PENN MUTUAL VARIABLE ANNUITY ACCOUNT III, 485APOS, 1999-02-24

PENN MUTUAL VARIABLE ANNUITY ACCOUNT III
485APOS, 1999-02-24

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<PAGE>

As filed with the Securities and Exchange Commission on February 24, 1999
File No. 333-62811

----------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-4

REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 / /

Pre-Effective Amendment No. / /

Post-Effective Amendment No. 1 /X/

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT of 1940 / /

Amendment No. 25 /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:

Angela C. Goelzer
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, DC 20036

and

C. Ronald Rubley
1701 Market Street
Philadelphia, PA 19103

It is proposed that this filing will become effective (check appropriate box)

[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (date) pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a) of Rule 485
[X] on May 1, 1999 pursuant to paragraph (a) of Rule 485

<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 Glossary 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 - What Charges N/A
and Expenses Do I Pay?

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

Item 8. Annuity Period The Contract - What Types of N/A
Options Annuity Payments May I Choose?

Item 9. Death Benefit The Contract - What are the Death N/A
On Death Benefits Under My Contract?

Item 10. Purchases and The Contract - How Do I Purchase N/A
Contract a Contract?
Value The Separate Account -
Accumulation Units

Item 11. Redemptions The Contract - May I Withdraw Any N/A
of My Money?

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

Item 14. Table of Statement of Additional N/A
Contents of Information Contents
Statement of
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 - How Do I Purchase Distribution of
Securities a Contract? Contracts
Being Offered The Contract - May I Transfer
and Expenses Money Among Subaccounts and
the Fixed Interest Accounts?
The Contract - What Charges Do
I Pay?

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>

PART A

Information Required in a Prospectus

<PAGE>

PROSPECTUS -- MAY 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 O TELEPHONE (215) 956-8000
- --------------------------------------------------------------------------------

This Prospectus describes a combination fixed and variable annuity contract
("Contract") offered by the Penn Mutual Life Insurance Company ("Penn Mutual").
Please read it carefully and save it for future reference.

The Contract is an agreement between you and Penn Mutual. You agree to make one
or more payments to us and we agree to make annuity and other payments to you at
a future date. You direct us to invest your payments in one or more of the
following Funds through Penn Mutual Variable Annuity Account III (the "Separate
Account"). You also may direct us to invest in one or more of our Fixed Interest
Accounts.

<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. MANAGER
Growth Equity Fund Independence Capital Management, Inc.
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.
- -------------------------------------------------------------------------------------------------------------------
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 MANAGER
Asset Manager Portfolio Fidelity Management and Research Company
Index 500 Portfolio Fidelity Management and Research Company
- -------------------------------------------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER UNIVERSAL FUNDS, INC. MANAGER
Emerging Markets Equity (International) Portfolio Morgan Stanley Dean Witter Asset Management Inc.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

A PROSPECTUS FOR EACH OF THESE FUNDS ACCOMPANIES THIS PROSPECTUS.

<PAGE>

The Contract

o is variable, which means that your Contract Value and the future payments
that we make to you will vary with the investment performance of the Funds
you select.

o is tax-deferred, which means that you will not pay taxes until we begin to
make annuity payments to you or you take money out.

o allows you to choose to receive your annuity payments over different
periods of time.

THE CONTRACT IS NOT SUITABLE FOR SHORT-TERM INVESTMENT. YOU MAY PAY A DEFERRED
SALES CHARGE OF UP TO 7% ON EARLY WITHDRAWALS. IF YOU WITHDRAW MONEY BEFORE AGE
59 1/2, YOU MAY PAY A 10% ADDITIONAL INCOME TAX. THE CONTRACT IS NOT A BANK
DEPOSIT AND IS NOT FEDERALLY INSURED.

YOU MAY RETURN THE CONTRACT WITHIN TEN DAYS FOR A FULL REFUND OF THE CONTRACT
VALUE (OR PURCHASE PAYMENTS, IF REQUIRED BY LAW). LONGER FREE LOOK PERIODS APPLY
IN SOME STATES.

You may obtain a Statement of Additional Information from us free of charge by
writing The Penn Mutual Life Insurance Company, Customer Service Group,
Philadelphia, PA 19172. Or, you can call us at (215) 956-8000. The Statement of
Additional Information contains more information about the Contract. It is filed
with the Securities and Exchange Commission and we incorporate it by reference
into this Prospectus. The table of contents of the Statement of Additional
Information is at the end of this Prospectus.

The Securities and Exchange Commission maintains a Web site (http://www.sec.gov)
that contains this Prospectus, the Statement of Additional Information, material
incorporated by reference, and other information regarding registrants that file
electronically with the Commission.

THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS
A CRIME FOR ANYONE TO TELL YOU OTHERWISE.

<PAGE>

- --------------------------------------------------------------------------------
PROSPECTUS CONTENTS
- --------------------------------------------------------------------------------
GLOSSARY........................................................................
- --------------------------------------------------------------------------------
EXPENSES........................................................................
- --------------------------------------------------------------------------------
EXAMPLES OF FEES AND EXPENSES...................................................
- --------------------------------------------------------------------------------
THE PENN MUTUAL LIFE INSURANCE COMPANY..........................................
- --------------------------------------------------------------------------------
YEAR 2000
- --------------------------------------------------------------------------------
THE SEPARATE ACCOUNT............................................................
Accumulation Units.....................................................
Voting Instructions....................................................
Investment Options in the Separate Account.............................
Penn Series Funds, Inc. ......................................
Neuberger & Berman Advisers Management Trust..................
Fidelity Investments' Variable Insurance Products Fund........
Fidelity Investments' Variable Insurance Products Fund II.....
Morgan Stanley Dean Witter Universal Funds, Inc. .............
- --------------------------------------------------------------------------------
THE FIXED INTEREST ACCOUNTS
- --------------------------------------------------------------------------------
THE CONTRACT
- --------------------------------------------------------------------------------
How Do I Purchase a Contract?..........................................
What Types of Annuity Payments May I Choose?...........................
Variable Annuity Payments ....................................
Fixed Annuity Payments ......................................
Other Information ............................................
What Are the Death Benefits Under My Contract?.........................
Enhanced Guaranteed Minimum Death Benefit ....................
Choosing a Lump Sum or Annuity ...............................
May I Transfer Money Among Subaccounts and the Fixed Interest Accounts?
Prior to the Annuity Date ...................................
After the Annuity Date .....................................
Dollar Cost Averaging.........................................
Automatic Rebalancing.........................................
May I Withdraw Any of My Money?........................................
Prior to the Annuity Date ...................................
After the Annuity Date .......................................
Systematic Withdrawals........................................
403(b) Withdrawals............................................
Deferment of Payments and Transfers....................................
What Charges Do I Pay?.................................................
Administration Charges........................................
Mortality and Expense Risk Charge.............................
Contingent Deferred Sales Charge..............................
Free Withdrawals..............................................
Enhanced Variable Account Death Benefit ......................
Premium Taxes.................................................
Performance Information................................................
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS..............................
General Information....................................................
Loans Under Section 403(b) Contracts...................................
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX CONSIDERATIONS...............................................
Withdrawals and Death Benefits.........................................
Annuity Payments.......................................................
Early Withdrawals......................................................
Transfers..............................................................
Separate Account Diversification.......................................

<PAGE>

Qualified Plans........................................................
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS............................................................
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION CONTENTS....................................

<PAGE>

- --------------------------------------------------------------------------------
GLOSSARY

ACCUMULATION PERIOD: A period that begins with your first purchase
payment and ends on the Annuity Date.
ACCUMULATION UNIT: A unit of measure used to compute the Variable
Account Value under the Contract prior to the Annuity Date.
ADMINISTRATIVE OFFICE: A reference to our administrative office means
The Penn Mutual Life Insurance Company, Administrative Office, 600
Dresher Road, Horsham, Pennsylvania 19044.
ANNUITANT: The person during whose life annuity payments are made.
ANNUITY DATE: The date on which annuity payments start.
ANNUITY PAYOUT PERIOD: The period of time, starting on the Annuity
Date, during which we make annuity payments.
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 named in the Contract as the Contract Owner.
CONTRACT VALUE: The sum of the Variable Account Value and the Fixed
Interest Account Value.
FIXED INTEREST ACCOUNT VALUE: The value of amounts held under the
Contract in all Fixed Interest Accounts.
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 subaccounts 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: "we" or "us" means The Penn Mutual Life Insurance Company,
also referred to in this Prospectus as Penn Mutual.
YOU: "you" means the Contract Owner or prospective Contract Owner.

