------------------------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE * 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity (a).............................. 06/01/83
(Independence Capital)
Value Equity (a)............................... 03/17/87
(OpCap)
Small-Cap Fund................................. 03/01/95
(OpCap)
Emerging Growth Fund (a)(g).................... 05/01/97
(RS Investment Management)
Flexibly Managed (a)........................... 07/31/84
(T. Rowe Price)
International Equity (a)....................... 11/01/92
(Vontobel)
Quality Bond (a)............................... 03/17/87
(Independence Capital)
High Yield Bond (a)............................ 08/06/84
(T. Rowe Price)
Capital Appreciation Portfolio (b)............. 11/20/87
(American Century Investment
Management)
Balanced Portfolio (c)......................... 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (c)............ 09/10/84
(Neuberger & Berman)
Partners Portfolio (c)......................... 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (d).................... 10/09/86
(Fidelity Investments)
</TABLE>

B-5
<PAGE>

<TABLE>
<S> <C>
Growth Portfolio (d)........................... 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (e).................... 09/06/89
(Fidelity Investments)
Index 500 (e).................................. 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International)(f)..... 10/01/96
(Morgan Stanley)
</TABLE>
____________________________
* Represents the date the underlying fund was established.
(a) Penn Series Funds, Inc.
(b) American Century Variable Portfolios, Inc.
(c) Neuberger and Berman Advisers Management Trust
(d) Variable Insurance Products Fund
(e) Variable Insurance Products Fund II
(f) Morgan Stanley Universal Funds, Inc.
(g) Average Annual Total Return for period May 1, 1997 to December 31, 1997

________________________________________________________________________________

Table 3 below shows the average annual rates of return on hypothetical
initial investments of $10,000, through the Separate Account, in funds of the
Penn Series Funds, Inc., American Century Variable Portfolios, Inc., Neuberger
and Berman Advisers Management Trust, Fidelity Investments' Variable Insurance
Products Fund, Fidelity Investments' Variable Insurance Products Fund II, and
Morgan Stanley Universal Funds, Inc. for the periods ended December 31, 1997 and
assumes the investments are not withdrawn at the end of the period.

________________________________________________________________________________

TABLE 3

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
---------------------------------------------------------------
FIVE TEN FROM
ONE YEAR YEARS YEARS INCEPTION
INCEPTION ENDED ENDED ENDED THROUGH
FUND (MANAGER) DATE* 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Growth Equity (a).......................... 06/01/83
(Independence Capital)
Value Equity (a)........................... 03/17/87
(OpCap)
Small-Cap Fund............................. 03/01/95
(OpCap)
Emerging Growth Fund (a)(g)................ 05/01/97
(RS Investment Management)
Flexibly Managed (a)....................... 07/31/84
(T. Rowe Price)
International Equity (a)................... 11/01/92
(Vontobel)
Quality Bond (a)........................... 03/17/87
(Independence Capital)
High Yield Bond (a)........................ 08/06/84
(T. Rowe Price)
</TABLE>

B-6
<PAGE>

<TABLE>
<S> <C>
Capital Appreciation Portfolio (b)......... 11/20/87
(American Century Investment
Management)
Balanced Portfolio (c)..................... 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (c)........ 09/10/84
(Neuberger & Berman)
Partners Portfolio (c)..................... 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (d)................ 10/09/86
(Fidelity Investments)
Growth Portfolio (d)....................... 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (e)................ 09/06/89
(Fidelity Investments)
Index 500 (e).............................. 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International)(f). 10/01/96
(Morgan Stanley)
</TABLE>

______________________________
* Represents the date the underlying fund was established.
(a) Penn Series Funds, Inc.
(b) American Century Variable Portfolios, Inc.
(c) Neuberger and Berman Advisers Management Trust
(d) Variable Insurance Products Fund
(e) Variable Insurance Products Fund II
(f) Morgan Stanley Universal Funds, Inc.
(g) Average Annual Total Return for period May 1, 1997 to December 31, 1997

The average annual rates of total return shown in Tables 2 and 3 are
computed by finding the average annual compounded rates of return over the
periods shown that would equate the initial amount invested to the Contract
Value at the end of the periods shown, in accordance with the following formula:
P(1 + T)/n/ = FV. In the formula, P is a hypothetical investment of $1,000 in
Table 2 and $10,000 in Table 3; T is the average annual total return; n is the
number of years; and FV is the Contract Value at the end of the periods shown.
The annual contract administrative charge is reflected assuming an anticipated
average Contract Value and assuming that the average Contract Value is allocated
equally across all available subaccounts by an average contract owner. The
average annual rates of total returns reflect all recurring charges, but do not
reflect the contingent deferred sales charge of 1% which, if applicable, would
reduce the amount that may be withdrawn under the Contract.

________________________________________________________________________________
YIELDS (MONEY MARKET FUND)

From time to time, advertisements and sales literature may quote the
current or effective yield of the Money Market subaccount.

[Supply current yield]

The yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical preexisting account having a balance of
one accumulation unit of the subaccount at the beginning of the period,
subtracting a hypothetical charge reflecting deductions from contract owner
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
multiplying the base period return by (365/7) with the resulting figure carried
to at least the nearest hundredth of

B-7
<PAGE>

1%. The hypothetical charge reflects deductions from contract owners' accounts
in proportion to the length of the base period. The annual contract
administrative charge is reflected assuming an anticipated average Contract
Value and assuming that the average Contract Value is allocated equally across
all available subaccounts by an average contract owner.

The effective yield is obtained by taking the base period return as
computed above, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula: Effective Yield = [(base period return + 1)
365/7] -1.

The yields do not reflect the contingent deferred sales charge of 1%. The
deferred sales charge may or may not be applicable to a withdrawal from a
Contract, depending on when the withdrawal is made.

THE YIELDS ON AMOUNTS HELD IN THE MONEY MARKET SUBACCOUNT NORMALLY WILL
FLUCTUATE ON A DAILY BASIS. THEREFORE, THE STATED YIELDS FOR ANY GIVEN PERIOD
ARE NOT AN INDICATION OR REPRESENTATION OF FUTURE YIELDS.

________________

THE PERFORMANCE INFORMATION SET FORTH ABOVE IS FOR PAST PERFORMANCE OF THE
FUNDS, ASSUMING THE SEPARATE ACCOUNT HAD INVESTED IN THE FUNDS FROM THEIR
INCEPTION, AND IS NOT AN INDICATION OR REPRESENTATION OF FUTURE PERFORMANCE.

________________________________________________________________________________
ADMINISTRATIVE AND RECORDKEEPING SERVICES

The Company performs all data processing, recordkeeping and other related
services with respect to the Contracts and the Separate Accounts.

________________________________________________________________________________
DISTRIBUTION OF CONTRACTS

Hornor, Townsend & Kent, Inc., a wholly owned subsidiary of The Penn Mutual
Life Insurance Company ("Penn Mutual"), serves as principal underwriter of the
Contracts. The address of Hornor, Townsend & Kent, Inc. is 600 Dresher Road,
Horsham, PA 19044.

The Contracts will be distributed by Hornor, Townsend & Kent, Inc. through
broker-dealers. Total commissions on purchase payments made under the Contract
will not exceed [1%] and trailer commissions based on a percentage of Contract
Value may be paid. The offering of the Contracts is continuous, and the Company
does not anticipate discontinuing the offering of the Contract, although we
reserve the right to do so.

________________________________________________________________________________
CUSTODIAN

The Company is custodian of the assets held in the Separate Account.

________________________________________________________________________________
INDEPENDENT AUDITORS

Ernst & Young LLP serves as independent auditors of The Penn Mutual Life
Insurance Company and Penn Mutual Variable Annuity Account III. Their offices
are located at 2001 Market Street, Suite 4000, Philadelphia, PA.

________________________________________________________________________________

B-8
<PAGE>

LEGAL MATTERS

Morgan, Lewis & Bockius LLP has provided advice on certain matters relating
to the federal securities laws and the offering of the Contracts. Their offices
are located at 2000 One Logan Square, Philadelphia, PA.

________________________________________________________________________________
FINANCIAL STATEMENTS

The consolidated financial statements of Penn Mutual are set forth on the
following pages. The consolidated financial statements of Penn Mutual should be
considered only as bearing upon Penn Mutual's ability to meet its obligations
under the Contract.

________________________________________________________________________________

B-9
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

THE BOARD OF TRUSTEES
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA

We have audited the accompanying consolidated balance sheet of The Penn Mutual
Life Insurance Company and subsidiaries as of December 31, 1997 and the related
consolidated income statement, statement of changes in equity and statement of
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit. The
financial statements of the Company as of December 31, 1996 and for each of the
two years in the period ended December 31, 1996 were audited by other auditors
whose report dated January 31, 1997 expressed an unqualified opinion on those
statements and included an explanatory paragraph that disclosed the Company's
adoption of several accounting principles which were not previously required to
be adopted. These changes are described in Note 1 to the financial statements.

We conducted our audit 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 audit provides a reasonable basis
for our opinion.

In our opinion, the 1997 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of The Penn Mutual Life Insurance Company and subsidiaries as of December 31,
1997, and the results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
January 30, 1998

B-10
<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS

THE BOARD OF TRUSTEES OF
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA

We have audited the accompanying consolidated balance sheet of The Penn Mutual
Life Insurance Company as of December 31, 1996 and the related consolidated
statements of income, changes in equity and statement of cash flows for the two
years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial condition of The
Penn Mutual Life Insurance Company and subsidiaries as of December 31, 1996, and
the results of their operations and their cash flows for the two years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

As discussed in Note 1 to the consolidated financial statements, in 1996 the
Company adopted Financial Accounting Standards Board Interpretation No. 40 (FIN
40) and Statement of Financial Accounting Standards No. 120 (SFAS 120), which
required implementation of several accounting pronouncements not previously
adopted. The effects of adopting FIN 40 and SFAS 120 were retroactively applied
to the Company's previously issued financial statements, consistent with the
implementation guidance of those standards.

/s/ PricewaterhouseCoopers LLP

2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 31, 1997

B-11
<PAGE>

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
ASSETS
Debt securities, at fair value........................... $5,427,652 $5,214,788
Equity securities, at fair value......................... 12,502 16,745
Mortgage loans on real estate............................ 52,996 124,914
Real estate, net of accumulated depreciation............. 22,358 97,805
Policy loans............................................. 642,989 656,073
Short-term investments................................... 43,470 37,515
Other invested assets.................................... 88,928 94,369
---------- ----------
TOTAL INVESTMENTS....................................... 6,290,895 6,242,209
Cash and cash equivalents................................ 37,064 37,314
Investment income due and accrued........................ 103,072 103,132
Deferred acquisition costs............................... 384,542 412,595
Amounts recoverable from reinsurers...................... 63,211 58,882
Broker/dealer receivables................................ 526,797 449,150
Other assets............................................. 92,203 85,382
Separate account assets.................................. 1,869,094 1,368,384
---------- ----------
TOTAL ASSETS............................................ $9,366,878 $8,757,048
========== ==========
LIABILITIES
Reserves for payment of future policy benefits........... $2,770,015 $2,782,621
Other policyholder funds................................. 2,973,434 3,053,412
Policyholders' dividends payable......................... 35,273 35,395
Broker/dealer payables................................... 333,104 303,089
Accrued income tax payable:
Current................................................. 17,476 25,487
Deferred................................................ 75,096 35,783
Other liabilities........................................ 283,666 282,501
Separate account liabilities............................. 1,869,094 1,368,384
---------- ----------
TOTAL LIABILITIES....................................... 8,357,158 7,886,672
---------- ----------
EQUITY
Unrealized gains/(losses) on investment securities, net
of taxes and amortization of deferred acquisition costs. 152,009 85,730
Retained earnings........................................ 857,711 784,646
---------- ----------
TOTAL EQUITY............................................ 1,009,720 870,376
---------- ----------
TOTAL LIABILITIES AND EQUITY........................... $9,366,878 $8,757,048
========== ==========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

B-12
<PAGE>

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES
Premium and annuity considerations.......... $ 195,220 $ 199,821 $ 187,907
Policy fee income........................... 102,398 89,349 80,652
Net investment income....................... 460,206 475,315 489,773
Net realized capital gains/(losses)......... 9,655 (10,078) 14,112
Broker/dealer fees and commissions.......... 290,005 241,068 200,223
Other income................................ 11,851 11,544 31,646
---------- ---------- ----------
TOTAL REVENUE.............................. 1,069,335 1,007,019 1,004,313
---------- ---------- ----------
BENEFITS AND EXPENSES
Benefits paid to policyholders and benefi-
ciaries.................................... 480,234 462,412 486,559
Policyholder dividends...................... 67,412 67,596 69,807
Increase/(decrease) in liability for future
policy benefits............................ (11,972) 42,652 38,038
General expenses............................ 202,731 178,554 186,204
Broker/dealer sales expense................. 160,730 132,724 109,492
Amortization of deferred acquisition costs.. 43,223 46,137 36,794
---------- ---------- ----------
TOTAL BENEFITS AND EXPENSES................ 942,358 930,075 926,894
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................. 126,977 76,944 77,419
---------- ---------- ----------
Income taxes:
Current.................................... 50,061 37,944 11,740
Deferred................................... 3,851 (9,919) (33,179)
---------- ---------- ----------
NET INCOME................................. $ 73,065 $ 48,919 $ 98,858
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

B-13
<PAGE>

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
OF INVESTMENT RETAINED TOTAL
FOR THE YEARS ENDED DECEMBER 31, SECURITIES EARNINGS EQUITY
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995.................. $(57,212) $636,869 $ 579,657
Net income for 1995........................ -- 98,858 98,858
Unrealized appreciation of securities...... 216,153 -- 216,153
-------- -------- ----------
BALANCE AT DECEMBER 31, 1995................ 158,941 735,727 894,668
Net income for 1996........................ -- 48,919 48,919
Unrealized depreciation of securities...... (73,211) -- (73,211)
-------- -------- ----------
BALANCE AT DECEMBER 31, 1996................ 85,730 784,646 870,376
Net income for 1997........................ -- 73,065 73,065
Unrealized appreciation of securities...... 66,279 -- 66,279
-------- -------- ----------
BALANCE AT DECEMBER 31, 1997................ $152,009 $857,711 $1,009,720
======== ======== ==========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

B-14
<PAGE>

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 73,065 $ 48,919 $ 98,858
Adjustments to reconcile net income to net
cash provided by operations:
Capitalization of policy acquisition
costs................................... (64,427) (60,234) (52,147)
Amortization of deferred acquisition
costs................................... 43,223 46,137 36,794
Policy fees on universal life and invest-
ment contracts.......................... (104,342) (89,349) (80,652)
Interest credited on universal life and
investment contracts.................... 160,417 171,051 186,549
Depreciation and amortization............ 18,682 11,613 13,260
Premiums due and other receivables....... (7,291) (105) (2,219)
Realized capital (gains)/losses.......... (9,655) 10,078 (14,112)
(Increase)/decrease in accrued investment
income.................................. 60 6,474 7,880
(Increase)/decrease in amounts due from
reinsurers.............................. (4,329) (14,200) 9,994
(Increase)/decrease in net broker dealer
receivables............................. (47,632) 296 (37,142)
Increase/(decrease) in future policy ben-
efit reserves........................... (13,358) 58,697 9,276
Increase/(decrease) in claims payable.... -- -- (16,322)
Increase/(decrease) in income tax pay-
able.................................... (4,526) 7,798 (59,512)
Other, net............................... (6,693) 39,625 (5,232)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVI-
TIES................................... 33,194 236,800 95,273
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of investments:
Debt securities available for sale....... 1,235,274 927,905 1,201,541
Equity securities........................ 20,374 25,413 153,985
Real estate.............................. 87,875 40,209 20,461
Other.................................... 14,355 15,284 10,834
Maturity and other principal repayments:
Debt securities available for sale....... 472,474 278,290 276,806
Equity securities........................ -- -- 1,992
Mortgage loans........................... 61,813 156,643 138,396
Cost of investments acquired:
Debt securities available for sale....... (1,772,007) (1,427,048) (1,448,184)
Equity securities........................ (15,268) (11,752) (80,999)
Mortgage loans........................... 0 (36,155) (115,047)
Real estate.............................. (15,600) (8,542) (15,428)
Other.................................... (15,503) (8,789) (8,420)
Change in policy loans, net............... 13,084 1,234 (18,708)
(Increase)/decrease in short-term invest-
ments, net............................... (5,955) 51,290 (80,740)
Purchases of furniture and equipment, net. (4,116) (6,449) (5,369)
----------- ----------- -----------
NET CASH (USED)/PROVIDED BY INVESTING
ACTIVITIES............................. 76,800 (2,467) 31,120
----------- ----------- -----------
</TABLE>

- CONTINUED -

The accompanying notes are an integral part of the consolidated financial
statements.

