PENN SERIES FUNDS INC, 485APOS, 1998-02-27

PENN SERIES FUNDS INC
485APOS, 1998-02-27

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<PAGE>

As filed with the Securities and Exchange Commission
on February 27, 1998 File No. 2-77284 (811-03459)

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER SECURITIES ACT OF 1933 /x/

Pre-Effective Amendment No. ____ / /

Post-Effective Amendment No. 46 /x/

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 26 /x/
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
- --------------------------------------------------------------------------------
600 Dresher Road
Horsham, Pennsylvania 19044
(Address of Principal Executive Offices)
Registrant's Telephone Number: 215-956-8000
- --------------------------------------------------------------------------------
JAMES B. MCELWAIN
President
Penn Series Funds, Inc.
Philadelphia, Pennsylvania 19172
(Name and Address of Agent for Service)

Copy to:
RICHARD W. GRANT
C. RONALD RUBLEY
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
- --------------------------------------------------------------------------------
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 (1) of Rule 485

___ on (date) pursuant to paragraph (a) (1) of Rule 485

___ 75 days after filing pursuant to paragraph (a)(2) of Rule
485

x on May 1, 1998 pursuant to paragraph (a)(2) of Rule 485
---
- --------------------------------------------------------------------------------

<PAGE>

CROSS REFERENCE SHEET TO PROSPECTUS
AND STATEMENT OF ADDITIONAL INFORMATION

Pursuant to Rule 495(a) under the Securities Act of 1933, the following table
indicates the location in the Prospectus and the Statement of Additional
Information of the information called for by the Items of Parts A and B of Form
N-1A.

Statement of Additional
Required by Form N-1A Prospectus Information
- ------------------------------------- ---------------------------- -----------------------------
<S> <C> <C>
1. Cover Page Cover Page

2. Synopsis Not Applicable

3. Condensed Financial Financial Highlights
Information

4. General Description of Cover Page; Investment
Registrant; Objectives and
Programs; Additional
Investment Information
Relating to the Funds

5. Management of the Fund Management of Penn
Series Funds, Inc.

5A. Management Discussion of *
Investment Performance

6. Capital Stock and Other Cover Page; Dividends,
Securities Distributions and Taxes;
Voting Rights

7. Purchase of Securities Being Sales and Redemption of
Offered Shares

8. Redemption or Repurchase Sale and Redemption of
Shares

9. Pending Legal Proceedings Not Applicable

10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and Not Applicable
History

</TABLE>
*Information required by Item 5A is contained in Registrant's December 31, 1997
Annual Report to Shareholders

<PAGE>

Statement of Additional
Required by Form N-1A Prospectus Information
- ------------------------------------- ---------------------------- -----------------------------
<S> <C> <C>

13. Investment Objectives and Investment Objectives;
Policies Securities and Investment
Techniques; Investment
Restrictions

14. Management of the Fund Management of Penn Directors and Officers
Series Funds, Inc.

15. Control Persons and General Information Ownership of Shares
Principal Holders of
Securities

16. Investment Advisory and Investment Advisers; Investment Advisory
Other Services Administrative and Services; Administrative
Corporate Services and Corporate Services;
Agent Accounting Services;
Independent Auditors;
Custodial Services

17. Brokerage Allocation and Portfolio Transactions
Other Practices

18. Capital Stock and Other Cover Page; Voting
Securities Rights

19. Purchase, Redemption and Net Asset Value of Net Asset Value of Shares
Pricing of Securities Being Shares
Offered

20. Tax Status Tax Status

21. Underwriters Not Applicable

22. Calculations of Performance Not Applicable
Data

23. Financial Statements Financial Statements of
Penn Series
</TABLE>
<PAGE>

PROSPECTUS -- MAY 1, 1998
- --------------------------------------------------------------------------------

PENN SERIES FUNDS, INC.
600 DRESHER ROAD, HORSHAM, PA 19044 . TELEPHONE (215) 956--8000
- --------------------------------------------------------------------------------

Penn Series Funds, Inc. ("Penn Series") is an open-end management investment
company offering a separate class or series of shares for each of nine
different diversified investment portfolios or Funds (collectively the "Funds"
and individually a "Fund"). Penn Series was incorporated under the laws of the
State of Maryland in 1982 and commenced business in 1983. The Funds and their
investment objectives are as follows.
- --------------------------------------------------------------------------------
GROWTH EQUITY seeks long-term growth of capital and increase of future
FUND: income by investing primarily in common stocks of well-
established growth companies;
- --------------------------------------------------------------------------------
VALUE EQUITY seeks to maximize total return (capital appreciation and
FUND: 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 seeks capital appreciation through investment in a
CAPITALIZATION diversified portfolio of securities consisting primarily of
FUND: equity securities of companies with market capitalizations
of under $1 billion;
- --------------------------------------------------------------------------------
EMERGING GROWTH seeks capital appreciation by investing primarily in common
FUND: stocks of emerging growth companies with above-average
growth prospects;
- --------------------------------------------------------------------------------
FLEXIBLY MANAGED seeks to maximize total return (capital appreciation and
FUND: 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 seeks to maximize capital appreciation by investing in a
EQUITY FUND: carefully selected diversified portfolio consisting
primarily of equity securities. The investments will
consist principally of equity securities of European and
Pacific Basin countries;
- --------------------------------------------------------------------------------
QUALITY BOND seeks the highest income over the long term consistent with
FUND: the preservation of principal by investing primarily in
marketable investment--grade debt securities;
- --------------------------------------------------------------------------------
HIGH YIELD BOND seeks high current income by investing primarily in a
FUND: diversified portfolio of long term high- yield 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;
- --------------------------------------------------------------------------------
MONEY MARKET seeks to preserve capital, maintain liquidity and achieve
FUND: the highest possible level of current income consistent
therewith, by investing in high quality money market
instruments; AN INVESTMENT IN THE FUND IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO
ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
- --------------------------------------------------------------------------------

Shares of the Funds are sold only to The Penn Mutual Life Insurance Company
("Penn Mutual") and its subsidiary, The Penn Insurance and Annuity Company
("PIA"), for their separate and general accounts. The Funds serve as underlying
investment vehicles for variable annuity contracts and variable life insurance
policies.

This prospectus sets forth concisely the information a prospective purchaser
of a variable contract should know before directing Penn Mutual or PIA to
invest purchase payments or premiums in one or more of the Funds. It should be
retained for future reference.
A Statement of Additional Information about the Penn Series Funds, Inc.,
which is incorporated by reference in this prospectus, has been filed with the
Securities and Exchange Commission. It is available, at no charge, by writing
The Penn Mutual Life Insurance Company, Customer Service Group, Philadelphia,
PA 19172. Or, you can call toll free, 1-800-523-0650. The date of the Statement
of Additional Information is the same as the date of this prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

1
<PAGE>

- --------------------------------------------------------------------------------
PROSPECTUS CONTENTS
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
FINANCIAL HIGHLIGHTS........................................................ 3
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND PROGRAMS.......................................... 13
Growth Equity Fund........................................................ 13
Value Equity Fund......................................................... 14
Small Capitalization Fund................................................. 15
Emerging Growth Fund...................................................... 16
Flexibly Managed Fund..................................................... 16
International Equity Fund................................................. 17
Quality Bond Fund......................................................... 19
High Yield Bond Fund...................................................... 20
Money Market Fund......................................................... 23
- --------------------------------------------------------------------------------
ADDITIONAL INVESTMENT INFORMATION RELATING TO THE FUNDS..................... 25
- --------------------------------------------------------------------------------
MANAGEMENT OF PENN SERIES FUNDS, INC........................................ 26
Directors and Officers.................................................... 26
Investment Adviser........................................................ 26
Investment Sub-Advisers................................................... 27
Administrative and Corporate Services Agent............................... 29
Expenses and Limitations Thereon.......................................... 29
Custodian, Accounting Services Agent and Transfer Agent................... 30
- --------------------------------------------------------------------------------
SALE AND REDEMPTION OF SHARES............................................... 30
- --------------------------------------------------------------------------------
NET ASSET VALUE OF SHARES................................................... 30
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................................... 31
- --------------------------------------------------------------------------------
VOTING RIGHTS............................................................... 31
- --------------------------------------------------------------------------------
</TABLE>

2
<PAGE>

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

FINANCIAL HIGHLIGHTS

The financial data for the year or period ended December 31, 1997 included in
the tables set forth in the following pages have been derived from the
financial statements of Penn Series Funds, Inc., which have been audited by
Ernst & Young LLP, independent auditors whose report thereon dated February 2,
1998 appears in the Statement of Additional Information. The financial data for
periods prior to 1997 were audited by Coopers & Lybrand LLP. The financial data
included in these tables should be read in conjunction with the financial
statements and the related notes included in the Statement of Additional
Information, which may be obtained upon request without charge. Further
information about the performance of the Funds is included in the annual report
to contract owners, which also may be obtained upon request without charge.

3
<PAGE>

- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: GROWTH EQUITY FUND (a)

The table below sets forth financial data for a share outstanding throughout
each year

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 21.46 $ 20.00 $ 18.30 $ 20.49 $ 18.82 $ 21.47 $ 16.35 $ 18.86 $ 15.78
-------- -------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.10 0.11 0.09 0.13 0.06 0.16 0.23 0.41 0.35
Net realized and
unrealized gain (loss)
on investment
transactions........... 5.64 3.85 4.75 (1.80) 2.28 1.12 5.45 (2.51) 4.60
-------- -------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 5.74 3.96 4.84 (1.67) 2.34 1.28 5.68 (2.10) 4.95
-------- -------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.10) (0.11) (0.09) (0.13) (0.06) (0.16) (0.23) (0.41) (0.35)
Distribution in excess
of net investment
income................. 0.00 0.00 (0.00) 0.00 0.00 0.00 0.00 0.00 (0.02)
Distribution from net
realized gains......... (2.73) (2.39) (3.05) (0.39) (0.61) (3.77) (0.33) 0.00 (1.50)
-------- -------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (2.83) (2.50) (3.14) (0.52) (0.67) (3.93) (0.56) (0.41) (1.87)
-------- -------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 24.37 $ 21.46 $ 20.00 $ 18.30 $ 20.49 $ 18.82 $ 21.47 $ 16.35 $ 18.86
======== ======== ======= ======= ======= ======= ======= ======= =======
Total return............ 26.74% 19.76% 26.45% (8.12%) 12.43% 5.96% 34.74% (11.13%) 31.37%
RATIOS/SUPPLEMENTAL
DATA:
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $136,058 $106,039 $95,593 $80,078 $83,938 $73,977 $59,670 $39,896 $39,541
======== ======== ======= ======= ======= ======= ======= ======= =======
Ratio of expenses to
average net assets (b). 0.77% 0.80% (b) 0.77% (b) 0.79% (b) 0.77% (b) 0.88% (b) 0.87% 0.91% 0.86%
======== ======== ======= ======= ======= ======= ======= ======= =======
Ratio of net investment
income to average net
assets (b)............. 0.39% 0.48% (b) 0.43% (b) 0.70% (b) 0.30% (b) 0.81% (b) 1.28% 2.43% 1.66%
======== ======== ======= ======= ======= ======= ======= ======= =======
Portfolio turnover rate. 169.1% 177.1% 169.8% 156.2% 185.3% 120.7% 41.7% 34.0% 40.4%
======== ======== ======= ======= ======= ======= ======= ======= =======
Average commission paid
(c).................... $ 0.0780 $ 0.0774
======== ========
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1988
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of year...... $ 15.14
--------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.35
Net realized and
unrealized gain (loss)
on investment
transactions........... 1.57
--------
Total from investment
operations............. 1.92
--------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.33)
Distribution in excess
of net investment
income................. 0.00
Distribution from net
realized gains......... (0.95)
--------
Total distributions..... (1.28)
--------
Net asset value, end of
year................... $ 15.78
========
Total return............ 12.68%
RATIOS/SUPPLEMENTAL
DATA:
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $33,184
========
Ratio of expenses to
average net assets (b). 0.77%
========
Ratio of net investment
income to average net
assets (b)............. 2.07%
========
Portfolio turnover rate. 27.3%
========
Average commission paid
(c)....................
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Growth Stock Fund prior to November 1, 1992.

(b) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets would have been
.81%, .82%, .84%, .82% and .89% and the ratios of the net investment
income to average net assets would have been .47%, .38%, .65%, .25% and
.80% for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.

(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

4
<PAGE>

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

FINANCIAL HIGHLIGHTS: VALUE EQUITY FUND (a)

The table below sets forth financial data for a share outstanding throughout
each year

(b) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been .90% and 3.85%
respectively, for the year ended December 31, 1992.

(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

5
<PAGE>

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

FINANCIAL HIGHLIGHTS: SMALL CAPITALIZATION FUND

The table below sets forth financial data for a share outstanding throughout
the period

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------
1997 1996 1995*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period..... $ 12.53 $ 10.96 $ 10.00
-------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... 0.07 0.07 0.09
Net realized and unrealized gain on
investment transactions................. 2.81 2.09 1.19
-------- -------- -------
Total from investment operations......... 2.88 2.16 1.28
-------- -------- -------
LESS DISTRIBUTIONS:
Dividend from net investment income...... (0.07) (0.07) (0.09)
Distribution from net realized gains..... (0.91) 0.52) (0.23)
-------- -------- -------
Total distributions...................... (0.98) (0.59) (0.32)
-------- -------- -------
Net asset value, end of period........... $ 14.43 $ 12.53 $ 10.96
======== ======== =======
Total return............................. 23.02% 19.76% 12.76% (d)
RATIOS/SUPPLEMENTAL DATA:
- --------------------------------------------------------------------------------
Net assets, end of period (in thousands). $ 38,726 $ 16,134 $ 4,828
======== ======== =======
Ratio of expenses to average net assets.. 0.85% 0.99% (b) 1.00% (a)(b)
======== ======== =======
Ratio of net investment income to average
net assets.............................. 0.66% 0.85% (b) 1.53% (a)(b)
======== ======== =======
Portfolio turnover rate.................. 71.1% 39.2% 64.3%
======== ======== =======
Average commission rate paid (c)......... $ 0.0557 $ 0.0486
======== ========
- --------------------------------------------------------------------------------
</TABLE>

(a) Annualized.

(b) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets would have been
1.06% and 1.29% ,and the ratio of net investment income to average net
assets would have been .78% and 1.24%, respectively, for the year ended
December 31, 1996 and the period ended December 31, 1995.

(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

(d) Not annualized.

* For the period from March 1, 1995 (commencement of operations) through
December 31, 1995.

6
<PAGE>

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

FINANCIAL HIGHLIGHTS: EMERGING GROWTH FUND

The table below sets forth financial data for a share outstanding throughout
the period

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
- -------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period....................... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss........................................ 0.00
Net realized and unrealized gain on investment
transactions.............................................. 3.92
-------
Total from investment operations........................... 3.92
-------
LESS DISTRIBUTIONS:
Dividend from net investment income........................ 0.00
Distribution from net realized gains....................... (1.07)
-------
Total distributions........................................ (1.07)
-------
Net asset value, end of period............................. $ 12.85
=======
Total return............................................... 39.22% (d)
RATIOS/SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------
Net assets, end of period (in thousands)................... $17,942
=======
Ratio of expenses to average net assets.................... 1.15% (a)(b)
=======
Ratio of net investment loss to average net assets......... (0.73%)(a)(b)
=======
Portfolio turnover rate.................................... 392.3% (a)
=======
Average commission rate paid (c)...........................
$0.0545
=======
- -------------------------------------------------------------------------------
</TABLE>

(a) Annualized.

(b) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets and the ratio of net
investment loss to average net assets would have been 1.41% and (0.99%),
respectively, for the period ended December 31, 1997.

(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

(d) Not annualized.

* For the Period from May 1, 1997 (commencement of operations) through
December 31, 1997.

7
<PAGE>

- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: FLEXIBLY MANAGED FUND (a)

The table below sets forth financial data for a share outstanding throughout
each year

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of year................ $ 18.74 $ 17.40 $ 15.19 $ 15.70 $ 14.31 $ 13.73 $ 12.30 $ 13.41 $ 12.65 $ 11.61
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.61 0.65 0.53 0.43 0.34 0.58 0.52 0.54 0.57 0.48
Net realized and
unrealized gain (loss)
on investment
transactions........... 2.33 2.19 2.86 0.22 1.92 0.74 2.14 (0.65) 2.11 1.72
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations............. 2.94 2.84 3.39 0.65 2.26 1.32 2.66 (0.11) 2.68 2.20
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.61) (0.65) (0.53) (0.43) (0.34) (0.58) (0.52) (0.54) (0.58) (0.48)
Distribution in excess
of net investment
income................. 0.00 0.00 (0.01) (0.02) 0.00 0.00 0.00 (0.01) 0.00 0.00
Distribution from net
realized gains......... (1.24) (0.85) (0.64) (0.71) (0.53) (0.16) (0.71) (0.45) (1.34) (0.68)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total distributions..... (1.85) (1.50) (1.18) (1.16) (0.87) (0.74) (1.23) (1.00) (1.92) (1.16)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 19.83 $ 18.74 $ 17.40 $ 15.19 $ 15.70 $ 14.31 $ 13.73 $ 12.30 $ 13.41 $ 12.65
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Total return............ 15.65% 16.37% 22.28% 4.14% 15.79% 9.61% 21.63% (0.82%) 21.19% 18.95%
RATIOS/SUPPLEMENTAL
DATA:
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $516,139 $398,544 $266,556 $169,847 $113,492 $70,979 $47,141 $29,315 $27,439 $18,372
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Ratio of expenses to
average net assets..... 0.76% 0.77% 0.79% 0.82% 0.85% 0.89% (b) 0.91% 0.90% 0.90% 0.86%
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Ratio of net investment
income to average net
assets................. 3.10% 3.90% 3.45% 3.14% 2.62% 4.56% (b) 4.45% 4.11% 4.41% 4.38%
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Portfolio turnover rate. 37.1% 32.9% 37.2% 37.3% 42.6% 29.5% 53.6% 43.3% 74.9% 176.7%
======== ======== ======== ======== ======== ======= ======= ======= ======= =======
Average commission rate
paid (c)............... $ 0.0362 $ 0.0627
======== ========
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Capital Appreciation Fund prior to November 1, 1992.
(b) Had fees not been waived by the investment adviser and/or administrator of
the Fund, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been .90% and 4.55% for
the year ended December 31, 1992, respectively.
(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

8
<PAGE>

- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: INTERNATIONAL EQUITY FUND

The table below sets forth financial data for a share outstanding throughout
each year

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 (a)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 15.61 $ 14.47 $ 13.01 $ 13.94 $ 10.12 $ 10.00
-------- -------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.58 0.63 0.13 0.09 0.03 0.03
Net realized and
unrealized gain (loss)
on investments and
foreign currency
related transactions... 1.04 1.81 1.67 (0.97) 3.83 0.17
-------- -------- -------- ------- ------- -------
Total from investment
operations............. 1.62 2.44 1.80 (0.88) 3.86 0.20
-------- -------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.53) (0.56) (0.12) (0.02) (0.01) (0.03)
Distribution in excess
of net investment
income................. 0.00 (0.74) (0.22) 0.00 0.00 (0.05)
Distribution from net
realized gains......... (0.57) 0.00 0.00 (0.00) (0.03) 0.00
Distribution from
capital................ 0.00 0.00 0.00 (0.03) 0.00 0.00
-------- -------- -------- ------- ------- -------
Total distributions..... (1.10) (1.30) (0.34) (0.05) (0.04) (0.08)
-------- -------- -------- ------- ------- -------
Net asset value, end of
period................. $ 16.13 $ 15.61 $ 14.47 $ 13.01 $ 13.94 $ 10.12
======== ======== ======== ======= ======= =======
Total return............ 10.41% 16.87% 13.80% 6.31% 38.14% 2.00%
RATIOS/SUPPLEMENTAL
DATA:
- ----------------------------------------------------------------------------------------
Net assets, end of
period (in thousands).. $129,638 $104,418 $ 69,531 $59,393 $40,798 $11,137
======== ======== ======== ======= ======= =======
Ratio of expenses to
average net assets..... 1.13% 1.17% 1.23% 1.22% 1.21% 1.54% (b)(c)
======== ======== ======== ======= ======= =======
Ratio of net investment
income to average net
assets................. 0.62% 0.66% 0.91% 0.82% 0.63% 1.56% (b)(c)
======== ======== ======== ======= ======= =======
Portfolio turnover rate. 35.7% 54.8% 62.5% 15.6% 11.1% 0.0%
======== ======== ======== ======= ======= =======
Average Commission Paid
(d).................... $ 0.0420 $ 0.0397
======== ========
- ----------------------------------------------------------------------------------------
</TABLE>
(a) For the period from November 2, 1992 (commencement of operations) to
December 31, 1992.