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

<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments....................................................................... None
Maximum Contingent Deferred Sales Charge..........................................7% of purchase payments withdrawn(a)
Transfer 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.............................................................................1.20%
Contract Administration Charge................................................................................0.15%
----
Total Separate Account Annual Expenses........................................................................1.35%(c)
</TABLE>
- ----------
(A) YOU DO NOT PAY THIS CHARGE IF YOU WAIT SEVEN YEARS BEFORE WITHDRAWING A
PURCHASE PAYMENT.
(B) YOU PAY $40 OR 2% OF THE VARIABLE ACCOUNT VALUE, WHICHEVER IS LESS. YOU
DO NOT PAY THIS CHARGE IF YOUR VARIABLE ACCOUNT VALUE IS MORE THAN
$100,000.
(C) YOU MAY PURCHASE AN ENHANCED GUARANTEED MINIMUM DEATH BENEFIT RIDER
WITH YOUR CONTRACT. THE CURRENT ANNUAL CHARGE FOR THIS RIDER IS 0.20%
OF THE VARIABLE ACCOUNT VALUE, AND WILL NEVER BE MORE THAN 0.25%. SEE
WHAT CHARGES DO I PAY? IN THIS PROSPECTUS.

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC. (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)

<TABLE>
<CAPTION>
MANAGEMENT TOTAL
FEES (AFTER OTHER FUND
WAIVER) EXPENSES EXPENSES
----------- -------- --------
<S> <C> <C> <C>
Growth Equity...............................
Value Equity................................
Small Capitalization .......................
Emerging Growth ...........................
Flexibly Managed............................
International Equity........................
Quality Bond................................
High Yield Bond.............................
Money Market................................
</TABLE>

- ------------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. THE TOTAL EXPENSES OF THE
EMERGING GROWTH FUND WOULD HAVE BEEN __%. IF THE INVESTMENT ADVISER AND
ADMINISTRATOR OF THAT FUND HAD NOT WAIVED PART OF THEIR FEES.

- --------------------------------------------------------------------------------
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST (A)
UNDERLYING FUND ANNUAL EXPENSES (AS A % OF PORTFOLIO AVERAGE NET ASSETS)

<TABLE>
<CAPTION>
MANAGEMENT,
ADVISORY AND
ADMINISTRATION OTHER TOTAL FUND
FEES EXPENSES EXPENSES
-------------- -------- ----------
<S> <C> <C> <C>
Limited Maturity Bond..............................................
Balanced...........................................................
Partners Fund......................................................
</TABLE>

- -------------
(A) NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST (THE "TRUST") IS DIVIDED
INTO PORTFOLIOS ("PORTFOLIOS"). EACH PORTFOLIO INVESTS IN A
CORRESPONDING SERIES ("SERIES") OF THE TRUST. THIS TABLE SHOWS THE
CURRENT EXPENSES PAID BY EACH PORTFOLIO AND THE PORTFOLIO'S SHARE OF
THE CURRENT EXPENSES OF ITS SERIES. SEE "EXPENSES" IN THE TRUST'S
PROSPECTUS.

<PAGE>

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

<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Equity-Income..............................................
Growth.....................................................
</TABLE>
- -----------
(A) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE. WITHOUT
THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN __% FOR THE EQUITY INCOME
PORTFOLIO AND __% FOR THE GROWTH PORTFOLIO.

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

<TABLE>
<CAPTION>
MANAGEMENT
FEE (AFTER OTHER TOTAL FUND
WAIVER) EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Asset Manager (a)............................................
Index 500 (b)................................................
</TABLE>

- --------------
(A) THE EXPENSES PRESENTED ARE FOR THE LAST FISCAL YEAR. SOME OF THE BROKERAGE
COMMISSIONS PAID BY THE FUND REDUCED THE EXPENSES SHOWN IN THIS TABLE. WITHOUT
THIS REDUCTION, TOTAL EXPENSES WOULD HAVE BEEN __% FOR THE ASSET MANAGER
PORTFOLIO.

(B) THESE EXPENSES ARE FOR THE LAST FISCAL YEAR. IF THE FUND'S INVESTMENT
ADVISER HAD NOT VOLUNTARILY WAIVED PART OF ITS FEE, TOTAL EXPENSES WOULD HAVE
BEEN __% FOR THE INDEX 500 PORTFOLIO.

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

<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL FUND
FEE EXPENSES EXPENSES
---------- -------- ----------
<S> <C> <C> <C>
Emerging Markets Equity (International)......................
</TABLE>

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

Please review these tables carefully. They show the expenses that you
pay directly and indirectly when you purchase a Contract. Your expenses include
Contract expenses and the expenses of the Funds that you select. See the
prospectuses of Penn Series Funds, Inc., Neuberger & Berman Advisers Management
Trust, Fidelity Investments' Variable Insurance Products Fund, Fidelity
Investments' Variable Insurance Products Fund II and Morgan Stanley Dean Witter
Universal Funds, Inc. for additional information on Fund expenses.

You also may pay premium taxes. These tables and the examples that
follow do not show the effect of premium taxes. See WHAT CHARGES DO I PAY? in
this Prospectus.

<PAGE>

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

The following examples show the total expenses that you would pay on each $1,000
invested.

You would pay the following expenses on a $1,000 investment (assuming a
5% annual return) if you surrender your Contract after the number of years
shown:

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Penn Series Growth Equity Fund.......................................
Penn Series Value Equity Fund........................................
Penn Series Small Capitalization Fund................................
Penn Series Emerging Growth Fund.....................................
Penn Series Flexibly Managed Fund....................................
Penn Series International Equity Fund................................
Penn Series Quality Bond Fund........................................
Penn Series High Yield Bond Fund.....................................
Penn Series Money Market Fund........................................
Neuberger & Berman Limited Maturity Bond Portfolio...................
Neuberger & Berman Balanced Portfolio................................
Neuberger & Berman Partners Fund Portfolio...........................
Fidelity's Equity Income Portfolio...................................
Fidelity's Growth Portfolio..........................................
Fidelity's Asset Manager Portfolio...................................
Fidelity's Index 500 ................................................
Morgan Stanley Dean Witter Emerging Markets Equity (International)
Portfolio............................................................
</TABLE>

You would pay the following expenses by the end of the year shown
(assuming a 5% annual return on investments) if you do not surrender your
Contract or if you annuitize your Contract:

<PAGE>

<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Fidelity's Growth Portfolio..........................................
Fidelity's Asset Manager Portfolio...................................
Fidelity's Index 500.................................................
Morgan Stanley Dean Witter Emerging Markets Equity (International)
Portfolio............................................................
</TABLE>

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

The examples are based upon Fund data for the fiscal year ended
December 31, 1998.

THESE ARE ONLY EXAMPLES. YOUR EXPENSES MAY BE MORE OR LESS THAN WHAT IS
SHOWN.

================================================================================
THE PENN MUTUAL LIFE INSURANCE COMPANY

THE PENN MUTUAL LIFE INSURANCE COMPANY. Penn Mutual is a Pennsylvania mutual
life insurance company chartered in 1847. We are located at 600 Dresher Road,
Horsham, PA 19044. Our mailing address is Independence Square, Philadelphia, PA
19172. We issue and are liable for all benefits and payments under the Contract.

================================================================================
YEAR 2000

Our services for the Separate Account depend on the smooth functioning
of our computer systems. Many computer systems in use today cannot recognize the
Year 2000, and may return to 1900 or some other date after December 31, 1999.
This could cause problems in the handling of securities trades, pricing and
account services. We are working on necessary changes to our systems to prepare
for the Year 2000 and expect that our systems will be adapted before that date.
We cannot, however, assure you that we will be successful. In addition, the
interaction of our computers with other non-complying computer systems could
cause problems.