B-15
<PAGE>

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits for universal life and investment con-
tracts......................................... $ 653,233 $ 625,816 $ 602,956
Withdrawals from universal life and investment
contracts...................................... (552,311) (567,697) (608,416)
Transfers to separate accounts.................. (236,008) (269,735) (114,332)
Issuance/(repayment) of debt.................... 24,842 (18,424) 1,354
--------- --------- ---------
NET CASH USED BY FINANCING ACTIVITIES......... (110,244) (230,040) (118,438)
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS..... (250) 4,293 7,955
CASH AND CASH EQUIVALENTS
Beginning of the year.......................... 37,314 33,021 25,066
--------- --------- ---------
End of the year................................ $ 37,064 $ 37,314 $ 33,021
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income Taxes................................... $ 54,507 $ 20,228 $ 46,286
Interest Paid.................................. 1,384 939 5,239
</TABLE>

See Note 2 for information on unrealized gains and losses and a 1996 non-cash
transaction related to mortgage loans.

The accompanying notes are an integral part of the consolidated financial
statements.

B-16
<PAGE>

- -------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS OF DOLLARS)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ORGANIZATION AND BASIS OF PRESENTATION

The Penn Mutual Life Insurance Company (the "Company") was founded and
commenced business in 1847 as a mutual life insurance company. The Company
concentrates primarily on the sale of individual life insurance and annuity
products. The primary products that the Company currently markets are
traditional whole life, term life, universal life, variable life, immediate
annuities and deferred annuities, both fixed and variable. The Company markets
its products through a network of career agents, independent agents, and
independent marketing organizations. The Company is also involved in the
broker-dealer business which offers a variety of investment products and
services and is conducted through the Company's non-insurance subsidiaries.
The Company sells its products in all fifty states and the District of
Columbia.

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of The Penn Mutual Life Insurance Company, its wholly owned life
insurance subsidiary, The Penn Insurance and Annuity Company ("PIA"), and non-
insurance subsidiaries (principally broker/dealer, investment advisory and
real estate subsidiaries) (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation. The
preparation of financial statements requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and notes to the consolidated financial statements.

ACCOUNTING CHANGES

As of January 1, 1996, the Company adopted Financial Accounting Standards
Board Interpretation No. 40 (FIN 40), "Applicability of Generally Accepted
Accounting Principles to Mutual Life Insurance and Other Enterprises", as
amended by Statement of Financial Accounting Standards (SFAS) No. 120,
"Accounting and Reporting by Mutual Life Insurance Enterprises for Certain
Long-Duration Participating Contracts". The initial effect of applying these
pronouncements has been reported retroactively, as of January 1, 1993. SFAS
No. 120 requires financial statements referred to as prepared in accordance
with generally accepted accounting principles (GAAP) to apply all applicable
authoritative GAAP pronouncements. Prior to the adoption of SFAS No. 120,
statutory financial statements were permitted to be referred to as being
prepared in accordance with GAAP. The significant GAAP authoritative
pronouncements requiring initial application were as follows:

. SFAS No. 60, "Accounting and Reporting by Insurance Enterprises",

. SFAS No. 87, "Employers' Accounting for Pensions",

. SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries",

. SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long Duration Contracts and for Realized Gains and Losses from the Sale of
Investments",

. SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" ,

. SFAS No. 109, "Accounting for Income Taxes",

. SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts",

. Statement of Position (SOP) 95-1, "Accounting for Certain Insurance
Activities of Mutual Life Insurance Enterprises".

The cumulative effect of applying SFAS No. 120 and FIN 40 primarily consists
of the initial deferral of acquisition costs, the establishment of deferred
taxes, the change in methodology for insurance reserves, and the elimination
of the statutory asset valuation reserve and interest maintenance reserve and
the establishment of investment valuation allowances. In connection with the
adoption of FIN 40, the Company also adopted SFAS No. 115, "Accounting for
Certain Debt and Equity Securities" as of January 1, 1994.

B-17
<PAGE>

- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS OF DOLLARS)

As a result of the change in accounting principles, net income as previously
reported, has been restated as follows:

<TABLE>
<CAPTION>
1995
---------
<S> <C>
Net income, as previously reported.............................. $ 729
Add adjustments for the cumulative effect on prior years
Deferred acquisition costs..................................... 15,353
Policy reserves................................................ (12,079)
Deferred taxes................................................. 32,341
Investment reserves............................................ 46,640
Other, net..................................................... 15,874
Total.......................................................... 98,129
---------
Net income, as adjusted......................................... $ 98,858
=========

As a result of the change in accounting principles, equity, as previously
reported has been restated as follows:

<CAPTION>
1995
---------
<S> <C>
Balance at beginning of year, as previously reported............ $ 315,321
---------
Add adjustments for the cumulative effect on prior years of ap-
plying retroactively the new basis of accounting
Deferred acquisition costs..................................... 466,446
Policy reserves................................................ (67,526)
Deferred taxes................................................. (527)
Investment reserves............................................ 13,651
Unrealized gains/(losses)...................................... (145,759)
Other, net..................................................... (1,949)
---------
Total.......................................................... 264,336
---------
Balance at beginning of year, as adjusted....................... 579,657
---------
Net income...................................................... 98,858
Net change in unrealized gains/(losses) on investment securi-
ties........................................................... 216,153
---------
315,011
---------
Balance at end of year.......................................... $ 894,668
=========
</TABLE>

INVESTMENTS

Debt securities (bonds, notes, redeemable preferred stocks and mortgage-backed
securities) which might be sold prior to maturity are classified as available
for sale. These securities are carried at fair value, with the change in
unrealized gains and losses reported through a separate component of equity.
Interest on debt securities is credited to income as it is earned.

Equity securities are classified as available for sale and carried at fair
value. Dividends on equity securities are credited to income on their ex-
dividend dates.

The Company regularly evaluates the carrying value of debt and equity
securities based on current economic conditions, past credit loss experience
and other circumstances of the investee. A decline in a security's fair value
that is deemed to be other than temporary is treated as a realized loss and a
reduction in the cost basis of the security.

Mortgage loans on real estate are stated at unpaid principal balances, net of
unamortized discounts and valuation allowances. Valuation allowances on
impaired loans are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the collateral
value if the loan is collateral dependent. However, if foreclosure is or
becomes probable, the measurement method used is collateral value.

Investment real estate, which the Company has the intent to hold, is carried at
cost less accumulated depreciation and valuation reserves. The Company
establishes valuation reserves for investment real estate when declines in
value are deemed to be permanent based on an analysis of discounted future cash
flows. Properties held for sale are carried at the lower of

B-18
<PAGE>

depreciated cost or fair value less selling costs. Valuation reserves are
established for properties held for sale when the fair value less estimated
selling costs is below depreciated cost. Real estate acquired through
foreclosure is recorded at the lower of cost or fair value less estimated
selling costs at the time of foreclosure. Depreciation is calculated using the
straight-line method over the estimated useful lives of the real estate.

Policy loans are carried at the unpaid principal balances.

Short-term investments include securities purchased with a maturity date of 90
days to less than one year. Short-term investments are valued at cost.

Other invested assets primarily include joint venture real estate partnerships,
which are valued on the equity basis, and venture capital limited partnerships,
which are carried at fair value.

Realized gains and losses are determined by specific identification and are
included in income on the trade date. Unrealized gains and losses, net of
appropriate taxes and amortization of deferred acquisition costs, are accounted
for as a separate component of equity.

The Company utilizes various financial instruments, such as interest rate swaps
and financial futures, to hedge against interest rate fluctuation. These
instruments are recorded using a valuation method consistent with the valuation
method of the assets hedged. Gains and losses on these instruments are deferred
and recognized in the Consolidated Income Statements over the remaining life of
the hedged security. Changes in the fair value of these instruments are
reported as unrealized gains or losses. Realized gains or losses are recognized
when the hedged securities are sold.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, money market instruments and
other debt securities with a maturity of 90 days or less when purchased.

OTHER ASSETS

Property and equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is calculated using the straight-line
method over the lesser of the term of the leases or the estimated useful life
of the improvements. Accumulated depreciation and amortization on property and
equipment and leasehold improvements was $44,329 and $40,671 at December 31,
1997 and 1996, respectively. Related depreciation and amortization expense was
$8,183, $7,510 and $6,914 for the years ended December 31, 1997, 1996 and 1995,
respectively.

Goodwill represents the excess of the cost of the businesses acquired over the
fair value of their net assets. These costs are amortized on a straight-line
basis over not more than 40 years and are included in other assets in the
Consolidated Balance Sheets. Unamortized goodwill amounted to $16,932 and
$17,740 at December 31, 1997 and 1996 respectively. Goodwill amortization was
$808, $909 and $907 for 1997, 1996 and 1995, respectively.

DEFERRED ACQUISITION COSTS

Costs of acquiring new insurance and annuity contracts, which vary with and are
primarily related to the production of new business, have been deferred to the
extent that such costs are deemed recoverable from future gross profits. Such
costs include commissions, certain costs of policy issuance and underwriting,
and certain variable agency expenses.

Deferred acquisition costs related to participating traditional and universal
life insurance policies and annuity products without mortality risk, that
include significant surrender charges, are being amortized over the lesser of
the estimated or actual contract life in proportion to estimated gross profits
arising principally from interest, mortality, expense margins and surrender
charges. The effects on amortization of deferred acquisition costs of revisions
to estimated gross profits are reflected in earnings in the period such
estimated gross profits are revised. Deferred acquisition costs are reviewed to
determine that the unamortized portion of such costs is recoverable from future
estimated gross profits. Certain costs and expenses reported in the
Consolidated Income Statements are net of amounts deferred.

B-19
<PAGE>

SEPARATE ACCOUNTS

Separate Account assets and liabilities represent segregated funds administered
and invested by the Company primarily for the benefit of variable life
insurance policyholders and annuity and pension contractholders, including
certain of the Company's benefit plans. The value of the assets in the Separate
Accounts reflects the actual investment performance of the respective accounts
and is not guaranteed by the Company. The carrying value for Separate Account
assets and liabilities approximates the estimated fair value of the underlying
assets.

INSURANCE LIABILITIES AND REVENUE RECOGNITION

Participating Traditional Life and Life Contingent Annuity Products

Future policy benefits include reserves for participating traditional life
insurance and life contingent annuity products and are established in amounts
adequate to meet the estimated future obligations of the policies in force.
Liabilities for participating traditional life products are computed using the
net level premium method, using assumptions for investment yields, mortality,
morbidity and withdrawals, which are consistent with the dividend fund interest
rate and mortality rates used in calculating cash surrender values. Interest
rate assumptions used in the calculation of the liabilities for participating
traditional life products ranged from 2.25% to 4.5%. Premiums are recognized as
income when due. Death and surrender benefits are reported in expense as
incurred.

Liabilities for life contingent annuity products are computed by estimating
future benefits and expenses. Assumptions are based on Company experience
projected at the time of policy issue, with provision for adverse deviations.
Interest rate assumptions range from 2.25% to 13.25%. Premiums are recognized
as income as they are received. Death and surrender benefits are reported in
expense as incurred.

Universal Life Products and Other Annuity Products

Other policyholder funds represent liabilities for universal life and
investment-type annuity products. The liabilities for these products are based
on the contract account value which consists of deposits received from
customers and investment earnings on the account value, less administrative and
expense charges. The liability for universal life products is also reduced by
mortality charges. Liabilities for the non-life contingent annuity products are
computed by estimating future benefits and expenses. Assumptions are based on
Company experience projected at the time of policy issue. Interest rate
assumptions range from 2.0% to 11.25%.

Contract charges assessed against account value for universal life and
investment-type annuities are reflected as policy fee income in revenue.
Interest credited to account values and universal life benefit claims in excess
of fund values are reflected as benefit expense.

Policyholders' Dividends

The majority of the Company's insurance products have been issued on a
participating basis. As of December 31, 1997, participating insurance expressed
as a percentage of insurance in force is 91%, and as a percentage of premium
income is 80%. The amount of policyholders' dividends to be paid is approved
annually by the Board of Trustees. The aggregate amount of policyholders'
dividends is calculated based on actual interest, mortality, morbidity and
expense experience for the year and on management's judgment as to the
appropriate level of equity to be retained by the Company. The carrying value
of this liability approximates the earned amount and fair value at December 31,
1997.

BROKER/DEALER REVENUE RECOGNITION

Broker-dealer transactions in securities and listed options, including related
commission revenue and expense, are recorded on a settlement-date basis.

FEDERAL INCOME TAXES

The Company files a consolidated federal income tax return with its life and
non-life insurance subsidiaries. Federal income taxes are charged or credited
to operations based upon amounts estimated to be payable or recoverable as a
result of taxable operations for the current year. Deferred income tax assets
and liabilities are established to reflect the impact of temporary differences
between the amount of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. These deferred tax
assets or liabilities are measured by using the enacted tax rates expected to
apply to taxable income in the period in which the deferred tax liabilities or
assets are expected to be settled or realized.

B-20
<PAGE>

REINSURANCE

In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance contracts. The Company has set its retention limit for
acceptance of risk on life insurance policies at various levels up to $1,250.

Insurance liabilities are reported before the effects of reinsurance.
Reinsurance receivables (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts.

RECLASSIFICATIONS

Certain 1996 and 1995 amounts have been reclassified to conform with 1997
presentation.

NOTE 2 - INVESTMENTS:

DEBT SECURITIES

The following tables summarize the Company's investment in debt securities,
including redeemable preferred stocks. All debt securities are classified as
available for sale and are carried at estimated fair value. Amortized cost is
net of cumulative writedowns for other than temporary declines in value of
$1,208 and $1,390 as of December 31, 1997 and 1996, respectively.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities.. $ 107,539 $ 6,302 $ -- $ 113,841
States and political subdivisions.. 12,085 569 -- 12,654
Foreign governments................ 20,397 3,049 -- 23,446
Corporate securities............... 2,854,234 218,145 6,748 3,065,631
Mortgage and other asset-backed se-
curities.......................... 2,133,758 76,160 757 2,209,161
---------- -------- ------ ----------
Total bonds........................ 5,128,013 304,225 7,505 5,424,733
Redeemable preferred stocks........ 3,085 -- 166 2,919
---------- -------- ------ ----------
TOTAL............................. $5,131,098 $304,225 $7,671 $5,427,652
========== ======== ====== ==========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and U.S.
Government and agency securities.. $ 42,928 $ 653 $ -- $ 43,581
States and political subdivisions.. 477 21 -- 498
Foreign governments................ 20,333 2,038 -- 22,371
Corporate securities............... 2,819,418 134,505 11,911 2,942,012
Mortgage and other asset-backed se-
curities.......................... 2,192,353 27,135 16,471 2,203,017
---------- -------- ------- ----------
Total bonds........................ 5,075,509 164,352 28,382 5,211,479
Redeemable preferred stocks........ 3,575 -- 266 3,309
---------- -------- ------- ----------
TOTAL............................. $5,079,084 $164,352 $28,648 $5,214,788
========== ======== ======= ==========
</TABLE>

B-21
<PAGE>

The following tables summarize the amortized cost and estimated fair value of
debt securities, including redeemable preferred stocks, by contractual
maturity.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Maturity:
Within one year.......................................... $ 241,759 $ 240,871
After one year through five years........................ 606,900 620,792
After five years through ten years....................... 613,951 644,749
After ten years through twenty years..................... 428,492 495,854
After twenty years....................................... 1,103,153 1,213,305
Mortgage and other asset-backed securities............... 2,133,758 2,209,162
---------- ----------
Total bonds............................................. 5,128,013 5,424,733
Redeemable preferred stocks.............................. 3,085 2,919
---------- ----------
TOTAL.................................................. $5,131,098 $5,427,652
========== ==========
</TABLE>

Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage and other asset-backed securities are presented
separately in the maturity schedule due to the potential for prepayment. The
weighted average life of these securities is 7.8 years.

At December 31, 1997, the Company held $2,209,162 in mortgage and other asset-
backed securities. The structured securities portfolio consists of commercial
and residential mortgage pass-through holdings totaling $1,961,662 and
securities backed by credit card receivables, auto loans, home equity and
manufactured housing loans totaling $247,500. These securities follow a
structured principal repayment schedule and are of high credit quality.
Securities totaling $1,810,481 are rated AAA and include $27,854 of interest
only tranches that were retained from the securitization of the Company's
mortgage loan portfolio.