(b) Annualized.

(c) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets and the ratio of net
investment income to average net assets would have been 1.90% annualized
and 1.20% annualized, respectively for the year ended December 31, 1992.

(d) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

9
<PAGE>

- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: QUALITY BOND FUND (a)

The table below sets forth financial data for a share outstanding throughout
each year

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of year................ $ 10.00 $ 10.24 $ 9.04 $ 10.19 $ 10.03 $ 10.51 $ 9.73 $ 9.68 $ 9.22
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.60 0.66 0.61 0.61 0.46 0.75 0.71 0.72 0.73
Net realized and
unrealized gain (loss)
on investment
transactions........... 0.20 (0.24) 1.21 (1.15) 0.71 (0.06) 0.81 0.05 0.46
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 0.80 0.42 1.82 (0.54) 1.17 0.69 1.52 0.77 1.19
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.60) (0.66) (0.61) (0.61) (0.46) (0.75) (0.71) (0.72) (0.73)
Distribution from net
realized gain.......... 0.00 0.00 0.00 0.00 (0.54) (0.42) (0.03) 0.00 0.00
Distribution in excess
of net realized gain... 0.00 0.00 (0.01) 0.00 (0.01) 0.00 0.00 0.00 0.00
------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions..... (0.60) (0.66) (0.62) (0.61) (1.01) (1.17) (0.74) (0.72) (0.73)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 10.20 $ 10.00 $ 10.24 $ 9.04 $ 10.19 $ 10.03 $ 10.51 $ 9.73 $ 9.68
======= ======= ======= ======= ======= ======= ======= ======= =======
Total return............ 8.03% 4.14% 20.14% (5.29%) 11.67% 6.57% 15.62% 7.95% 12.91%
RATIOS/SUPPLEMENTAL
DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $40,077 $37,611 $38,048 $31,338 $33,027 $20,314 $21,153 $16,568 $11,809
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of expenses to
average net assets..... 0.75% 0.77% (b) 0.73% (b) 0.78% (b) 0.79% (b) 0.84% (b) 0.83% 0.86% 0.82% (b)
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of net investment
income to average net
assets................. 5.87% 6.03% (b) 6.20% (b) 6.14% (b) 5.21% (b) 6.25% (b) 7.41% 7.76% 8.10% (b)
======= ======= ======= ======= ======= ======= ======= ======= =======
Portfolio turnover rate. 317.3% 107.6% 449.2% 380.9% 389.4% 190.8% 44.1% 13.9% 5.4%
======= ======= ======= ======= ======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1988
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning
of year................ $ 9.17
-------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... 0.65
Net realized and
unrealized gain (loss)
on investment
transactions........... 0.04
-------
Total from investment
operations............. 0.69
-------
LESS DISTRIBUTIONS:
Dividend from net
investment income...... (0.64)
Distribution from net
realized gain.......... 0.00
Distribution in excess
of net realized gain... 0.00
-------
Total distributions..... (0.64)
-------
Net asset value, end of
year................... $ 9.22
=======
Total return............ 7.57%
RATIOS/SUPPLEMENTAL
DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year
(in thousands)......... $7,041
=======
Ratio of expenses to
average net assets..... 0.73%
=======
Ratio of net investment
income to average net
assets................. 7.53%
=======
Portfolio turnover rate. 7.7%
=======
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Fixed Income Fund prior to November 1, 1992.

(b) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratio of expenses to average net assets would have been 78%,
.78%, .83%, .84%, .87% and .83%, and the ratio of net investment income to
average net assets would have been 6.02%, 6.15%, 6.09%, 5.16%, 6.22% and
8.09%, for the years ended December 31, 1996, 1995, 1994, 1993, 1992 and
1989, respectively.

10
<PAGE>

- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: HIGH YIELD BOND FUND

The table below sets forth financial data for a share outstanding throughout
each year

(a) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratios of expenses to average net assets would have been
.93%, .98%, 1.01% and .95%, and the ratios of net investment income to
average net assets would have been 9.82%, 11.29%, 12.11% and 11.67%,
respectively, for the years ended December 31, 1992, 1991, 1990 and 1989.

(b) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

11
<PAGE>

- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS: MONEY MARKET FUND

The table below sets forth financial data for a share outstanding throughout
each year

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income.............. 0.0503 0.0489 0.0538 0.0365 0.0250 0.0306 0.0536 0.0740 0.0855
------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations.......... 0.0503 0.0489 0.0538 0.0365 0.0250 0.0306 0.0536 0.0740 0.0855
------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DIVIDENDS:
Dividends from net
investment income... (0.0503) (0.0489) (0.0538) (0.0365) (0.0250) (0.0306) (0.0536) (0.0740) (0.0855)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total dividends...... (0.0503) (0.0489) (0.0538) (0.0365) (0.0250) (0.0306) (0.0536) (0.0740) (0.0855)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======= ======= ======= =======
Total return......... 5.15% 5.00% 5.51% 3.71% 2.53% 3.08% 5.49% 7.65% 8.87%
RATIOS/SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of
year
(in thousands)...... $37,476 $34,501 $24,726 $16,531 $13,005 $11,862 $12,811 $15,348 $11,351
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of expenses to
average net assets.. 0.70% 0.73% (a) 0.69% (a) 0.73% (a) 0.74% (a) 0.77% (a) 0.79% (a) 0.82% (a) 0.76% (a)
======= ======= ======= ======= ======= ======= ======= ======= =======
Ratio of net
investment income to
average net assets.. 5.04% 4.88% (a) 5.37% (a) 3.74% (a) 2.51% (a) 3.07% (a) 5.47% (a) 7.40% (a) 8.53% (a)
======= ======= ======= ======= ======= ======= ======= ======= =======
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
1988
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value,
beginning of year... $ 1.00
--------
INCOME FROM
INVESTMENT
OPERATIONS:
Net investment
income.............. 0.0702
--------
Total from investment
operations.......... 0.0702
--------
LESS DIVIDENDS:
Dividends from net
investment income... (0.0702)
--------
Total dividends...... (0.0702)
--------
Net asset value, end
of year............. $ 1.00
========
Total return......... 7.40%
RATIOS/SUPPLEMENTAL DATA:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of
year
(in thousands)...... $ 9,578
========
Ratio of expenses to
average net assets.. .73%
========
Ratio of net
investment income to
average net assets.. 7.02%
========
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Had fees not been waived by the investment adviser and administrator of
the Fund, the ratios of expenses to average net assets would have been
.74%, .74%, .79%, .82%, .84%, .83%, .87% and .79%, and the ratios of net
investment income to average net assets would have been 4.87%, 5.32%,
3.68%, 2.43%, 3.00%, 5.43%, 7.35% and 8.50% for the years ended December
31, 1996, 1995, 1994, 1993, 1992, 1991, 1990 and 1989, respectively.

12
<PAGE>

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND PROGRAMS

The investment objectives of the various Funds, and their policies and
programs for achieving those objectives, are described below. There can be no
assurance, of course, that the Funds will achieve their investment objectives.
The investment objectives of the Funds are fundamental, which means that they
may not be changed without the approval of the holders of a majority of the
outstanding shares of the affected Fund, or if it is less, 67% of the shares
represented at a meeting of shareholders at which the holders of 50% or more of
the shares are represented. Unless otherwise indicated, each Fund's practices,
policies and programs for achieving its objective are not fundamental.
Additional information regarding these investment practices and their
associated risks is contained in the Statement of Additional Information.

- --------------------------------------------------------------------------------
GROWTH EQUITY FUND

INVESTMENT OBJECTIVE. The investment objective of the Growth Equity Fund is
to achieve long-term growth of capital and increase of future income by
investing primarily in common stocks of well-established growth companies.
INVESTMENT PROGRAM. To achieve its objective, the Growth Equity Fund invests
primarily in the stocks of a diversified group of well-established companies
which are expected to demonstrate long-term earnings growth that is greater
than the projected growth rate for the economy as a whole. While current
dividend income is not a prerequisite in the selection of a growth company, the
companies in which the Fund invests will normally have a record of paying
dividends and are generally expected to increase the amounts of such dividends
in future years as earnings increase.
Ordinarily, the Fund's assets will be invested primarily in common stocks,
but the Fund may also invest in convertible securities, preferred stocks, and
securities of foreign issuers which hold the prospect of contributing to the
achievement of the Fund's objectives. The Fund's holdings are generally listed
on a national securities exchange. While the Fund may invest in unlisted
securities, such securities will usually have an established over-the-counter
market. In addition, the Fund may increase its reserves for temporary defensive
purposes or to enable it to take advantage of buying opportunities. The Fund's
reserves will be invested in money market instruments, such as U.S. Government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
and short-term corporate debt securities or shares of investment companies that
invest in such instruments. The Fund may write covered call options and
purchase put options on its portfolio securities, purchase call or put options
on securities indices and invest in stock index futures contracts (and options
thereon) for hedging purposes.
As a matter of fundamental policy, the Fund will not purchase the securities
of any company if, as a result, more than 25% of its total assets would be
concentrated in any one industry.
FOREIGN SECURITIES. The Fund may invest up to 30% of its total assets in
securities principally traded in securities markets outside the United States.
The risks of investing in foreign securities are described below under
"International Equity Fund". Before investing in foreign securities, the risks
will be carefully considered by the adviser.
FOREIGN CURRENCY TRANSACTIONS. Since investments in foreign companies will
usually involve currencies of foreign countries, and since the Fund may
temporarily hold funds in bank deposits in foreign currencies during the
completion of investment programs, the value of the assets of the Fund as
measured in United States dollars may be affected favorably or unfavorably by
changes in foreign currency exchange rates and exchange control regulations,
and the Fund may incur costs in connection with conversions between various
currencies. The Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into forward contracts to
purchase or sell foreign currencies. The Fund will generally not enter into a
forward contract with a term of greater than one year. Risks peculiar to
investments denominated in currencies of foreign countries are described below
under "International Equity Fund". For more information, see "Foreign Currency
Transactions" in the Statement of Additional Information.

PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but, when circumstances warrant, securities may be sold without regard
to the length of time held. The Fund's portfolio turnover rates for 1997 and
1996 were 169.1%, and 177.1% respectively. A high rate of portfolio turnover
results in increased transaction costs to the Fund, including increased
brokerage expenses. For more information about brokerage expenses, see
"Portfolio Transactions" in the Statement of Additional Information.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Growth Equity
Fund will achieve its investment objective. Because of its investment policy,
the Growth Equity Fund may or may not be suitable or appropriate for particular
contract holders. The Fund is designed for long-term investors who can accept
the risks entailed in seeking long-term growth of capital and an increase in
future income through investment primarily in common stocks. By investing
primarily in well-established growth companies, the Fund seeks to avoid some of
the volatility associated with investment in less established companies. The
Fund's adviser believes that, over the long term, the earnings of well-
established growth companies will not be

13
<PAGE>

as adversely affected by unfavorable economic conditions as the earnings of
more cyclical companies. The value of the Fund's portfolio securities will
fluctuate based on market conditions, specific industry conditions, and the
condition of the individual issuers. Consistent with a long-term investment
approach, contract holders selecting the Fund should be prepared to withstand
periods of adverse market conditions and should not rely on an investment in
the Fund for their short-term financial needs.

- --------------------------------------------------------------------------------
VALUE EQUITY FUND

INVESTMENT OBJECTIVE. The investment objective of the Value Equity Fund is 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.
INVESTMENT PROGRAM. To achieve its objective, the Fund will invest primarily
in equity securities that are believed to be undervalued in the marketplace in
relation to factors such as the companies' assets, earnings, potential for
dividend growth and cash flows. Equity securities include common and preferred
stocks and bonds, debentures and notes convertible into common stocks and
depository receipts for such securities. The Fund may write covered call
options and purchase put options on its portfolio securities, purchase call or
put options on securities indices and invest in stock index futures' contracts
(and options thereon) for hedging purposes.
As a matter of fundamental policy, the Fund will not purchase the securities
of any company if, as a result, more than 25% of the Fund's assets would be
concentrated in any one industry.
The Fund may also invest its assets in fixed income securities (corporate,
government, and municipal bonds of various maturities), preferred stock, and
warrants. The Fund will generally purchase debt securities that are considered
investment grade securities (e.g., AAA, AA, A, or BBB by S&P, or Aaa, Aa, A, or
Baa by Moody's), or, if not rated, are of equivalent investment quality as
determined by OpCap Advisors. Debt securities within the top credit categories
(e.g., AAA, AA, and A by S&P) comprise what are generally known as high-grade
bonds. Medium-grade bonds (e.g., BBB by S&P) are regarded as having an adequate
capacity to pay principal and interest, although adverse economic conditions or
changing circumstances are more likely to lead to a weakening of such capacity
than that for higher grade bonds. The Fund may also invest up to 5% of its
assets in noninvestment grade debt securities, which are also known as "junk
bonds". The Fund may, from time to time, invest in municipal bonds when the
expected total return from such bonds appears to exceed the total returns
obtainable from corporate or government bonds of similar credit quality. The
Fund's holdings are generally listed on a national securities exchange. While
the Fund may invest in unlisted securities, such securities will usually have
an established over-the-counter market.

FOREIGN SECURITIES. The Fund may invest in U.S. dollar-denominated securities
of foreign issuers which hold the prospect of contributing to the achievement
of the Fund's objectives--limited to 25% of its assets. Nondollar-denominated
fixed income securities and equity securities issued by foreign issuers will be
limited to 5% and 10% of the Fund's assets, respectively. The Fund may also
enter into forward currency contracts. Risks peculiar to investments in foreign
securities and securities that are denominated in foreign currencies are
described below under " International Equity Fund".
CASH RESERVES. While the Fund will remain primarily invested in equity
securities, it may, for temporary defensive purposes, reduce its equity
holdings and invest in reserves without limitation. The reserve position of the
Fund will not be managed for purposes of anticipating short-term market
fluctuations. The Fund's reserves will be invested in high-grade money market
instruments, such as U.S. Government obligations, certificates of deposit,
bankers' acceptances, commercial paper, short-term corporate debt securities
and repurchase agreements, or shares of investment companies that invest in
such instruments.
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit ratings
assigned by established rating services (Aaa, Aa or A by Moody's, or AAA, AA or
A by S&P), or, if not rated, of equivalent investment quality as determined by
the investment adviser.

PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits but, when circumstances warrant, securities may be sold without regard
to the length of time held. The Fund's annual portfolio turnover rates for,
1997 and 1996 were 18.7%, and 25.0% respectively.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Value Equity
Fund will achieve its investment objective. Because of its investment policy,
the Fund may or may not be suitable or appropriate for particular contract
holders. Investors should be aware that it may take considerable time for the
marketplace to recognize value. Also, it is always possible that anticipated
improvements in a company's performance may not occur.

14
<PAGE>

- --------------------------------------------------------------------------------
SMALL CAPITALIZATION FUND

INVESTMENT OBJECTIVE. The investment objective of the Small Capitalization
Fund is to seek capital appreciation through investment in a diversified
portfolio consisting primarily of equity securities of companies with market
capitalization of under $1 billion.
INVESTMENT PROGRAM. To achieve its objective, the Small Capitalization Fund
attempts to identify securities of smaller-capitalization companies which are
underpriced. Smaller capitalization companies may often be under-priced for the
following reasons: (i) institutional investors, which currently represent a
majority of the trading volume in the shares of publicly-traded companies, are
often less interested in such companies because in order to acquire an equity
position that is large enough to be meaningful to an institutional investor,
such an investor may be required to buy a large percentage of the company's
outstanding equity securities and (ii) such companies may not be regularly
researched by stock analysts, thereby resulting in greater discrepancies in
valuation. The Fund may also purchase securities in initial public offerings,
or shortly after such offerings have been completed, when the investment
adviser believes that such securities have greater-than-average market
appreciation potential. Under normal circumstances at least 65% of the Fund's
assets will be invested in equity securities. The majority of securities
purchased by the Fund will be traded on the New York Stock Exchange, the
American Stock Exchange or in the over-the-counter market.
Ordinarily, the Fund's assets will be primarily invested in equity
securities, but the Fund may also invest a portion of its assets in bonds,
convertible securities, preferred stocks and securities of foreign issuers
which hold the prospect of contributing to the achievement of the Fund's
objective. It is the present intention of the Fund to invest no more than 5% of
its assets in bonds rated below Baa by Moody's or BBB by S&P, commonly known as
"junk bonds". The Fund may write covered call options and purchase put options
on its portfolio securities, purchase put or call options on securities indices
and invest in stock index futures contracts (and options thereon) for hedging
or other non-speculative purposes.
FOREIGN SECURITIES. The Fund may acquire foreign equity and debt securities.
It is currently the Fund's intention to limit foreign equity securities to not
more than 15% of its assets, dollar denominated debt securities of foreign
issuers to not more than 15% of assets, and non-dollar denominated debt
securities of foreign issuers to not more than 5% of assets. The Fund may also
enter into forward currency contracts. The risks of investing in foreign
securities, including those denominated in foreign currencies, are described
below under "International Equity Fund".
CASH RESERVES. While the Fund will normally remain primarily invested in
equity securities, it may, for temporary defensive purposes, reduce its equity
holdings and invest in reserves without limitation. The reserve position of the
Fund will not be managed for purposes of anticipating short-term market
fluctuations. The Fund's reserves will be invested in high-grade money market
instruments, such as U.S. Government obligations, certificates of deposit,
bankers acceptances, short-term corporate debt securities and repurchase
agreements, or shares of investment companies that invest in such instruments.
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit ratings
assigned by established rating services (Aaa, Aa or A by Moody's, or AAA, AA or
A by S&P), or, if not rated, of equivalent investment quality as determined by
the investment adviser.

PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but, when circumstances warrant, securities may be sold without regard
to the length of time held. The Fund's annual portfolio turnover rate for 1997
and 1996 was 71.1% and 39.2%, respectively. A high rate of portfolio turnover
results in increased transaction costs to the Fund, including increased
brokerage expenses. For more information about brokerage expenses, see
"Portfolio Transactions" in the Statement of Additional Information.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Small
Capitalization Fund will achieve its investment objective. The Fund is expected
to have greater risk exposure and reward potential than a portfolio which
invests primarily in larger-capitalization companies. Smaller-capitalization
companies may have limited product lines, markets or financial resources or may
depend upon a limited management group. The trading volumes of securities of
smaller-capitalization companies are normally less than those of larger-
capitalization companies. This often translates into greater price swings, both
upward and downward. Since trading volumes are lower, new demand for the
securities of such companies could result in disproportionately large increases
in the price of such securities. The waiting period for the achievement of an
investor's objectives might be longer since these securities are not being
closely monitored by research analysts and, thus, it takes more time for
investors to become aware of fundamental changes or other factors which have
motivated the Fund's purchase. Smaller-capitalization companies often achieve
higher growth rates and experience higher failure rates than do larger-
capitalization companies.