Penn Mutual and the mutual funds that serve as investment options for
the Separate Account have relationships with investment advisers,
broker-dealers, transfer agents, custodians, and other service providers that
are not affiliated with Penn Mutual. Penn Mutual is contacting these vendors and
service providers to obtain assurances that such service providers have taken
appropriate measures to address the Year 2000 problem. If these parties do not
prepare in a timely manner, it could cause problems for the Separate Account.

The foregoing statements are designated Year 2000 Readiness Disclosure
within the meaning of The Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271, S. 2392).

================================================================================
THE SEPARATE ACCOUNT

Penn Mutual established PENN MUTUAL VARIABLE ANNUITY ACCOUNT III (the
"Separate Account") on April 13, 1982. The Separate Account is registered with
the Securities and Exchange Commission as a unit investment trust and is a
"separate account" within the meaning of the federal securities laws. The
Separate Account is divided into subaccounts that invest in shares of different
mutual funds.

o The income, gains and losses of Penn Mutual do not have any
effect on the income, gains or losses of the Separate Account
or any subaccount.

o The Separate Account and its subaccounts are not responsible
for the liabilities of any other business of Penn Mutual.

<PAGE>

- --------------------------------------------------------------------------------
ACCUMULATION UNITS

Your assets in the Separate Account are held as Accumulation Units of
the subaccounts that you select. We value Accumulation Units on each day the New
York Stock Exchange is open. When you invest in or transfer money to a
subaccount, you receive the Accumulation Unit price next computed after we
receive your purchase payment or transfer request at our administrative office.
In the case of the your first purchase payment, you receive the price next
computed after we accept your application to purchase a Contract.

The value of an Accumulation Unit is $10 when a subaccount begins
operation. The value of an Accumulation Unit may vary, and is determined by
multiplying its last computed value by the net investment factor for the
subaccount for the current valuation period. The net investment factor measures
(1) investment performance of Fund shares held in the subaccount, (2) any taxes
on income or gains from investments held in the subaccount and (3) the mortality
and expense risk charge at an annual rate of 1.20% and contract administration
charge at an annual rate of 0.15% assessed against the subaccount.

- --------------------------------------------------------------------------------
VOTING INSTRUCTIONS

You have the right to tell us how to vote proxies for the Fund shares
in which your purchase payments are invested. If the law changes and permits us
to vote the Fund shares, we may do so.

If you are a Contract Owner, we determine the number of Fund shares
that you may vote by dividing the your interest in a subaccount by the net asset
value per share of the Fund. If you are receiving annuity payments, we determine
the number of Fund shares that you may vote by dividing the reserve allocated to
the subaccount by the net asset value per share of the Fund. We change these
procedures whenever we are required to do so by law.

- --------------------------------------------------------------------------------
INVESTMENT OPTIONS IN THE SEPARATE ACCOUNT

The Separate Account currently has subaccounts that invest in the following
Funds:

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;

<PAGE>

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
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 with these
objectives, 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.

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 FUND 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.

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.

<PAGE>

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 DEAN WITTER 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 that are
developing strongly and in which the markets are becoming more sophisticated.

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

SHARES OF PENN SERIES ARE SOLD TO OTHER VARIABLE LIFE AND VARIABLE
ANNUITY SEPARATE ACCOUNTS OF PENN MUTUAL AND ITS SUBSIDIARY, THE PENN INSURANCE
AND ANNUITY COMPANY. SHARES OF 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
DEAN WITTER UNIVERSAL FUNDS, INC., DIRECTLY TO QUALIFIED PENSION AND RETIREMENT
PLANS. FOR MORE INFORMATION ON THE POSSIBLE CONFLICTS INVOLVED WHEN THE SEPARATE
ACCOUNT INVESTS IN FUNDS OFFERED TO OTHER SEPARATE AAOUNTS, SEE THE FUND
PROSPECTUSES.

READ THE PROSPECTUSES OF THESE FUNDS BEFORE INVESTING.

================================================================================
THE FIXED INTEREST ACCOUNTS

Interests in the Company's general account are not registered under the
Securities Act of 1933 and the general account is not registered as an
investment company under the Investment Company Act of 1940. The general account
and any interests held in the general account are not subject to the provisions
of these Acts. This Prospectus generally discusses only the variable portion of
the Contract. The staff of the Securities and Exchange Commission has not
reviewed the disclosure in this Prospectus relating to the Fixed Interest
Accounts. Disclosure regarding the Fixed Interest Accounts, 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.
See MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS.

================================================================================
THE CONTRACT

A combination variable and fixed annuity contract may be an attractive long-term
investment vehicle for many people. Our Contract allows you to invest in:

o the Separate Account, through which you may invest in one or
more of the available Funds of Penn Series Funds, Inc.,
Neuberger & Berman Advisers Management Trust, Fidelity
Investments' Variable Insurance Products Fund, Fidelity
Investments' Variable Insurance Products Fund II and

<PAGE>

Morgan Stanley Dean Witter Universal Funds, Inc. See THE
SEPARATE ACCOUNT in this Prospectus.

o one or more Fixed Interest Accounts. The Fixed Interest
Accounts are guaranteed and funded by Penn Mutual through its
general account. See THE FIXED INTEREST ACCOUNTS and MORE
INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS in this
Prospectus.

You decide, within Contract limits,

o how often you make a purchase payment and how much you invest;

o the Funds and/or Fixed Interest Accounts in which your
purchase payments are invested;

o whether or not to transfer money among the available Funds and
Fixed Interest Accounts;

o the type of annuity that we pay and who receives it,

o the Beneficiary or Beneficiaries to whom we pay death
benefits: and

o the amount and frequency of withdrawals from the Contract
Value.

Your Contract has

o an Accumulation Period, during which you make one or more
purchase payments and we invest your payments as you tell us;
and

o an Annuity Payout Period, during which we make annuity
payments to you. Your Payout Period begins on your Annuity
Date.

We may amend your Contract at any time to comply with legal
requirements. State law may require us to obtain your approval for any Contract
amendment. We may, with approval of the Securities and Exchange Commission and
the governing state insurance department, substitute another mutual fund for any
of the Funds currently available.

The Contract is available to individuals and institutions. The
Contracts also may 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).

You may contact us by writing The Penn Mutual Life Insurance Company,
Customer Service Group, Philadelphia, PA 19172. Or, you may call (215) 956-8000.

- --------------------------------------------------------------------------------
HOW DO I PURCHASE A CONTRACT?

To purchase a Contract, send us a completed application, together with
a check for your first purchase payment, to our administrative office. This also
is the address to send all subsequent purchase payments. We usually accept an
application to purchase a Contract within two business days after we receive it.
If you send us an incomplete application, we will return your purchase payment
to you within five business days unless you ask us to keep it while you complete
the application.

<PAGE>

The minimum purchase payment that we will accept is $5,000, although we
may decide to accept lower amounts. We will accept total purchase payments under
your Contract of up to $1 million. You must obtain our prior approval to make
total purchase payments in excess of $1 million.

The principal underwriter of the Contracts is Hornor, Townsend & Kent,
Inc., 600 Dresher Road, Horsham, PA 19044, a wholly-owned subsidiary of Penn
Mutual.

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WHAT TYPES OF ANNUITY PAYMENTS MAY I CHOOSE?

You may choose: (1) an annuity for a set 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) any other form of annuity that we may
agree upon. You may choose a variable annuity (except for a set number of
years), a fixed annuity, or a combination of both. You may choose a person other
than yourself to be the Annuitant. Currently, during the Annuity Payout Period,
your variable annuity may not be allocated to more than four subaccounts.

VARIABLE ANNUITY PAYMENTS. The size of your variable annuity payments
will vary depending upon the performance of the investment options that you
choose for the Annuity Payout Period. Your payments also will depend on the size
of your investment, the type of annuity you choose, the expected length of the
annuity period, and the annuity purchase rates and charges in your Contract.

When you purchase a variable annuity, you will pick an assumed interest
rate of 3% or 5%. If the annual net investment return during the annuity payout
period is greater than the rate chosen, your annuity payments will increase. If
the annual net investment return is less, your payments will decrease. Choosing
a higher assumed interest rate would mean a higher first annuity payment but
more slowly rising or more rapidly falling subsequent payments. Choosing a lower
assumed interest rate would have the opposite effect.