At December 31, 1997, the largest industry concentration of the Company's
portfolio was investments in the finance industry of $734,428, representing 14%
of the total debt portfolio.

Effective November 30, 1995, the Company adopted the implementation guidance
contained in the Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." As a result of adopting this guidance, the Company
reclassified all of its held-to-maturity securities to available-for-sale based
upon a reassessment of the appropriateness of the classifications of all
securities held at that time. The amortized cost and net unrealized gain of the
securities reclassified were $546,834 and $47,348 respectively, at November 30,
1995.

Proceeds during 1997, 1996 and 1995 from sales of available for sale securities
were $1,235,274, $927,905 and $1,201,541, respectively. Gross gains and gross
losses realized on those sales were $21,799 and $8,990, respectively during
1997, $15,932 and $6,899, respectively during 1996 and $62,216 and $10,201,
respectively during 1995. The change in net unrealized gains and losses on debt
securities classified as available for sale included as a separate component of
equity was $160,850, $(149,259) and $438,883 for 1997, 1996 and 1995,
respectively.

The Company's investment portfolio of debt securities is predominantly
comprised of investment grade securities. At December 31, 1997 and 1996, debt
securities with amortized cost totaling $198,943 and $184,719, respectively,
were less than investment grade. At December 31, 1997 and 1996, the Company did
not hold any securities which are either in default as to principal and/or
interest payments, are to be restructured pursuant to commenced negotiations or
are in situations where the borrowers went into bankruptcy subsequent to
acquisition (collectively, "problem debt securities"). The Company did not hold
any debt securities which were non-income producing for the preceding twelve
months as of December 31, 1997 and 1996.

EQUITY SECURITIES

During 1997, 1996 and 1995, the proceeds from sales of equity securities
amounted to $20,374, $25,413 and $153,985, respectively. The gross gains and
gross losses realized on those sales were $975 and $558, $1,369 and $247, and
$9,604 and $3,753, for 1997, 1996 and 1995, respectively.

B-22
<PAGE>

MORTGAGE LOANS

On August 29, 1996, the Company securitized the majority of its mortgage loan
portfolio by transferring the loans to a trust which qualifies as a REMIC (Real
Estate Mortgage Investment Conduit) under the Internal Revenue Code. Prior to
transferring the loans with a principal value of $781,564 and a book value of
$780,942, the loans were written down to a fair market value of $755,559, and
the related reserve of $25,285 was released. The trust issued sixteen classes
of Commercial Mortgage Pass-Through Certificates with a total par value of
$781,564. The certificates evidence the entire beneficial ownership interest in
the trust. The cash flow from the mortgages will be used to repay the
certificates over an average life of 4.28 years. The actual date on which the
principal amount of the notes may be paid in full could be substantially
earlier or later based on performance of the mortgages. The cash flows of the
assets of the trust will be the sole source of payments on the notes. The
Company has not guaranteed these certificates or the mortgage loans held by the
trust. As a result of this transaction, the Company recognized a loss of $98
upon the transfer of the mortgages to the trust, representing the difference
between the fair market value of the certificates and the book value of the
mortgage loans transferred to the trust.

The Company retained the highest quality classes of certificates with a par
value of $715,126 and a fair market value of $734,326 at the time of the
securitization. As of December 31, 1997, the par value and fair value of these
securities was $570,130 and $597,248, respectively. The Company sold the lowest
rated classes of certificates with a par value of $66,438 and a fair market
value of $24,838.

The mortgage loans which were not included in the securitization and were
retained by the Company had a book value of $171,555 with a related reserve of
$21,907 and an estimated fair value of $153,405 on the date of the
securitization. Loans which the Company intended to dispose of within a period
of 6 to 24 months were written down to their estimated net realizable value.
These loans had a book value of $99,817 and an estimated net realizable value
of $81,310 at the time of the securitization. The writedown of $18,507 was
fully offset by a release in mortgage loss reserve. As of December 31, 1997,
the Company held $12,368 of these loans. The Company intended to hold mortgage
loans with a book value of $71,738 on the date of the securitization, through
their remaining terms. As of December 31, 1997, the Company continued to hold
$44,428 of these mortgages. The Company discontinued the origination of
commercial mortgage loans in 1996.

The following tables summarize the carrying value of mortgage loans, by
property type and geographic concentration, at December 31.

<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Property Type
Office buildings............................................. $20,012 $ 51,510
Retail....................................................... 7,862 39,090
Dwellings.................................................... 25,237 33,540
Other........................................................ 3,685 4,174
Valuation allowance.......................................... (3,800) (3,400)
------- --------
TOTAL....................................................... $52,996 $124,914
======= ========
</TABLE>

<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Geographic Concentration
Northeast.................................................... $23,313 $ 49,438
Midwest...................................................... 5,922 22,920
South........................................................ 12,502 20,717
West......................................................... 15,059 35,239
Valuation allowance.......................................... (3,800) (3,400)
------- --------
TOTAL....................................................... $52,996 $124,914
======= ========
</TABLE>

B-23
<PAGE>

The following table presents changes in the mortgage loan valuation allowance
for the years presented:

<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Balance at January 1............................................ $3,400 $47,192
Provision....................................................... 400 --
Charge offs..................................................... -- (43,792)
------ -------
BALANCE AT DECEMBER 31......................................... $3,800 $ 3,400
====== =======
</TABLE>

As of December 31, 1997 and 1996, the Company's mortgage loan portfolio
contained $0 and $15,726, respectively, of loans delinquent over 60 days or in
foreclosure. As of December 31, 1997 and 1996, there were no non-income
producing mortgage loans for the preceding twelve months.

During 1997, the Company did not restructure the terms of any outstanding
mortgages. During 1996, the Company restructured the terms of outstanding
mortgages with a carrying value of $4,000. As of December 31, 1997 and 1996,
the mortgage loan portfolio included $2,834 and $7,110, respectively, of
restructured mortgage loans. Restructured mortgage loans include commercial
loans for which the basic terms, such as interest rate, maturity date,
collateral or guaranty have been changed as a result of actual or anticipated
delinquency. Restructures do not include mortgages refinanced upon maturity at
or above current market rates. Gross interest income on restructured mortgage
loans on real estate that would have been recorded in accordance with the
original terms of such loans amounted to $298 and $893 in 1997 and 1996,
respectively. Gross interest income from these loans included in net investment
income totaled $262 and $674 in 1997 and 1996, respectively.

At December 31, 1997, the recorded investment in loans that are considered to
be impaired was $12,368 that, as a result of write-downs, do not have a
valuation allowance. The average recorded investment in impaired loans during
the year ended December 31, 1997 was approximately $38,096. During 1997, $1,454
was received on these impaired loans which was applied to the outstanding
principal balance or will be applied to principal at the date of foreclosure.

REAL ESTATE

The following table summarizes the carrying value of the Company's real estate
holdings at December 31.

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Investment.................................................... $19,999 $33,386
Properties held for sale...................................... 7,828 73,260
Less: valuation allowance (5,469) (8,841)
------- -------
TOTAL........................................................ $22,358 $97,805
======= =======
</TABLE>

At December 31, 1997 and 1996, accumulated depreciation on real estate amounted
to $6,498 and $38,781, respectively. Depreciation expense on real estate
totaled $5,709, $6,488 and $10,091 for the years ended December 31, 1997, 1996
and 1995, respectively. During 1997, the Company sold its largest real estate
investment for $65,007 cash to an unrelated buyer. At the date of the sale,
this property had a carrying value of $61,914, net of related reserves,
resulting in a gain of $3,093. During 1996, the Company wrote down the
statement value of this property by $16,000 to its estimated fair value, based
on changes in future valuation assumptions.

OTHER

Investments on deposit with regulatory authorities as required by law were
$7,106 and $7,085 at December 31, 1997 and 1996, respectively.

As of December 31, 1997 and 1996, the Company's investments included $597,248
and $725,806, respectively, of the tranches retained from the 1996
securitization of the Company's commercial mortgage loan portfolio. These
investments represented 59% and 86% of equity at December 31, 1997 and 1996,
respectively.

B-24
<PAGE>

The following table summarizes the sources of investment income, excluding
investment gains/(losses), for the year ended December 31.

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Debt securities..................................... $390,852 $356,669 $331,644
Equity securities................................... 1,371 1,313 2,602
Mortgages........................................... 12,098 62,454 99,109
Real estate......................................... 17,519 24,143 31,661
Policy loans........................................ 40,921 40,580 41,762
Short-term investments.............................. 2,426 6,052 3,934
Other invested assets............................... 21,268 14,665 18,016
Cash and cash equivalents........................... 2 44 34
-------- -------- --------
Gross investment income............................. 486,457 505,920 528,762
Less: Investment expenses.......................... 26,251 30,605 38,989
-------- -------- --------
Investment income, net.............................. $460,206 $475,315 $489,773
======== ======== ========
</TABLE>

The following table summarizes net realized capital gains/(losses) on
investments for the year ended December 31. Net realized capital gains/(losses)
include decreases in valuation allowances of $3,154, $44,164 and $2,463 in
1997, 1996 and 1995, respectively.

<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Debt securities..................................... $12,991 $ 10,412 $51,873
Equity securities................................... 417 1,122 6,652
Mortgage loans...................................... 280 (2,821) (2,799)
Real estate......................................... (684) (22,356) (41,617)
Other............................................... (811) 3,565 3
Amortization of deferred acquisition costs.......... (2,538) -- --
------- -------- -------
Realized gains/(losses)............................. $ 9,655 $(10,078) $14,112
======= ======== =======
</TABLE>

The following table summarizes the change in unrealized gains and losses for
investments carried at fair value for the year ended December 31.

<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Unrealized Gains/(Losses):
Debt securities.................................. $160,850 $(149,259) $438,883
Equity securities................................ 408 (582) 2,340
Other............................................ (14,581) (1,545) 11,190
-------- --------- --------
146,677 (151,386) 452,413
-------- --------- --------
Less:
Deferred policy acquisition costs................ (45,043) 38,324 (116,992)
Deferred income taxes............................ (35,355) 39,851 (119,268)
-------- --------- --------
Net change in unrealized gains/(losses).......... $ 66,279 $ (73,211) $216,153
======== ========= ========
</TABLE>

B-25
<PAGE>

NOTE 4 - FAIR VALUE INFORMATION:

The following table summarizes the carrying value and estimated fair value of
the Company's financial instruments as of December 31, 1997 and 1996.

<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Debt securities
Available for sale........ $5,427,652 $5,427,652 $5,214,788 $5,214,788
Equity securities
Common stock.............. 3,051 3,051 660 660
Non-redeemable preferred
stocks................... 9,451 9,451 16,085 16,085
Mortgage loans............. 52,996 57,224 124,914 131,577
Policy loans............... 642,989 606,681 656,073 634,291
Cash & cash equivalents.... 37,064 37,064 37,314 37,314
Short-term investments..... 43,470 43,470 37,515 37,515
Separate account assets.... 1,869,094 1,869,094 1,368,384 1,368,384
Other invested assets...... 88,928 88,928 94,369 94,369
FINANCIAL LIABILITIES:
Investment-type contracts
Individual annuities...... $1,225,192 $1,260,639 $1,281,965 $1,317,257
Guaranteed investment con-
tracts................... 59,809 61,456 111,224 112,247
Other group annuities..... 147,061 148,257 161,889 163,524
Other policyholder funds.. 1,541,372 1,541,372 1,498,334 1,498,334
---------- ---------- ---------- ----------
Total policyholder funds. 2,973,434 3,011,724 3,053,412 3,091,362
Policyholders' dividends
payable................... 35,273 35,273 35,395 35,395
Separate account liabili-
ties...................... 1,869,094 1,869,094 1,368,384 1,368,384
</TABLE>

The estimated fair values for the Company's investments in debt and equity
securities are based on quoted market prices, where available. In situations
where market prices are not readily available, primarily private placements,
fair values are estimated using a formula pricing method based on fair values
of securities with similar characteristics. The estimated fair value of
currently performing mortgage loans is estimated by discounting the cash flows
associated with the investment, using an interest rate currently offered for
similar loans to borrowers with similar credit ratings. Loans with similar
credit quality, characteristics and time to maturity are aggregated for
purposes of discounted cash flow analysis. Assumptions regarding credit risk,
cash flows and discount rates are determined using the available market and
borrower-specific information. The estimated fair value for non-performing
loans is based on the estimated fair value of the underlying real estate, which
is based on recent appraisals or other estimation techniques. The estimated
fair value of policy loans is calculated by discounting estimated future cash
flows using interest rates currently being offered for similar loans. Loans
with similar characteristics are aggregated for purposes of the calculations.
The carrying values of cash, cash equivalents, short-term investments and
separate account assets approximate their fair values. The estimated fair value
for the venture capital limited partnerships are based on values determined by
the partnerships' managing general partners. The resulting estimated fair
values may not be indicative of the value negotiated in an actual sale.

The fair values of the Company's liabilities for individual annuities,
guaranteed investment contracts and certain group annuities are estimated by
discounting the cash flows associated with the contracts, using an interest
rate currently offered for similar contracts with maturities similar to those
remaining for the contracts being valued. The statement value for certain of
the other group annuities approximates their fair value due to the nature of
the contracts. The statement values of other policyholder funds, policyholders'
dividends payable and separate account liabilities approximate their fair
values.

Currently, disclosure of estimated fair values is not required for all the
Company's assets and liabilities. Therefore, presentation of the estimated fair
value of a significant portion of assets without a corresponding valuation of
liabilities associated with

B-26
<PAGE>

insurance contracts can be misinterpreted. The estimated fair values of
liabilities under all of the Company's contracts are considered in the overall
management of interest rate risk. The continuing management of the relationship
between the maturities of the Company's investments and the amounts due under
insurance contracts reduces the Company's exposure to changing interest rates.

The Company is exposed to interest rate risk on its interest sensitive
products. The Company's investment strategy is designed to minimize interest
risk by managing the durations and anticipated cash flows of the Company's
assets and liabilities.

To minimize exposure and reduce risk from exchange and interest rate
fluctuations in the normal course of business, the Company enters into interest
rate swap programs for purposes other than trading. As of December 31, 1997 and
1996, the Company had interest rate swaps with aggregate notional amounts equal
to $105,000 and $115,000, respectively, with average unexpired terms of 19 and
29 months, respectively. Interest rate swap agreements involve the exchange of
fixed and floating rate interest payment obligations without an exchange of the
underlying notional principal amounts. During the term of the swap, the net
settlement amount is accrued as an adjustment to interest income. Gross
unrealized gains and losses, which represent fair value based on dealer-quoted
prices, were $5,164 and $0, respectively at December 31, 1997 and $7,605 and
$0, respectively, at December 31, 1996. These fair values represent the amount
at risk if the counterparties default and the amount that the Company would
receive to terminate the contracts, taking into account current interest rates
and, where appropriate, the current credit worthiness of the counterparties.

In the normal course of business, the Company loans securities under
arrangements in which collateral is obtained in amounts greater than the
current market value of loaned securities. This collateral is held in the form
of cash, cash equivalents or securities issued or guaranteed by the United
States Government. The Company is at risk to the extent the value of loaned
securities exceeds the value of the collateral obtained. The Company controls
this risk by requiring collateral of the highest quality and requiring that
additional collateral be deposited when the market value of loaned securities
increases in relation to the collateral held or the value of the collateral
held decreases in relation to the value of the loaned securities. The Company
had loaned securities outstanding of $155,356 and $0 as of December 31, 1997
and 1996, respectively.

NOTE 5 - INCOME TAXES:

The Company follows the asset and liability method of accounting for income
taxes whereby current and deferred tax assets and liabilities are recognized
utilizing currently enacted tax laws and rates. Deferred taxes are adjusted to
reflect tax rates at which future tax liabilities or assets are expected to be
settled or realized.

Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. The significant temporary
differences that give rise to the deferred tax assets and liabilities at
December 31 relate to the following:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Future policy benefits...................................... $ 88,172 $ 83,327
Dividend award.............................................. 11,970 12,005
Allowances for investment losses............................ 3,667 8,411
Employee benefit liabilities................................ 27,979 27,113
Other....................................................... 23,467 27,530
-------- --------
Total deferred tax asset................................... 155,255 158,386
-------- --------
DEFERRED TAX LIABILITIES
Deferred acquisition costs.................................. 127,495 124,660
Real estate................................................. (1,261) 299
Unrealized gains............................................ 81,553 48,233
Other....................................................... 22,564 20,977
-------- --------
Total deferred tax liability............................... 230,351 194,169
-------- --------
Net deferred tax liability.................................. $ 75,096 $ 35,783
======== ========
</TABLE>

B-27
<PAGE>

The federal income taxes attributable to consolidated net income are different
from the amounts determined by multiplying consolidated net income before
federal income taxes by the expected federal income tax rate. The difference
between the amount of tax at the U.S. federal income tax rate of 35% and the
consolidated tax provision is summarized as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Tax expense at 35%................................ $44,442 $26,930 $ 27,096
Increase/(decrease) in income taxes resulting
from:
Differential earnings amount..................... 6,942 500 3,878
Resolution of tax issues......................... -- -- (57,000)
Other............................................ 2,528 595 4,587
------- ------- --------
Federal income tax expense/(benefit).............. $53,912 $28,025 $(21,439)
======= ======= ========

As a mutual life insurance company, the Company is subject to Internal Revenue
Code provisions which require mutual, but not stock, life insurance companies
to include the Differential Earnings Amount (DEA) in each year's taxable
income. This amount is computed by multiplying the Company's average taxable
equity base by a prescribed rate, which is intended to reflect the difference
between stock and mutual companies' earnings rates.

In 1995, the Company settled various tax issues with the IRS, including an
issue surrounding the tax treatment of certain traditional life insurance
policy updates. As a result of these settlements, the 1995 federal income tax
expense was decreased in the Income Statement by approximately $57,000, which
included $22,300 of interest, net of tax.

The Internal Revenue Service has examined the Company's income tax returns
through the year 1990 and is currently examining years 1991 through 1994.
Management believes that an adequate provision has been made for potential
assessments.

NOTE 6 - BENEFIT PLANS:

The Company maintains qualified and non-qualified defined benefit pension plans
covering substantially all of its employees. The plans are non-contributory and
provide pension benefits based on years of service and average annual
compensation (measured over 60 consecutive months of highest earnings in a 120-
month period). Contributions are determined by using the Projected Unit Credit
Method. The total pension expense related to these plans amounted to $5,917,
$5,963 and $5,054 in 1997, 1996 and 1995, respectively.

The Company's funding policy for its qualified defined benefit plans is to
contribute an amount between the minimum required contribution and the maximum
deductible amount in accordance with the Internal Revenue Code. The following
table summarizes the components of net periodic pension cost for the Company's
qualified defined benefit plans:

<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Service cost...................................... $ 2,161 $ 2,506 $ 1,827
Interest cost on projected benefit obligation..... 4,050 3,540 2,909
Actual return on assets........................... (4,925) (3,095) (5,515)
Net amortization and deferrals.................... 2,367 919 3,736
------- ------- --------
Net periodic pension cost......................... $ 3,653 $ 3,870 $ 2,957
======= ======= ========
</TABLE>

B-28
<PAGE>

The following table summarizes the funded status of the Company's qualified
defined benefit plans:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested.......................................... $ 44,964 $ 32,572 $ 29,744
Non-vested...................................... 924 935 763
-------- -------- --------
Accumulated benefit obligation................... 45,888 33,507 30,507
Provision for future salary increases............ 16,769 15,162 17,147
-------- -------- --------
Projected benefit obligation..................... 62,657 48,669 47,654
Plan assets at fair value........................ (42,783) (37,938) (34,067)
-------- -------- --------
Projected benefit obligation in excess of plan
assets.......................................... 19,874 10,731 13,587
Unrecognized prior service cost.................. (178) (203) (228)
Unrecognized net (gain) loss from past experi-
ence............................................ (9,605) (2,430) (6,859)
Unrecognized net asset obligation at transition.. (1,288) (1,609) (1,931)
-------- -------- --------
Accrued pension cost at December 31.............. $ 8,803 $ 6,489 $ 4,569
======== ======== ========

The assumptions used to measure the actuarial present value of the projected
benefit obligation were:

<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Discount rate.................................... 7.00% 7.50% 7.00%
Expected long-term rate of return on plan assets. 8.00% 8.00% 8.00%
Salary scale..................................... 5.50% 5.50% 5.50%
</TABLE>

The qualified defined benefit pension plan's assets are held in trust and
administered under a participatory group annuity contract issued by the Company
with assets invested in various separate accounts of the Company. A non-
participatory annuity contract issued by the Company funds benefits accrued
prior to 1986.

The Company maintains four defined contribution pension plans for substantially
all of its employees and full-time agents. For two plans, designated
contributions of up to 6% or 8% of annual compensation are eligible to be
matched by the Company. Contributions for the third plan are based on tiered
earnings of full time agents. The last plan, which covers employees of a
subsidiary, are determined on a discretionary basis by the Board of Directors
of that subsidiary. At December 31, 1997, 1996 and 1995, the expense recognized
for these plans was $8,345, $6,092 and $5,083, respectively. The estimated fair
value of the defined contribution plans' assets were $229,378, $201,679 and
$176,832, respectively.

The Company also provides certain medical, life insurance and other welfare
benefits (postretirement benefits) for retired employees and full-time agents.
Substantially all employees and full-time agents become eligible for these
benefits if they reach retirement age while working for the Company and have at
least 10 years of service. Employees retiring after January 1, 1993 receive a
defined dollar benefit under the medical plan. The Company continues to fund
postretirement benefit costs on a pay-as-you-go basis.

B-29
<PAGE>

The following table sets forth the postretirement benefits plan's status,
reconciled to amounts recognized in the Company's Consolidated Balance Sheet
and Income Statements at December 31.

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees.......................................... $22,638 $21,301 $32,473
Fully eligible active plan participants........... 2,707 2,547 2,826
Other active plan participants.................... 6,068 5,710 5,672
------- ------- -------
Total............................................ 31,413 29,558 40,971
Plan assets at fair value.......................... -- -- --
------- ------- -------
Accumulated postretirement benefits obligation in
excess of plan assets............................. 31,413 29,558 40,971
Unrecognized prior service cost.................... -- -- --
Unrecognized net gain from past experience......... 13,730 16,261 5,129
------- ------- -------
Accrued postretirement benefits cost............... $45,143 $45,819 $46,100
======= ======= =======
Net periodic postretirement benefits cost includes
the following components:
Service cost...................................... 393 434 355
Interest cost on accumulated postretirement bene-
fits obligation.................................. 2,182 2,206 2,910
Actual return on assets........................... -- -- --
Net amortization and deferral..................... (1,060) (815) (573)
------- ------- -------
Net periodic postretirement benefits cost.......... $ 1,515 $ 1,825 $ 2,692
======= ======= =======
</TABLE>

At December 31, 1997, the assumed health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8.5% in 1998, grading to
5.0% in the year 2004. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 7.00% at December 31,
1997. At December 31, 1996, the assumed health care cost trend rate used in
measuring the accumulated postretirement benefit obligation was 8.5% in 1997,
grading to 5.0% in the year 2004. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.5% at
December 31, 1996. At December 31, 1995, the assumed health care cost trend
rate used in measuring the accumulated postretirement benefit obligation was
9.0% in 1996, grading to 5.0% in the year 2004. The weighted-average discount
rate used in determining the accumulated postretirement benefit obligation was
7.0% at December 31, 1995.

If the health care cost trend rate was increased by one percentage point for
each future year, the accumulated postretirement benefit obligation as of
December 31, 1997 would increase by $1,948. The effect of this change on the
sum of the service cost and interest cost, before taxes, would be an increase
of $136.

B-30
<PAGE>

NOTE 7 - REINSURANCE:

The Company has assumed and ceded reinsurance on certain life and annuity
contracts under various agreements. Reinsurance permits recovery of a portion
of losses from reinsurers, although the Company remains primarily liable as the
direct insurer on all risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of present reinsurers to ensure that amounts due from reinsurers are
collectable. The table below highlights the amounts shown in the accompanying
financial statements.

<TABLE>
<CAPTION>
ASSUMED CEDED TO
GROSS FROM OTHER OTHER NET
AMOUNT COMPANIES COMPANIES AMOUNT
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
Life Insurance in Force.......... $31,027,764 $5,217,856 $4,620,599 $31,625,021
Premiums......................... 190,754 11,189 6,723 195,220
Benefits......................... 330,432 14,293 26,916 317,809
Reserves......................... 5,741,456 1,993 59,322 5,684,127
DECEMBER 31, 1996:
Life Insurance in Force.......... $30,057,996 $5,420,951 $3,186,567 $32,292,380
Premiums......................... 196,897 12,745 9,821 199,821
Benefits......................... 293,270 16,466 16,808 292,928
Reserves......................... 5,833,970 2,063 56,632 5,779,401
</TABLE>

During 1995, the Company had gross premiums of $184,362, assumed premiums of
$13,453 and ceded premiums of $9,908 and gross benefits of $303,911, assumed
benefits of $13,265 and ceded benefits of $14,700.

Reinsurance receivables with a carrying value of $50,617 and $50,522 were
associated with a single reinsurer at December 31, 1997 and 1996, respectively.

During 1995, the Company recaptured the portion of its disability income
business that was previously reinsured under a quota share and excess
reinsurance agreement with the Monarch Life Insurance Company ("Monarch"). As a
result of this recapture, approximately $21,200 of cash and policyholder
reserves were transferred to the Company from Monarch.

NOTE 8 - COMMITMENTS AND CONTINGENCIES:

The Company and its subsidiaries are respondents in a number of proceedings,
some of which involve extra-contractual damage in addition to other damages. In
addition, insurance companies are subject to assessments, up to statutory
limits, by state guaranty funds for losses of policyholders of insolvent
insurance companies. In the opinion of management, the outcome of the
proceedings and assessments are not likely to have a material adverse effect on
the financial position of the Company.

The Company, in the ordinary course of business, extends commitments relating
to its investment activities. As of December 31, 1997, the Company had
outstanding commitments totaling $38,326 relating to these investment
activities. The fair value of these commitments approximates the face amount.

NOTE 9 - STATUTORY INFORMATION:

State insurance regulatory authorities prescribe or permit statutory accounting
practices for calculating net income and capital and surplus which differ in
certain respects from generally accepted accounting principles (GAAP). The
significant differences relate to deferred acquisition costs, which are charged
to expenses as incurred; federal income taxes, which reflect amounts that are
currently taxable; and benefit reserves, which are determined using prescribed
mortality, morbidity and interest assumptions, and which, when considered in
light of the assets supporting these reserves, adequately provide for
obligations under policies and contracts. In addition, the recording of
impairments in the value of investments generally lags recognition under GAAP.

The combined insurance companies' statutory capital and surplus at December 31,
1997 and 1996 was $435,861 and $379,774, respectively. The combined insurance
companies' net income, determined in accordance with statutory accounting
practices, for the years ended December 31, 1997, 1996 and 1995, was $63,615,
$25,905 and $729, respectively.

B-31
<PAGE>

NOTE 10 - BUSINESS SEGMENT INFORMATION:
The operations of the Company are conducted principally through two business
units: Insurance and Broker-Dealer. The insurance operations offer a diverse
portfolio of life insurance products and both individual and group annuity
products. The Broker-Dealer operations provide broad financial and investment
services.

Assets are held directly by each business unit in amounts necessary to both
fund liabilities and to provide a margin to cover business risks.

The table below summarizes the information concerning the business units:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Insurance...................................... $ 778,179 $ 765,210 $ 803,276
Broker-Dealer.................................. 291,156 241,809 201,037
---------- ---------- ----------
TOTAL......................................... $1,069,335 $1,007,019 $1,004,313
========== ========== ==========
PRETAX INCOME
Insurance...................................... $ 84,722 $ 43,765 $ 53,337
Broker-Dealer.................................. 42,255 33,178 24,082
---------- ---------- ----------
TOTAL......................................... $ 126,977 $ 76,943 $ 77,419
========== ========== ==========
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
IDENTIFIABLE ASSETS
Insurance...................................... $8,784,570 $8,259,309
Broker-Dealer.................................. 582,308 497,739
---------- ----------
TOTAL......................................... $9,366,878 $8,757,048
========== ==========
</TABLE>

B-32
<PAGE>

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------

(a) Financial Statements included in Part B:

Consolidated Financial Statements of The Penn Mutual Life
Insurance Company:

Report of Independent Accountants
Statements of Financial Condition at December 31, 1997 and 1996
Statements of Operations and Surplus for the years
ended December 31, 1997, 1996 and 1995
Statements of Cash Flows for the years ended December 31, 1997
1996 and 1995
Notes to Financial Statements

(b) Exhibits

1. (a) Resolutions of Executive Committee of Board of Trustees of
The Penn Mutual Life Insurance Company authorizing the
establishment of the Registrant. Incorporated herein by
reference to Exhibit 1(a) to the Registration Statement on
Form N-4 of Penn Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001504) filed on
September 3, 1998.

2. Not applicable

3. (a) Sales Support Agreement between The Penn Mutual Life
Insurance Company and Horner, Townsend & Kent, Inc., a
wholly-owned subsidiary of Penn Mutual. To be filed by
Amendment.

(b) Distribution Agreement between The Penn Mutual Life
Insurance Company and Horner, Townsend & Kent, Inc., a
wholly-owned subsidiary of Penn Mutual. To be filed by
Amendment.

(c) Form of Agent's Agreement relating to broker-dealer
supervision. Incorporated herein by reference to Exhibit
3(c) to the Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (Accession No.
0001036050-98-001504) filed on September 3, 1998.

(d) Form of Broker-Dealer Selling Agreement (for broker-dealers
licensed to sell variable annuity contracts and/or variable
life insurance contracts under state insurance laws).
Incorporated herein by reference to Exhibit 3(d) to the
Registration Statement on Form N-4 of Penn Mutual Variable
Annuity Account III (Accession No. 0001036050-98-001504)
filed on September 3, 1998.

C-1
<PAGE>

(e) Form of Broker-Dealer Selling Agreement (for broker-dealers
with affiliated corporations licensed to sell variable
annuity contracts and/or variable life insurance contracts
under state insurance laws). Incorporated herein by
reference to Exhibit 3(e) to the Registration Statement on
Form N-4 of Penn Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001504) filed on
September 3, 1998.

(f) Form of Addendum (Form 98-1) to Broker-Dealer Selling
Agreement. Incorporated herein by reference to Exhibit 3(f)
to the Registration Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (Accession No. 0001036050-98-
001504) filed on September 3, 1998.

4. (a) Individual Variable and Fixed Annuity Contract (Form VAB-
98). Filed herewith.

(b) Rider -- Guaranteed Minimum Death Benefit -- Rising Floor
(GDBRF-98) Incorporated herein by reference to Exhibit 4(b)
to the Registration Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (Accession No. 0001036050-98-
001504) filed on September 3, 1998.

(c) Rider -- Guaranteed Minimum Death Benefit -- Step Up
(GDBSU-98). Incorporated herein by reference to Exhibit
4(c) to the Registration Statement on Form N-4 of Penn
Mutual Variable Annuity Account III (Accession No.
0001036050-98-001504) filed on September 3, 1998.

(d) Endorsement No. 1534-96 to Individual Variable and Fixed
Annuity Contract. Incorporated herein by reference to
Exhibit 4(d) to the Registration Statement on Form N-4 of
Penn Mutual Variable Annuity Account III (Accession No.
0001036050-98-001504) filed on September 3, 1998.

(e) Endorsement No. 1542-97 to Individual Variable and Fixed
Annuity Contract. Filed herewith. Incorporated herein by
reference to Exhibit 4(e) to the Registration Statement on
Form N-4 of Penn Mutual Variable Annuity Account III
(Accession No.0001036050-98-001504) filed on
September 3, 1998.

(f) Endorsement No. 1536-90 to Individual Variable and Fixed
Annuity Contract. Incorporated herein by reference to
Exhibit 4(f) to the Registration Statement on Form N-4 of
Penn Mutual Variable Annuity Account III (Accession No.
0001036050-98-001504) filed on September 3, 1998.

5. Application (Form 5798) for Individual Variable Annuity
Contract. Filed herewith.

C-2
<PAGE>

6. (a) Charter of The Penn Mutual Life Insurance Company (May
1983). Incorporated herein by reference to Exhibit 6(a) to
the Registration Statement on Form N-4 of Penn Mutual
Variable Annuity Account III (Accession No. 0001036050-98-
001504) filed on September 3, 1998.

(b) By-laws of The Penn Mutual Life Insurance Company, as
amended through February 21, 1997. Incorporated herein by
reference to Exhibit 6(b) to the Registration Statement on
Form N-4 of Penn Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001504) filed
on September 3, 1998.

7. None

8. (a) Fund Participation Agreement among The Penn Mutual Life
Insurance Company, TCI Portfolios, Inc.(renamed American
Century Variable Portfolios, Inc.) and Investors Research
Corporation (renamed American Century Investment
Management, Inc.). Incorporated herein by reference to
Exhibit 8(a) to the Registration Statement on Form N-4 of
Penn Mutual Variable Annuity Account III (Accession No.
0001036050-98-001504) filed on September 3, 1998.