15
<PAGE>

- --------------------------------------------------------------------------------
EMERGING GROWTH FUND

INVESTMENT OBJECTIVE. The investment objective of the Emerging Growth Fund is
capital appreciation.
INVESTMENT PROGRAM. To achieve its objective, the Fund will invest primarily
in equity securities (principally common stocks) of emerging growth companies.
Emerging growth companies are companies that have the potential, based upon
superior products or services, operating characteristics, and financial
capabilities, for more rapid growth than the overall economy. The Fund's
investments generally will be in securities of companies in industry segments
that are experiencing rapid growth, and in securities of companies with
proprietary advantages. The adviser will consider a number of factors in
evaluating potential investments, including, for example, the rate of earnings
growth, the quality of management, the extent of proprietary advantage, the
return on equity, and/or the financial condition of the company.
Although the Fund will ordinarily be invested in equity securities, the Fund
may invest in bonds, convertible securities, preferred stocks and securities of
foreign issuers which hold the prospect of contributing to the achievement of
the Fund's objective. The Fund may also invest in bonds rated below Baa by
Moody's or BBB by S&P (commonly referred to as "junk bonds"), but presently
does not expect such investments in any such bonds to exceed 5% of the Fund's
assets. The Fund may write covered call options and purchase put options on its
portfolio securities, purchase put and call options on securities indices and
invest in stock index futures contracts (and options thereon) for hedging and
other non-speculative purposes.
FOREIGN SECURITIES. The Fund may invest up to 10 % of its total assets in
foreign equity and debt securities. The fund may also enter into forward
currency contracts. The risks of investing in foreign securities, including
those denominated in foreign currencies, are described below under
"International Equity Fund."
CASH RESERVES. While the Fund will normally remain primarily invested in
equity securities, it may, for temporary defensive purposes, reduce its equity
holdings, and invest in reserves without limitation. The reserve position of
the Fund will not be managed for purposes of anticipating short-term market
fluctuations. The Fund's reserves will be invested in high-grade money market
instruments, such as U.S. Government obligations, certificates of deposit,
bankers acceptances, short-term corporate debt securities and repurchase
agreements, or shares of investment companies that invest in such instruments.
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit ratings
assigned by established rating services (Aaa, Aa or A by Moody's, or AAA, AA or
A by S&P), or, if not rated, of equivalent investment quality as determined by
the investment adviser.

PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but, when circumstances warrant, securities may be sold without regard
to the length of time held. The Fund's annual portfolio turnover rate for 1997
was 392.3%. A high rate of portfolio turnover results in increased transaction
costs to the Fund, including increased brokerage expenses. For more information
about brokerage expenses, see "Portfolio Transactions" in the Statement of
Additional Information.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Emerging
Growth Fund will achieve its investment objective. The Fund is expected to have
greater risk exposure and reward potential than a portfolio which invests
primarily in larger-capitalization companies. The trading volumes of securities
of smaller-capitalization companies are normally less than those of larger-
capitalization companies. This often translates into greater price swings, both
upward and downward. Since trading volumes are lower, new demand for the
securities of such companies could result in disproportionately large increases
in the price of such securities. The waiting period for the achievement of an
investor's objectives might be longer since these securities are not being
closely monitored by research analysts and, thus, it takes more time for
investors to become aware of fundamental changes or other factors which have
motivated the Fund's purchase. Smaller-capitalization companies often achieve
higher growth rates and experience higher failure rates than do larger-
capitalization companies.

- --------------------------------------------------------------------------------
FLEXIBLY MANAGED FUND

INVESTMENT OBJECTIVE. The investment objective of the Flexibly Managed Fund
is to maximize total return (capital appreciation and income) by investing in
common stocks, equity related 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.
INVESTMENT PROGRAM. To achieve its objective, the Fund may invest in the
common stocks of established companies that offer above-average prospects for
capital appreciation. Such companies usually can be placed in one of two
portfolio categories: (i) long-term "core" holdings, composed of companies
which are undervalued relative to their assets or growth potential, or are
currently out of favor with investors; and (ii) "short-term" holdings, which
include companies whose stock price is expected to rise over the short term but
whose longer term prospects may or may not be attractive.

16
<PAGE>

The Fund may also invest in the following securities:
. Equity-related securities, such as convertible securities (i.e., bonds
or preferred stock convertible into or exchangeable for common stock),
preferred stock, and warrants.

. Corporate debt securities within the four highest credit categories
assigned by established rating agencies, which include both high and
medium-quality investment grade bonds. The Fund may also invest in
non-investment grade corporate debt securities, which are also known
as "junk bonds," if immediately after such investment the Fund would
not have more than 15% of its total assets invested in such
securities. The Fund's investment in all corporate debt securities
will be limited to 35% of net assets. Medium-quality investment grade
bonds are regarded as having an adequate capacity to pay principal and
interest although adverse economic conditions or changing
circumstances are more likely to lead to a weakening of such capacity
than that for higher grade bonds.
. Short-term reserves (i.e., money market instruments), which may be
used to reduce downside volatility during uncertain or declining
equity market conditions. The Fund's reserves will be invested in the
following high-grade money market instruments: U.S. Government
obligations, certificates of deposit, bankers' acceptances, commercial
paper, short-term corporate debt securities and repurchase agreements.
If the Fund's position in money market securities maturing in one year or
less equals 35% or more of the Fund's total assets, the Fund will normally have
25% or more of its assets concentrated in securities of the banking industry.
Investments in the banking industry may be affected by general economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers. In addition, the profitability of the banking
industry is largely dependent upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. The adviser believes that any risk to the Fund which might result
from concentrating in the banking industry will be minimized by diversification
of the Fund's investments, the short maturity of money market instruments, and
the advisers' credit research.
The Fund may write covered call options, purchase put options on its
portfolio securities, purchase call or put options on securities and securities
indices and invest in stock index futures contracts (and options thereon) for
hedging purposes. The Fund may purchase securities, from time to time, on a
when-issued basis; the value of such securities may decline or increase prior
to settlement date.

FOREIGN SECURITIES. The Fund may invest up to 25% of its total assets
(excluding reserves) in foreign securities. Risks peculiar to investments in
foreign securities and securities that are denominated in foreign currencies
are described below under "International Equity Fund".
REPURCHASE AGREEMENTS. As part of its reserve position, the Fund may enter
into repurchase agreements on the same terms as the Money Market Fund, except
that the underlying security may be within the three highest credit categories
assigned by established rating services (Aaa, Aa or A by Moody's or AAA, AA or
A by S&P) or, if not rated, of equivalent investment quality as determined by
the Fund's investment adviser.

PORTFOLIO TURNOVER. The Fund may engage in short-term trading in seeking to
maximize capital appreciation. Changes in the investment portfolio will be made
whenever the adviser believes they are advisable, either as a result of a
security having reached its price objective, or for reasons not foreseen at the
time of the investment--without regard to the length of time the security has
been held by the Fund. As a result, short-term trading may cause portfolio
turnover to be higher than that of other funds with less aggressive trading
strategies, which may, in turn, increase the Fund's transaction costs. A high
rate of portfolio turnover results in increased transaction costs to the Fund,
including increased brokerage expenses. The Fund's portfolio turnover rates for
1997 and 1996 were 37.1% and 32.9%, respectively.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Flexibly
Managed Fund will achieve its investment objective. Because of its investment
policy, the Flexibly Managed Fund may or may not be suitable or appropriate for
particular contract holders. The value of the Fund's portfolio securities will
fluctuate based on market conditions, specific industry conditions, and the
condition of the individual issuers.

- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND

INVESTMENT OBJECTIVE. The investment objective of the International Equity
Fund is to achieve maximum capital appreciation by investing in a diversified
portfolio consisting primarily of equity securities of companies principally in
Europe and Pacific Basin countries.

17
<PAGE>

INVESTMENT PROGRAM. To achieve its objective, the Fund will invest most of
its assets in equity securities (including stocks, warrants, convertible bonds,
and preferred stocks convertible into common stocks) of companies operating
principally in the countries in Europe and the Pacific Basin that are generally
considered to have developed markets. These include the United Kingdom,
Germany, France, the Netherlands, Switzerland, Norway, Spain, Japan, Hong Kong,
Australia and Singapore. A smaller proportion of the Fund's assets may be
invested in "developing countries" such as Taiwan, Malaysia, Indonesia, South
Africa and Mexico.
Under normal circumstances the Fund will have at least 65% of its assets
invested in European and Pacific Basin equity securities. The Fund intends to
diversify investment broadly among countries and to invest in the securities of
companies in not less than three different countries, in addition to the United
States.

The Fund attempts to invest in equity securities with a superior potential
for capital appreciation utilizing a series of macro and micro analyses. The
macro economic analysis will be based upon detailed research on the global
economic environment and on individual countries' projected economic data. This
analysis will guide the investment adviser's allocation of assets to particular
countries. The micro economic analysis will focus on quality of management and
the relationship of current prices to earnings growth or to undervalued assets.
Strong emphasis is put on cash flow rather than earnings as a more meaningful
way to evaluate companies in foreign countries where accounting standards are
less rigorously enforced than in the United States.
The Fund may not always purchase securities on the principal market. For
example, American Depository Receipts ("ADRs") may be purchased if trading
conditions make them more attractive than the underlying security. ADRs are
registered receipts typically issued in the U.S. by a bank or trust company
evidencing ownership of an underlying foreign security. The Fund may invest in
ADRs which are structured by a U.S. bank without the sponsorship of the
underlying foreign issuer. In addition to the risks of foreign investment
applicable to the underlying securities, such unsponsored ADRs may also be
subject to the risks that the foreign issuer may not be obligated to cooperate
with the U.S. bank, may not provide additional financial and other information
to the bank or the investor, or that such information in the U.S. market may
not be current. The International Equity Fund may likewise utilize European
Depository Receipts ("EDRs"), which are receipts typically issued in Europe by
a bank or trust company evidencing ownership of an underlying foreign security.
Unlike ADRs, EDRs are issued in bearer form. For purposes of determining the
country of origin, ADRs and EDRs will not be deemed to be domestic securities.
For temporary defensive purposes, the Fund may hold cash or debt obligations
denominated in U.S. dollars or foreign currencies. These debt obligations
include U.S. and foreign government securities and investment grade corporate
debt securities, or bank deposits of major international institutions. When the
adviser believes that investments should be deployed in a temporary defensive
posture because of economic or market conditions, the Fund may invest up to
100% of its assets in United States Government securities (such as bills,
notes, or bonds of the United States Government and its agencies) or other
forms of indebtedness such as bonds, certificates of deposit or repurchase
agreements.
The International Equity Fund may also acquire fixed income investments where
these fixed income securities are convertible into equity securities (and which
may therefore reflect appreciation in the underlying equity security), and
where anticipated interest rate movements, or factors affecting the degree of
risk inherent in a fixed income security, are expected to change significantly
so as to produce appreciation in the security consistent with the objective of
the Fund. Fixed income securities in which the Fund may invest will be rated at
the time of purchase Baa or higher by Moody's Investor Service, Inc., or BBB or
higher by Standard and Poor's Corporation or, if they are foreign securities
which are not subject to standard credit ratings, the fixed income securities
will be "investment grade" issues (in the judgment of the adviser) based on
available information.
The International Equity Fund has the right to invest in securities which may
be considered to be "thinly-traded" if they are deemed to offer the potential
for appreciation, but it does not presently intend to invest more than 5% of
its total assets in such securities. The trading volume of such securities is
generally lower and their prices may be more volatile as a result, and such
securities are less likely to be exchange-listed securities. The Fund may also
invest, subject to restrictions, in options (puts and calls) and restricted
securities.
FOREIGN CURRENCY TRANSACTIONS. The value of assets of the Fund as measured in
United States dollars may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations, and the Fund
may incur costs in connection with conversions between various securities.
Normally, exchange transactions will be conducted on a spot or cash basis at
the prevailing rate in the foreign exchange market. However, to balance
undesirable currency risk, the Fund may enter into forward contracts to
purchase or sell foreign currencies in anticipation of the currency
requirements, and to protect against possible adverse movements in foreign
exchange rates. Such contracts may reduce the risk of loss due to a decline in
the value of the currency which is sold, they also limit any possible gain
which might result should the value of the currency rise. Similarly, although
forward contracts will be used primarily to protect the Fund from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted. Any transactions in foreign
currencies will be designed to protect the dollar value of the assets
composing, or selected to be acquired for, the

18
<PAGE>

investment portfolio of the Fund. The Fund will not speculate in foreign
currencies. For more information, see "Foreign Currency Transactions" in the
Statement of Additional Information.
The Fund may purchase and write call options on foreign currencies for the
purpose of protection against declines in the dollar value of foreign
securities. The purchase of an option on foreign currency may constitute an
effective hedge against fluctuations in exchange rates although, in the event
of rate movements adverse to the Fund's position, the Fund may forfeit the
entire amount of the premium plus related transaction costs.
The Fund may enter into contracts for the purchase or sale for future
delivery of foreign currencies ("foreign currency futures"). This investment
technique will be used only to hedge against anticipated future changes in
exchange rates which otherwise might adversely affect the value of the Fund's
securities or adversely affect the prices of securities that the Fund intends
to purchase at a later date. The successful use of currency futures will
usually depend on the investment adviser's ability to forecast currency
exchange rate movements correctly. Should exchange rates move in an unexpected
manner, the Fund may not achieve the anticipated benefits of foreign currency
futures or may realize losses.

PORTFOLIO TURNOVER. The Fund will not trade in securities for short-term
profits, but when circumstances warrant, securities may be sold without regard
to the length of time held. The Fund's portfolio turnover rates for 1997 and
1996 were 35.7% and 54.8%, respectively.
GENERAL RISK CONSIDERATIONS. Investments in foreign securities involve
sovereign risk in addition to the credit and market risks normally associated
with domestic securities. Such foreign investments may also be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid or more volatile than securities of U.S. companies,
the financial markets on which they are traded may be subject to less strict
governmental supervision, and foreign brokerage commissions and custodian fees
are generally higher than in the United States. Investments in foreign
securities may also be subject to other risks different from those affecting
U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the United States). A contract owner who selects
this Fund will incur the risks generally associated with investment in equity
securities and, in addition, the risk of losses attributable to changes in
currency exchange rates to the extent that those risks are not adequately
hedged by the investment adviser.

- --------------------------------------------------------------------------------
QUALITY BOND FUND

INVESTMENT OBJECTIVE. The Quality Bond Fund seeks the highest income over the
long term that is consistent with the preservation of principal by investing
primarily in marketable investment-grade debt securities.
INVESTMENT PROGRAM. To achieve its objective, the Fund invests in a
diversified portfolio primarily consisting of long, intermediate, and short-
term marketable (i.e., securities for which market quotations are readily
available) debt securities. The proportion invested in each category can be
expected to vary depending upon the evaluation of market patterns and trends by
Independence Capital Management. Except as provided below, the Fund will only
purchase debt securities that are considered investment grade securities (e.g.,
AAA, AA, A, or BBB by S&P) by at least one of the established rating agencies
(S&P, Moody's, Duff & Phelps, Inc., Fitch Investors Service, Inc., or McCarthy,
Crisanti & Maffei, Inc.) or, if not rated, are of equivalent investment quality
as determined by Independence Capital Management. The Fund may also invest up
to 10% of its net assets in securities rated BB or B by S&P (or securities with
a comparable rating by another established rating agency), which are also known
as "junk bonds." In normal times, at least 80% of the Fund's total assets will
be invested in income producing securities. At least 75% of the value of the
Fund's total assets (not including cash) will be invested in one or more of the
following categories of investments: (i) Marketable Corporate Debt Securities;
(ii) U.S. Government Obligations; (iii) U.S. Government Agency Securities; (iv)
Bank Obligations; (v) Savings and Loan Obligations; (vi) Commercial Paper;
(vii) Collateralized Mortgage Obligations; (viii) Securities of Certain
Supranational Organizations; (ix) Repurchase Agreements involving these
securities; (x) Private Placements (restricted securities); (xi) Asset Backed
Securities; and (xii) Municipal Obligations. In addition, the Fund may, as part
of this minimum 75% of its assets, write covered call options and purchase put
options on its portfolio securities, purchase call or put options on securities
indices and invest in interest rate futures contracts (and options thereon) for
hedging purposes. Without regard to the above described quality of investments,
the Fund may invest up to 25% of the value of its total assets (not including
cash) in Convertible Securities, which can be converted into or which carry
warrants to purchase common stock or other equity interests, and Preferred and
Common Stocks. The Fund may from time to time purchase these securities on a
when-issued basis; the value of such income-producing securities may decline or
increase prior to settlement date.

19
<PAGE>

The Fund will hold short-term cash reserves if management believes that it is
advisable for temporary defensive or emergency purposes. The Fund will usually
hold its cash reserves in short-term money market securities, such as
certificates of deposit, or in shares of investment companies that invest in
short term money market securities. As a matter of fundamental policy, the Fund
will, under certain conditions explained in the Statement of Additional
Information, invest up to 50% of its total assets in any one of the following
industries: gas utility, gas transmission utility, electric utility, telephone
utility, and petroleum. Investments in any of these industries may be affected
by environmental conditions, energy conservation programs, fuel shortages,
availability of capital to finance operations and construction programs, and
federal and state legislative and regulatory actions. Independence Capital
Management believes that any risk to the Fund which might result from
concentrating in any such industry will be minimized by diversification of the
Fund's investments.
Although investment in the Fund is not without risk, the Fund will seek to
reduce risk through diversification, credit analysis, and attention to current
developments and trends in both the economy and financial markets.
ASSET-BACKED SECURITIES. Asset-backed securities are securities which
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets, most often a pool or pools of similar
assets (e.g., trade receivables). Asset-backed commercial paper, one type of
asset-backed security, is issued by a special purpose entity, organized solely
to issue the commercial paper and to purchase interests in the assets. The
credit quality of these securities depends primarily upon the quality of the
underlying assets and the level of credit support and/or enhancement provided.
MUNICIPAL OBLIGATIONS. The Fund may invest in Municipal Obligations that meet
the Fund's overall quality requirements. Although the Fund and contract owners
will not benefit from the exemption from federal income tax for the interest on
Municipal Obligations, the adviser believes that Municipal Obligations may
under certain market circumstances be desirable investments consistent with the
Fund's objective, particularly the preservation of principal.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements on the
same terms as the Money Market Fund, except that the underlying security may be
within the four highest credit categories assigned by established rating
agencies (Aaa, Aa, A, or Baa by Moody's or AAA, AA, A, or BBB by S&P) or, if
not rated, of equivalent investment quality as determined by the adviser.
FOREIGN SECURITIES. The Fund may invest in U.S. dollar-denominated foreign
securities. While investments in foreign securities are intended to reduce risk
by providing further diversification, risks peculiar to investments in foreign
securities are described above under "International Equity Fund".

PORTFOLIO TURNOVER. The Fund may sell any of its portfolio securities if it
believes that the security's market value will fall. The Fund may sell a
security and purchase another when it believes that there is a favorable spread
between the yields of such securities. A high rate of portfolio turnover
results in increased transaction costs to the Fund, including increased
brokerage expenses. For more information about brokerage expenses, see
"Portfolio Transactions" in the Statement of Additional Information. The Fund's
annual portfolio turnover rates for 1997 and 1996 were 317.3% and 107.6%,
respectively.
GENERAL RISK CONSIDERATIONS. There can be no assurance that the Quality Bond
Fund will achieve its investment objective. Because of its investment policy,
the Quality Bond Fund may or may not be suitable or appropriate for particular
contract holders. The Fund is not a money market fund and is not an appropriate
investment for those whose primary objective is principal stability. The value
of the portfolio securities of the Fund will fluctuate based upon market
conditions and interest rates. Although the Fund seeks to reduce risk by
investing in a diversified portfolio, such diversification does not eliminate
risk.
Yields on short, intermediate, and long-term fixed income securities are
dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering, the maturity of the
obligation, and the rating of the issue. Debt securities with longer maturities
tend to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter maturities
and lower yields. The market prices of debt securities usually vary, depending
upon available yields. An increase in interest rates will generally reduce the
value of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of the Fund to achieve
its investment objective is also dependent on the continuing ability of the
issuers of the debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due.

- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND

INVESTMENT OBJECTIVE. The investment objective of the High Yield Bond Fund is
to realize high current income by investing primarily in a diversified
portfolio of long-term high-yield fixed income securities in the medium to
lower quality ranges; a secondary objective is capital appreciation.
INVESTMENT PROGRAM. The Fund will invest at least 80% of the value of its
total assets in high-yielding, income-producing debt securities and preferred
stocks (including convertible securities). The Fund seeks to invest its assets
in securities

20
<PAGE>

rated Ba or lower by Moody's, or BB or lower by S&P, or, if not rated, of
comparable investment quality as determined by Price Associates.
Because high yield bonds involve greater risks than higher quality bonds,
they are commonly known as "junk" bonds. The Fund may, from time to time,
purchase bonds that are in default, rated Ca by Moody's or CC by S&P, if, in
the opinion of Price Associates, there is potential for capital appreciation.
Such bonds are regarded, on balance, as predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation (see "Ratings of Corporate Debt Securities"). In
addition, the Fund may invest its portfolio in medium quality investment grade
securities (rated Baa by Moody's or BBB by S&P) which provide greater liquidity
than lower quality securities. Moreover, the Fund may, for temporary defensive
purposes under extraordinary economic or financial market conditions, invest in
higher quality securities.
Investments in the Fund's portfolio may include: (i) Corporate Debt
Securities; (ii) U.S. Government Obligations; (iii) U.S. Government Agency
Securities; (iv) Bank Obligations; (v) Savings and Loan Obligations; (vi)
Commercial Paper; (vii) Securities of Certain Supranational Organizations;
(viii) Repurchase Agreements involving these securities; (ix) Private
Placements (restricted securities); (x) Foreign Securities; (xi) Convertible
Securities--debt securities convertible into or exchangeable for equity
securities or debt securities that carry with them the right to acquire equity
securities, as evidenced by warrants attached to such securities or acquired as
part of units of the securities; (xii) Preferred Stocks--securities that
represent an ownership interest in a corporation and that give the owner a
prior claim over common stock on the company's earnings and assets; (xiii) Loan
Participation and Assignments; (xiv) Trade Claims and (xv) Zero Coupon and Pay-
in-Kind Bonds. The Fund may purchase securities, from time to time, on a when-
issued basis; the value of such securities may decline or increase prior to
settlement date.
RISKS OF HIGH YIELD INVESTING. There can be no assurance that the High Yield
Bond Fund will achieve its investment objective. The high yield securities in
which the Fund may invest are predominantly speculative as regards the issuer's
continuing ability to meet principal and interest payments. The value of the
lower quality securities in which the Fund may invest will be affected by the
creditworthiness of individual issuers, general economic and specific industry
conditions, and will fluctuate inversely with changes in interest rates.
Furthermore, the share price and yield of the Fund are expected to be more
volatile than the share price and yield of a fund investing in higher quality
securities, which react primarily to movements in the general level of interest
rates. Price Associates carefully considers these factors and the Fund attempts
to reduce risk by diversifying its portfolio, by analyzing the creditworthiness
of individual issuers, and by monitoring trends in the economy, financial
markets, and specific industries. Such efforts, however, will not eliminate
risk. High yield bonds may be more susceptible than investment grade bonds to
real or perceived adverse economic and competitive industry conditions. High
yield bond prices may decrease in response to a projected economic downturn
because the advent of a recession could lessen the ability of highly leveraged
issuers to make principal and interest payments on their debt securities.
Highly leveraged issuers also may find it difficult to obtain additional
financing during a period of rising interest rates. In addition, the secondary
trading market for lower quality bonds may be less active and less liquid than
the trading market for higher quality bonds. As such, the prices at which lower
quality bonds can be sold may be adversely affected and valuing such lower
quality bonds can be a difficult task. If market quotations are not available,
these securities will be valued by a method that, in the good faith belief of
the Fund's Board of Directors, accurately reflects fair value. The judgment of
the Penn Series Board of Directors plays a greater role in valuing high yield
securities than is the case with respect to securities for which more objective
market data are available.

21
<PAGE>

During 1997 the dollar weighted average ratings (computed monthly) of the
debt obligations held by the Fund (excluding equities and reserves), expressed
as a percentage of the Fund's total net investments, were as follows:

<TABLE>
<CAPTION>
STANDARD AND POOR'S RATINGS PERCENTAGE OF TOTAL NET INVESTMENTS**
----------------------------------------------------------------------------
<S> <C>
AAA 0.3%
----------------------------------------------------------------------------
AA 0.0
----------------------------------------------------------------------------
A 0.0
----------------------------------------------------------------------------
BBB 0.0
----------------------------------------------------------------------------
BB 11.9
----------------------------------------------------------------------------
B 70.8
----------------------------------------------------------------------------
CCC 2.8
----------------------------------------------------------------------------
CC 0.1
----------------------------------------------------------------------------
C 0.0
----------------------------------------------------------------------------
D 0.0
----------------------------------------------------------------------------
Unrated* 4.6
----------------------------------------------------------------------------
</TABLE>

* Price Associates has advised that in its view the unrated debt
obligations were comparable in quality to debt obligations rated in the
S&P categories as follows: BBB: 0.0%; BB: 1.0%; B: 2.6%; CCC: 1.0%; CC:
0.0%; C: 0.0%; D: 0.0%; Unrated: 0.0%.

** Unaudited.

CREDIT ANALYSIS. Because investment in lower and medium quality fixed-income
securities involves greater investment risk, including the possibility of
default or bankruptcy, achievement of the Fund's investment objectives will be
more dependent on Price Associates' credit analysis than would be the case if
the Fund were investing in higher quality fixed-income securities. Although the
ratings of Moody's or S&P are used as preliminary indicators of investment
quality, a credit rating assigned by such a commercial rating service will not
measure the market risk of lower quality bonds and may not be a timely
reflection of the condition and economic viability of an individual issuer.
Price Associates therefore places primary significance on its own in-depth
credit analysis and security research. All of the Fund's investments will be
selected from an approved list of securities deemed appropriate for the Fund by
Price Associates, which maintains a credit rating system based upon comparative
credit analyses of issuers within the same industry and individual credit
analysis of each company. These analyses take into consideration such factors
as a corporation's present and potential liquidity, profitability, internal
capability to generate funds, and adequacy of capital. Although some issuers do
not seek to have their securities rated by Moody's or S&P, such unrated
securities will also be purchased by the Fund only after being subjected to
analysis by Price Associates. Unrated securities are not necessarily of lower
quality than rated securities, but the market for rated securities is usually
broader.
MATURITY. The maturity of debt securities may be considered long (10 plus
years), intermediate (1 to 10 years), or short-term (12 months or less). The
proportion invested by the Fund in each category can be expected to vary
depending upon the evaluation of market patterns and trends by Price
Associates.
YIELD AND PRICE. Lower to medium quality, long-term fixed-income securities
typically yield more than higher quality, long-term fixed-income securities.
Thus, the Fund's yield normally can be expected to be higher than that of a
fund investing in higher quality debt securities. The yields and prices of
lower quality fixed income securities may tend to fluctuate more than those for
higher rated securities. In the lower quality segments of the fixed income
markets, changes in perception of issuers' creditworthiness tend to occur more
frequently and in a more pronounced manner than do changes in higher quality
securities, which may result in greater price and yield volatility. For a given
period of time, the Fund may have a high yield but a negative total return.
OTHER INVESTMENTS. The Fund may invest up to 20% of its total assets in
dividend-paying common stocks (including up to 5% in warrants to purchase
common stocks) that are considered by Price Associates to be consistent with
the Fund's current income and capital appreciation investment objectives.
However, the Fund currently does not intend to purchase equity securities or
securities convertible to equity securities. In seeking higher income or a
reduction in principal volatility, the Fund may write covered call options and
purchase covered put options and spreads and purchase uncovered put options and
uncovered call options; and the Fund may invest in interest rate futures
contracts (and options thereon) for hedging purposes.

22
<PAGE>

CASH RESERVES. The Fund will hold short-term cash reserves (money market
instruments maturing in one year or less) as Price Associates believes is
advisable to maintain liquidity or for temporary defensive purposes.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements on the
same terms as the Money Market Fund, except that the underlying security may be
within the three highest credit categories assigned by established rating
agencies (Aaa, Aa or A by Moody's or AAA, AA or A by S&P) or, if not rated, of
equivalent investment quality as determined by Price Associates.
BANKING INDUSTRY. The Fund will, as a matter of fundamental policy, normally
concentrate 25% or more of its assets in the securities of the banking industry
when the Fund's position in issues maturing in one year or less equals 35% or
more of the Fund's total assets. Investments in the banking industry may be
affected by general economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers. In addition, the
profitability of the banking industry is largely dependent upon the
availability and cost of funds for the purpose of financing lending operations
under prevailing money market conditions. Price Associates believes that any
risk to the Fund which might result from concentrating in the banking industry
will be minimized by diversification of the Fund's investments and Price
Associates' credit research.
FOREIGN SECURITIES. Subject to the Fund's quality and maturity standards, the
Fund may invest without limitation in the securities (payable in U.S. dollars)
of foreign issuers in developed countries and in the securities of foreign
branches of U.S. banks such as negotiable certificates of deposit
(Eurodollars). The Fund may also invest up to 20% of its total assets in non-
U.S. dollar-denominated fixed-income securities principally traded in financial
markets outside the United States. Such investments involve certain risks not
normally associated with domestic securities, as explained under "International
Equity Fund". The Fund may also enter into forward foreign currency exchange
contracts, which involve certain risks as explained under "International Equity
Fund".
ZERO COUPON BONDS AND PAY-IN-KIND BONDS. A zero coupon bond does not make
cash interest payments during the life of the bond. Instead, it is sold at a
deep discount to face value, and the interest consists of the gradual
appreciation in price as the bond approaches maturity. "Zeros" can be an
attractive financing method for issuers with near-term cash-flow problems or
seeking to preserve liquidity. Pay-in-kind (PIK) bonds pay interest in cash or
additional securities, at the issuer's option, for a specified period. Like
zeros, they may help a corporation economize on cash. PIK prices reflect the
market value of the underlying debt plus any accrued interest. Zeros and PIKs
can be higher-or lower-quality debt, and both are more volatile than coupon
bonds. There is no limit on the funds's investments in these securities. The
fund is required to distribute to shareholders income imputed to any zero or
PIK investments. Such distributions could reduce the fund's reserve position
and require the fund to sell securities and incur a gain or loss at a time it
may not otherwise want to in order to provide the cash necessary for these
distributions.

LOAN PARTICIPATION AND ASSIGNMENTS. Large loans to corporations or
governments, including governments of less developed countries (LDCs), may be
shared or syndicated among several lenders, usually banks. The Fund could
participate in such syndicates, or could buy part of a loan, becoming a direct
lender. Participation and assignments involve special types of risk, including
those of being a lender, but are not necessarily more risky than junk bonds. As
an operating policy, the Fund may not invest more than 15% of total assets in
loan participation.
TRADE CLAIMS. This is an IOU arising from a business transaction, such as a
sale of goods, not from a loan. Such claims are typically bought at a discount
to their face value, with the size of the discount reflecting the probability
of repayment. They may be illiquid and very volatile in price. As an operating
policy, the Fund may not invest more than 5% of total assets in trade claims.

PORTFOLIO TURNOVER. Due to the nature of the Fund's investment program, the
portfolio turnover may exceed 100%. A high rate of portfolio turnover results
in increased transaction costs to the Fund, including increased brokerage
expenses. The Fund's portfolio turnover rates for 1997 and 1996 were 111.3% and
118.5%, respectively.

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MONEY MARKET FUND

INVESTMENT OBJECTIVE. The investment objective of the Money Market Fund is to
preserve shareholder capital, maintain liquidity and achieve the highest
possible level of current income consistent therewith, by investing in high-
quality money market instruments.
INVESTMENT PROGRAM. To achieve its objective, the Fund invests in a
diversified portfolio of money market securities, limited to those described
below, which are rated within the two highest credit categories assigned by
nationally recognized statistical rating organizations, or, if not rated, are
of comparable investment quality as determined by Independence Capital
Management and approved by the Penn Series Board of Directors. Such securities
include: (i) U.S. Government Obligations; (ii) U.S. Government Agency
Securities; (iii) Bank Obligations; (iv) Commercial Paper; (v) Short-Term
Corporate Debt

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<PAGE>

Securities; (vi) Canadian Government Securities, limited to 10% of the Fund's
assets; (vii) Savings and Loan Obligations; (viii) Securities of Certain
Supranational Organizations; (ix) Repurchase Agreements involving these
securities other than Foreign Securities; (x) Foreign Securities--U.S. dollar-
denominated money market securities issued by foreign issuers, foreign branches
of U.S. banks and U.S. branches of foreign banks; and (xi) Asset Backed
Securities. Certain of the securities may have adjustable rates of interest
with periodic demand features. The Fund may also invest in securities of
investment companies that invest in money market securities meeting the
foregoing criteria.
The Fund has a policy of seeking to maintain a stable net asset value of
$1.00 per share, but this is not guaranteed and the Fund's yield is not fixed.
PORTFOLIO QUALITY. The Fund will invest in U.S. dollar-denominated money
market instruments determined by Independence Capital Management, under
guidelines adopted by the Penn Series Board of Directors, to present minimum
credit risk. This determination will take into consideration such factors as
liquidity, profitability, ability to generate funds and capital adequacy. In
addition, the Fund will observe investment restrictions contained in Rule 2a-7
promulgated by the Securities and Exchange Commission under the Investment
Company Act of 1940, including the following: (a) the Fund will not invest in a
money market instrument if, as a result, more than the greater of 1% of the
Fund's total assets or $1,000,000 would be invested in securities of that
issuer which are not rated in the highest rating category of nationally
recognized statistical rating organizations (or, if not rated, are not of
comparable quality); and (b) the Fund will not invest in a money market
instrument if, as a result, more than 5% of the Fund's total assets would be
invested in securities which are not rated in the highest rating category of
nationally recognized statistical rating organizations (or, if not rated, are
not of comparable quality).
FOREIGN SECURITIES. Subject to the Fund's quality and maturity standards, the
Fund may invest without limitation in U.S. dollar-denominated foreign
securities. While investments in foreign securities are intended to reduce risk
by providing further diversification, such investments involve certain risks
not normally associated with domestic securities, as explained under
"International Equity Fund".
ADJUSTABLE RATE SECURITIES. The Fund may invest in adjustable rate
securities. Adjustable rate securities have interest rates that are adjusted
periodically according to a set formula in order to minimize fluctuation in the
principal value of the investments. The maturity of such securities may be
shortened under certain special conditions. "Variable rate" securities are
domestic certificates of deposit which provide for the establishment of a new
interest rate on predetermined dates or whenever a specified interest rate
(such as the bank prime lending rate) changes. "Floating rate" securities are
corporate or bank holding company notes or Eurodollar certificates of deposit
with reset provisions similar to those for variable rate instruments.
ASSET-BACKED SECURITIES. The Fund may invest in asset-backed securities (see
description of asset-backed securities under "Quality Bond Fund" above).
MATURITY. The Fund purchases securities which mature in 397 days or less, and
the average maturity of all securities held by the Fund will generally not be
greater than 90 days.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements through
which investors (such as the Fund) purchase a security (known as the
"underlying security") from a well-established securities dealer or a bank that
is a member of the Federal Reserve System and on the approved list of the
Fund's investment adviser. Concurrently, the securities dealer or the bank
agrees to repurchase the underlying security at a future point at the same
price, plus specified interest. The underlying security, which is held as
collateral, will be marked to market on a daily basis. The Fund will only enter
into a repurchase agreement where the underlying security is in the highest
rating category of nationally recognized statistical rating organizations (or,
if not rated, is of comparable quality) and the repurchase agreement meets the
other quality and diversification standards of Rule 2a-7. Moreover, the Board
of Penn Series has adopted standards applicable to all the Funds regarding the
creditworthiness of parties with whom each Fund may enter into repurchase
agreements. These standards are designed to provide reasonable assurance that
such a party presents no serious risk of becoming involved in a bankruptcy
proceeding within the time frame contemplated by the repurchase agreement.
Repurchase agreements are generally for a short period of time, often less than
a week. In the event of a bankruptcy or default of certain sellers of
repurchase agreements, the Fund could experience costs and delays in
liquidating the underlying security, which is held as collateral, and the Fund
might incur a loss if the value of the collateral held declines during this
period.
GENERAL RISK CONSIDERATIONS. An investment in the Money Market 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. While this Fund invests in high-grade money market
instruments, investment in the Fund is not without risk even if all portfolio
instruments are paid in full at maturity. An increase in interest rates could
reduce the value of the Fund's portfolio investments, and a decline in interest
rates could increase the value.

24
<PAGE>

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ADDITIONAL INVESTMENT INFORMATION RELATING TO THE FUNDS

OPTIONS. Each Fund (other than the Money Market Fund) may write covered call
options and purchase put options on its portfolio securities and purchase call
or put options on securities indices. The aggregate market value of the
portfolio securities covering call or put options will not exceed 25% of a
Fund's total assets. Such options may be exchange-traded or dealer options. An
option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time. Although options will primarily be
used to minimize principal fluctuations, or to generate additional premium
income for the Funds, they do involve certain risks. Writing covered call
options involves the risk of not being able to effect closing transactions at a
favorable price or participate in the appreciation of the underlying securities
or index above the exercise price. Purchasing put or call options involves the
risk of losing the entire premium (purchase price of the option). In addition,
the High Yield Bond Fund may also engage in other options transactions within
the limits described in the Statement of Additional Information, which also
provides further details on the risks of options transactions.
FUTURES CONTRACTS. Each Fund (other than the Money Market Fund) may enter
into futures contracts and options thereon (interest rate futures contracts or
stock index futures contracts as applicable) as a hedge against or to minimize
adverse principal fluctuations, or as an efficient means of adjusting its
exposure to the market. The Funds will not use futures contracts for
speculation. Each Fund will limit its use of futures contracts so that: (1) no
more than 5% of the Fund's total assets will be committed to initial margin
deposits or premiums on options and (2) immediately after entering into such
contracts, no more than 30% of the Fund's total assets would be represented by
such contracts. The initial margin is the amount that must be deposited with
the futures commission merchant when a futures contract is entered into. The
value of a futures contract changes daily; and if it decreases, the Fund is
obligated to deposit additional amounts in order to maintain what is known as
"variation margin." Correspondingly, if the value of a futures contract
increases, the Fund may withdraw and use for other purposes a part of the
margin deposit. The premium on an option is equal to the difference between the
market value and the intrinsic value of the option.
These contracts entail certain risks, including but not limited to the
following: no assurance that futures contracts transactions can be offset at
favorable prices; possible reduction of the Fund's total return due to the use
of hedging; possible reduction in value of both the securities hedged and the
hedging instrument; possible lack of liquidity due to daily limits on price
fluctuation or other factors; imperfect correlation between price movements in
the contract and in the securities being hedged; and potential losses in excess
of the amount invested in the futures contracts themselves. Further details
concerning the Funds' use of futures contracts and the risks involved are
contained in the Statement of Additional Information.
INVESTMENT COMPANIES. Each Fund may invest in securities issued by other
investment companies which invest in short-term, high quality debt securities
and which determine their net asset value per share based on the amortized cost
or penny-rounding method of valuation. The International Equity Fund may invest
in securities of mutual funds that invest in foreign securities. Securities of
investment companies will be acquired by a Fund within the limits prescribed by
the 1940 Act. In addition to the advisory fees and other expenses a Fund bears
directly in connection with its own operations, as a shareholder of another
investment company, a Fund would bear its pro rata portion of the other
investment company's advisory fees and other expenses.
LENDING OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, each Fund may, as a fundamental policy, lend securities with a value of
up to 30% of its total assets to unaffiliated broker-dealers or institutional
investors. Any such loan will be continuously secured by collateral at least
equal to the value of the security loaned. Although the risks of lending
portfolio securities are believed to be slight, as with other extensions of
secured credit, such lending could result in delays in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially. Loans will only be made to
firms deemed to be of good standing and will not be made unless the
consideration to be earned from such loans would justify the risk.