During the Variable Annuity Payout Period, you (or your Beneficiary in
the event of death) may transfer your Annuity Unit Values among four subaccounts
of the Separate Account that you choose on the Annuity Date.
You may not select other subaccounts after the Annuity Date.

FIXED ANNUITY PAYMENTS. The size of your fixed annuity payments will
not change. The size of these payments is determined by a number of factors,
including the size of your investment, the form of annuity chosen, the expected
length of the annuity period, and a guaranteed 3% rate of return.

OTHER INFORMATION. Unless you tell us otherwise:

o you will receive a life annuity with payments guaranteed for
10 years. Tax deferred annuities under Section 403(b) of the
Code will receive a joint and survivor annuity.

o the annuity will be split between fixed and variable in the
same proportions as your Contract Value on the Annuity Date,
except if your Contract Value is allocated to more than four
subaccounts, the variable portion will be allocated to the
Money Market Subaccount until you give us instructions to
allocate to not more than four subaccounts.

o your annuity payments will begin on 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.

You may change the Annuity Date or your annuity option by giving us written
notice at our administrative office at least 30 days prior to the current
Annuity Date. If your Contract Value is less than $5,000, we may pay you in a
lump sum. We usually make annuity payments monthly, starting with the Annuity
Date, but we will pay you quarterly, semiannually or annually, if you prefer. If
necessary, we will adjust the frequency of your payments so that payments are at
least $50 each. For information on the treatment of annuity payments, see
FEDERAL INCOME TAX CONSIDERATIONS in this Prospectus.

<PAGE>

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WHAT ARE THE DEATH BENEFITS UNDER MY CONTRACT?

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

If you die before the Annuity Date and you are not the Annuitant, we
will pay your Beneficiary the Contract Value as of the date our administrative
office receives proof of death and other information required to process the
payment. If you are the Annuitant, we will pay your Beneficiary the death
benefit described in the next paragraph.

If the Annuitant dies before the Annuity Date, we will pay a death
benefit equal to the sum of the Variable Account death benefit and the Fixed
Interest Account death benefit as of the date we receive proof of death and
other information required to process the payment. 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
and amounts transferred out. The Fixed Interest Account death benefit is the
Fixed Interest Account Value.

We generally pay the death benefit within seven days after we receive
proof of death and all required information.

ENHANCED GUARANTEED MINIMUM DEATH BENEFIT. 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 in
place of the Variable Account death benefit, if it is greater, and if the
Annuitant dies before the Annuity Date and before age 90. We offer two different
enhanced guaranteed minimum death benefits. You may purchase either, but only at
the time you purchase your Contract.

The guaranteed minimum death benefit - step-up: This is the highest
Variable Account Value on the current or prior Contract Anniversary dates,
adjusted as follows. The death benefit on an anniversary date will be adjusted
upward by the amount of any purchase payments allocated and transfers made to
the Variable Account after the anniversary date, and before the next anniversary
date, and adjusted downward by an amount that is in the same proportion that the
Variable Account Value was decreased by transfers and withdrawals (including any
deferred sales charge) after the anniversary date and before the next
anniversary date.

The guaranteed minimum death benefit - rising floor: This 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 up to the date the guaranteed death benefit is paid, or the date the
Annuitant turns 80 years of age, if earlier. If a withdrawal or transfer is made
from the Variable Account prior to death, 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 enhanced guaranteed minimum death benefit will terminate if you
withdraw or transfer the full Variable Account Value from your Contract. For
information on the cost of the enhanced guaranteed minimum death benefits, see
WHAT CHARGES DO I PAY? In this Prospectus.

CHOOSING A LUMP SUM OR ANNUITY. Your Beneficiary has one year from your
death to choose to receive the death benefit in a lump sum or as an annuity.

o The Beneficiary has only 60 days to make this election if the
death benefit is paid upon death of an Annuitant other than
you.

<PAGE>

o If the Beneficiary chooses a lump sum, he or she may ask us to
postpone payment of the lump sum for up to five years (until
paid out, the death benefit will be allocated to subaccounts
of the Separate Account and/or Fixed Interest Accounts as
directed by the Beneficiary).

o If the Beneficiary chooses an annuity, we will begin annuity
payments no later than one year from the date of death.
Payments will be made over the Beneficiary's life or over a
period not longer than the Beneficiary's life expectancy.

o If an election is not made within one year of the date of
death of the Contract Owner or within 60 days of the death of
an Annuitant other than you, the death benefit will be paid to
the Beneficiary in a lump sum.

If your Beneficiary is your surviving spouse, he or she may become the
Contract Owner rather than receive the death benefit. If there is more than one
surviving Beneficiary, they must choose their portion 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 paid in accordance with your
choice of annuity.

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

- --------------------------------------------------------------------------------
MAY I TRANSFER MONEY AMONG SUBACCOUNTS AND THE FIXED INTEREST ACCOUNTS?

PRIOR TO THE ANNUITY DATE. You may transfer amounts from one subaccount
of the Separate Account to another subaccount of the Separate Account. Within
Contract limits, you also may transfer from the subaccounts of the Separate
Account to the One Year Fixed Interest Account. You may not transfer amounts
from the subaccounts of the Separate Account to the Six Month Fixed Interest
Account. You may transfer from the One Year Fixed Interest Account to the
Variable Account only at the completion of the interest period or within 25 days
thereafter. You may transfer from the Six Month Fixed Interest Account to the
Variable Account as described under "Dollar Cost Averaging" below or 100% at any
time.

AFTER THE ANNUITY DATE. You may transfer amounts from one subaccount of
the Separate Account to another. Transfers are limited to the four subaccounts
selected at the time of annuitization. Upon your death or the death of the
Annuitant, a Beneficiary who is receiving annuity payments may transfer amounts
among the subaccounts of the Separate Account.

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

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

o A transfer request must be received at our administrative
office and all other administrative requirements for transfer
must be met to make the transfer. Neither we nor the Separate
Account will be liable for following 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. Dollar cost averaging is a way to invest in
which securities are purchased at regular intervals in fixed dollar amounts so
that the cost of the securities gets averaged over time and possibly over market
cycles. You can have a fixed percentage of your purchase payments transferred
monthly or quarterly from one account to other accounts to achieve dollar cost
averaging. These transfers may be made only from one of the

<PAGE>

following accounts: Money Market Subaccount, Limited Maturity Bond Subaccount,
Quality Bond Subaccount, or the Six Month Fixed Interest Account. You may do
this for up to 60 months with a maximum of 6 months for the Six Month Fixed
Interest Account, or until you tell us to change or cancel the dollar cost
averaging. If you stop dollar cost averaging during a six month period, any
money left in the Six Month Fixed Interest Account will be transferred into the
One Year Fixed Interest Account. If you stop dollar cost averaging at the end of
a six month period, you may ask us to transfer money left in the Six Month Fixed
Interest Account to the One Year Fixed Interest Account.

AUTOMATIC REBALANCING. Automatic Rebalancing is a way to transfer money
from those subaccounts that have increased in value to those subaccounts that
have decreased in value. Over time, this may help you to sell high and buy low,
although there can be no assurance of this. If you have a Contract Value of at
least $10,000 you may elect to have your investments in subaccounts of the
Separate Account automatically rebalanced. We will transfer funds under your
Contract on a quarterly (calendar) basis among the subaccounts 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.

- --------------------------------------------------------------------------------
MAY I WITHDRAW ANY OF MY MONEY?

Prior to the Annuity Date and the death of the Contract Owner or
Annuitant, you may withdraw all or part of your Contract Value. We base your
withdrawal request on your Contract Value next determined on the day we receive
a proper written request for withdrawal (and the Contract, in case of a full
withdrawal) at our administrative office. We normally will pay you within seven
days. You may pay tax when you make a withdrawal, including an additional 10%
tax under certain circumstances. See FEDERAL INCOME TAX CONSIDERATIONS

o The minimum withdrawal is $500. If it is your first withdrawal
in a Contract Year, the minimum withdrawal is the Free
Withdrawal Amount if less than $500. The Free Withdrawal
Amount is equal to 15% of the purchase payments as of the date
of the request.

o You may make a partial withdrawal only if the amount remaining
in the contract is at least $5,000 and the balance remaining
in each subaccount or a fixed interest account is at least
$250.

o If you do not tell us otherwise, the withdrawal will be taken
pro rata from the variable subaccounts; if the partial
withdrawal exhausts your Variable Account Value, then any
remaining withdrawal will be taken from a fixed interest
account beginning with the fixed interest account with the
shortest interest period.