(b)(1) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust. Incorporated herein by reference to
Exhibit 8(b)(1) to the Registration Statement on Form N-4
of Penn Mutual Variable Annuity Account III (Accession No.
0001036050-98-001504) filed on September 3, 1998.

(b)(2) Form of Assignment and Modification Agreement between
Neuberger & Berman Management Incorporated, Neuberger &
Berman Advisers Management Trust, Advisers Managers Trust
and The Penn Mutual Life Insurance Company. Incorporated
herein by reference to Exhibit 8(b)(2) to the Registration
Statement on Form N-4 of Penn Mutual Variable Annuity
Account III (Accession No. 0001036050-98-001504) filed on
September 3, 1998.

(b)(3) Amendment to Fund Participation Agreement between The Penn
Mutual Life Insurance Company and Neuberger & Berman
Advisers Management Trust. Incorporated herein by reference
to Exhibit 8(b)(3) to Post-Effective Amendment No.5 to the
Registration Statement of Penn Mutual Variable Life Account
I (File No. 33-54662) filed on April 30, 1997 (CIK No.
0000950109 & Accession No. 0000950109-97-003328).

(c) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Penn Series Funds, Inc. Incorporated
herein by

C-3
<PAGE>

reference to Exhibit 8(c) to the Registration Statement on
Form N-4 of Penn Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001504) filed on
September 3, 1998.

(d) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products Fund
and Fidelity Distributors Croporation. Incorporated herein
by reference to Exhibit 8(d) to the Registration Statement
on Form N-4 of Penn Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001504) filed on
September 3, 1998.

(e) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products Fund II
and Fidelity Distributors Corporation. Incorporated herein
by reference to Exhibit 8(e) to the Registration Statement
on Form N-1A of Penn Mutual Variable Annuity Account III
(Accession No. 0001036050-98-001504) filed on
September 3, 1998.

(f) Participation Agreement between The Penn Mutual Life
Insurance Company, Morgan Stanley Universal Funds, Inc.,
Morgan Stanley Asset Management Inc. and Miller Andersen &
Sherrerd LLP. Incorporated herein by reference to Exhibit
8(f) to Post-Effective Amendment No. 2 to the Registration
Statement of PIA Variable Annuity Account I (33-83120)
filed on April 30, 1998 (CIK No. 0000928880 & Accession No.
0000950109-97-003327).

9. Opinion of Counsel. To be filed by Amendment.

10. (a) Consent of Ernst & Young LLP. Filed herewith

(b) Consent of PricewaterhouseCoopers LLP. Filed herewith.

11. Not applicable.

12. Not applicable.

13. Schedule of Computation of Performance Quotations set forth
in this Registration Statement. To be Filed by Amendment.

14. (a) Powers of Attorney of Trustees (except Ms. Bloch and
Messrs. Notebaert and Rock). Incorporated herein by
reference to Exhibit 14 to Post-Effective Amendment No. 22
to the Registration Statement on Form N-4 of Penn Mutual
Variable

C-4
<PAGE>

Annuity Account III filed on April 29, 1997 (CIK No.
0000702184 & Accession No. 00001021408-97-000161).

(b) Powers of Attorney of Edmond F. Notebaert and Robert H.
Rock Incorporated herein by reference to Exhibit 14(b) to
Post Effective Amendment No. 24 to the Registration
Statement on Form N-4 of Penn Mutual Variable Annuity
Account III filed on April 24, 1998 (CIK No. 0000702184 &
Accession No. 000095109-98-002717).

(c) Power of Attorney of Ms. Julia Chang Bloch. Incorporated
herein by reference to Exhibit 14(c) to the Registration
Statement on Form N-4 of Penn Mutual Variable Annuity
Account III (Accession No. 0001036050-98-001504) filed on
September 3, 1998.

ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
---------------------------------------

The following table sets forth the names of the officers and trustees
of the Depositor who are engaged directly or indirectly in activities
relating to the Registrant or the variable annuity contracts offered
by the Registrant and the executive officers of the Depositor.

ROBERT E. CHAPPELL NANCY S. BRODIE
Chairman of the Board and Chief Executive Vice President and
Executive Officer and Member of Chief Financial Officer
the Board of Trustees

DANIEL J. TORAN PETER M. SHERMAN
President and Chief Operating Senior Vice President and
Officer and Member of the Board of Chief Investment Officer
Trustees

LARRY L. MAST ANN M. STROOTMAN
Executive Vice President, Sales and Vice President and Controller
Marketing

HAROLD E. MAUDE, JR. STEVEN M. HERZBERG
Senior Vice President, Assistant Vice President
Independence Financial Network and Treasurer

C-5
<PAGE>

RICHARD F. PLUSH JAMES MCELWAIN
Vice President and Senior Actuary Assistant Vice President,
Retirement and Investment Sales
Operations

JOHN M. ALBANESE
Senior Vice President, Customer
Service and Information Systems
ROBERT P. DAVIS
FREDERICK M. ROCKOVAN Vice President and Chief Actuary
Vice President, Insurance Service

The business address of the director and officers is The Penn Mutual
Life Insurance Company, Philadelphia, PA 19172.

ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
-------------------------------------------------------------------
REGISTRANT
----------

PENN MUTUAL WHOLLY-OWNED SUBSIDIARIES
-------------------------------------

Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------

The Penn Insurance and Life Insurance and Annuities Delaware
Annuity Company

Independence Capital Investment Adviser Pennsylvania
Management, Inc.

Penn Janney Fund, Inc. Investments Pennsylvania

INDEPENDENCE SQUARE Holding Company Pennsylvania
PROPERTIES, INC.

The Pennsylvania Trust Trust Company Pennsylvania
Company

INDEPENDENCE SQUARE PROPERTIES, INC.
WHOLLY-OWNED SUBSIDIARIES
-------------------------

Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------

Penn Glenside Corporation Real Estate Investment Pennsylvania

Penn Wayne Corporation Real Estate Investment Pennsylvania

St. James Realty Corporation Real Estate Investment Pennsylvania

C-6

<PAGE>

Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------

Investors' Mortgage Real Estate Investment Pennsylvania
Corporation

Christie Street Properties, Real Estate Investment Pennsylvania
Inc.

INDEPRO CORPORATION Real Estate Investment Delaware

Economic Resources Real Estate Investment Delaware
Associates, Inc.

WPI Investment Company Real Estate Investment Delaware

Hornor, Townsend & Kent, Registered Broker-Dealer Pennsylvania
Inc. and Investment Adviser

Penn Tallahassee Real Estate Investment Florida
Corporation

JANNEY MONTGOMERY SCOTT Registered Broker-Dealer Delaware
INC. and Investment Adviser

INDEPRO CORPORATION
WHOLLY-OWNED SUBSIDIARIES
-------------------------

Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
Indepro Property Fund I Real Estate Investment Delaware
Corporation

Indepro Property Fund II Real Estate Investment Delaware
Corporation

Commons One Corporation Real Estate Investment Delaware

West Hazleton, Inc. Real Estate Investment Delaware

JANNEY MONTGOMERY SCOTT, INC.
WHOLLY-OWNED SUBSIDIARIES
-------------------------

Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------

Addison Capital Investment Adviser Pennsylvania
Management, Inc.

C-7
<PAGE>

Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------

JMS Resources, Inc. Oil and Gas Development Pennsylvania

JMS Investor Services, Inc. Insurance Sales Delaware

ITEM 27. NUMBER OF CONTRACT OWNERS
-------------------------

As of August 1, 1998, there were no contracts being registered under
this Registration Statement outstanding.

ITEM 28. INDEMNIFICATION
---------------

Section 6.2 of the By-laws of The Penn Mutual Life Insurance Company
provides that, in accordance with the provisions of the Section, the
Company shall indemnify trustees and officers against expenses
(including attorneys' fees), judgments, fines, excise taxes and
amounts paid in settlement actually and reasonably incurred in
connection with actions, suits and proceedings, to the extent such
indemnification is not prohibited by law, and may provide other
indemnification to the extent not prohibited by law. The By-laws are
filed as Exhibit 6(b) to Post-Effective Amendment No. 12 to this
Registration Statement and are incorporated in this Post-Effective
Amendment by reference.

Pennsylvania law (15 Pa. C.S.A. (S)(S) 1741-1750) authorizes
Pennsylvania corporations to provide indemnification to directors,
officers and other persons.

Penn Mutual owns a directors and officers liability insurance policy
covering liabilities directors and officers of Penn Mutual and its
subsidiaries may incur in acting as directors and officers.

Selling Agreements entered into by The Penn Mutual Life Insurance
Company ("Penn Mutual") and its subsidiary, Hornor, Townsend & Kent,
Inc. ("HTK") with securities brokers and insurance agents generally
provide for indemnification of Penn Mutual and HTK and their directors
and officers in the event of liability resulting from unauthorized
acts of the brokers and insurance agents.

Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate

C-8
<PAGE>

jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

ITEM 29. PRINCIPAL UNDERWRITERS
----------------------

Hornor Townsend & Kent, Inc. serves as principal underwriters of the
securities of the Registrant.

Hornor Townsend & Kent, Inc. serves as principal underwriter for
Addison Capital Shares, Inc., a registered investment company.

Hornor, Townsend & Kent, Inc. - Directors and Officers
------------------------------------------------------

John J. Gray, Director and Chairman of the Board
Harold E. Maude, Jr., Director
Nina M. Mulrooney, Director
Norman T. Wilde, Jr., Director
Daniel J. Toran, Director
Ronald C. Zimmerman, President and Chief Executive Officer
Michael D. Sweeney, Assistant Vice President, Director of Compliance
and Secretary
Edward G. Pecelli - Assistant Vice President, Director of Sales and
Marketing
Laura M. Ritzko, Assistant Secretary
Henry S. Buck, Assistant Vice President and Assistant Treasurer
Barbara S. Wood, Senior Vice President, Finance and Treasurer
Bruce Ohrenich, Vice President, Sales
Joseph R. Englert, Assistant Vice President, Director of Operations
William H. Pentz, Counsel
Constance Flaville, Assistant Secretary

The principal business address of Messrs. Gray and Wilde is Janney,
Montgomery, Scott Inc., 1801 Market Street, Philadelphia,
Pennsylvania.
The principal business address of Mses. Mulrooney and Ritzko and
Messrs.
Maude, Toran and Pentz is The Penn Mutual Life Insurance Company,
Philadelphia, Pennsylvania, 19172. The principal business address of
the other directors and officers is Hornor, Townsend & Kent, Inc., 600
Dresher Road, Horsham, Pennsylvania.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------

The name and address of the person who maintains physical possession
of each account, book or other documents required by Section 31(a) of
the Investment Company Act of 1940 is as follows:

C-9
<PAGE>

The Penn Mutual Life Insurance Company
600 Dresher Road
Horsham, Pennsylvania 19044

ITEM 31. MANAGEMENT SERVICES
-------------------

See "Administrative and Recordkeeping Services" in Part B of this
Registration Statement.

ITEM 32. UNDERTAKINGS
------------

The Penn Mutual Life Insurance Company hereby undertakes:

(a) to file a post-effective amendment to this Registration Statement
as frequently as is necessary to ensure that the audited
financial statements in the Registration Statement are never more
than 16 months old for so long as payments under the variable
annuity contracts may be accepted;

(b) to include either (1) as part of any application to purchase a
contract or account offered by the prospectus, a space that an
applicant can check to request a statement of additional
information, or (2) a post card or similar written communication
affixed to or included in the prospectus that the applicant can
remove to send for a statement of additional information;

(c) to deliver any statement of additional information and any
financial statements required to be made available under Form N-4
promptly upon written or oral request.

Restrictions on withdrawals under Section 403(b) Contracts are imposed
in reliance upon, and in compliance with, a no-action letter issued by
the Chief of the Office of Insurance Products and Legal Compliance of
the Securities and Exchange Commission to the American Council of Life
Insurance on November 28, 1988.

The Penn Mutual Life Insurance Company represents that the fees and
charges deducted under the Individual Variable and Fixed Annuity
Contract, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed
by the Registrant.

C-10
<PAGE>

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant has caused this Registration Statement to be signed
on its behalf, by the undesigned, thereunto duly authorized, in the Township of
Horsham and Commonwealth of Pennsylvania on this 3rd day of September, 1998.

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
(Registrant)

By: THE PENN MUTUAL LIFE INSURANCE COMPANY
(Depositor)

By: /s/ ROBERT E. CHAPPELL
-----------------------------------------------
Robert E. Chappell
Chairman of the Board of Trustees
and Chief Executive Officer

As required by the Securities Act of 1933, this Registration Statement
has been signed by the following persons, in the capacities indicated, on the
3rd day of September, 1998.

Signature Title
- --------- -----

/s/ ROBERT E. CHAPPELL Chairman of the Board of Trustees
- ----------------------
Robert E. Chappell and Chief Executive Officer

/s/ NANCY S. BRODIE Executive Vice President and
- --------------------
Nancy S. Brodie Chief Financial Officer

*JULIA CHANG BLOCH Trustee

*JAMES A. HAGEN Trustee

*PHILLIP E. LIPPINCOTT Trustee

*JOHN F. MCCAUGHAN Trustee

*ALAN B. MILLER Trustee

*EDMOND F. NOTEBAERT Trustee

*ROBERT H. ROCK Trustee

*DANIEL J. TORAN Trustee

*NORMAN T. WILDE, JR. Trustee

*WESLEY S. WILLIAMS, JR. Trustee

*By: /s/ ROBERT E. CHAPPELL
-----------------------------------------
Robert E. Chappell, attorney-in-fact
<PAGE>

EXHIBIT INDEX

EX.99 B 4. (a) Individual Variable and Fixed Annuity Contract (Form
VAB-98). Filed herewith.

EX.99 B 5. Application (Form 5798) for Individual Variable Annuity
Contract.

EX.99 B 10. (a) Consent of Ernst & Young LLP. Filed herewith.

EX.99 B 10. (b) Consent of PricewaterhouseCoopers LLP. Filed herewith.

EX.99 B 10. (c) Consent of Morgan, Lewis & Bockius LLP. Filed herewith.

<PAGE>

Exhibit 4(a)

THE PENN MUTUAL LIFE INSURANCE COMPANY
Founded 1847

Contract Owner William Penn 9999999 Contract Number

Contract Date August 7, 1998 September 1, 2058 Annuity Date

Annuitant William Penn 35 Age of Annuitant

VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THEY MAY DECREASE OR INCREASE
AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.

RIGHT TO REVIEW CONTRACT: The Contract Owner may cancel this contract within
ten days after its receipt. Simply return or mail it to the Company or the
representative through whom it was purchased. The Company will refund the
Contract Value as of the time notification is received.

This is a legal contract between the Contract Owner and Penn Mutual. Please read
the contract carefully.

Executed on the Contract Date by The Penn Mutual Life Insurance Company.

/s/ Laura M. Ritzko
Secretary

/s/ Robert E. Chappell
Chairman and
Chief Executive Officer

INDIVIDUAL VARIABLE AND FIXED
ANNUITY CONTRACT
FLEXIBLE PURCHASE PAYMENTS

Annuity Payments payable on Annuity Date
Flexible Purchase Payments payable until
Annuity Date Participating
The Company will make monthly annuity
payments and other payments as set forth
in this contract.

The Penn Mutual Life Insurance Company, Philadelphia, Pennsylvania 19172
VAB-98

A004373C
<PAGE>

GUIDE TO CONTRACT SECTIONS

1. Contract Specifications

2. Endorsements

3. Definitions

4. Purchase Payments

5. The Separate Account

6. The Fixed Account

7. Charges and Deductions

8. Contract Value

9. Annuity Payments

10. Fixed Annuity Payments

11. Variable Annuity Payments

12. Annuity Options

13. Death Benefit

14. Transfers

15. Withdrawal

16. General

Additional Contract Specifications and a copy of any
applications follow Section 16.

A004372I
<PAGE>

1. CONTRACT SPECIFICATIONS

Contract Owner: William Penn Contract Number: 9999999

Contract Date: August 7, 1998 Annuity Date: September 1, 2058

Annuitant: William Penn Age of Annuitant: 35

Market Type: Non-Qualified

Separate Account: PML Variable Annuity Account III

Schedule of Purchase Payments
- -----------------------------

Initial Purchase Payment of $30,000.00 was allocated to the contract on August
7, 1998 as follows:
Variable Account 70%
Fixed Account 30%

Subsequent Purchase Payments may be made subject to the provisions of the
contract.