INVESTMENT RESTRICTIONS APPLICABLE TO ALL THE FUNDS. As a matter of
fundamental policy, (i) each of the Growth Equity, Value Equity, International
Equity, Quality Bond and Money Market Funds will not purchase securities of any
issuer if, as a result, more than 5% of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreement
with any one issuer) or more than 10% of the voting securities of any issuer
would be held by the Fund; and (ii) each of the Small Capitalization, Emerging
Growth, Flexibly Managed and High Yield Bond Funds, with respect to 75% of the
Fund's total assets, will not purchase securities of any issuer if, as a
result, more than 5% of the Fund's total assets would be invested in securities
of a single issuer (including repurchase agreements with any one issuer) or
more than 10% of the voting securities of any issuer would be held by the Fund;
(iii) each Fund will not borrow money, except that the Funds may borrow from
banks as a temporary measure for extraordinary or emergency purposes, and then
only in amounts not exceeding 15% of each Fund's total assets valued at market
or, with respect to the Quality Bond Fund and the Money Market Fund, the lesser
of 10% of its total assets valued at cost or 5% of its total assets valued at
market; the Funds will not borrow in order to increase

25
<PAGE>

income (leveraging), but only to facilitate redemption requests which might
otherwise require untimely disposition of portfolio securities; interest paid
on any such borrowings will reduce net investment income; (iv) each Fund will
not in any manner transfer as collateral any securities owned by the Fund
except as may be necessary in connection with permissible borrowings; and (v)
each Fund will not purchase additional securities when money borrowed exceeds
5% of the Fund's total assets.
In addition to the restrictions set forth above and those set forth in the
Statement of Additional Information, each Fund may be subject to investment
restrictions imposed under the insurance laws and regulations of Pennsylvania
and other states. These restrictions are non-fundamental and, in the event of
amendments to the applicable statutes or regulations, each Fund will comply,
without the approval of the shareholders, with the requirements as so modified.

Section 817(h) of the Internal Revenue Code requires that the assets of each
Fund be adequately diversified so that Penn Mutual or its affiliated insurance
companies, and not the variable contract owners, are considered the owners for
federal income tax purposes of the assets held in the separate accounts. Each
Fund ordinarily must satisfy the diversification requirements within one year
after contract owner funds are first allocated to the particular Fund. In order
to meet the diversification requirements of regulations issued under Section
817(h), each Fund will meet the following test: no more than 55% of the assets
will be invested in any one investment; no more than 70% of the assets will be
invested in any two investments; no more than 80% of the assets will be
invested in any three investments; and no more than 90% will be invested in any
four investments. Each Fund must meet the above diversification requirements
within 30 days of the end of each calendar quarter.

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MANAGEMENT OF PENN SERIES FUNDS, INC.

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DIRECTORS AND OFFICERS

The affairs of Penn Series are managed under the direction of its Board of
Directors. The directors decide upon matters of general policy and review the
actions of Penn Series' investment advisers and sub-advisers and its
administrative and corporate services agent, as set forth below. The Penn
Series' officers conduct and supervise the daily business operations of Penn
Series.

The Board of Directors of Penn Series monitors investments in the Funds to
determine whether there is any material conflict between the interests of
variable annuity contract owners and variable life contract owners. Although
neither Penn Mutual, PIA nor Penn Series currently perceives or anticipates any
material conflict, it is possible that such conflict could arise from: (1)
changes in state insurance law; (2) changes in federal income tax law; (3)
changes in the investment management of any Fund of Penn Series; or (4)
differences between voting instructions given by variable annuity contract
owners and those given by variable life insurance policy owners. In the event
of a material, irreconcilable conflict, Penn Mutual or PIA will take the steps
necessary to protect its variable annuity and variable life contract owners.
Penn Mutual and PIA will be responsible for reporting any potential or existing
conflicts to the Board of Directors of Penn Series and will remedy, at its
cost, any material, irreconcilable conflict. This could include discontinuance
of investment in shares of Penn Series and investment in shares of another
investment company.

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INVESTMENT ADVISER

INDEPENDENCE CAPITAL MANAGEMENT, INC. Independence Capital Management, Inc.
("ICMI") serves as investment adviser to each of the Funds. ICMI is a wholly-
owned subsidiary of The Penn Mutual Life Insurance Company ("Penn Mutual"), a
life insurance company that has been in the insurance and investment business
since the late 1800s. Penn Mutual and its subsidiaries currently have assets
under management of over $8 billion. ICMI was organized in June 1989 and, in
addition to serving as investment adviser to the Funds, also serves as
investment adviser to corporate and pension fund accounts. Its offices are
located at 600 Dresher Road, Horsham, Pennsylvania 19044. As of December 31,
1997, ICMI serves as investment adviser for over $400 million of investment
assets.

ICMI makes the day-to-day investment decisions for the GROWTH EQUITY, QUALITY
BOND and MONEY MARKET FUNDS and places purchase and sale orders on behalf of
the Funds to implement the investment decisions. The Funds pay ICMI, on a
monthly basis, an advisory fee based on the average daily net assets of each
Fund at the following annual rates: Growth Equity Fund, 0.50%; Quality Bond
Fund, 0.45%; Money Market Fund, 0.40%. The fees will be reduced by 0.05% for
any of the Funds whose assets exceed $100 million.

Richardson T. Merriman, Senior Vice President of Independence Capital
Management, manages the Growth Equity Fund and has served as portfolio manager
of the Fund since 1995. Mr. Merriman is also President of Pennsylvania Trust
Company, a Penn Mutual subsidiary.

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<PAGE>

Peter M. Sherman, President and Portfolio Manager of Independence Capital
Management, Inc., since September 1995, is primarily responsible for the day-
to-day investment management of the Quality Bond and Money Market Funds. He
served as Senior Vice President, ICMI, prior to becoming President. Mr. Sherman
is Senior Vice President and Chief Investment Officer of Penn Mutual; prior to
May 1996, he was Vice President, Fixed Income Portfolio Management, Penn
Mutual.

In addition, ICMI provides investment advisory services to the VALUE EQUITY,
SMALL CAPITALIZATION, EMERGING GROWTH, FLEXIBLY MANAGED, INTERNATIONAL EQUITY
and HIGH YIELD BOND FUNDS, and provides investment management services to the
Funds through sub-advisers who are specially selected and qualified to manage
the Funds. ICMI and the sub-advisers are authorized to make investment
decisions for the Funds and to place purchase and sale orders on behalf of the
Funds to implement the investment decisions. In accordance with the investment
objectives and policies of the Funds, and under the supervision of ICMI and
general oversight of the Board of Directors of Penn Series, the sub-advisers
are responsible for the day-to-day investment management of the Fund. ICMI has
supervisory responsibility for the investment advisory services, including
formulating investment policies and analyzing economic trends that may affect
the Funds, and directing and evaluating the investment management services
rendered by the sub-advisers.

For providing investment advisory and management services to the Value
Equity, Small Capitalization, Flexibly Managed, International Equity and High
Yield Bond Funds, the Funds pay ICMI, on a monthly basis, an advisory fee based
on average daily net assets of each Fund, at the following annual rates: Value
Equity Fund--0.50%; Small Capitalization Fund--0.50%; Flexibly Managed Fund--
0.50%; High Yield Bond Fund--0.50%; and International Equity Bond Fund--0.75%.

For providing investment advisory and management services to the Emerging
Growth Fund, the Fund pays ICMI, on a monthly basis, an advisory fee based on
average daily net assets of the Fund, at the following annual rates: 0.80% of
the first $25,000,000 of average daily net assets; 0.75% of the next
$25,000,000 of average daily net assets; and 0.70% of the average daily net
assets in excess of $50,000,000.

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INVESTMENT SUB-ADVISERS

T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price Associates, Inc. ("Price
Associates") is sub-adviser to the FLEXIBLY MANAGED and the HIGH YIELD BOND
FUNDS pursuant to an investment sub-advisory agreement entered into by ICMI and
Price Associates on May 1, 1998. As sub-adviser, Price Associates provides
investment management services to the Funds. Price Associates was incorporated
in 1947 as successor to the investment counseling firm founded by the late Mr.
Thomas Rowe Price, Jr. in 1937. Its corporate home office is located at 100
East Pratt Street, Baltimore, Maryland 21202. Price Associates serves as
investment adviser to a variety of individual and institutional investors
accounts, including other mutual funds. As of December 31, 1997, Price
Associates and its affiliates, managed more than $124 billion of assets.

For providing investment management services to the Flexibly Managed and High
Yield Bond Funds, ICMI pays Price Associates, on a monthly basis, fees based on
the average daily net assets of each Fund. The fees are paid at the following
rates: 0.50% with respect to the first $250,000,000 of the combined total
average daily net assets of the two Funds and 0.40% with respect to the next
$500,000,000 of combined total average daily net assets of the two Funds;
provided, that the fees shall be paid at the rate of 0.40% with respect to all
average daily net assets of the two Funds at such time the combined total
average daily net assets of the two Funds exceed $750,000,000.

Richard P. Howard, Vice President of Price Associates, has been primarily
responsible for the day-to-day investment management of the Flexibly Managed
Fund since 1989. During the past five years, he has served as Vice President
and equity portfolio manager of Price Associates.

Mark J. Vaselkiv, Vice President of Price Associates, has been primarily
responsible for the day-to-day investment management of the High Yield Bond
Fund since 1994. During the past five years, he has been a Vice President and a
portfolio manager in the taxable bond department of Price Associates.

OPCAP ADVISORS. OpCap Advisors ("OpCap") is sub-adviser to the VALUE EQUITY
and SMALL CAPITALIZATION FUNDS pursuant to an investment sub-advisory Agreement
entered into by ICMI and OpCap on May 1, 1998. As sub-adviser, OpCap provides
investment management services to the Funds. OpCap is a subsidiary of
Oppenheimer Capital, a registered investment adviser with approximately $61.4
billion in assets under management on December 31, 1997. PIMCO Advisors L.P., a
registered investment adviser with approximately $125 billion in assets under
management through various subsidiaries, and its affiliates, acquired control
of Oppenheimer Capital and OpCap on November 4, 1997. As a result of various
agreements and ownership interests, Pacific Life Insurance Company, certain
PIMCO managers and Pacific Investment Management Company may be deemed, under
provisions of the Investment Company Act, to control PIMCO Advisors L.P. and
ultimately Oppenheimer Capital and OpCap. See the Statement of Additional
Information for additional information regarding PIMCO

27
<PAGE>

Advisors L.P. and its affiliates. OpCap is located at One World Financial
Center, New York, New York 10281. It acts as investment adviser and sub-adviser
to other mutual funds. As of December 31, 1997, OpCap managed assets of mutual
funds with an aggregate value of more than $15.9 billion.

For providing investment management services to the Value Equity and Small
Capitalization Funds, ICMI pays OpCap, on a monthly basis, fees based on the
average daily net assets of each Fund. The fees are paid at the following
rates: 0.40% with respect to the first $50,000,000 of the combined total
average daily net assets of the two Funds; 0.35% with respect to the next
$200,000,000 of the combined total average daily net assets of the two Funds;
and 0.30% with respect to the combined total average daily net assets of the
two Funds in excess of $250,000,000.

Eileen P. Rominger, Managing Director of Oppenheimer Capital, the parent of
OpCap Advisors, is primarily responsible for the day-to-day investment
management of the Value Equity Fund. Ms. Rominger has had that responsibility
since November 1992. She has been an analyst and portfolio manager at
Oppenheimer Capital since 1981.
The Small Capitalization Fund is managed by Timothy McCormack, Timothy Curro
and Gavin Albert. Timothy McCormack has been a portfolio manager of the Fund
since March 1996. Timothy Curro and Gavin Albert became portfolio managers of
the Fund on January 1, 1997. Mr. Curro has been a Vice President of Oppenheimer
Capital since November 1996. Prior thereto, he was a general partner of Value
Holdings, L.P., an investment partnership, from May 1995 to November 1996, a
Vice President in the equity research department at UBS Securities Inc. from
June 1994 through May 1995 and from January 1991 through February 1993, and was
a partner with Omega Advisors, Inc. from March 1993 to March 1994. Mr. Albert,
Vice President of Oppenheimer Capital since December 1996, joined the firm in
September 1994 as a research analyst. Prior thereto he was a management
consultant for EDS Energy Management in 1994, attended the Vanderbilt
University Business School from September 1992 to May 1994 (with a Masters of
Business Administration degree in finance and management) and was a financial
analyst in the Corporate Finance department of Texaco, Inc. from 1990 to 1992.
Mr. McCormack, Vice President of Oppenheimer Capital, joined the firm in 1994.
From 1993 to 1994 he was a security analyst at U.S. Trust Company and prior
thereto he was a securities analyst at Gabelli & Company. He has a masters of
Business Administration degree from the Wharton School.

VONTOBEL USA INC. Vontobel USA Inc. ("Vontobel") is sub-adviser to the
INTERNATIONAL EQUITY FUND pursuant to an investment sub-advisory agreement
entered into by ICMI and Vontobel on May 1, 1998. As sub-adviser, Vontobel
provides investment management services to the Fund. Vontobel is a wholly owned
subsidiary of Vontobel Holding Ltd. and an affiliate of Bank J. Vontobel & Co.
Ltd., one of the largest private banks and brokerage firms in Switzerland. Its
principal place of business is located at 450 Park Avenue, New York, New York
10022. As of December 31, 1997, Vontobel managed assets of over $1.9 billion, a
substantial part of which was invested outside of the United States. The
Vontobel group of companies has investments in excess of $30 billion under
management.

For providing investment management services to the International Equity
Fund, ICMI pays Vontobel, on a monthly basis, an advisory fee based on average
daily net assets of the Fund, at the annual rate of 0.50%.

Fabrizio Pierallini, Senior Vice President and Portfolio Manager, Vontobel
USA Inc., is primarily responsible for the day-to-day investment management of
the International Equity Fund. Mr. Pierallini joined Vontobel in April 1994
with responsibilities for managing international equities. Prior thereto, he
served as Associate Director/Portfolio Manager, Swiss Bank Corporation, New
York.

RS INVESTMENT MANAGEMENT , INC. (formerly Robertson Stephens Investment
Management, Inc.). RS Investment Management, Inc. ("RS") is sub-adviser to the
EMERGING GROWTH FUND pursuant to an investment sub-advisory agreement entered
into by ICMI and RS on May 1, 1998. As sub-adviser, RS provides investment
management services to the Fund.

RS, 555 California Street, San Francisco, CA 94104, is sub-adviser to the
Emerging Growth Fund pursuant to the sub-advisory agreement entered into by
Independence Capital Management and RS on May 1, 1998. As sub-adviser, RS
provides investment management services to the Fund. RSIM, Inc. commenced
operations in March 1986 and is an indirect wholly-owned subsidiary of
BankAmerica Corporation. BankAmerica Corporation is a global financial services
company with approximately $250 billion in assets and an equity capital base of
approximately $20 billion.

ICMI pays Robertson Stephens, on a monthly basis, a sub-advisory fee based on
average daily net assets of the Fund. The sub-advisory fee is paid at the
following rates: (i) 0.70% of the first $25,000,000 of average daily net assets
of the Fund; (ii) 0.65% of the next $25,000,000 of average daily net assets of
the Fund; and (iii) 0.60% of average daily net assets of the Fund in excess of
$50,000,000.
James Callinan, Managing Director of Robertson Stephens & Company Investment
Management, L.P. and Portfolio Manager of Robertson Stephens, is responsible
for managing the Emerging Growth Fund. Mr. Callinan has more than nine years of
investment research and management experience. From 1986 until June 1996, Mr.
Callinan was employed by Putnam

28
<PAGE>

Investments, where, beginning in June 1994, he served as portfolio manager of
the Putnam OTC Emerging Growth Fund. Mr. Callinan received an A.B. in economics
from Harvard College, and M.S. in accounting from New York University, and an
M.B.A. from Harvard Business School, and is a Chartered Financial Analyst.

GENERAL INFORMATION. In allocating to brokers purchases and sales of
portfolio securities of the Growth Equity, Value Equity, Small Capitalization,
Emerging Growth, Flexibly Managed, International Equity and Quality Bond Funds,
the adviser and sub-advisers are required to seek best price and most favorable
execution but, under certain conditions, may take into consideration brokerage
and research services and the sales of Fund shares.

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ADMINISTRATIVE AND CORPORATE SERVICES AGENT

The Penn Mutual Life Insurance Company ("Penn Mutual") is the administrative
and corporate services agent of Penn Series Funds, Inc. Penn Mutual is a
Pennsylvania mutual life insurance company chartered in 1847 and has been
engaged continuously in the life insurance business since that date. Its
corporate home office is located at Independence Square, Philadelphia,
Pennsylvania 19172.
Under an administrative and corporate services agreement between the Fund and
Penn Mutual, Penn Mutual administers Penn Series' corporate affairs, subject to
the supervision of the Board of Directors and, in connection therewith,
furnishes Penn Series with office facilities, prepares regulatory filings,
provides staff assistance to the Board, and provides those ordinary clerical
and bookkeeping services which are not provided by Penn Series' custodian,
transfer agent, accounting services agent or adviser. Each Fund pays Penn
Mutual an annual fee equal to 0.15% of the Fund's average daily net assets,
subject to the limitations on Fund expenses described below.

Like other mutual funds, financial and business organizations and individuals
around the world, each of the Funds could be adversely affected if the computer
systems used by its investment adviser, sub-advisers and other service
providers do not properly process and calculate date-related information from
and after January 1, 2000. This is commonly known as the "Year 2000 Problem."
Penn Series is taking steps that it believes are reasonably designed to address
the Year 2000 Problem with respect to the computer systems that it uses and to
obtain satisfactory assurances that comparable steps are being taken by each of
the Fund's other major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any adverse impact on
the Funds.

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EXPENSES AND LIMITATIONS THEREON

The Funds bear all expenses of its operations other than those incurred by
its investment adviser and sub-advisers under the investment advisory agreement
and investment sub-advisory agreements and those incurred by Penn Mutual under
its administrative and corporate services agreement. In particular, each Fund
pays: investment advisory fees; administrator's fee; shareholder servicing fees
and expenses; custodian and accounting fees and expenses; legal and auditing
fees; expenses of printing and mailing prospectuses and shareholder reports;
registration fees and expenses; proxy and annual meeting expenses; and
directors' fees and expenses.

With respect to each Fund, the investment adviser, the investment sub-
advisers and Penn Mutual have agreed to waive fees or reimburse expenses to the
extent the Fund's total expense ratio (excluding interest, taxes, brokerage,
other expenses which are capitalized in accordance with generally accepted
accounting principles, and extraordinary expenses, but including investment
advisory and administrative and corporate services fees) exceeds the expense
limitation for the Fund. The expense limitations for the Funds are as follows:
Growth Equity Fund: 1.00%; Value Equity Fund: 1.00%; Small Capitalization Fund:
1.00%; Emerging Growth Fund: 1.15%; Flexibly Managed Fund: 1.00%; International
Equity Fund: 1.50%; Quality Bond Fund: 0.90%; High Yield Bond Fund: 1.00% and
Money Market Fund: 0.80%. All waivers of fees or reimbursements of expenses
with respect to the Flexibly Managed, High Yield Bond, and Emerging Growth
Funds will be shared equally by the sub-advisers and Penn Mutual. For the other
Funds, the sub-adviser will waive fees with regards to the entirety of the
first 0.10% of excess above the expense limitations; Penn Mutual will waive
fees or reimburse expenses for the entirety of any additional excess above the
first 0.10%.