SYSTEMATIC WITHDRAWALS. If your Contract Value is at least $25,000 and
you have not made a Free Withdrawal in the current contract year, you can make
systematic withdrawals. These are regular payments that we make to you on a
monthly, quarterly, semiannual or annual basis. It is a convenient way for you
to withdraw a limited percentage of purchase payments without incurring a
contingent deferred sales charge. The total amount that you withdraw in a
Contract Year cannot exceed your Free Withdrawal Amount, and the minimum amount
of each withdrawal payment is $100. Your payments will begin on the next
withdrawal date after we receive your request. See FREE WITHDRAWALS below. For
information on the tax treatment of withdrawals, see FEDERAL INCOME TAX
CONSIDERATIONS in this Prospectus.

403(B) WITHDRAWALS. There are restrictions on withdrawals from
Contracts qualifying under Section 403(b) of the Code. Generally, withdrawals
may 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 subaccounts 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.

<PAGE>

- --------------------------------------------------------------------------------
DEFERMENT OF PAYMENTS AND TRANSFERS

We reserve the right to defer a withdrawal, a transfer of Contract
Value, 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 that makes it
impractical for us 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.

- --------------------------------------------------------------------------------
WHAT CHARGES DO I PAY?

ADMINISTRATION CHARGES:

These charges reimburse us for administering the Contract and the Separate
Account.

o We deduct from your Variable Account Value an annual contract
administration charge that is the lesser of $40 or 2% of your
Variable Account Value. You will not pay this charge if your
Variable Account Value is more than $100,000. To pay this
charge, we cancel Accumulation Units credited to your
Contract, pro rata among the subaccounts in which you invest.

o We deduct from the net asset value of the Separate Account a
daily administration charge that will not exceed an effective
annual rate of 0.15%.

MORTALITY AND EXPENSE RISK CHARGE:

We deduct from the net asset value of the Separate Account a daily
mortality and expense risk charge that will not exceed an effective annual rate
of 1.20%. This charge compensates 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 paid
during both the accumulation and variable annuity pay-out phases of the
Contract.

CONTINGENT DEFERRED SALES CHARGE:

This charge pays for our sales expenses. Sales expenses that 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.

You pay this charge only if you withdraw a purchase payment within
seven years of the effective date of payment. The following table shows the
schedule of the contingent deferred sales charge that will be applied to
withdrawal of a purchase payment, after allowing for the free withdrawals which
are described in the next subsection. Purchase payments will be treated as
withdrawn on a first-in, first-out basis.

<PAGE>

NUMBER OF FULL CONTRACT
YEARS SINCE PURCHASE PAYMENT APPLICABLE CHARGE
- -------------------------------------------------------------------------------
0 7%
- -------------------------------------------------------------------------------
1 7%
- -------------------------------------------------------------------------------
2 6%
- -------------------------------------------------------------------------------
3 5%
- -------------------------------------------------------------------------------
4 4%
- -------------------------------------------------------------------------------
5 3%
- -------------------------------------------------------------------------------
6 1.5%
- -------------------------------------------------------------------------------
7+ 0%
- -------------------------------------------------------------------------------

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 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
unfairly discriminate against any Contract Owner.

FREE WITHDRAWALS:

SEVEN-YEAR-OLD PURCHASE PAYMENTS. You may withdraw any purchase payment
that was made more than 7 years before the withdrawal without incurring a
contingent deferred sales charge.

ANNUAL WITHDRAWALS OF 15% OF PURCHASE PAYMENTS. On the last day of the
first contract year and once each contract year thereafter, you may withdraw,
without incurring a contingent deferred sales charge, up to 15% of total
purchase payments as of the date of the request. You may take a free withdrawal
on a single sum basis or systematically, but not both. The free withdrawal
amount will be applied to purchase payments on a first-in, first-out basis. With
respect to any withdrawal in excess of the free 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. This free withdrawal applies only to the first withdrawal request made in
a contract year and the amount is not cumulative from year to year.

MEDICALLY RELATED WITHDRAWAL. Subject to state law, after the first
contract year and before the Annuity Date, you may withdraw, without incurring a
contingent deferred sales charge, all or part of your Contract Value if certain
medically related contingencies occur. This free withdrawal is available if you
are (1) first confined in a nursing home or hospital while this Contract is in
force and remain confined for at least 90 days in a row or (2) first diagnosed
as having a fatal illness (an illness expected to result in death within 2 years
for 80% of diagnosed cases) while this Contract is in force. The precise terms
and conditions of this benefit are set forth in the Contract. It is not
available if your age at issue is greater than 75. The medically related
contingencies that must be met for free withdrawal vary in some states.

DISABILITY RELATED WITHDRAWAL. You may withdraw, without incurring a
contingent deferred sales charge, part or all of your Contract Value if you (you
or the Annuitant for qualified Contracts) become totally disabled as defined in
the Contract.

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

<PAGE>

ENHANCED GUARANTEED MINIMUM DEATH BENEFIT (OPTIONAL):

If you purchase an Enhanced Guaranteed Minimum Death Benefit as part of
your Contract, we will deduct a guaranteed minimum death benefit charge from the
Variable Account Value. The charge is currently 0.20% of the average annual
Variable Account Value, but may be raised to a maximum rate of 0.25% at the
discretion of Penn Mutual. The charge will be made on each Contract anniversary
and at any time the Variable Account Value is withdrawn or transferred in full.
The charge will be deducted by canceling Accumulation Units credited to your
Contract, with the charge allocated pro rata among the subaccounts 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

We 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 subaccounts, 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 also may 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 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.

================================================================================
MORE INFORMATION ABOUT THE FIXED INTEREST ACCOUNTS

GENERAL INFORMATION

You may allocate or transfer money to our One Year Fixed Interest
Account. The interest rate that you earn on money in this account is set at the
time you invest and will not vary during the one year period. The rate will
never be less than 3%.

If you participate in our dollar cost averaging program, you may
allocate money to our Six Month Fixed Interest Account. The interest rate that
you earn is set at the time that you invest and will not vary during the six
month period. The rate will never be less than 3%. If you stop dollar cost
averaging before your money has been in

<PAGE>

this account six months, your money will be transferred to the One Year Fixed
Interest Account unless you specify a different investment option.

You may transfer money in the Fixed Interest Accounts to subaccounts of
the Separate Account, subject to the fixed interest account provisions of your
Contract. If you do not withdraw or reallocate money in the One Year Fixed
Interest Account within 25 days after the end of an interest period, we will
treat it as a new allocation to the One Year Fixed Interest Account. In
accordance with state law, we may defer a withdrawal or transfer from the fixed
interest accounts for up to six months if we reasonably determine that
investment conditions are such that an orderly sale of assets in our general
account is not feasible.

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LOANS UNDER SECTION 403(B) CONTRACTS

If your Contract qualifies under Section 403(b) of the Code, and if
state law permits, you may be able to borrow against money that you have
invested in a Fixed Interest Account. Review your Contract loan endorsement or
consult our representative for a complete description of the terms of the loan
privilege, including minimum and maximum loan amounts, repayment terms, and
restrictions on prepayments.

When you borrow, an amount equal to your loan will be transferred, as
collateral, from your Separate Account subaccounts to an account in our general
account called the "Restricted Account." Amounts transferred to the Restricted
Account currently earn interest at a rate of 1 1/2 percentage points less than
the rate of interest that we charge you on the loan. The lowest possible
interest that you could earn on your Restricted Account assets is 2 1/2
percentage points less than the rate charged on the loan. On your Contract
Anniversary, the accrued interest in the Restricted Account will be transferred
to your Separate Account subaccounts in accordance with your current payment
allocation instructions.

Loan repayments are due quarterly. When you repay part of your loan, we
transfer 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.