Schedule of Annual Charges
- --------------------------

Annual Contract Administration Charge*: $40
Asset Based Contract Administration Charge**: .15%
Mortality & Expense Risk Charge**: 1.25%

Date Annual Charges are deducted each year: August 6

*THE CONTRACT ADMINISTRATION CHARGE APPLIES EACH YEAR THERE IS A VARIABLE
ACCOUNT VALUE WHICH IS LESS THAN $100,000.

**THE MORTALITY AND EXPENSE RISK CHARGE AS WELL AS THE ASSET BASED CONTRACT
ADMINISTRATION CHARGE ARE MADE DAILY AGAINST THE ASSETS OF THE SEPARATE ACCOUNT.

Schedule of Contingent Deferred Sales Charge
- --------------------------------------------

Number of contract years since Contingent Deferred
purchase payment Sales Charge
(% of purchase payment)
0 1.0%
1+ 0.0

Refer to Section 7 of the contract for further information on the Contingent
Deferred Sales Charge.

Page 3
<PAGE>

2. ENDORSEMENTS
To be made only by the Company

This page is intentionally
--------------------------

left blank.
-----------

Page 4

B004253E
<PAGE>

3. DEFINITIONS
- ---------------

Accumulation Unit: A unit of measure used to compute the Variable Account Value
under the contract prior to the Annuity Date. See Section 8.

Annuitant: The person during whose life annuity payments are made.

Annuity Date: The date on which annuity payments start.

Annuity Unit: A unit of measure used to calculate the amount of a variable
annuity payment. See Section 11.

Contract Owner: The person specified in the contract as the contract owner. The
Contract Owner has all rights to control all aspects of the contract, including,
after the Annuity Date and before the death of the Annuitant, the right to
transfer amounts among the subaccounts of the Separate Account and the right to
change the beneficiary.

Fixed Account: The account under which amounts are held for the Contract Owner
under all fixed interest options prior to the Annuity Date.

Interest Period: The period of time for which an interest rate declared by the
Company is guaranteed. The period begins on the first day of the calendar month
in which allocation or transfer is made.

Qualified Plan: A retirement arrangement that receives special tax treatment
under Section 403, 408, or any similar provisions of the Internal Revenue Code.

Variable Account: The account under which amounts are held for the Contract
Owner under all subaccounts of the Separate Account prior to the Annuity Date.

The Company: The Penn Mutual Life Insurance Company.

Page 5
<PAGE>

4. PURCHASE PAYMENTS
- ---------------------

Purchase payments will be allocated to the subaccounts of the Separate Account
and to the fixed interest options of the Fixed Account as directed by the
Contract Owner in the application for this contract.

Subsequent purchase payments will be allocated, as specified in the allocation
section of the application, to the subaccounts of the Separate Account and to
the fixed interest options of the Fixed Account unless the Contract Owner
directs that the purchase payments be allocated otherwise.

Purchase payments applied to the contract after issue may be made at any time
without prior notice to the Company. The minimum subsequent purchase payment is
$25,000.

Total purchase payments may not exceed $1,000,000 at any time without the
consent of the Company.

Page 6
<PAGE>

5. THE SEPARATE ACCOUNT
- ------------------------

The Separate Account. The Separate Account named on Page 3 was established by
the Company for this and other variable contracts. The Separate Account is
divided into subaccounts for the investment of assets in shares of the mutual
funds which are listed in the Additional Contract Specifications Page.

The Company owns the assets held in the Separate Account. However, the portion
of the assets of each subaccount of the Separate Account equal to the reserves
and other contract liabilities with respect to the subaccount of the Separate
Account are not chargeable with the liabilities arising out of any other
business the Company may conduct. Income and realized and unrealized gains and
losses from the assets held in each subaccount are credited to or charged
against the subaccount without regard to the income, gains or losses in other
investment accounts of the Company. Shares of a mutual fund held in a subaccount
will be redeemed at current net asset value to make transfers, pay benefits and
cover applicable charges and deductions. Any dividend or capital gain
distribution from a mutual fund will be reinvested in shares of that mutual
fund.

Substitution of Investment. If investment in a subaccount should no longer be
possible, or a subaccount's investment in a particular mutual fund should no
longer be possible, or, in the judgment of the Company, investment in a
subaccount or mutual fund becomes inappropriate to the purposes of the contract,
or, if in the judgment of the Company, investment in another subaccount, mutual
fund or insurance company separate account is in the interest of Contract Owners
of this class of contracts, the Company may substitute another subaccount,
mutual fund or insurance company separate account. Substitution may be made with
respect to existing investments and the investment of future purchase payments.

Substitution will be subject to all approvals required under applicable law.

Page 7

6. THE FIXED ACCOUNT
- ---------------------

The Fixed Account. The Fixed Account consists of the fixed interest options
which are listed in the Additional Contract Specifications Page.

Amounts allocated or transferred to the Fixed Account under this contract become
a part of the general account assets of the Company and do not fluctuate with
regard to investment experience.

One Year Fixed Interest Option. Amounts may be allocated or transferred to this
fixed interest option. Amounts held in this fixed interest option of the Fixed
Account will be credited with interest at effective annual rates declared by the
Company. The declared interest rate will apply from the date of the allocation
or transfer through the end of a one year interest period. At the expiration of
an interest period, the Company will renew the portion of the fixed interest
option that has expired at the new rate declared for the interest period at that
time. For the 25 days following the expiration of such period, the Contract
Owner may transfer all or a portion of the amount held in such fixed interest
option to subaccount(s) of the Separate Account.

The Company will not declare rates of interest for any fixed interest option of
less than 3%.

Page 8
<PAGE>

7. CHARGES AND DEDUCTIONS
- --------------------------

Contract Administration Charges. These charges are assessed against contracts
with a Variable Account Value. The first charge is the Annual Contract
Administration Charge which will be no greater than the lesser of 2% of the
Variable Account Value or dollaramount specified on Page 3. This charge will
only be applied if the Variable Account Value at the time the charge is incurred
is less than $100,000. It will be deducted annually on the dates specified on
Page 3. It will also be deducted when the Variable Account Value is withdrawn or
transferred in full if withdrawal or transfer is not on the date specified on
Page 3. The charge will not be deducted after the Annuity Date.

A004360P

The second charge is an asset based contract administration charge. On an annual
basis the charge will be a percentage of the daily net asset value of the
Variable Account which will not exceed the charge shown on Page 3.

Mortality and Expense Risk Charge. This charge is made to compensate the Company
for the mortality guarantees made under this contract and for guaranteeing that
the contract administration charges will not be increased by the Company over
the life of this contract or other contracts under the same class. On an annual
basis the charge will be a percentage of the daily net asset value of the
Variable Account. The charge will not exceed the value shown on Page 3.

Contingent Deferred Sales Charge. This charge, if applicable, will be deducted
upon withdrawal, in whole or in part, of the Contract Value. This charge will
not be applied on payment at time of annuitization or on a death benefit
payment. For further definition of the charge, see Section 15-Withdrawal.

Premium Taxes. The Company may deduct from the Contract Value any premium or
other taxes payable to a state or other government entity. Should the Company
elect not to assess any amount so due, the Company does not waive the right to
collect such amounts at a later date.

Deductions. The asset based contract administration charge and the mortality and
expense risk charge will be computed and deducted from each subaccount of the
Separate Account in which the Contract Owner is invested. These deductions will
be made daily.

The Company will deduct other charges applicable to the Variable Account by
canceling Accumulation Units or Annuity Units. The value of the canceled units
will be equal to the amount of the charges. Cancellation ofAccumulation Units
will be in the ratio of the Contract Owner's share in each subaccount of the
Separate Account to the Variable Account Value.

Page 9
<PAGE>

8. CONTRACT VALUE
- ------------------

The Contract Value. The contract value is the sum of the Variable Account Value
and the Fixed Account Value.

The Fixed Account Value. The Fixed Account Value is the sum of all money
allocated or transferred to the fixed interest options of the Fixed Account plus
all interest credited to the Fixed Account. This amount shall be adjusted for
withdrawals, transfers and charges.

The Variable Account Value. The Variable Account Value is the sum of the values
of the Accumulation Units held in the subaccounts of the Separate Account for
this contract.

Number of Accumulation Units. For each subaccount of the Separate Account, the
number of Accumulation Units is the sum of (a) divided by (b), where:

(a) is each amount allocated to the subaccount; and

(b) is the value of the Accumulation Unit for that
subaccount for the valuation period in which the purchase
payment was received.

The number of Accumulation Units will be adjusted for transfers, withdrawals and
charges. Adjustments will be made as of the valuation period in which all
requirements for the transaction are received.

Value of Each Accumulation Unit. For each subaccount of the Separate Account,
the value was arbitrarily set at $10 when the subaccount was established. The
value may increase or decrease from one valuation period to the next. For any
valuation period the value is (a) multiplied by (b), where:

(a) is the value of an Accumulation Unit for the prior
valuation period; and

(b) is the net investment factor for that subaccount for
the current valuation period.

Net Investment Factor. As used in this contract, net investment factor is an
index used to measure the investment performance of a subaccount from one
valuation period to the next.

A004361P

For any subaccount, the net investment factor for a valuation period is found by
dividing (a) by (b) and subtracting (c), where:

(a) is the net result of:

(1) net asset value per share of the mutual fund held in the
subaccount as of the end of the valuation period; plus

(2) the per-share amount of any dividend or capital
gain distributions by the mutual fund if the "ex dividend"
date occurs in the valuation period; plus or minus

(3) a per-share charge or credit as the Company may
determine, as of the end of the valuation period, for tax
reserves.

(b) is the net result of:

(1) the net asset value per share of the mutual fund
held in the subaccount as of the end of the last prior
valuation period; plus or minus

(2) the per share charge or credit for tax reserves as
of the end of the last prior valuation period.

(c) is the sum of the daily asset based contract
administration charge, the daily mortality and expense risk
charge. On an annual basis, the sum of such charges will
not exceed the values shown on Page 3.

Valuation Period. It is the interval of time from one valuation to the next.
Valuation is the time when shares of the applicable mutual funds are valued.

Page 10
<PAGE>

9. ANNUITY PAYMENTS
- --------------------

Annuity Date. Unless another Annuity Date was chosen in the application or later
written notification, the Annuity Date will be the later of the first day of the
next month after the Annuitant's 95th birthday or 10 years after the Contract
Date.

The Annuity Date must be on the first day of a month. The Contract Owner may
change the Annuity Date up to 30 days before the current Annuity Date.

Annuity Options. The Contract Owner may choose a fixed annuity option, a
variable annuity option, or a combination of both up to 30 days prior to the
Annuity Date.

On the Annuity Date, the Contract Value, net of premium taxes if applicable,
must be annuitized. If not otherwise specified by the Contract Owner, the
contract will be annuitized on the Annuity Date based on a life annuity with
payments guaranteed for a 10 year period. If not otherwise specified by the
Contract Owner, the Fixed Account Value will be annuitized under the fixed
annuity option and the Variable Account Value will be annuitized under the
variable annuity option.

Minimum Annuity Payments. If the Contract Value to be applied at the Annuity
Date is less than $5,000, the Company may pay such amount in a lump sum. Annuity
payments will be made monthly, quarterly, semi annually or annually at the
Contract Owner's request. If any payment would be less than $50, the Company may
change the frequency so that payments are at least $50 each.

Page 11
<PAGE>

10. FIXED ANNUITY PAYMENTS
- ---------------------------

Amount of Fixed Annuity Payments. The portion of the Contract Value designated
by the Contract Owner for a fixed annuity option, will be applied to that
annuity option as of the Annuity Date. In no event will the monthly income under
Option 1, Option 2, Option 3 and Option 4 be less than the guaranteed monthly
income. The guaranteed monthly income will be equal to that portion of the
Contract Value, designated by the Contract Owner for a fixed annuity option,
applied to the Fixed Annuity.

Options Table in this section. The Fixed Annuity Options Table shows the amount
of the first payment for each $1,000 so applied, according to the age at the
Annuity Date. The tables are based on the Annuity 2000 Basic Table, without
projections, 50% male/50% female with an effective annual interest rate of 3%.
Adjusted ages are used in applying those tables.

A004362P

FIXED ANNUITY OPTION TABLES

The following tables show the amount of the first monthly income payment for
each $1,000 of value applied under an annuity option. "Age" as used in the
tables for Options 2,3, and 4 means an adjusted age determined in the following
manner from the actual age of the Annuitant on the birthday nearest the date of
the first payment:

Date of First Payment Adjusted Age
Before calendar year 2010 Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3

Option-1 Annuity for Specified Number of Years

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number of Years 5 6 7 8 9 10 11 12 13 14 15 16 17
Monthly Income 17.91 15.14 13.16 11.68 10.53 9.61 8.86 8.24 7.71 7.26 6.87 6.53 6.23
Number of Years 18 19 20 21 22 23 24 25 26 27 28 29 30
Monthly Income 5.96 5.73 5.51 5.32 5.15 4.99 4.84 4.71 4.59 4.47 4.37 4.27 4.18
</TABLE>
<TABLE>
<CAPTION>
Option 2 - Life Annuity and Option 3 - Life Annuity with Payments Guaranteed for 10 or 20 Years

Life 10 Years 20 Years Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
<S> <C> <C> <C> <C> <C> <C> <C>
50 3.95 3.93 3.86 75 7.61 6.88 5.34
51 4.02 3.99 3.91 76 7.93 7.06 5.37
52 4.08 4.06 3.96 77 8.27 7.25 5.40
53 4.16 4.12 4.02 78 8.64 7.44 5.42
54 4.23 4.20 4.08 79 9.03 7.62 5.44

55 4.31 4.27 4.14 80 9.46 7.81 5.46
56 4.39 4.35 4.20 81 9.91 7.99 5.47
57 4.48 4.43 4.26 82 10.41 8.16 5.48
58 4.58 4.52 4.33 83 10.93 8.32 5.49
59 4.68 4.61 4.39 84 11.50 8.48 5.50

60 4.78 4.71 4.46 85 12.11 8.62 5.50
61 4.90 4.81 4.53 86 12.76 8.76 5.51
62 5.02 4.92 4.60 87 13.46 8.88 5.51
63 5.15 5.03 4.66 88 14.20 8.99 5.51
64 5.28 5.15 4.73 89 14.98 9.09 5.51

65 5.43 5.28 4.80 90 15.81 9.17 5.51
66 5.59 5.41 4.87 91 16.68 9.25 5.51
67 5.76 5.55 4.93 92 17.59 9.32 5.51
68 5.94 5.70 4.99 93 18.55 9.38 5.51
69 6.13 5.85 5.05 94 19.55 9.44 5.51

70 6.33 6.01 5.11 95 20.62 9.48 5.51
71 6.56 6.17 5.17
72 6.79 6.34 5.21
73 7.05 6.51 5.26
74 7.32 6.69 5.30
</TABLE>

Option 4 - Joint and Survivor Life Annuity

Page 12

A004363P
<PAGE>

11. VARIABLE ANNUITY PAYMENTS
- -----------------------------

First Variable Annuity Payment. The portion of the Contract Value designated by
the Contract Owner for a variable annuity option will be applied to one of the
Variable Annuity Option Tables in this section for the variable annuity option
and the assumed interest rate chosen as of the Annuity Date. The tables are
based on the Annuity 2000 Basic Table, without projections, 50% male/50% female
with an effective annual interest rate stipulated on the table. Adjusted ages
are used in applying those tables.

Subsequent Variable Annuity Payments. Payments after the first will vary in
amount according to the investment performance of the subaccount(s). The payment
amount may change from month to month. The amount of each subsequent payment is
the sum of (a) multiplied by (b) for each applicable subaccount, where:

(a) is the number of Annuity Units for the subaccount; and

(b) is the value of an Annuity Unit for that subaccount for
the valuation period in which payment is due.

The amount of each annuity payment after the first will not be affected by
variations in expense or mortality experience.

Number of Annuity Units. The number of units for the subaccount of each
investment account chosen is (a) divided by (b), where:

(a) is the amount of the first variable annuity payment
attributable to that subaccount; and

(b) is the value of an Annuity Unit for the subaccount as
of the Annuity Date.

The number of Annuity Units is fixed except for adjustments for subaccount
transfers. Adjustments will be made as of the valuation period in which all
requirements for the transfer are received.