For the year ended December 31, 1997, the annualized ratios of operating
expenses (after waivers) to the average net assets for each of the Funds were:
Growth Equity Fund: 0.77%; Value Equity Fund: 0.76%; Small Capitalization Fund:
0.85%; Emerging Growth Fund: 1.15%; Flexibly Managed Fund: 0.76%; International
Equity Fund: 1.13%; Quality Bond Fund: 0.75%; High Yield Bond Fund: 0.81%;
Money Market Fund: 0.70%.

29
<PAGE>

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CUSTODIAN, ACCOUNTING SERVICES AGENT AND TRANSFER AGENT

PNC Bank, Broad & Chestnut Streets, Philadelphia, PA 19107, is custodian of
the assets of the Funds of Penn Series, and maintains certain records and books
in connection therewith. A subsidiary of PNC Bank, PFPC Inc., Wilmington,
Delaware 19809, is the accounting services agent and transfer agent for the
Funds of Penn Series.

As accounting services agent, PFPC Inc. provides accounting services to, and
keeps the accounts and records of, Penn Series. Under the accounting services
agreement, the accounting service fee is calculated daily based on a
predetermined percentage of daily net assets. For domestic portfolios (Growth
Equity, Value Equity, Small Capitalization, Emerging Growth, Flexibly Managed,
Quality Bond, High Yield Bond and Money Market), the percentages are as
follows: .075% of the first $100 million, .050% of the next $200 million, .030%
of the next $300 million, and .020% of the remainder. For international
portfolios (International Equity), the percentages are as follows: .085% of the
first $100 million, .060% of the next $300 million, .040% of the next $200
million, and .030% of the remainder. Additionally, all non-money market funds
are subject to specified minimum annual fees.

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SALE AND REDEMPTION OF SHARES

Shares of each Fund of Penn Series are sold to Penn Mutual and its
subsidiary, PIA, for their separate accounts at net asset value of the shares
next determined after receipt of the purchase order. There is no sales charge
or sales load.

Shares of each Fund of Penn Series are redeemed at their net asset value next
determined after receipt of a written request for redemption. There is no
redemption charge.

- --------------------------------------------------------------------------------
NET ASSET VALUE OF SHARES

Net asset value per share of the Growth Equity, Value Equity, Small
Capitalization, Emerging Growth, Flexibly Managed, International Equity,
Quality Bond, and High Yield Bond Funds is determined as of the close of the
New York Stock Exchange, on each day the New York Stock Exchange is open for
trading. The net asset value per share of each Fund is determined by
subtracting that Fund's liabilities (including accrued expenses) from its total
assets (the value of the securities the Fund holds plus cash and other assets,
including income accrued but not yet received) and dividing the result by the
total number of shares outstanding.
Portfolio securities listed on a national securities exchange are valued at
the last quoted sales price on the exchange or, if there has been no sale on
that day, at the mean between the current closing bid and asked prices. All
other portfolio securities for which over-the-counter market quotations are
readily available are valued on the basis of the mean between the last current
bid and asked prices. When market quotations are not readily available, or when
restricted or other assets are being valued, the securities or assets will be
valued at fair value as determined by, or pursuant to delegated authority of,
the Board of Directors.
Foreign portfolio securities generally are valued in accordance with the
above procedures, except as described below. Trading in foreign securities on
European and Far Eastern securities exchanges and over-the-counter markets is
normally completed well before the close of the business day in New York. In
addition, Far Eastern securities trading may not take place on all business
days in New York. Furthermore, trading takes place in Japanese markets on
certain Saturdays and in various foreign markets on days which are not business
days in New York and on which net asset value is not calculated.
Foreign portfolio securities, including ADRs and EDRs, which are traded on
stock exchanges, are valued at the last sale price, prior to the Fund valuation
time, on the exchange on which such securities are traded, unless the Fund is
aware of a material change in the value prior to the time the Fund values its
securities, or, lacking any sales, at the last available bid price. ADR's for
which such a value cannot be readily determined on any day will be valued at
the closing price of the underlying security adjusted for the exchange rate.
The Funds will make the effort to follow the above pricing procedures,
recognizing that due to differing hours, the calculation of net asset value may
not take place contemporaneously with the determination of the prices of
foreign portfolio securities used in such calculations. Events affecting the
values of foreign portfolio securities that occur between the time their prices
are determined and the close of the New York Stock Exchange will not be
reflected in the Fund calculation of net asset value unless the Board of
Directors deems that the particular event would materially affect the net asset
value, in which case an adjustment will be made. Assets or liabilities
initially expressed in terms of foreign currencies are translated prior to the
next determination of the net asset value of the Fund shares into U.S. dollars
at the prevailing market rates.
Net asset value per share of the Money Market Fund is determined, as of Noon,
Philadelphia time, on each day the New York Stock Exchange is open for trading.
The net asset value per share of the Money Market Fund is determined by
subtracting

30
<PAGE>

the Fund's liabilities from its total assets and dividing the result by the
total number of shares outstanding. Securities held by the Money Market Fund
are valued by the amortized cost method. This means that each obligation will
be valued initially at its purchase price and thereafter by amortizing any
discount or premium uniformly to maturity.

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DIVIDENDS, DISTRIBUTIONS AND TAXES

Penn Series is qualified as a regulated investment company under Section 851
of the Internal Revenue Code and distributes substantially all of its net
investment income and realized gains from securities transactions to
shareholders. For each taxable year in which it and each of its Funds so
qualify, Penn Series will not be subject to tax on net investment income and
realized gains from securities transactions distributed to shareholders.
Further, under current provisions of the Code, Penn Mutual and PIA do not
expect to incur federal income tax on earnings of their separate accounts
resulting from their shares of Penn Series to the extent that those earnings
are credited to variable contracts.

- --------------------------------------------------------------------------------
VOTING RIGHTS

The shares of the Funds have equal voting rights, except that certain issues
will be voted on separately by the shareholders of each Fund. Penn Mutual and
PIA own all the outstanding shares of Penn Series, either in their separate
accounts registered under the 1940 Act or in their unregistered separate
accounts or general accounts. Pursuant to the 1940 Act, however, Penn Mutual
and PIA will vote the shares held in registered separate accounts in accordance
with voting instructions received from variable contract owners or payees
having the right to give such instructions. Fund shares for which contract
owners or payees are entitled to give voting instructions, but as to which no
voting instructions are received, and shares owned by Penn Mutual and PIA in
their general and unregistered separate accounts, will be voted in proportion
to the shares for which voting instructions have been received. Under state
insurance law and federal regulations, there are certain circumstances under
which Penn Mutual and PIA may disregard such voting instructions. If voting
instructions are ever so ignored, contract owners will be advised of that
action in the next semiannual report.
Penn Series currently does not intend to hold annual meetings of shareholders
unless required to do so under applicable law. The law provides shareholders
with the right under certain circumstances to call a meeting of shareholders to
consider removal of one or more directors. As required by law, Penn Series will
assist in variable contract owner and payee communication on such matters.

31
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION -- MAY 1, 1998
- --------------------------------------------------------------------------------

PENN SERIES FUNDS, INC.
600 DRESHER ROAD, HORSHAM, PA 19044 . TELEPHONE (215) 956-8000
- --------------------------------------------------------------------------------

This statement is not a prospectus but should be read in conjunction with the
current prospectus of Penn Series Funds, Inc. ("Penn Series") dated May 1,
1998. To obtain the prospectus you may write to The Penn Mutual Life Insurance
Company ("Penn Mutual"), Customer Service Group--H3F, Independence Square,
Philadelphia, PA 19172. Or, you may call, toll free, 1-800-548-1119.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT OBJECTIVES...................................................... B-2
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SECURITIES AND INVESTMENT TECHNIQUES....................................... B-3
Investments in Debt Securities........................................... B-3
Investments in Foreign Equity Securities................................. B-5
Investments in Smaller Companies......................................... B-6
Foreign Currency Transactions............................................ B-6
Repurchase Agreements.................................................... B-7
Lending of Portfolio Securities.......................................... B-8
Illiquid Securities...................................................... B-8
Warrants................................................................. B-8
When-Issued Securities................................................... B-9
The Quality Bond Fund's Policy Regarding Industry Concentration.......... B-9
Options.................................................................. B-9
Futures Contracts........................................................ B-10
Loan Participations and Assignments...................................... B-11
Trade Claims............................................................. B-11
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS.................................................... B-12
Growth Equity Fund....................................................... B-12
Value Equity Fund........................................................ B-13
Small Capitalization Fund................................................ B-14
Emerging Growth Fund..................................................... B-15
Flexibly Managed Fund.................................................... B-16
International Equity Fund................................................ B-17
Quality Bond Fund........................................................ B-18
High Yield Bond Fund..................................................... B-19
Money Market Fund........................................................ B-20
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GENERAL INFORMATION........................................................ B-21
Investment Advisory Services............................................. B-21
Administrative and Corporate Services.................................... B-22
Accounting Services...................................................... B-23
Limitation on Fund Expenses.............................................. B-24
Portfolio Transactions................................................... B-24
Directors and Officers................................................... B-26
Custodial Services....................................................... B-27
Independent Auditors..................................................... B-27
Legal Matters............................................................ B-27
Net Asset Value of Shares................................................ B-27
Ownership of Shares...................................................... B-28
Tax Status............................................................... B-28
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RATINGS OF COMMERCIAL PAPER................................................ B-29
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RATINGS OF CORPORATE DEBT SECURITIES....................................... B-31
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FINANCIAL STATEMENTS OF PENN SERIES........................................ B-32
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REPORT OF INDEPENDENT AUDITORS............................................. B-69
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</TABLE>

B-1
<PAGE>

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES

Information in this Statement of Additional Information supplements the
discussion in the Penn Series Prospectus regarding investment objectives,
programs and restrictions of the nine Funds that comprise the Penn Series
Funds, Inc. Unless otherwise specified, the investment policies and
restrictions of the Funds are not fundamental policies. The operating policies
of each Fund are subject to change by the Board of Directors without
shareholder approval. Fundamental policies of each Fund may not be changed
without the approval of at least a majority of the outstanding shares of that
Fund or, if it is less, 67% of the shares represented at a meeting of
shareholders at which the holders of 50% or more of the shares are represented.
The investment objectives of the nine Funds are as follows. There is, of
course, no assurance that these objectives will be achieved.
- --------------------------------------------------------------------------------
GROWTH EQUITY seeks long-term growth of capital and increase of future
FUND 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 seeks capital appreciation through investment in a
CAPITALIZATION diversified portfolio of securities consisting primarily of
FUND equity securities of companies with market capitalizations
of under $1 billion;
- --------------------------------------------------------------------------------
EMERGING GROWTH seeks capital appreciation by investing primarily in common
FUND stocks of emerging growth companies with above-average
growth prospects;
- --------------------------------------------------------------------------------
FLEXIBLY MANAGED seeks to maximize total return (capital appreciation and
FUND 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;
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QUALITY BOND FUND seeks the highest income over the long term consistent with
the preservation of principal by investing primarily in
marketable investment-grade debt securities;
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HIGH YIELD BOND seeks high current income by investing primarily in a
FUND 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;
- --------------------------------------------------------------------------------
MONEY MARKET FUND seeks to preserve capital, maintain liquidity and achieve
the highest possible level of current income consistent
therewith, by investing in high quality money market
instruments; AN INVESTMENT IN THE FUND IS NEITHER INSURED
NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO
ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
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B-2
<PAGE>

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SECURITIES AND INVESTMENT TECHNIQUES

- --------------------------------------------------------------------------------
INVESTMENTS IN DEBT SECURITIES

Debt securities in which one or more of the Funds may invest in include those
described below.
U.S. GOVERNMENT OBLIGATIONS. The Funds may invest in bills, notes, bonds, and
other debt securities issued by the U.S. Treasury. These are direct obligations
of the U.S. Government and differ mainly in the length of their maturities.
U.S. GOVERNMENT AGENCY SECURITIES. The Funds may invest in debt securities
issued or guaranteed by U.S. Government sponsored enterprises, federal
agencies, and international institutions. These include securities issued by
the Federal National Mortgage Association, Government National Mortgage
Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, and the Tennessee Valley Authority.
Some of these securities are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
Treasury; and the remainder are supported only by the credit of the
instrumentality.
LONG-TERM, MEDIUM TO LOWER QUALITY CORPORATE DEBT SECURITIES. The High Yield
Bond Fund will invest in outstanding convertible and nonconvertible corporate
debt securities (e.g., bonds and debentures) that generally have maturities of
at least 10 years. This Fund will generally invest in long-term corporate
obligations which are rated BBB or lower by Standard & Poor's Corporation
("Standard & Poor's") or Baa or lower by Moody's Investors Service, Inc.
("Moody's"), or, if not rated, are of equivalent quality as determined by the
Fund 's investment adviser. Other Funds may invest limited amounts in medium to
lower quality corporate debt securities in accordance with their stated
investment policies.

INVESTMENT GRADE CORPORATE DEBT SECURITIES. The Quality Bond Fund will invest
principally in corporate debt securities of various maturities that are
considered investment grade securities by at least one of the established
rating services (e.g., AAA, AA, A, or BBB by Standard & Poor's) or, if not
rated, are of equivalent quality as determined by the Fund's investment
adviser, Independence Capital Management, Inc. ("ICMI").
BANK OBLIGATIONS. The Funds may invest in certificates of deposit, bankers'
acceptances, and other short-term debt obligations. Certificates of deposit are
short-term obligations of commercial banks. A bankers' acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with
international commercial transactions.
No Fund will invest in any security issued by a commercial bank unless (i)
the bank has total assets of at least $1 billion, or the equivalent in other
currencies, or, in the case of domestic banks which do not have total assets of
at least $1 billion, the aggregate investment made in any one such bank by any
one Income Fund is limited to $100,000 and the principal amount of such
investment is insured in full by the Federal Deposit Insurance Corporation,
(ii) in the case of a U.S. Bank, it is a member of the Federal Deposit
Insurance Corporation, and (iii) in the case of foreign banks, the security is,
in the opinion of the Fund's investment adviser, of an investment quality
comparable with other debt securities which may be purchased by the Fund. These
limitations do not prohibit investments in securities issued by foreign
branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
COMMERCIAL PAPER. The Funds may invest in short-term promissory notes issued
by corporations primarily to finance short-term credit needs. The Money Market
Fund will only invest in commercial paper which is rated A-2 or better by
Standard & Poor's, Prime-2 or better by Moody's or, if not rated, is of
equivalent quality as determined by the investment adviser, and further will
invest only in instruments permitted under the SEC Rule 2a-7 which governs
money market fund investing.
CANADIAN GOVERNMENT SECURITIES. The Funds may invest in debt securities
issued or guaranteed by the Government of Canada, a Province of Canada, or an
instrumentality or political subdivision thereof. However, the Money Market
Fund will only purchase these securities if they are marketable and payable in
U.S. dollars. The Money Market Fund will not purchase any such security if, as
a result, more than 10% of the value of its total assets would be invested in
such securities.
SAVINGS AND LOAN OBLIGATIONS. The Quality Bond, High Yield Bond, and Money
Market Funds may invest in negotiable certificates of deposit and other debt
obligations of savings and loan associations. They will not invest in any
security issued by a savings and loan association unless: (i) the savings and
loan association has total assets of at least $1 billion, or, in the case of
savings and loan associations which do not have total assets of at least $1
billion, the aggregate investment made in any one savings and loan association
is limited to $100,000 and the principal amount of such investment is insured
in full by the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation; (ii) the savings and loan association issuing the
security is a member of the Federal Home Loan Bank System; and (iii) the
security is insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation.

No Fund will purchase any security of a small bank or savings and loan
association which is not readily marketable if, as a result, more than 10% of
the value of its total assets would be invested in such securities, other
illiquid securities, and securities

B-3
<PAGE>

without readily available market quotations, such as restricted securities and
repurchase agreements maturing in more than seven days.
MUNICIPAL OBLIGATIONS. The Quality Bond and Value Equity Funds may invest in
Municipal Obligations that meet the Fund's quality standards. The two principal
classifications of Municipal Obligations are "general obligation" securities
and "revenue" securities. General obligation securities are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue securities are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source such
as the user of the facility being financed. Revenue securities include private
activity bonds which are not payable from the unrestricted revenues of the
issuer. Consequently, the credit quality of private activity bonds is usually
directly related to the credit standing of the corporate user of the facility
involved.
Municipal Obligations may also include "moral obligation" bonds, which are
normally issued by special purpose public authorities. If the issuer of moral
obligation bonds is unable to meet its debt service obligations from current
revenues, it may draw on a reserve fund, the restoration of which is a moral
commitment but not a legal obligation of the state or municipality which
created the issuer.
Municipal Obligations may include variable and floating rate instruments. If
such instruments are unrated, they will be determined by the adviser to be of
comparable quality at the time of the purchase to rated instruments purchasable
by a Fund.
To the extent a Fund's assets are to a significant extent invested in
Municipal Obligations that are payable from the revenues of similar projects,
the Fund will be subject to the peculiar risks presented by the laws and
economic conditions relating to such projects to a greater extent than it would
be if its assets were not so invested.
FOREIGN DEBT SECURITIES. Subject to the particular Fund's quality and
maturity standards, the Quality Bond, High Yield Bond and Money Market Funds
may invest without limitation in the debt securities (payable in U.S. dollars)
of foreign issuers in developed countries and in the securities of foreign
branches of U.S. banks such as negotiable certificates of deposit
(Eurodollars). The High Yield Bond Fund may also invest up to 20% of its assets
in non-U.S. dollar-denominated fixed-income securities principally traded in
financial markets outside the United States.
The International Equity Fund may invest in debt securities of foreign
issuers. The securities will be rated Baa or higher by Moody's Investor
Services, Inc. or BBB or higher by Standard and Poor's Corporation or, if they
have not been so rated, will be the equivalent of investment grade (Baa or BBB)
as determined by the adviser. The Value Equity Fund may also invest up to 15%
of its assets in U.S.-traded dollar denominated debt securities of foreign
issuers, and up to 5% of its assets in non-dollar denominated fixed income
securities issued by foreign issuers.
The Small Capitalization and Emerging Growth Funds may also invest up to 15%
of its assets in U.S.-traded dollar denominated debt securities of foreign
issuers, and up to 5% of its assets in non-dollar denominated fixed income
securities issued by foreign issuers.
For information on risks involved in investing in foreign securities, see
information on "INVESTMENT IN FOREIGN EQUITY SECURITIES" below.
PRIME MONEY MARKET SECURITIES DEFINED. Prime money market securities include:
U.S. Government obligations; U.S. Government agency securities; bank or savings
and loan association obligations issued by banks or savings and loan
associations whose debt securities or parent holding companies' debt securities
or affiliates' debt securities guaranteed by the parent holding company are
rated AAA or A-1 or better by Standard & Poor's, Aaa or Prime-1 by Moody's, or
AAA by Fitch; commercial paper rated A-1 or better by Standard & Poor's, Prime-
1 by Moody's, or, if not rated, issued by a corporation having an outstanding
debt issue rated AAA by Standard & Poor's, Moody's, or Fitch; short-term
corporate debt securities rated AAA by Standard & Poor's, Moody's, or Fitch;
Canadian Government securities issued by entities whose debt securities are
rated AAA by Standard & Poor's, Moody's, or Fitch; and repurchase agreements
where the underlying security qualifies as a prime money market security as
defined above.
COLLATERALIZED MORTGAGE OBLIGATIONS. The Quality Bond Fund may invest in
collateralized mortgage obligations ("CMOs"). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
the Fund invests, the investment may be subject to a greater or lesser risk of
prepayment than other types of mortgage-related securities. CMOs may also be
less marketable than other securities.
ASSET-BACKED SECURITIES. The Quality Bond and Money Market Funds may invest a
portion of their assets in debt obligations known as "asset-backed securities."
The credit quality of most asset-backed securities depends primarily on the
credit quality of the assets underlying such securities, how well the entity
issuing the security is insulated from the credit risk of

B-4
<PAGE>

the originator or any other affiliated entities, and the amount and quality of
any credit support provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety of
economic and other factors. As a result, the yield on any asset-backed security
is difficult to predict with precision and actual yield to maturity may be more
or less than the anticipated yield to maturity. Asset-backed securities may be
classified as "pass through certificates" or "collateralized obligations."
"Pass through certificates" are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets. Pass
through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because pass
through certificates represent an ownership interest in the underlying assets,
the holders thereof bear directly the risk of any defaults by the obligors on
the underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt instruments, also known as
collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card or automobile
receivables. The assets collateralizing such asset-backed securities are
pledged to a trustee or custodian for the benefit of the holders thereof. Such
issuers generally hold no assets other than those underlying the asset-backed
securities and any credit support provided. As a result, although payments on
such asset-backed securities are obligations of the issuers, in the event of
defaults on the underlying assets not covered by any credit support, the
issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
ZERO COUPON AND PAY-IN-KIND BONDS. The High Yield Bond Fund may invest in
zero coupon and pay-in-kind bonds. A zero coupon security has no cash coupon
payments. Instead, the issuer sells the security at a substantial discount from
its maturity value. The interest received by the investor from holding this
security to maturity is the difference between the maturity value and the
purchase price. The advantage to the investor is that reinvestment risk of the
income received during the life of the bond is eliminated. However, zero coupon
bonds like other bonds retain interest rate and credit risk and usually display
more price volatility than those securities that pay a cash coupon.
Pay-in-Kind (PIK) Instruments are securities that pay interest in either cash
or additional securities, at the issuer's option, for a specified period.
PIK's, like zero coupon bonds, are designed to give an issuer flexibility in
managing cash flow. PIK bonds can be either senior or subordinated debt and
trade flat (i.e., without accrued interest). The price of PIK bonds is expected
to reflect the market value of the underlying debt plus an amount representing
accrued interest since the last payment. PIK's are usually less volatile than
zero coupon bonds, but more volatile than cash pay securities.
For federal income tax purposes, these types of bonds will require the
recognition of gross income each year even though no cash may be paid to the
Fund until the maturity or call date of the bond. The Fund will nonetheless be
required to distribute substantially all of this gross income each year to
comply with the Internal Revenue Code, and such distributions could reduce the
amount of cash available for investment by the Fund.