If you are in default, we will report 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. We will repay
the loan by withdrawing the amount in default, plus interest and any applicable
contingent deferred sales charge, from your Separate Account subaccounts in
accordance with your Loan Request and Agreement. If Section 403(b) prevents us
from doing this, your outstanding loan balance will continue to accrue interest
and the amount due will be withdrawn when a withdrawal becomes permissible.
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. We reserve 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 is a general summary of some federal income tax
considerations. It is based on the law in effect on the date of this Prospectus,
which may change, and does not address state or local tax laws. For further
information, you should consult qualified tax counsel.

You pay no federal income tax on increases in the value of your
Contract until money is distributed to you or your beneficiary as a withdrawal,
death benefit or an annuity payment.

<PAGE>

WITHDRAWALS AND DEATH BENEFITS. You may pay tax on a withdrawal, and
your beneficiary may pay tax on a death benefit. The taxable portion of these
payments generally will be the amount by which the payment exceeds your cost.
Thus, you or your Beneficiary generally will have taxable income to the extent
that your Contract Value exceeds your purchase payments. Ordinary income tax
rates apply. If you designate a Beneficiary who is either 37 1/2 years younger
than you or your grandchild, you may obtain Generation Skipping Transfer Tax
treatment 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.

ANNUITY PAYMENTS. The taxable portion of an annuity payment generally
is 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.

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.

EARLY WITHDRAWALS. 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. Generally, there will be no additional income tax on

o early withdrawals that 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;

o withdrawals made on or after age 59 1/2;

o on distributions made after death;

o withdrawals attributable to total and permanent disability.

TRANSFERS. You may pay tax if you transfer your Contract to someone
else. 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.

SEPARATE ACCOUNT DIVERSIFICATION. 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., 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

<PAGE>

may direct their investments to particular subaccounts 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.

QUALIFIED PLANS. 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 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 qualified plan or 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.

This general summary of federal income tax does not address every issue
that may affect you. You should consult qualified tax counsel.

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

The consolidated financial statements of The Penn Mutual Life Insurance
Company at December 31, 1998, and for the year then ended appear in the
Statement of Additional Information. 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. No amounts were allocated to the subaccounts as of December 31, 1998.
There are, therefore, no financial statements for the subaccounts at this time.

<PAGE>

================================================================================
STATEMENT OF ADDITIONAL INFORMATION CONTENTS

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

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

<PAGE>

PART B

Information Required in a Statement

of Additional Information

<PAGE>

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

PENN MUTUAL VARIABLE ACCOUNT III
THE PENN MUTUAL LIFE INSURANCE COMPANY
PHILADELPHIA, PENNSYLVANIA 19172 O 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 Pennant Select Contract,
dated May 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 (the "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 OF 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-

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

<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 sub-
account, 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

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).

B-2

<PAGE>

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 1.35% of the daily net asset value of the subaccount.

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

ASSUMED 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 subaccounts of the Separate Account were not available
until the effective date of this registration statement, the returns calculated
below reflect a hypothetical return as if the sub-accounts 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., 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.

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

TABLE 1
<TABLE>
<CAPTION>

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

B-3
<PAGE>

Value Equity (a)................................. 03/17/87
(OpCap)
Small-Cap Fund................................... 03/01/95
(OpCap)
Emerging Growth Fund (a)(f)...................... 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)
Balanced Portfolio (b)........................... 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (b).............. 09/10/84
(Neuberger & Berman)
Partners Portfolio (b)........................... 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (c)...................... 10/09/86
(Fidelity Investments)
Growth Portfolio (c)............................. 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (d)...................... 09/06/89
(Fidelity Investments)
Index 500 (d).................................... 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International) (e)...... 10/01/96
(Morgan Stanley)

- --------------
* REPRESENTS THE DATE THE UNDERLYING FUND WAS ESTABLISHED.
(A) PENN SERIES FUNDS, INC.
(B) NEUBERGER AND BERMAN ADVISERS MANAGEMENT TRUST
(C) VARIABLE INSURANCE PRODUCTS FUND
(D) VARIABLE INSURANCE PRODUCTS FUND II
(E) MORGAN STANLEY UNIVERSAL FUNDS, INC.
(F) AVERAGE ANNUAL TOTAL RETURN FOR PERIOD MAY 1, 1997 TO DECEMBER 31, 1997

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.
The performance information in Table 1 is calculated in accordance with the
standard formula prescribed by the Securities and Exchange Commission.

B-4

<PAGE>

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

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., 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
----------------------------------------------------------

FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- ---------- -------- -------- -------- --------
<S> <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)(f).................... 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)
Balanced Portfolio (b)......................... 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (b)............ 09/10/84
(Neuberger & Berman)
Partners Portfolio (b)......................... 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (c).................... 10/09/86
(Fidelity Investments)
Growth Portfolio (c)........................... 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (d).................... 09/06/89
(Fidelity Investments)
Index 500 (d).................................. 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International) (e).... 10/01/96
(Morgan Stanley)
</TABLE>

- -------------
* REPRESENTS THE DATE THE UNDERLYING FUND WAS ESTABLISHED.
(A) PENN SERIES FUNDS, INC.
(B) NEUBERGER AND BERMAN ADVISERS MANAGEMENT TRUST
(C) VARIABLE INSURANCE PRODUCTS FUND
(D) VARIABLE INSURANCE PRODUCTS FUND II
(E) MORGAN STANLEY UNIVERSAL FUNDS, INC.
(F) AVERAGE ANNUAL TOTAL RETURN FOR PERIOD MAY 1, 1997 TO DECEMBER 31, 1997

B-5

<PAGE>

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

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., 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
------------------------------------------------------------
FROM TEN FIVE ONE
INCEPTION YEARS YEARS YEAR
INCEPTION THROUGH ENDED ENDED ENDED
FUND (MANAGER) DATE* 12/31/97 12/31/97 12/31/97 12/31/97
- -------------- ------------ -------- -------- -------- --------
<S> <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)(f)................ 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)
Balanced Portfolio (b)..................... 02/28/89
(Neuberger & Berman)
Limited Maturity Bond Portfolio (b)........ 09/10/84
(Neuberger & Berman)
Partners Portfolio (b)..................... 03/22/94
(Neuberger & Berman)
Equity-Income Portfolio (c)................ 10/09/86
(Fidelity Investments)
Growth Portfolio (c)....................... 10/09/86
(Fidelity Investments)
Asset Manager Portfolio (d)................ 09/06/89
(Fidelity Investments)
Index 500 (d).............................. 08/27/92
(Fidelity Investments)
Emerging Markets Equity (International) (e) 10/01/96
(Morgan Stanley)
</TABLE>

B-6

<PAGE>

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 ranging from 7% to 1% which, if
applicable, would reduce the amount that may be withdrawn under the Contract.
The performance information in Tables 2 and 3 is not calculated in accordance
with the standard formula prescribed by the Securities and Exchange Commission.

- --------------------------------------------------------------------------------
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 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 ranging from
7% to 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 SUBACCOUNTS OF THE SEPARATE ACCOUNT HAD INVESTED IN THE
FUNDS FROM THEIR INCEPTION, AND IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
PERFORMANCE.

B-7

<PAGE>

- --------------------------------------------------------------------------------
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 7% 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 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.

The consolidated financial statements of the Penn Mutual Life Insurance
Company at December 31, 1997, and for the year then ended, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young,
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 appearing herein, and
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.

- --------------------------------------------------------------------------------
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 1701 Market Street, 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 Contracts.

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

B-8

<PAGE>

PART C

OTHER INFORMATION

<PAGE>

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements included in Part B:

[Financial Statements for Year Ended December 31, 1998 will be
filed by amendment.]

(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. Previously filed as
Exhibit 1(a) to this Registration Statement filed on
September 3, 1998 (Accession No. 0001036050-98-001504) and
incorporated herein by reference.

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. Previously filed as
Exhibit 3(a) to this Registration Statement on November 30,
1998 (Accession No. 0001036050-98-002055) and incorporated
herein by reference.

(b) Form of Distribution Agreement between The Penn Mutual Life
Insurance Company and Horner, Townsend & Kent, Inc., a
wholly-owned subsidiary of Penn Mutual. Previously filed as
Exhibit 3(b) to this Registration Statement on November 30,
1998 (Accession No. 0001036050-98-002055) and incorporated
herein by reference.