Value of Each Annuity Unit. For each subaccount, the value of an Annuity Unit
was arbitrarily set at $10 when the subaccount was established. The value may
increase or decrease from one valuation period to the next. For any valuation
period the value is (a) multiplied by (b) multiplied by (c), where:

(a) is the value of an Annuity Unit for the last prior
valuation period

(b) is the net investment factor for that subaccount for the
valuation period

Net Investment Factor. The net investment factor is an index used to measure the
investment performance of a subaccount from one valuation period to the next.
For any subaccount, the net investment factor for a valuation period is found by
dividing (a) by (b) and subtracting (c), where:

(a) is the net result of:

(1) net asset value per share of the mutual fund held
in the subaccount as of the end of the valuation period;
plus

(2) the per-share amount of any dividend or capital
gain distributions by the mutual fund if the "ex-dividend"
date occurs in the valuation period; plus or minus

(3) a per-share charge or credit as the Company may
determine, as of the end of the valuation period, for tax
reserves.

(b) is the net result of:

(1) the net asset value per-share of the mutual fund
held in the subaccount as of the end of the last prior
valuation period; plus or minus

(2) the per-share charge or credit for tax reserves as
of the end of the last prior valuation period.

(c) is the sum of the daily asset based contract
administration charge and the daily mortality and expense
risk charge. On an annual basis, this charge will be a
percentage of the daily net asset value of the Separate
Account. The sum of such charges will not exceed the
values shown on Page 3.

Page 13

A004364P
<PAGE>

11. VARIABLE ANNUTIY PAYMENTS (CONTINUED)
- ----------------------------------------

VARIABLE ANNUITY OPTION TABLES - 3% INTEREST OPTION

Date of First Payment Adjusted Age
Before calendar year 2010 Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3

<TABLE>
Option 2 - Life Annuity and Option 3 - Life Annuity with Payments Guaranteed for 10 or 20 Years

Life 10 Years 20 Years Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
<S> <C> <C> <C> <C> <C> <C> <C>

50 3.95 3.93 3.86 75 7.61 6.88 5.34
51 4.02 3.99 3.91 76 7.93 7.06 5.37
52 4.08 4.06 3.96 77 8.27 7.25 5.40
53 4.16 4.12 4.02 78 8.64 7.44 5.42
54 4.23 4.20 4.08 79 9.03 7.62 5.44

55 4.31 4.27 4.14 80 9.46 7.81 5.46
56 4.39 4.35 4.20 81 9.91 7.99 5.47
57 4.48 4.43 4.26 82 10.41 8.16 5.48
58 4.58 4.52 4.33 83 10.93 8.32 5.49
59 4.68 4.61 4.39 84 11.50 8.48 5.50

60 4.78 4.71 4.46 85 12.11 8.62 5.50
61 4.90 4.81 4.53 86 12.76 8.76 5.51
62 5.02 4.92 4.60 87 13.46 8.88 5.51
63 5.15 5.03 4.66 88 14.20 8.99 5.51
64 5.28 5.15 4.73 89 14.98 9.09 5.51

65 5.43 5.28 4.80 90 15.81 9.17 5.51
66 5.59 5.41 4.87 91 16.68 9.25 5.51
67 5.76 5.55 4.93 92 17.59 9.32 5.51
68 5.94 5.70 4.99 93 18.55 9.38 5.51
69 6.13 5.85 5.05 94 19.55 9.44 5.51

70 6.33 6.01 5.11 95 20.62 9.48 5.51
71 6.56 6.17 5.17
72 6.79 6.34 5.21
73 7.05 6.51 5.26
74 7.32 6.69 5.30
</TABLE>
<TABLE>
<CAPTION>
Option 4 - Joint and Survivor Life Annuity

Age 50 55 60 65 70 75 80 85 90 95 Age
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 3.53 3.64 3.73 3.80 3.85 3.89 3.92 3.93 3.94 3.95 50
55 3.64 3.79 3.92 4.04 4.13 4.20 4.24 4.27 4.29 4.30 55
60 3.73 3.92 4.12 4.30 4.45 4.57 4.65 4.71 4.74 4.76 60
65 3.80 4.04 4.30 4.56 4.81 5.02 5.17 5.28 5.35 5.38 65
70 3.85 4.13 4.45 4.81 5.18 5.52 5.80 6.01 6.15 6.23 70
75 3.89 4.20 4.57 5.02 5.52 6.04 6.52 6.91 7.19 7.37 75
80 3.92 4.24 4.65 5.17 5.80 6.52 7.27 7.96 8.50 8.87 80
85 3.93 4.27 4.71 5.28 6.01 6.91 7.96 9.03 9.99 10.73 85
90 3.94 4.29 4.74 5.35 6.15 7.19 8.50 9.99 11.48 12.78 90
95 3.95 4.30 4.76 5.38 6.23 7.37 8.87 10.73 12.78 14.74 95
</TABLE>

A004365P

11. VARIABLE ANNUITY PAYMENTS (CONTINUED)
- ----------------------------------------

VARIABLE ANNUITY OPTION TABLES - 5% INTEREST OPTION

Date of First Payment Adjusted Age
Before calendar year 2010 Actual Age
2010-2019 Actual age decreased by 1
2020-2029 Actual age decreased by 2
2030 and later Actual age decreased by 3

Option 2 - Life Annuity and Option 3 - Life Annuity with Payments Guaranteed for 10 or 20 Years

Life 10 Years 20 Years Life 10 Years 20 Years
Age Annuity Guaranteed Guaranteed Age Annuity Guaranteed Guaranteed
<S> <C> <C> <C> <C> <C> <C> <C>

50 5.17 5.14 5.04 75 8.79 7.93 6.35
51 5.23 5.19 5.09 76 9.11 8.10 6.38
52 5.29 5.25 5.13 77 9.45 8.28 6.41
53 5.36 5.31 5.18 78 9.82 8.46 6.43
54 5.43 5.38 5.23 79 10.22 8.64 6.44

55 5.50 5.45 5.29 80 10.65 8.81 6.46
56 5.58 5.52 5.34 81 11.12 8.98 6.47
57 5.67 5.60 5.40 82 11.62 9.14 6.48
58 5.76 5.68 5.45 83 12.15 9.29 6.49
59 5.86 5.77 5.51 84 12.73 9.44 6.50

60 5.96 5.86 5.57 85 13.34 9.58 6.50
61 6.07 5.96 5.63 86 14.00 9.70 6.51
62 6.19 6.06 5.69 87 14.71 9.81 6.51
63 6.32 6.17 5.75 88 15.46 9.92 6.51
64 6.45 6.28 5.82 89 16.25 10.01 6.51

65 6.60 6.40 5.88 90 17.08 10.09 6.51
66 6.75 6.53 5.94 91 17.96 10.17 6.51
67 6.92 6.66 5.99 92 18.88 10.23 6.51
68 7.10 6.80 6.05 93 19.84 10.29 6.51
69 7.29 6.95 6.10 94 20.84 10.34 6.51

70 7.50 7.10 6.15 95 21.91 10.38 6.51
71 7.72 7.25 6.20
72 7.96 7.42 6.24
73 8.22 7.58 6.28
74 8.49 7.75 6.32
</TABLE>
<TABLE>
<CAPTION>
Option 4 - Joint and Survivor Life Annuity

Age 50 55 60 65 70 75 80 85 90 95 Age
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
50 4.74 4.83 4.92 4.99 5.04 5.09 5.12 5.14 5.15 5.16 50
55 4.83 4.96 5.09 5.20 5.29 5.36 5.42 5.45 5.47 5.49 55
60 4.92 5.09 5.26 5.43 5.58 5.71 5.80 5.86 5.90 5.93 60
65 4.99 5.20 5.43 5.68 5.92 6.13 6.29 6.41 6.49 6.54 65
70 5.04 5.29 5.58 5.92 6.27 6.61 6.90 7.12 7.27 7.37 70
75 5.09 5.36 5.71 6.13 6.61 7.12 7.60 8.01 8.30 8.50 75
80 5.12 5.42 5.80 6.29 6.90 7.60 8.34 9.03 9.59 9.99 80
85 5.14 5.45 5.86 6.41 7.12 8.01 9.03 10.11 11.07 11.84 85
90 5.15 5.47 5.90 6.49 7.27 8.30 9.59 11.07 12.57 13.87 90
95 5.16 5.49 5.93 6.54 7.37 8.50 9.99 11.84 13.87 15.83 95
</TABLE>

Page 14

A004366P
<PAGE>

12. ANNUITY OPTIONS
- -------------------

Option 1-Annuity for Specified Number of Years. Payments will be made for a
specified number of years, which may not be less than 5 nor more than 30. This
option is available for a fixed annuity only.

Option 2-Life Annuity. Payments will be made for the life of the Annuitant.
Payments will cease with the last payment due prior to the Annuitant's death.

Option 3-Life Annuity with Payments Guaranteed for 10 or 20 years. Payments will
be made for the life of the Annuitant. A guaranteed payment period of either 10
or 20 years may be chosen.

Option 4-Joint and Survivor Life Annuity. The initial payment will be made if
either the Annuitant or the designated second Annuitant are living. Subsequent
payments will continue during the joint lives of the Annuitants and thereafter
during the life of the surviving annuitant. Payments will end with the last
payment due before the death of the last Annuitant to die.

Other annuity forms may be available with the consent of the Company.

If the Annuitant dies prior to the end of the specified period under Option 1 or
the guaranteed period under Option 3, the beneficiary may choose either:

(1) To have the payments continue for the remainder of
the specified or guaranteed period, or

(2) To receive at any time in one sum the present value
of the remaining payments to be made over the
specified or guaranteed period.

If the beneficiary dies while receiving annuity payments under Option 1 or the
guaranteed period of Option 3, the present value of remaining payments will be
paid in one sum to the beneficiary's estate unless otherwise specified. The
present value will be computed as of the valuation period in which due proof of
death and the necessary forms to make payment to a beneficiary are received at
our Administrative Office. At that time, the present value of the fixed annuity
option will be commuted at a rate set by the Company on the annuity date and the
present value of the variable annuity option will be commuted at the assumed
interest rate built into the annuity table chosen at annuitization.

Payments. Payments will be made on the first day of the month starting with the
Annuity Date. Payments under all options will be made to or at the direction of
the Contract Owner.

Page 15
<PAGE>

13. DEATH BENEFIT
- ------------------

Death Before the Annuity Date. A death benefit shall be payable upon the earlier
of the death of:

(1) the Contract Owner or

(2) the Annuitant.

Prior to the Annuity Date and upon receipt of due proof of death and the
necessary forms to make payment to a beneficiary, the Company will pay a death
benefit to the beneficiary.

Upon the Contract Owner's death, the death benefit is equal to the Contract
Value on the date of receipt of due proof of death.

Upon the Annuitant's death, the death benefit is equal to the Fixed Account
death benefit plus the Variable Account death benefit. The Fixed Account death
benefit is equal to the Fixed Account Value on the date of receipt of due proof
of death and the necessary forms to make payment to a beneficiary. The Variable
death benefit is the greater of:

(1) the Variable purchase payments, net of Variable Account transfers
and less the total amount of any partial withdrawals from the Variable
Account; or

(2) the Variable Account Value at the date of receipt of due proof of
death and the necessary forms to make payment to a beneficiary.

Within one year of the date of death, the beneficiary may elect one of the
following payout options if death occurs before the Annuity Date.

(1) The death benefit may be paid in a single sum. The
payment will generally be made within 7 days of receipt
of the necessary forms to make payment.

A004367P

(2) The Contract Value may be paid out in a single sum within five years
after of the date of death. At the time of this election, the
beneficiary must specify the allocation of the Contract Value to the
subaccounts of the Separate Account and the fixed interest options of
the Fixed Account. During this election and within five years after the
date of death, the beneficiary may transfer amounts among the
subaccounts of the Separate Account and the fixed interest options of
the Fixed Account. Transfers from the fixed interest options are subject
to the limitations imposed on such options prior to the end of the
interest period.

(3) The death benefit may be paid in the form of one of the Annuity
Options. If the death benefit becomes payable upon the death of the
Annuitant, election to receive the death benefit in the form of an
annuity must be made within 60 days of the death of the Annuitant. The
payments must be made over the life of the beneficiary or over a period
not extending beyond the life expectancy of the beneficiary. Payments
under this option must commence within one year after the date of death.

(4) If the beneficiary is the Contract Owner's surviving spouse, the
surviving spouse may elect to become the Contract Owner.

If no such election is made within one year of the date of death, the Company
will pay the Contract Value to the beneficiary at that time. If there is more
than one surviving beneficiary, the beneficiaries must choose to receive their
respective portions of the death benefit according to either (1) or (2) or (3)
in the preceding paragraph. If no beneficiary survives the first to die of the
Contract Owner or the Annuitant, the death benefit will be paid in a lump sum to
the Contract Owner's estate or the Contract Owner, respectively.

Death After the Annuity Date. This death benefit shall be payable upon the death
of the Annuitant. If death occurs after the Annuity Date, the death benefit
payable, if any, will be according to the annuity option in force.

Beneficiary. The beneficiary is the person(s) who is to receive:

(1) Payment on the earlier of the death of the
Contract Owner or the Annuitant prior to the Annuity
Date, or

(2) Remaining payments under specified or
guaranteed annuity payments, if any, on death of the
Annuitant on or after the Annuity Date.

The Contract Owner shall designate the beneficiary in the application. The
Contract Owner may change the beneficiary at any time before the death of the
Contract Owner or the Annuitant, whichever occurs first.

The estate of a beneficiary who dies before the first to die of the Contract
Owner or the Annuitant shall have no rights under this contract.

Page 16
<PAGE>

14. TRANSFERS
- --------------

Transfers. Subject to and in accordance with the provisions of this contract and
prior to the Annuity Date, the Contract Owner may transfer amounts among the
subaccounts of the Separate Account and the one year fixed interest option of
the Fixed Account, provided that:

(a) the minimum amount which may be transferred is
$250 or, if less, the full amount held in the subaccount or
fixed interest option;

(b) for partial transfers, the amount remaining in asubaccount or fixed
interest option must be at least $250;

(c) amounts may be transferred from the one year fixed
interest option(s) to other subaccounts only during the 25
day period immediately following the end of the interest
period for which an interest rate is declared on such fixed
interest option(s).

Subject to and in accordance with the provisions of this contract and after the
Annuity Date, the Contract Owner may transfer amounts among subaccounts of the
Separate Account. Upon death of the Contract Owner or the Annuitant and under
the election of a Variable Annuity option, the beneficiary shall have the right
to transfer amounts among the subaccounts of the Separate Account, provided
that:

(a) the minimum amount which may be transferred is
$250 or, if less, the full amount held in the subaccount;

(b) for partial transfers, the amount remaining in a
subaccount must be at least $250.

A004368P Page 17
<PAGE>

15. WITHDRAWAL
- ---------------

Withdrawal. Prior to the earlier of the Annuity Date, the death of the Contract
Owner or the death of the Annuitant, the Contract Owner may withdraw all or part
of the Contract Value.

Withdrawal Payments. The Contract Owner may make a full or partial withdrawal.
The minimum withdrawal is $500.

At the time of a partial withdrawal, the amount remaining in the contract must
be at least $5,000 or such lower amount as the Company may require. A minimum
balance of $250 must be in each subaccount or a fixed interest option. If the
Contract Owner makes a full withdrawal, the contract must be returned to the
Company.

Unless otherwise specified by the Contract Owner, the withdrawal will be made
first prorata from the subaccounts of the Separate Account up to the Variable
Account Value, and then from the Fixed Account beginning with the fixed interest
option with the shortest interest period. Within a fixed interest option,
partial withdrawals will be made from amounts most recently allocated, renewed
or transferred.

Contingent Deferred Sales Charge. The Contingent Deferred Sales Charge will be
imposed upon withdrawals.

For purposes of calculating the Contingent Deferred Sales Charge, purchase
payments will be allocated to the amount withdrawn. The Company will allocate
the purchase payment with the earliest effective date first, then the next
earliest purchase payment until theallocation is equal to the withdrawal amount.
There will be no Contingent Deferred Sales Charge on amounts withdrawn that
exceed the total purchase payments of the contract.

The percentage charged will vary depending upon the number of full contract
years since the purchase payments were made to the time of the withdrawal in
accordance with the table shown on Page 3

The Contingent Deferred Sales Charge will be equal to the sum of charges applied
to the purchase payments associated with the withdrawal. The charge applied to
each purchase payment is equal to the product of (a) multiplied by (b) for each
purchase payment associated with the withdrawal, where:

(a) is the amount of the purchase payment associated with the
withdrawal, and

(b) is the percentage that corresponds to the number of full contract
years since the purchase payment.

Systematic Withdrawals. After the contract is issued and prior to the Annuity
Date, the Contract Owner may request a withdraw systematically once each
contract year. The minimum Contract Value to be eligible for a withdrawal of
this type is $25,000 or such lower amount as the Company may require. The
maximum systematic withdrawal amount is set annually; it is equal to 15 % of
total purchase payments. The minimum systematic withdrawal amount is $100. The
withdrawals can be made on a monthly, quarterly, semiannual or annual basis.