- --------------------------------------------------------------------------------
INVESTMENTS IN FOREIGN EQUITY SECURITIES

The Growth Equity, Value Equity, Small Capitalization, Emerging Growth and
Flexibly Managed Funds may invest in the equity securities of foreign issuers,
subject to the following limitations based upon the total assets of each Fund:
Growth Equity Fund--30%; Value Equity Fund--25%; Small Capitalization Fund--
15%; Emerging Growth Fund--10%; and Flexibly Managed Fund--25%. The
International Equity Fund, under normal circumstances, will have at least 65%
of its assets in such investments. Because these Funds may invest in foreign
securities, selection of these Funds involves risks that are different in some
respects from an investment in a fund which invests only in securities of U.S.
domestic issuers. Foreign investments may be affected favorably or unfavorably
by changes in currency rates and exchange control regulations. There may be
less publicly available information about a foreign company than about a U.S.
company, and foreign companies may not be subject to accounting, auditing, and
financial reporting standards and requirements comparable to those applicable
to U.S. companies. Securities of some foreign companies are less liquid or more
volatile than securities of U.S. companies, and foreign brokerage commissions
and custodian fees are generally higher than in the United States. Investments
in foreign securities may also be subject to other risks different from those
affecting U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, imposition of withholding taxes on
dividend or interest payments, and currency blockage (which would prevent cash
from being brought back to the United States).

B-5
<PAGE>

- --------------------------------------------------------------------------------
INVESTMENTS IN SMALLER COMPANIES

The Small Capitalization and Emerging Growth Funds may invest a substantial
portion of their assets in securities issued by smaller companies. Such
companies may offer greater opportunities for capital appreciation than larger
companies, but investments in such companies may involve certain special risks.
Such companies may have limited product lines, markets, or financial resources
and may be dependent on a limited management group. While the markets in
securities of such companies have grown rapidly in recent years, such
securities may trade less frequently and in smaller volume than more widely
held securities. The values of these securities may fluctuate more sharply than
those of other securities, and a Fund may experience some difficulty in
establishing or closing out positions in these securities at prevailing market
prices. There may be less publicly available information about the issuers of
these securities or less market interest in such securities than in the case of
larger companies, and it may take a longer period of time for the prices of
such securities to reflect the full value of their issuers' underlying earnings
potential or assets. Some securities of smaller issuers may be restricted as to
resale or may otherwise be highly illiquid. The ability of a Fund to dispose of
such securities may be greatly limited, and a Fund may have to continue to hold
such securities during periods when they would otherwise be sold.

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FOREIGN CURRENCY TRANSACTIONS

The Growth Equity, Value Equity, Small Capitalization, Emerging Growth,
International Equity and High Yield Bond Funds may enter into forward foreign
currency exchange contracts as described below. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large, commercial banks) and their customers.
A forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades.

These Funds may enter into forward foreign currency exchange contracts only
under two circumstances. First, when a Fund enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may desire
to "lock in" the U.S. dollar price of the security. By entering into a forward
contract for the purchase or sale, for a fixed amount of dollars, of the amount
of foreign currency involved in the underlying security transactions, the Fund
will be able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and the subject
foreign currency during the period between the date the security is purchased
or sold and the date on which payment is made or received. Second, when the
adviser to one of these Funds believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, the
Fund may enter into a forward contract to sell, for a fixed amount of dollars,
the amount of the foreign currency approximating the value of some or all of
the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movement is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. The International Equity
Fund may enter into a forward contract to buy or sell foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of the Fund's portfolio securities denominated in such
currency. In certain circumstances the adviser to the International Equity Fund
may commit a substantial portion of the portfolio to the consummation of
forward contracts. The Growth Equity Fund, Value Equity Fund, Small
Capitalization Fund, Emerging Growth Fund and High Yield Bond Fund do not
intend to enter into such forward contracts under this second circumstance on a
regular or continuous basis, and will not do so if, as a result, the Fund will
have more than 15% of the value of its total assets committed to the
consummation of such contracts. The Funds will also not enter into such forward
contracts or maintain a net exposure to such contracts where the consummation
of the contracts would obligate them to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies. A
Fund's custodian bank will place cash or liquid equity or debt securities in a
separate account of the Fund in an amount equal to the value of the Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts entered into under the second circumstance, as set forth above. If
the value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Fund's commitments with
respect to such contracts.
At the maturity of a forward contract, a Fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.

B-6
<PAGE>

It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Fund to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and
if a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between a Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent that the price of the currency it has agreed
to purchase exceeds the price of the currency it has agreed to sell.
It also should be realized that this method of protecting the value of a
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which one can achieve at some future
point in time. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from the value of such
currency increase.

Although the International Equity Fund, Growth Equity Fund, Value Equity
Fund, Small Capitalization Fund, Emerging Growth Fund and High Yield Bond Fund
value their assets daily in terms of U.S. dollars, they do not intend to
convert their holdings of foreign currencies into U.S. dollars on a daily
basis. They will do so from time to time, and investors should be aware of the
costs of currency conversion. Although foreign exchange dealers do not charge a
fee for conversion, they do realize a profit based on the difference (the
"spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.

- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS

Each Fund, other than the Growth Equity Fund, may enter into repurchase
agreements through which an investor (such as a Fund) purchases a security
(known as the "underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Concurrently, the
bank or securities dealer agrees to repurchase the underlying security at a
future point at the same price, plus specified interest. Repurchase agreements
are generally for a short period of time, often less than a week. A Fund will
not enter into a repurchase agreement with a maturity of more than seven
business days if, as a result, more than 10% of the value of its total assets
would then be invested in such repurchase agreements. The Quality Bond Fund
will only enter into a repurchase agreement where the underlying securities are
(excluding maturity limitations) rated within the four highest credit
categories assigned by established rating services (Aaa, Aa, A, or Baa by
Moody's or AAA, AA, A, or BBB by Standard & Poor's), or, if not rated, of
equivalent investment quality as determined by the investment adviser. With the
exception of the Money Market Fund, the underlying security must be rated
within the top three credit categories, or, if not rated, must be of equivalent
investment quality as determined by the investment adviser or sub-adviser. In
the case of the Money Market Fund, the underlying security must be rated within
the top credit category or, if not rated, must be of comparable investment
quality as determined by the investment adviser and the repurchase agreement
must meet the other quality and diversification standards of Rule 2a-7 under
the Investment Company Act of 1940. In addition, each Fund will only enter into
a repurchase agreement where (i) the market value of the underlying security,
including interest accrued, will be at all times equal to or exceed the value
of the repurchase agreement, and (ii) payment for the underlying security is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, a Fund could
experience both delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying security during
the period while a Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights.

B-7
<PAGE>

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LENDING OF PORTFOLIO SECURITIES

For the purpose of realizing additional income, each Fund may make secured
loans of portfolio securities amounting to not more than 30% of its total
assets. This policy is a fundamental policy for all the Funds. Securities loans
are made to unaffiliated broker-dealers or institutional investors pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent. The collateral
received will consist of government securities, letters of credit or such other
collateral as may be permitted under its investment program and by regulatory
agencies and approved by the Board of Directors. While the securities are being
lent, the Fund will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral or a fee from the borrower. Each Fund has a right
to call each loan and obtain the securities on five business days' notice. No
Fund will have the right to vote securities while they are being lent, but it
will call a loan in anticipation of any important vote. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower
fail financially. Loans will only be made to firms deemed by the adviser to be
of good standing and will not be made unless, in the judgment of the adviser,
the consideration to be earned from such loans would justify the risk.

- --------------------------------------------------------------------------------
ILLIQUID SECURITIES

Illiquid securities generally are those which may not be sold in the ordinary
course of business within seven days at approximately the value at which the
Fund has valued them.

The Funds may purchase securities which are not registered under the
Securities Act of 1933 but which can be sold to qualified institutional buyers
in accordance with Rule 144A under that Act. Any such security will not be
considered illiquid so long as it is determined by the adviser, acting under
guidelines approved and monitored by the Board of Directors, that an adequate
trading market exists for that security. In making that determination, the
adviser will consider, among other relevant factors: (1) the frequency of
trades and quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades. A Fund's treatment of Rule
144A securities as liquid could have the effect of increasing the level of fund
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities. The adviser will continue to
monitor the liquidity of any Rule 144A security which has been determined to be
liquid and, if a security is no longer liquid because of changed conditions,
the holdings of illiquid securities will be reviewed to determine if any steps
are required to assure that the 10% test continues to be satisfied.

- --------------------------------------------------------------------------------
WARRANTS

The Flexibly Managed and High Yield Bond Funds may invest in warrants if,
after such investment, no more than 10% of the value of a Fund's net assets
would be invested in warrants. The Value Equity, Small Capitalization, Emerging
Growth, International Equity, Quality Bond and Money Market Funds may invest in
warrants; however, not more than 5% of any such Fund's assets (at the time of
purchase) will be invested in warrants other than warrants acquired in units or
attached to other securities. Of such 5% not more than 2% of such assets at the
time of purchase may be invested in warrants that are not listed on the New
York or American Stock Exchange. Warrants basically are options to purchase
equity securities at a specific price valid for a specific period of time. They
do not represent ownership of the securities, but only the right to buy them.
They have no voting rights, pay no dividends and have no rights with respect to
the assets of the corporation issuing them. Warrants differ from call options
in that warrants are issued by the issuer of the security which may be
purchased on their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel to the prices
of the underlying securities.

B-8
<PAGE>

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WHEN-ISSUED SECURITIES

The Value Equity Fund, Small Capitalization Fund, Quality Bond Fund, Flexibly
Managed Fund, Emerging Growth Fund and High Yield Bond Fund may from time to
time purchase securities on a "when-issued" basis. The price of such
securities, which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment for the when-issued
securities take place at a later date. Normally, the settlement date occurs
within one month of the purchase. During the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest
accrues to the Fund purchasing the when-issued security. Forward commitments
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date, which risk is in addition to the risk of decline
in value of the Fund's other assets. While when-issued securities may be sold
prior to the settlement date, the Funds intend to purchase such securities with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the particular Fund makes the commitment to
purchase a security on a when-issued basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The
advisers do not believe that the net asset value or income of the Funds will be
adversely affected by the respective Fund's purchase of securities on a when-
issued basis. The Funds will maintain cash and marketable securities equal in
value to commitments for when-issued securities. Such segregated securities
either will mature or, if necessary, be sold on or before the settlement date.

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THE QUALITY BOND FUND'S POLICY REGARDING INDUSTRY CONCENTRATION

When the market for corporate debt securities is dominated by issues in the
gas utility, gas transmission utility, electric utility, telephone utility, or
petroleum industries, the Quality Bond Fund will as a matter of fundamental
policy concentrate 25% or more, but not more than 50%, of its assets in any one
such industry, if the Fund has cash for such investment (i.e., will not sell
portfolio securities to raise cash) and, if in Independence Capital
Management's judgment, the return available and the marketability, quality, and
availability of the debt securities of such industry justifies such
concentration in light of the Fund's investment objective. Domination would
exist with respect to any one such industry, when, in the preceding 30-day
period, more than 25% of all new-issue corporate debt offerings (within the
four highest grades of Moody's or S&P and with maturities of 10 years or less)
of $25,000,000 or more consisted of issues in such industry. Although the Fund
will normally purchase corporate debt securities in the secondary market as
opposed to new offerings, Independence Capital Management believes that the new
issue-based dominance standard, as defined above, is appropriate because it is
easily determined and represents an accurate correlation to the secondary
market. Investors should understand that concentration in any industry may
result in increased risk. Investments in any of these industries may be
affected by environmental conditions, energy conservation programs, fuel
shortages, difficulty in obtaining adequate return on capital in financing
operations and large construction programs, and the ability of the capital
markets to absorb debt issues. In addition, it is possible that the public
service commissions which have jurisdiction over these industries may not grant
future increases in rates sufficient to offset increases in operating expenses.
These industries also face numerous legislative and regulatory uncertainties at
both federal and state government levels. Independence Capital Management
believes that any risk to the Fund which might result from concentration in any
industry will be minimized by the Fund's practice of diversifying its
investments in other respects. The Quality Bond Fund's policy with respect to
industry concentration is a fundamental policy. See INVESTMENT RESTRICTIONS
below.

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OPTIONS

Each Fund, other than the Money Market Fund, may write covered call and buy
put options on its portfolio securities and purchase call or put options on
securities indices. The High Yield Bond Fund may engage in other options
transactions described in INVESTMENT RESTRICTIONS below, including the purchase
of spread options, which give the owner the right to sell a security that it
owns at a fixed dollar spread or yield spread in relation to another security
that the owner does not own, but which is used as a benchmark.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Options on particular securities may be more
volatile than the underlying securities, and therefore, on a percentage basis,
more risky than an investment in the underlying securities themselves.

A Fund will write call options only if they are "covered." This means that a
Fund will own the security or currency subject to the option or an option to
purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an
account consisting of cash, U.S. Government securities or other liquid high-
grade debt obligations having a value equal to the fluctuating market value of
the optioned securities.

B-9
<PAGE>

There are several risks associated with transactions in options on securities
and indices. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange"), may be absent for reasons which include the following: there may
be insufficient trading interest in certain options; restrictions may be
imposed by an Exchange on opening transactions or closing transactions or both;
trading halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that
class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades
on that Exchange would continue to be exercisable in accordance with their
terms.

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FUTURES CONTRACTS

Each Fund, other than the Money Market Fund, may invest in futures contracts
and options thereon (interest rate futures contracts or stock index futures
contracts, as applicable), in accordance with each Fund's individual
restrictions on futures contracts set forth under INVESTMENT RESTRICTIONS
below. Such futures contracts would not be entered into for speculative
purposes, but to hedge risks associated with the Fund's securities investments
or to provide an efficient means of regulating its exposure to the market. To
enter into a futures contract, a Fund must make a deposit of initial margin
with its custodian in a segregated account in the name of its futures broker.
Initial margin on futures contracts is in the nature of a performance bond or
good faith deposit. Subsequent payments to or from the broker, called variation
margin, will be made on a daily basis as the price of the underlying index or
instrument fluctuates, making the long and short positions in the futures
contracts more or less valuable.
Successful use of futures by a Fund is subject, first, to the investment
adviser's ability to correctly predict movements in the direction of the
market. For example, if a Fund has hedged against the possibility of a decline
in the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit of the
increased value of its securities which it has hedged because it will have
approximately equal offsetting losses in its futures positions.
Even if the investment adviser has correctly predicted market movements, the
success of a futures position may be affected by imperfect correlations between
the price movements of the futures contract and the securities being hedged. A
Fund may purchase or sell futures contracts on any stock index or interest rate
index or instrument whose movements will, in the investment adviser's judgment,
have a significant correlation with movements in the prices of all or portions
of the Fund's portfolio securities. The correlation between price movements in
the futures contract and in the portfolio securities probably will not be
perfect, however, and may be affected by differences in historical volatility
or temporary price distortions in the futures markets. To attempt to compensate
for such differences, the Fund could purchase or sell futures contracts with a
greater or lesser value than the securities it wished to hedge or purchase.
Despite such efforts, the correlation between price movements in the futures
contract and the portfolio securities may be worse than anticipated, which
could cause the Fund to suffer losses even if the investment adviser had
correctly predicted the general movement of the market.
A Fund which engages in the purchase or sale of futures contracts may also
incur risks arising from illiquid markets. The ability of a Fund to close out a
futures position depends on the availability of a liquid market in the futures
contract, and such a market may not exist for a variety of reasons, including
daily limits on price movements in futures markets. In the event a Fund is
unable to close out a futures position because of illiquid markets, it would be
required to continue to make daily variation margin payments, and could suffer
losses due to market changes in the period before the futures position could be
closed out.
The trading of futures contracts is also subject to the risks of trading
halts, suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Options on futures contracts are subject to risks similar to those described
above, and also to a risk of loss due to an imperfect correlation between the
option and the underlying futures contract.