C-1

<PAGE>

(c) Form of Agent's Agreement relating to broker-dealer
supervision. Previously filed as Exhibit 3(c) to this
Registration Statement on September 3, 1998 (Accession No.
0001036050-98- 001504) and incorporated herein by reference.

(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).
Previously filed as Exhibit 3(d) to this Registration
Statement on November 30, 1998 (Accession No.
0001036050-98-002055) and incorporated herein by reference.

(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. Previously filed as Exhibit 3(e)
to this Registration Statement on November 30, 1998
(Accession No. 0001036050-98-002055) and incorporated herein
by reference.

(f) Form of Addendum (Form 98-1) toBroker-Dealer Selling
Agreement. Previously filed as Exhibit 3(f) to this
Registration Statement on September 3, 1998 (Accession No.
0001036050-98- 001504) and incorporated herein by reference.

4. (a) Individual Variable and Fixed Annuity Contract (Form
VAA-98). Previously filed as Exhibit 4(a) to this
Registration Statement on November 30, 1998 (Accession No.
0001036050-98-002055) and incorporated herein by reference.

(b) Rider -- Guaranteed Minimum Death Benefit -- Rising Floor
(GDBRF-98). Previously filed as Exhibit 4(b) to this
Registration Statement on November 30, 1998 (Accession No.
0001036050-98-002055) and incorporated herein by reference.

C-2
<PAGE>

(c) Rider -- Guaranteed Minimum Death Benefit -- Step Up
(GDBSU-98). Previously filed as Exhibit 4(c) to this
Registration Statement on November 30, 1998 (Accession No.
0001036050- 98-002055) and incorporated herein by
reference.

(d) Endorsement No. 1534-96 to Individual Variable and Fixed
Annuity Contract. Previously filed as Exhibit 4(d) to this
Registration Statement on September 3, 1998 (Accession No.
0001036050-98-001504) and incorporated herein by reference.

(e) Endorsement No. 1542-97 to Individual Variable and Fixed
Annuity Contract. Previously filed as Exhibit 4(e) to this
Registration Statement on September 3, 1998 (Accession No.
0001036050-98-001504) and incorporated herein by reference.

(f) Endorsement No. 1536-98 to Individual Variable and Fixed
Annuity Contract is filed herewith.

5. Application (Form PM5790) for Individual Variable Annuity
Contract. Previously filed as Exhibit 5 to this
Registration Statement on September 3, 1998 (Accession No.
0001036050-98- 001504) and incorporated herein by
reference.

6. (a) Charter of The Penn Mutual Life Insurance Company (May
1983). Previously filed as Exhibit 6(a) to this
Registration Statement on September 3, 1998 (Accession No.
0001036050-98- 001504) and incorporated herein by
reference.

(b) By-laws of The Penn Mutual Life Insurance Company, as
amended through February 21, 1997. Previously filed as
Exhibit 6(b) to this Registration Statement on September 3,
1998 (Accession No. 0001036050-98-001504) and incorporated
herein by reference.

C-3
<PAGE>

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.). Previously filed as
Exhibit 8(a) to this Registration Statement on September
3, 1998 (Accession No. 0001036050-98-001504) and
incorporated herein by reference.

(b)(1) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Neuberger & Berman Advisers
Management Trust. Previously filed as Exhibit 8(b)(1) to
this Registration Statement on September 3, 1998
(Accession No. 0001036050-98-001504) and incorporated
herein by reference.

(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.
Previously filed as Exhibit 8(b)(2) to this Registration
Statement on September 3, 1998 (Accession No.
0001036050-98-001504) and incorporated herein by
reference.

(b)(3) Amendment to Fund Participation Agreement between The
Penn Mutual Life Insurance Company and Neuberger &
Berman Advisers Management Trust. Previously filed as
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) on April 30, 1997 (CIK No.
0000950109 & Accession No. 0000950109-97-003328) and
incorporated herein by reference.

C-4
<PAGE>

(c) Form of Sales Agreement between The Penn Mutual Life
Insurance Company and Penn Series Funds, Inc. Previously
filed as Exhibit 8(c) to this Registration Statement on
September 3, 1998 (Accession No. 0001036050-98-001504) and
incorporated herein by reference.

(d) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products Fund
and Fidelity Distributors Corporation. Previously filed as
Exhibit

(e) Form of Participation Agreement between The Penn Mutual
Life Insurance Company, Variable Insurance Products Fund II
and Fidelity Distributors Corporation. Previously filed as
Exhibit 8(e) to this Registration Statement on September 3,
1998 (Accession No. 0001036050-98-001504) and incorporated
herein by reference.

(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. Previously filed as Exhibit 8(f) to
Post-Effective Amendment No. 2 to the Registration
Statement of PIA Variable Annuity Account I (33-83120) on
April 30, 1998 (CIK No. 0000928880 & Accession No.
0000950109-97-003327) and incorporated herein by reference.

9 Opinion and Consent of Franklin L. Best, Esq., Associate
General Counsel of The Penn Mutual Life Insurance Company.
Previously filed as Exhibit 9 to this Registration
Statement on November 30, 1998 (Accession No.
0001036050-98-002055) and incorporated herein by reference.

10. (a) Consent of Ernst & Young LLP. [To be filed by Amendment.]

C-5
<PAGE>

(b) Consent of PricewaterhouseCoopers LLP. [To be filed by
Amendment.]

11. Not applicable.

12. Not applicable.

13. Schedule of Computation of Performance Quotations. [To be
filed by Amendment].

14. (a) Powers of Attorney of Trustees (except Ms. Bloch and
Messrs. Notebaert and Rock). Previously filed as Exhibit
14(a) to Post-Effective Amendment No. 22 to the
Registration Statement on Form N-4 of Penn Mutual Variable
Annuity Account III (2- 77283) on April 29, 1997 (CIK No.
0000702184 & Accession No. 00001021408-97-000161) and
incorporated herein by reference.

(b) Powers of Attorney of Edmond F. Notebaert and Robert H.
Rock. Previously filed as Exhibit 14(b) to Post Effective
Amendment No. 24 to the Registration Statement on Form N-4
of Penn Mutual Variable Annuity Account III (2-77283) on
April 24, 1998 (CIK No. 0000702184 & Accession No.
000095109-98- 002717) and incorporated herein by reference.

(c) Power of Attorney of Ms. Julia Chang Bloch. Previously
filed as Exhibit 14(c) to this Registration Statement on
September 3, 1998 (Accession No. 0001036050-98-001504) and
incorporated herein by reference.

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.

C-6
<PAGE>

ROBERT E. CHAPPELL ANN M. STROOTMAN
Chairman of the Board and Chief Vice President and Controller
Executive Officer and Member of
the Board of Trustees

DANIEL J. TORAN ROBERT P. DAVIS
President and Chief Operating Vice President and Chief Actuary
Officer and Member of the Board of
Trustees

NANCY S. BRODIE FREDERICK M. ROCKOVAN
Executive Vice President and Chief Vice President, Insurance Service
Financial Officer

LARRY L. MAST RICHARD F. PLUSH
Executive Vice President, Sales and Vice President, Products and
Marketing Programs

PETER M. SHERMAN JAMES MCELWAIN
Executive Vice President and Assistant Vice President,
Chief Investment Officer Retirement and Investment Sales
Operations

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

JOHN M. ALBANESE LAURA RITZKO
Senior Vice President, Customer Secretary
Service and Information Systems

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

C-7
<PAGE>
<TABLE>
<CAPTION>
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
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
</TABLE>

INDEPENDENCE SQUARE PROPERTIES, INC.
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>

Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
INDEPRO CORPORATION Real Estate Investment Delaware

WPI Investment Company Real Estate Investment Delaware

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

Penn Tallahassee Real Estate Investment Florida
Corporation
</TABLE>

C-8
<PAGE>
<TABLE>
<CAPTION>
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
JANNEY MONTGOMERY SCOTT Registered Broker-Dealer and Delaware
INC. Investment Adviser
</TABLE>
INDEPRO CORPORATION
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
JANNEY MONTGOMERY SCOTT, INC.
WHOLLY-OWNED SUBSIDIARIES
<TABLE>
<CAPTION>
Corporation Principal Business State of Incorporation
- ----------- ------------------ ----------------------
<S> <C> <C>
Addison Capital Investment Adviser Pennsylvania
Management, Inc.
JMS Resources, Inc. Oil and Gas Development Pennsylvania
JMS Investor Services, Inc. Insurance Sales Delaware
</TABLE>

ITEM 27. NUMBER OF CONTRACT OWNERS

As of March 31, 1999, there were _____ owners of Contracts issued under
tax retirement plans and _____ owners of Contracts issued other than
under tax qualified retirement plans.