A level systematic withdrawal payment will begin one modal period after the date
of receipt of the request. No Contingent Deferred Sales Charge will be applied
to systematic withdrawals under this provision.

The Contract Owner must send the Company written notice to either stop the
systematic withdrawals or tochange the amount or the mode of the withdrawals.
The systematic withdrawals will terminate upon the earlier of the death of the
Contract Owner or the Annuitant.

Page 18
<PAGE>

16. GENERAL
- ------------

Ownership of Contract. The Contract Owner must be named in the application. Upon
written notice to the Company, the Contract Owner may assign the contract to a
new Contract Owner.

Deferment of Transfers and Payments. Transfers and payments of withdrawals from
the Variable Account and payment of the Variable Account death benefit will be
made within seven days after receipt by the Company of all documents required
for such transfer, payment of withdrawal or payment of death benefits. However,
the Company may defer a transfer, a withdrawal, a death benefit payment, the
Annuity Date or annuity payments under the contract, if :

A004369P

(1) The New York Stock Exchange is closed (other than
customary weekend and holiday closings);

(2) Trading on the New York Stock Exchange is
restricted;

(3) An emergency exists such that it is not reasonably
practical to dispose of securities held in the Separate
Account or to fairly determine the value of its assets; or

(4) The Securities and Exchange Commission by order so
permits for the protection of security holders.

Conditions in (2) and (3) will be decided by, or in accordance with rules of,
the Securities and Exchange Commission.

The Company may defer a transfer or payment of a withdrawal from the Fixed
Account or payment of the Fixed Account death benefit for a period not exceeding
six months, if it reasonably determines that investment conditions are such that
an orderly sale of assets held as part of general assets is not possible.

Incontestability. No material misstatement made by the applicant will void the
contract unless it is contained in the written application attached to the
contract. The contract will be incontestable after it has been in force for 2
years from the Contract Date.

Misstatement of Age. If the age of the Annuitant or a joint payee is misstated,
any amount payable under this contract will be that amount which the purchase
payments paid would have purchased on the basis of the correct age.

If the annuity payments have been overpaid because the age of the Annuitant or
joint payee has been misstated, the amount overpaid, with interest at the rate
of 6% per year or such higher rate as state law may require, compounded
annually, will be charged against the payments still to be made under this
contract.

If the annuity payments have been underpaid because the age of the Annuitant or
joint payee has been misstated, the amount underpaid, with interest at the rate
of 6% per year or such higher rate as state law may require, compounded
annually, will be paid in full with the next payment due under this contract.

Proof of Age and Survival. The Company may require satisfactory proof of correct
age at any time. If any payment under this contract depends on the payee being
alive, the Company may require satisfactory proof of survival.

The Contract. The contract, any endorsements, any riders and its attached
application are the entire contract. It is issued in consideration of the
application and purchase payments.

Only the President, a Vice President, an Associate Actuary, an Actuary or
Secretary of the Company may change the contract. Any change must be in writing.

At any time, the Company may make such changes in this contract as are required
to make it conform with any law or regulation issued by any government agency to
which it is subject.

Participating Contract. The contract may participate in divisible surplus of
Penn Mutual. Divisible surplus, if any, to be apportioned to the contract shall
be apportioned annually and shall be paid in cash or credited to the Contract
Value at the end of the contract year. No divisible surplus is expected to be
apportioned to this contract in the foreseeable future.

Dates. Contract years and anniversaries are measured from the Contract Date.

Notices, Changes and Choices. To be effective, all notices, changes and choices
which the Contract Owner may make under the contract must be in writing.
Contract Owner should provide notification on a form provided or approved by the
Company, signed and received by the Company at its Administrative Office or
designated service office. If acceptable to the Company, notices, changes and
choices relating to beneficiaries and ownership will take effect as of the date
signed unless the Company has already acted in reliance on the prior status. The
Company is not responsible for their validity.

Contract Payments. All sums payable to or by the Company are payable at its
designated service office.

Protection of Proceeds. Annuity payments under this contract may not be assigned
by the payee prior to their due dates. To the extent allowed by law, annuity
payments are not subject to legal process for debts of a payee.

A004370P

Compliance with Minimum Value Requirements. Annuity, death and withdrawal
benefits are not less than the minimum benefits required under applicable laws
and regulations of the jurisdiction in which this contract is delivered.

The benefits provided under the Fixed Account of this contract are increased by
interest credited in excess of the guaranteed minimums, if any.

Periodic Reports. As required by federal and state law and at least once each
year, the Company will furnish the Contract Owner with periodic reports. The
periodic reports will contain information on the Separate Account, the Variable
Account Value, the number of Accumulation Units, the value per Accumulation Unit
and the Fixed Account Value.

Page 19

A004371P
<PAGE>

ADDITIONAL CONTRACT SPECIFICATIONS
- ----------------------------------

Eligible Mutual Funds
- ---------------------

Penn Series Funds, Inc.
Independence Capital (ICMI) Vontobel USA
Money Market International Equity
Quality Bond
Growth Equity T. Rowe Price
High Yield Bond
OpCap Advisors Flexibly Managed
Value Equity
Small Capitalization

TCI Portfolios, Inc. Neuberger & Berman Advisers Management Trust
Twentieth Century Neuberger & Berman
(Investors Research) Limited Maturity Bond Portfolio
TCI Growth Portfolio Balanced Portfolio

Variable Insurance Product Funds Variable Insurance Product Funds II
Fidelity Management Fidelity Management
Equity Income Asset Manager
Growth

Eligible Fixed Interest Options
-------------------------------

One Year

EXCEPT WITH THE CONSENT OF PENN MUTUAL, THERE CAN BE NO ALLOCATION OF PURCHASE
PAYMENTS AND TRANSFERS TO MORE THAN 17 OF THE FUNDS AND THE FIXED INTEREST
ACCOUNTS PRIOR TO THE ANNUITY DATE. FOLLOWING THE ANNUITY DATE, THE INITIAL
ALLOCATION AND SUBSEQUENT TRANSFERS CAN BE TO NO MORE THAN 1 FIXED INTEREST
OPTION AND 3 FUNDS OVER THE PHASE OF THE CONTRACT.

A004385P

Please notify the Company promptly of any change in address.

Annual Election - The Company is a mutual life insurance company. It has no
stockholders. The Contract Owner of this contract is a member of The Company
while this contract is in force during the life of the Annuitant before the
Annuity Date and before total withdrawal of the Contract Value. Members have the
right to vote in person or by proxy at the annual election of Trustees held at
the Home Office, on the first Tuesday of March. If more information is desired,
it may be obtained from the Secretary.

VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT
EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE AND ARE NOT GUARANTEED AS TO
FIXED DOLLAR AMOUNT.

INDIVIDUAL VARIABLE AND FIXED
ANNUITY CONTRACT
FLEXIBLE PURCHASE PAYMENTS
Annuity Payments payable on Annuity Date
Flexible Purchase Payments payable until
Annuity Date Participating
The Company will make monthly annuity payments
and other payments as set forth in this
contract.

The Penn Mutual Life Insurance Company, Philadelphia, Pennsylvania 19172
VAB-98

<PAGE>

Exhibit 5

APPLICATION FOR INDIVIDUAL
VARIABLE AND FIXED ANNUITY

THE PENN MUTUAL LIFE INSURANCE COMPANY
Philadelphia, Pa. 19172

<TABLE>
====================================================================================================================================
<S> <C>
1 MARKET TYPE: (Choose one) 2 DEATH BENEFIT OPTION: (Choose one)

[_] Non-Qualified
[_] IRA - (Select Type) [_] Standard If no option is elected, the contract

[_] Rollover [_] Transfer [_] Custodial [_] Rising Floor will be issued with a Standard
[_] 403(b) Transfer [_] Step Up Death Benefit.

====================================================================================================================================

3 CONTRACT OWNER: 4 ANNUITANT: (If different from Contract Owner)

- ------------------------------------------------------ ----------------------------------------------------
Name (First, Middle, Last) (Please Print) Name (First, Middle, Last) (Please Print)

- ------------------------------------------------------ ------------------------------------------------------
Address Address

- ------------------------------------------------------- ------------------------------------------------------
City State Zip Code City State Zip Code

- -------------------------------------------------------- ------------------------------------------------------
Date of Birth Sex Date of Birth Sex

- -------------------------------------------------------- ------------------------------------------------------
Social Security No./Tax ID Social Security No./Tax ID

- -------------------------------------------------------- --------------------------------------------------------
Daytime Telephone Number Daytime Telephone Number

- -------------------------------------------------------- --------------------------------------------------------
Employer Name Employer Name

- -------------------------------------------------------- --------------------------------------------------------
City State Zip Code City State Zip Code

====================================================================================================================================

5 BENEFICIARIES: 6 ANNUITY DATE:
PRIMARY BENEFICIARY: ______________________________________ SELECT ANNUITY DATE:

Social Security No.: _____________________________________ MO. DAY YR.

Relationship to Annuitant: ________________________________ 01

CONTINGENT BENEFICIARY: ___________________________________ If no date is selected, the Annuity Date will be the later of

the first day of the month following the Annuitant's 95th
Social Security No.: ______________________________________ birthday or 10 years after the issue date.

Relationship to Annuitant: ________________________________

====================================================================================================================================

7 PURCHASE PAYMENT: ($25,000 Minimum) MAKE CHECK PAYABLE TO:
PURCHASE PAYMENT $ _________________________ The Penn Mutual Life Insurance Company
====================================================================================================================================

8 DOLLAR COST AVERAGING:
Allocate ________ % of my initial purchase payment to the following Dollar Cost Averaging Source Account (select one):
[_] AMT Limited Maturity Bond Fund; [_] Quality Bond Fund; [_] Money Market Fund.
Over a _____ month period (maximum is 60 months) transfer the initial allocated purchase payment in equal monthly payments based
on the allocation listed in the Fund Allocation section below. The first monthly transfer will take place on the 15th of the
month following the date of issue and each month thereafter for the period indicated above. The Dollar Cost Averaging Program
will terminate on the earlier of the end of the period indicated above or after exhausting all amounts for the source account
indicated above.
====================================================================================================================================

9 FUND ALLOCATION: (Indicate whole percentages. Total allocations in this section must equal 100%.) Select the Variable Investment
Options and/or Fixed Interest Options that will be used to allocate the initial purchase payment (less the Dollar Cost Averaging
Amount); the subsequent purchase payments and the monthly dollar cost averaging transactions.
FIDELITY INVESTMENTS NEUBERGER & BERMAN VONTOBEL USA
---- % VIP Equity Income ---- % AMT Limited Maturity Bond ---- % International Equity
---- % VIP Growth ---- % AMT Balanced AMERICAN CENTURY
---- % VIP II Asset Manager ---- % AMT Partners ---- % VP Capital Appreciation
---- % VIP II Index 500 MORGAN STANLEY
INDEPENDENCE CAPITAL (ICMI) OPCAP ADVISORS ---- % Emerging Markets Equity (Int'l)
---- % Money Market ---- % Value Equity THE PENN MUTUAL LIFE INSURANCE COMPANY
---- % Quality Bond ---- % Small Capitalization FIXED INTEREST OPTIONS
---- % Growth Equity T. ROWE PRICE ---- % 1 Year Fixed Interest (not available
ICMI/ROBERTSON STEPHENS ---- % High Yield Bond with Dollar Cost Averaging)
---- % Emerging Growth ---- % Flexibly Managed
- ------------------------------------------------------------------------------------------------------------------------------------

PM 5798 Version 8/98

Page 1 of 2
</TABLE>
<PAGE>

<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
VALUES AND PAYMENTS UNDER THIS CONRACT, WHEN BASED UPON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THEY MAY
DECREASE OR INCREASE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.
- ------------------------------------------------------------------------------------------------------------------------------------

10 REPLACEMENT: IS THIS ANNUITY INTENDED TO REPLACE OR CHANGE EXISTING LIFE INSURANCE OR ANNUITIES? [_] Yes [_] No
If yes, list insurance company and policy number in the Remarks Section. If this is an exchange under IRC Section 1035, attach
necessary 1035 Exchange Forms.
====================================================================================================================================

11 NOTICES:
FRAUD - Any person, who knowingly and with intent to defraud any insurance company or other person, files an application for
-----
insurance or a statement of claim containing any materially false information or conceals for the purpose of misleading
information concerning any fact material thereto commits a fraudulent insurance act, which is a crime and subjects such person
to criminal and civil penalties.
====================================================================================================================================

12 ACKNOWLEDGEMENT:
I hereby represent that my answers to the above sections are correct and true to the best of my knowledge and belief. By
signing below, I understand that:
a) The contract value and annuity payments, when based on investment experience of a separate account, are variable and are not

guaranteed as to a fixed dollar amount;
b) This annuity is a long term commitment to meet insurance needs and financial goals; and I acknowledge receipt of the most
recent prospectus;
c) The annuity applied for is suitable for my investment objectives and my financial situation and needs; and
d) The owner has the privilege of Telephone Transfers.

VALUES AND PAYMENTS UNDER THIS CONTRACT, WHEN BASED UPON THE INVESTMENT EXPERIENCE OF A SEPARATE ACCOUNT, ARE VARIABLE. THEY MAY

DECREASE OR INCREASE AND ARE NOT GUARANTEED AS TO FIXED DOLLAR AMOUNT.

SIGNATURES:

Signed at: ____________________________ ______________________________ _____________________________________
City State Date Signed

____________________________ ________________________________________________________
Signature of Contract Owner Signature of Annuitant (if different from Contract Owner)
====================================================================================================================================

13 REGISTERED REPRESENTATIVE:
Do you have any reason to believe the contract applied for is to replace
existing insurance or annuities? [_] Yes [_] No

_________________________________________ ____________________________________________________________________________________
Signature of Registered Representative Printed Name of Registered Representative State License Number
(Resident agent if required by law)

________________________________________ ____________________________________________________________________________________
Telephone No. Office Code (3 digit) Representative Code (5 digit)

________________________________________ ____________________________________________________________________________________
Office/Firm Name Broker/Dealer Name

Commission Information Office 5-Digit
Representative Code Number Representative Code Percent (%)

____________________________ __________________________ ________________________________ __________________________

===================================================================================================================================
14 SEND APPLICATION, CHECK & OTHER REQUIRED FORMS TO:

The Penn Mutual Life Insurance Company
600 Dresher Road - C2L
Horsham, PA 19044
====================================================================================================================================

15 REMARKS:
- ------------------------------------------------------------------------------------------------------------------------------------
PM 5798 Version 8/98

Page 2 of 2
</TABLE>

<PAGE>

Exhibit 10(a)

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Independent Auditors"
in the Statement of Additional Information, and to the use of our report dated
January 30, 1998 accompanying the financial statements of The Penn Mutual Life
Insurance Company for the year ended December 31, 1997, which is included in the
Statement of Additional Information in Amendment 22 to the Registration
Statement on Form N-4 of Penn Mutual Variable Annuity Account
III.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
August 31, 1998

<PAGE>

Exhibit 10(b)

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in the Statement of Additional Information of this
Registration Statement on Form N-4, filed on behalf of the Penn Mutual Life
Insurance Company and Penn Mutual Variable Annuity Account III under the
Securities Act of 1933 and as Amendment No. 22 under the Investment Company Act
of 1940 (file No. 2-77283) of our report, which includes an explanatory
paragraph regarding the adoption of several accounting pronouncements, dated
January 31, 1997 on our audits of the consolidated financial statements of The
Penn Mutual Life Insurance Company as of December 31, 1996 and for the two year
period ended December 31, 1996.

/s/ PricewaterhouseCoopers LLP
August 31, 1998

<PAGE>

Exhibit 10(c)

2000 One Logan Square Morgan, Lewis
Philadelphia, PA 19103-6993 & Bockius LLP
215-963-5000 Counselors At Law
Fax: 215-963-5299

August 31,1998

Board of Trustees
The Penn Mutual Life Insurance Company
Philadelphia, PA 19172

Re: Penn Mutual Variable Annuity Account III (the "Separate Account")
-----------------------------------------------------------------

Dear Ladies and Gentlemen

We hereby consent to the reference of our name under the caption "Legal Matters"
in the Statement of Additional Information filed as part of this Registration
Statement on Form N-4 under the Securities Act of 1933 on behalf of the Separate
Account and as Post-Effective Amendment No.22 to the Separate Account's
Registration Statement under the Investment Company Act of 1940. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
Very truly yours,

/s/ Morgan, Lewis & Bockius LLP
- -------------------------------
Morgan, Lewis & Bockius LLP