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.

C-9
<PAGE>
Pennsylvania law (15 Pa. C.S.A. Sections 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 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
Larry L. Mast, Director
Nina M. Mulrooney, Director
Norman T. Wilde, Jr., Director
Daniel J. Toran, Director
Ronald C. Zimmerman, President and Chief Executive Officer

C-10
<PAGE>

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
Joseph R. Englert, Assistant Vice President, Director of Operations
Franklin L. Best, Jr., 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. Mast, Toran and Best 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:

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-11
<PAGE>

(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-12

<PAGE>

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company
Act of 1940, the Registrant has caused this Post-Effective Amendment No. 1 to
the Registration Statement to be signed on its behalf, by the undersigned,
thereunto duly authorized, in the Township of Horsham and Commonwealth of
Pennsylvania on this 22nd day of February, 1999.

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 Post-Effective
Amendment #1 to the Registration Statement has been signed by the following
persons, in the capacities indicated, on the 22nd day of February, 1999.

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

<PAGE>

*By: /s/ Robert E. Chappell
-------------------------------------
Robert E. Chappell, attorney-in-fact

EXHIBIT INDEX

EX.00 B 4. (f) Endorsement No. 1536-98 to Individual Variable and Fixed
Annuity Contract.

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

<PAGE>

SECTION 2 - ENDORSEMENTS
ENDORSEMENT 403(B) CONTRACT LOANS

The Individual Variable and Fixed Annuity Contract is amended as follows:

1. The following is added to the Fixed Account Provisions:

RESTRICTED ACCOUNT. Amounts will be transferred to and from the Restricted
Account in accordance with the provisions of the Loan section and the terms
of a Loan Request and Agreement as provided therein. For each amount
transferred to the Restricted Account, interest will be credited at an
effective annual rate declared by the Company. Such rate will not be lower
than 2 1/2% less than the interest rate charged by the Company on the loan
with respect to which the transfer to the Restricted Account was made.
Interest will be credited at the same rate for the entire period that all
or any part of the amount is held in the Restricted Account. The declared
effective annual interest rate under the Restricted Account will never be
less than 3%. On each contract anniversary, interest credited to the
Restricted Account will be transferred to the investment accounts in
accordance with the Contract Owner's then current purchase payment
allocation instructions.

2. Death Benefit section is amended by the addition of the following: Any
outstanding loan balance will be repaid before any death benefit proceeds
are payable.

3. The Withdrawal section is amended by the addition of the following: The
proceeds of any full or partial withdrawal must first be applied to the
repayment of any outstanding loan balance.

4. The following provision is added to the Miscellaneous section:

Any outstanding loan balance must be repaid before Account Values can be
applied to provide annuity payments and before the contract, or any part
thereof or right therein, is assigned, transferred or exchanged.

While a loan is outstanding, the net amount of any withdrawal, after
deduction of all applicable charges, must be at least equal to the
scheduled loan payment.

5. The following section is added to the contract:

LOANS

CONTRACT LOANS. At any time following one month after the Contract Date,
the Contract Owner may borrow funds from the general account of the Company
if this contract was issued as part of an arrangement under the provisions
of Section 403(b) of the Internal Revenue Code.

LOAN REQUEST AND AGREEMENT. To make a loan under this contract, the
Contract Owner must submit a completed Loan Request and Agreement on a form
provided by the Company.

LOAN AMOUNT. The maximum loan amount is onehalf of the Contract Value but
not more than $50,000. The minimum loan amount is $2,000. No loan may be
made if the Contract Value is less than $4,000. No new loan may be made if
any part of a prior loan remains unpaid.

RESTRICTED ACCOUNT. When a loan is made, an amount equal to the amount of
the loan will be transferred to the Restricted Account from the Contract
Onwers share of the subaccount accounts of the Separate Account and the
fixed interest options of the Fixed Account in accordance with direction
provided by the Contract Owner in the Loan Request and Agreement. When a
loan payment is received by the Company, an amount equal to the portion
which is repayment of principal will be transferred from the Restricted
Account to the Money Market Account. Transfers from the Restricted Account
will be made as of the date a loan payment is received or, if earlier, the
due date of a payment received during the grace period.

LOAN INTEREST. The loan will bear interest at a rate declared by the
Company for the entire term of the loan. Such rate will be based on the
Monthly Average of the Composite Yield on Seasoned Corporate Bonds as
published by Moody's Investor Service, Inc. for the calendar month ending
two months before the effective date of the loan. If the Monthly

Endorsement No. 1536-98

<PAGE>

Average of the Composite Yield on Seasoned Corporate Bonds is no longer
published, the rate used in its place will be as established by law or by
regulation of the insurance supervisory official of the jurisdiction in
which this policy is delivered. Interest will accrue on the outstanding
loan balance until the entire loan is repaid; provided, however, that in
the event of prepayment of the entire loan in the first loan year, the
amount of interest payable as part of the scheduled payments during the
first loan year must still be paid. If interest is not paid when due, it
will be added to the outstanding loan balance and will then bear interest
at the same rate.

TERM OF LOAN. A loan made for the purchase of a primary residence may be
made for 10 years. All other loans will be for a term of 5 years.

REPAYMENT. Each loan, together with all accrued interest, must be fully
repaid in equal quarterly payments over its term. Payments will be due
three months from the effective date of the loan and every three months
thereafter. Payments must be made to the Company at its Home Office or its
designated service office.

GRACE PERIOD. Each scheduled loan payment shall have a grace period of 30
days from its due date during which a loan payment will not be deemed in
default. Any scheduled loan payment which is not made within the grace
period will be in default. A payment made after the grace period but before
the next scheduled bill date will be deemed an unscheduled prepayment of
principal.

PAYMENT IN DEFAULT. If a payment is in default, an amount equal to the
defaulted payment including interest accrued plus any applicable contract
charges will be withdrawn from the contract in accordance with the Contract
Owner's direction in the Loan Request and Agreement but subject to the
timing restrictions of Section 403(b)(11) of the Internal Revenue Code. The
amount withdrawn will be applied to the payment in default.

Such withdrawal will not be subject to minimum withdrawal amount or
remaining account balance.

LOAN IN DEFAULT. If at any time during the term of the loan four scheduled
payments are not made within the applicable grace periods, the entire loan
will be in default and immediately due and payable. An amount equal to the
outstanding loan balance, including all accrued interest plus any
applicable contract charges, will be withdrawn from the contract in
accordance with the Contract Owner's direction in the Loan Request and
Agreement but subject to the timing restrictions of Section 403(b)(11) of
the Internal Revenue Code. The amount withdrawn will be applied to repay
the loan in default.

Such withdrawal will not be subject to minimum withdrawal amount or
remaining account balance.

DEATH OF ANNUITANT. In the event of the death of the Annuitant, any
outstanding loan shall be considered immediately due and payable in full
from proceeds payable under the Death Benefit provisions of the contract.

The effective date of this endorsement is the Contract Date unless a later date
is shown below.

Philadelphia, Pennsylvania
(Included at Issue) The Penn Mutual Life Insurance Company

/s/ Peter R. Schaefer
---------------------
Actuary

Endorsement No. 1536-98

<PAGE>

February 24, 1999

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

Re: Penn Mutual Variable Annuity Account III (the "Separate Account")
REGISTRATION STATEMENT ON FORM N-4 (FILE NO. 333-62811)

Dear Ladies and Gentleman:

We hereby consent to the reference of our name under the caption "Legal Matters"
in the Statement of Additional Information filed as part of Post-Effective
Amendment No. 1 to the above referred Registration Statement on Form N-4 under
the Securities Act of 1933 on behalf of the Separate Account and as Amendment
No. 25 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