B-10
<PAGE>

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LOAN PARTICIPATIONS AND ASSIGNMENTS

The High Yield Bond Fund may invest in loan participations and assignments
(collectively "participations"). Such participations will typically be
participating interests in loans made by a syndicate of banks, represented by
an agent bank which has negotiated and structured the loan, to corporate
borrowers to finance internal growth, mergers, acquisitions, stock repurchases,
leveraged buyouts and other corporate activities. Such loans may also have been
made to governmental borrowers, especially governments of developing countries
(LDC debt). LDC debt will involve the risk that the governmental entity
responsible for the repayment of the debt may be unable or unwilling to do so
when due. The loans underlying such participations may be secured or unsecured,
and the Fund may invest in loans collateralized by mortgages on real property
or which have no collateral. The loan participations themselves may extend for
the entire term of the loan or may extend only for short "strips" that
correspond to a quarterly or monthly floating rate interest period on the
underlying loan. Thus, a term or revolving credit that extends for several
years may be subdivided into shorter periods.
The loan participations in which the High Yield Bond Fund will invest will
also vary in legal structure. Occasionally, lenders assign to another
institution both the lender's rights and obligations under a credit agreement.
Since this type of assignment relieves the original lender of its obligations,
it is called a novation. More typically, a lender assigns only its right to
receive payments of principal and interest under a promissory note, credit
agreement or similar document. A true assignment shifts to the assignee the
direct debtor-creditor relationship with the underlying borrower.
Alternatively, a lender may assign only part of its rights to receive payments
pursuant to the underlying instrument or loan agreement. Such partial
assignments, which are more accurately characterized as "participating
interests," do not shift the debtor-creditor relationship to the assignee, who
must rely on the original lending institution to collect sums due and to
otherwise enforce its rights against the agent bank which administers the loan
or against the underlying borrower.
Because the High Yield Bond Fund is allowed to purchase debt securities,
including debt securities at private placement, the Fund will treat loan
participations as securities and not subject to its fundamental investment
restriction prohibiting the Fund from making loans.
There is not a recognizable, liquid public market for the loan
participations. Hence, the High Yield Bond Fund would consider loan
participations as illiquid securities and subject them to the Fund's
restriction on investing no more than 10% of assets in securities for which
there is no readily available market. The Fund would initially impose a limit
of no more than 5% of total assets in illiquid loan participations.
Where required by applicable SEC positions, the Fund will treat both the
corporate borrower and the bank selling the participation interest as an issuer
for purposes of its fundamental investment restriction which prohibits
investing more than 5% of Fund assets in the securities of a single issuer.
Various service fees received by the High Yield Bond Fund from loan
participations may be treated as non-interest income depending on the nature of
the fee (commitment, takedown, commission, service or loan origination). To the
extent the service fees are not interest income, they will not qualify as
income under Section 851(b) of the Internal Revenue Code. Thus the sum of such
fees plus any other non-qualifying income earned by the Fund cannot exceed 10%
of total income.

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TRADE CLAIMS

The High Yield Bond Fund may invest up to 5% of its total assets in trade
claims. Trade claims are non-securitized rights of payment arising from
obligations other than borrowed funds. Trade claims typically arise when, in
the ordinary course of business, vendors and suppliers extend credit to a
company by offering payment terms. Generally, when a company files for
bankruptcy protection payments on these trade claims cease and the claims are
subject to a compromise along with the other debts of the company. Trade claims
typically are bought and sold at a discount reflecting the degree of
uncertainty with respect to the timing and extent of recovery. In addition to
the risks otherwise associated with low-quality obligations, trade claims have
other risks, including the possibility that the amount of the claim may be
disputed by the obligor.
Over the last few years a market for the trade claims of bankrupt companies
has developed. Many vendors are either unwilling or lack the resources to hold
their claim through the extended bankruptcy process with an uncertain outcome
and timing. Some vendors are also aggressive in establishing reserves against
these receivables, so that the sale of the claim at a discount may not result
in the recognition of a loss.

Trade claims can represent an attractive investment opportunity because these
claims typically are priced at a discount to comparable public securities. This
discount is a reflection of a less liquid market, a smaller universe of
potential buyers and the risks peculiar to trade claim investing. It is not
unusual for trade claims to be priced at a discount to public securities that
have an equal or lower priority claim.

B-11
<PAGE>

As noted above, investing in trade claims does carry some unique risks which
include:
ESTABLISHING THE AMOUNT OF THE CLAIM. Frequently, the supplier's estimate of
its receivable will differ from the customer's estimate of its payable.
Resolution of these differences can result in a reduction in the amount of the
claim. This risk can be reduced by only purchasing scheduled claims (claims
already listed as liabilities by the debtor) and seeking representations from
the seller.
DEFENSES TO CLAIMS. The debtor has a variety of defenses that can be asserted
under the bankruptcy code against any claim. Trade claims are subject to these
defenses, the most common of which for trade claims relates to preference
payments. (Preference payments are all payments made by the debtor during the
90 days prior to the filing. These payments are presumed to have benefitted the
receiving creditor at the expense of the other creditors. The receiving
creditor may be required to return the payment unless it can show the payments
were received in the ordinary course of business.) While none of these defenses
can result in any additional liability of the purchaser of the trade claim,
they can reduce or wipe out the entire purchased claim. This risk can be
reduced by seeking representations and indemnification from the seller.
DOCUMENTATION/INDEMNIFICATION. Each trade claim purchased requires
documentation that must be negotiated between the buyer and seller. This
documentation is extremely important since it can protect the purchaser from
losses such as those described above. Legal expenses in negotiating a purchase
agreement can be fairly high. Additionally, it is important to note that the
value of an indemnification depends on the seller's credit.
VOLATILE PRICING DUE TO ILLIQUID MARKET. There are only a handful of brokers
for trade claims and the quoted price of these claims can be volatile. All
trade claims would be considered illiquid investments.
NO CURRENT YIELD/ULTIMATE RECOVERY. Trade claims are almost never entitled to
earn interest. As a result, the return on such an investment is very sensitive
to the length of the bankruptcy, which is uncertain. Although not unique to
trade claims, it is worth noting that the ultimate recovery on the claim is
uncertain and there is no way to calculate a conventional yield to maturity on
this investment. Additionally, the exit for this investment is a plan of
reorganization which may include the distribution of new securities. These
securities may be as illiquid as the original trade claim investment.
TAX ISSUE. Although the issue is not free from doubt, it is likely that trade
claims would be treated as nonsecurities investments. As a result, any gains
would be considered "non-qualifying" under the Internal Revenue Code. The High
Yield Bond Fund may have up to 10% of its gross income (including capital
gains) derived from non-qualifying sources.

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INVESTMENT RESTRICTIONS

Except as otherwise specified, the investment restrictions described below
have been adopted as fundamental policies of the eight respective Funds.
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of a Fund's shares present at a meeting if the holders of more than 50%
of the outstanding shares are present in person or by proxy or (2) more than
50% of the Fund's outstanding shares. Operating policies are subject to change
by Penn Series' Board of Directors without shareholder approval. Any investment
restriction which involves a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets of,
or borrowings by, a Fund.

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GROWTH EQUITY FUND

Investment restrictions (1) through (14) and (20) through (22) described
below have been adopted by the Growth Equity Fund and are fundamental policies,
except as otherwise indicated. Restrictions (15) through (19) are operating
policies which are subject to change by the Board of Directors without
shareholder approval.
The Fund may not: (1) PERCENT LIMIT ON ASSETS INVESTED IN ANY ONE ISSUER.
Purchase any securities which would cause more than 5% of its total assets at
the time of such purchase to be invested in the securities of any issuer,
except for securities issued or guaranteed by the U.S. Government; (2) PERCENT
LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE. Purchase any securities which would
cause the Fund at the time of such purchase to own more than 10% of the
outstanding securities of any class of any issuer; (3) UNSEASONED ISSUERS.
Purchase the securities of any issuer engaged in continuous operation for less
than three years; (4) INDUSTRY CONCENTRATION. Purchase any securities which
would cause more than 25% of its total assets at the time of such purchase to
be concentrated in the securities of issuers engaged in any one industry; (5)
REAL ESTATE. Purchase or sell real estate, although it may invest in the
securities of companies whose business involves the purchase or sale of real
estate; (6) COMMODITIES. Purchase or sell commodities or commodity contracts;
except that it may enter into futures contracts subject to (22) below; (7)
INVESTMENT COMPANIES. Acquire the securities of any investment company, except
securities purchased in regular transactions in the open market or acquired
pursuant to a plan of merger or consolidation (to the extent permitted by the

B-12
<PAGE>

Investment Company Act of 1940 and any rules adopted thereunder); (8) SHORT
SALES AND PURCHASES ON MARGIN. Effect short sales of securities or purchase
securities on margin, except for use of short-term credit necessary for
clearance of purchases of portfolio securities, and except for margin deposits
made in connection with futures contracts, subject to (22) below; (9) LOANS.
Make loans, except that it may (i) acquire publicly distributed bonds,
debentures, notes, and other debt securities, and (ii) lend portfolio
securities provided that no such loan may be made if as a result the aggregate
of such loans would exceed 30% of the value of the Fund's total assets; (10)
BORROWING. Borrow money, except the Fund may borrow from banks as a temporary
measure for extraordinary or emergency purposes, and then only in amounts not
exceeding 15% of its total assets valued at market. The Fund will not borrow in
order to increase income (leveraging), but only to facilitate redemption
requests which might otherwise require untimely disposition of portfolio
securities. Interest paid on such borrowings will reduce net investment income.
The Fund may also enter into futures contracts as set forth in (22) below; (11)
UNDERWRITING. Act as an underwriter of securities, except insofar as it might
technically be deemed to be an underwriter for purposes of the Securities Act
of 1933 upon disposition of certain securities; (12) SECURITIES OF ADVISER.
Purchase or retain the securities of its investment adviser, or of any
corporation of which any officer, director, or member of the investment
committee of the investment adviser is a director; (13) ALLOCATION OF PRINCIPAL
BUSINESS TO OFFICERS AND DIRECTORS. Deal with any of its officers or directors,
or with any firm of which any of its officers or directors is a member, as
principal in the purchase or sale of portfolio securities; (14) ALLOCATION OF
BROKERAGE BUSINESS TO ADVISER. Pay commissions on portfolio transactions to its
investment adviser or to any officer or director of its investment adviser;
(15) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the purpose of
exercising management or control; (16) RESTRICTED AND ILLIQUID SECURITIES.
Purchase any securities which would cause more than 5% of its total assets at
the time of such purchase to be invested in securities which may not be
publicly sold without registration under the Securities Act of 1933, or are
otherwise illiquid or not readily marketable; (17) PUTS, CALLS, ETC. Invest in
puts, calls, straddles, spreads, or any combination thereof, except that the
Fund reserves the right to write covered call options and purchase put and call
options; (18) OIL AND GAS PROGRAMS. Purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs;
(19) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or
retain the securities of any issuer if those officers or directors of Penn
Series, or of its investment adviser, who each owns beneficially more than .5%
of the outstanding securities of such issuer, together own beneficially more
than 5% of such securities; (20) MORTGAGING. Mortgage, pledge, or hypothecate
or, in any other manner, transfer as security for indebtedness any security
owned by the Growth Equity Fund, except (i) as may be necessary in connection
with permissible borrowings, in which event such mortgaging, pledging, or
hypothecating may not exceed 15% of the Fund's assets, valued at cost;
provided, however, that as a matter of operating policy, which may be changed
without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market, and (ii)
it may enter into futures contracts; (21) SENIOR SECURITIES. Issue any class of
securities senior to any other class of securities; or (22) FUTURES CONTRACTS.
Enter into a futures contract if, as a result thereof, (i) the then current
aggregate futures market prices of securities required to be delivered under
open futures contract sales plus the then current aggregate purchase prices of
securities required to be purchased under open futures contract purchases would
exceed 30% of the Fund's total assets (taken at market value at the time of
entering into the contract) or (ii) more than 5% of the Fund's total assets
(taken at market value at the time of entering into the contract) would be
committed to margin on such futures contracts or to premiums on options
thereon.

- --------------------------------------------------------------------------------
VALUE EQUITY FUND

Investment restrictions (1), (2), (3), (5), (7) through (11), (14), and (15)
are fundamental policies of the Value Equity Fund, except as otherwise
indicated. Restrictions (4), (6), (12) and (13) are operating policies and are
subject to change by the Board of Directors without shareholder approval.
The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; (D) UNSEASONED
ISSUERS. More than 5% of the value of the Value Equity Fund's total assets
would be invested in the securities of issuers which at the time of purchase
had been in operation for less than three years, including predecessors and
unconditional guarantors; (2) RESTRICTED OR NOT READILY MARKETABLE SECURITIES.
Purchase a security if, as a result, more than 10% of the Fund's total assets
would be invested in (a) securities with legal or contractual restrictions on
resale; (b) repurchase agreements maturing in more than seven (7) days; and (c)
other securities that are not readily marketable; (3) REAL ESTATE. Purchase or
sell real estate (although it may purchase money market securities secured by
real estate or interests therein, or issued by companies which invest in real
estate or interests therein); (4) INVESTMENT

B-13
<PAGE>

COMPANIES. Purchase securities of open-end and closed-end investment companies,
except to the extent permitted by the Investment Company Act of 1940 and any
rules adopted thereunder; (5) COMMODITIES. Purchase or sell commodities or
commodity contracts; except that it may enter into futures contracts subject to
(15) below; (6) OIL AND GAS PROGRAMS. Purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs;
(7) SHORT SALES AND PURCHASES ON MARGIN. Effect short sales of securities or
purchase securities on margin, except for use of short-term credit necessary
for clearance of purchases of portfolio securities, except that it may make
margin deposits in connection with futures contracts, subject to (15) below;
(8) LOANS. Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements, and (ii) lend portfolio
securities provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 30% of the value of the Fund's total
assets; provided, however, that the Fund may acquire publicly distributed
bonds, debentures, notes and other debt securities and may purchase debt
securities at private placement within the limits imposed on the acquisition of
restricted securities; (9) BORROWING. Borrow money, except from banks as a
temporary measure for extraordinary or emergency purposes, and then only in
amounts not exceeding 15% of its total assets valued at market. The Fund will
not borrow in order to increase income (leveraging), but only to facilitate
redemption requests which might otherwise require untimely disposition of
portfolio securities; interest paid on any such borrowings will reduce net
investment income; the Fund may also enter into futures contracts as set forth
in (15) below; (10) MORTGAGING. Mortgage, pledge, or hypothecate or, in any
other manner, transfer as security for indebtedness any security owned by the
Fund, except (i) as may be necessary in connection with permissible borrowings,
in which event such mortgaging, pledging, or hypothecating may not exceed 15%
of the Fund's assets, valued at cost; provided, however, that as a matter of
operating policy, which may be changed without shareholder approval, the Fund
will limit any such mortgaging, pledging, or hypothecating to 10% of its net
assets, valued at market; and (ii) it may enter into futures contracts;
(11) UNDERWRITING. Underwrite securities issued by other persons except: (i) to
the extent that the Fund may be deemed to be an underwriter within the meaning
of the Securities Act of 1933 in connection with the purchase of government
securities directly from the issuer in accordance with the Fund's investment
objectives, program, and restrictions; and (ii) the later disposition of
restricted securities acquired within the limits imposed on the acquisition of
restricted securities; (12) CONTROL OF PORTFOLIO COMPANIES. Invest in companies
for the purpose of exercising management or control; (13) OWNERSHIP OF
PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or retain the
securities of any issuer if, to the knowledge of the Fund's management or
investment adviser, those officers and directors of Penn Series, and of its
investment adviser, who each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; (14) SENIOR SECURITIES. Issue any class of securities senior to any
other class of securities; or (15) FUTURES CONTRACTS. Enter into a futures
contract if, as a result thereof, (i) the then current aggregate futures market
prices of securities required to be delivered under open futures contract sales
plus the then current aggregate purchase prices of securities required to be
purchased under open futures contract purchases would exceed 30% of the Fund's
total assets (taken at market value at the time of entering into the contract)
or (ii) more than 5% of the Fund's total assets (taken at market value at the
time of entering into the contract) would be committed to margin on such
futures contracts or to premiums on options thereon.

- --------------------------------------------------------------------------------
SMALL CAPITALIZATION FUND

Investment restrictions (1) through (9) are fundamental policies of the Small
Capitalization Fund, except as otherwise indicated. Restrictions (10) through
(15) are non-fundamental operating policies and are subject to change by the
Board of Directors without shareholder approval.

B-14
<PAGE>

valued at market; the Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities; (8) UNDERWRITING.
Underwrite securities issued by other persons except: (i) to the extent that
the Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase of government securities
directly from the issuer in accordance with the Fund's investment objectives,
program, and restrictions; and (ii) the later disposition of restricted
securities acquired within the limits imposed on the acquisition of restricted
securities; (9) SENIOR SECURITIES. Issue any class of securities senior to any
other class of securities. Entering into repurchase agreements, borrowing money
in accordance with restriction (7) above, or lending portfolio securities in
accordance with restriction (6) above, shall not be considered for purposes of
the present restriction a senior security; (10) CONTROL OF PORTFOLIO COMPANIES.
Invest in companies for the purpose of exercising management or control; (11)
OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Invest in
securities of any issuer if, to the knowledge of the Fund, any officer or
director of the Fund or any officer or director of the adviser or sub-adviser,
owns more than .5% of the outstanding securities of such issuer, and such
officers and directors who own more than .5% own in the aggregate more than 5%
of such securities; (12) OIL AND GAS PROGRAMS. Invest in oil, gas or mineral
exploration or developmental programs, except that it may invest in the
securities of companies which operate, invest in, or sponsor such programs;
(13) RESTRICTED OR NOT READILY MARKETABLE SECURITIES. Purchase a security if,
as a result, more than 10% of the Fund's total assets would be invested in
illiquid securities; (14) SHORT SALES. Effect short sales of securities, except
short sales "against the box;" (15) MORTGAGING. Mortgage, pledge, hypothecate
or, in any other manner, transfer as security for indebtedness any security
owned by the Fund, except as may be necessary in connection with permissible
borrowings (including reverse repurchase agreements) financial options and
other hedging activities.

- --------------------------------------------------------------------------------
EMERGING GROWTH FUND

Investment restrictions (1) through (9) are fundamental policies of the
Emerging Growth Fund, except as otherwise indicated. Restrictions (10) through
(15) are non-fundamental operating policies and are subject to change by the
Board of Directors without shareholder approval.

The Fund may not: (1) DIVERSIFICATION. Make an investment unless, when
considering all its other investments, 75% of the value of the Fund's assets
would consist of cash, cash items, obligations of the U.S. Government, its
agencies or instrumentalities and other securities; for purposes of this
restriction, "other securities" are limited for each issuer to not more than 5%
of the value of the Fund's assets and to not more than 10% of the issuer's
outstanding voting securities held by Penn Series as a whole; (2) INDUSTRY
CONCENTRATION. Invest more than twenty-five percent or more of the value of the
Fund's total assets in the securities of issuers having their principal
business activities in the same industry; (3) REAL ESTATE. Invest in real
estate or interests in real estate, but may purchase readily marketable
securities of companies holding real estate or interests therein, and
securities which are secured by real estate or interests therein; (4)
COMMODITIES. Invest in physical commodities or physical commodity contracts,
but it may purchase and sell financial futures contracts and options thereon;
(5) PURCHASES ON MARGIN. Purchase securities on margin, except that it may make
margin deposits in connection with financial futures contracts or options; (6)
LOANS. Make loans, although the Fund may (i) purchase money market securities
and enter into repurchase agreements, and (ii) lend portfolio securities
provided that no such loan may be made if, as a result, the aggregate of such
loans would exceed 30% of the value of the Fund's total assets; provided,
however, that the Fund may acquire publicly distributed bonds, debentures,
notes and other debt securities and may purchase debt securities at private
placement within the limits imposed on the acquisition of restricted
securities; (7) BORROWING. Borrow money, except the Fund may borrow from banks
as a temporary measure for extraordinary or emergency purposes, and then only
in amounts not exceeding 15% of its total assets valued at market; the Fund
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities; (8) UNDERWRITING. Underwrite securities
issued by other persons except: (i) to the extent that the Fund may be deemed
to be an underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase of government securities directly from the issuer
in accordance with the Fund's investment objectives, program, and restrictions;
and (ii) the later disposition of restricted securities acquired within the
limits imposed on the acquisition of restricted securities; (9) SENIOR
SECURITIES. Issue any class of securities senior to any other class of
securities. Entering into repurchase agreements, borrowing money in accordance
with restriction (7) above, or lending portfolio securities in accordance with
restriction (6) above, shall not be considered for purposes of the present
restriction a senior security; (10) CONTROL OF PORTFOLIO COMPANIES. Invest in
companies for the purpose of exercising management or control; (11) OWNERSHIP
OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Invest in securities of any
issuer if, to the knowledge of the Fund, any officer or director of the Fund or
any officer or director of the adviser or sub-adviser, owns more than .5% of
the outstanding securities of such issuer, and such officers and directors who
own more than .5% own in the aggregate more than 5% of such securities; (12)
OIL AND GAS PROGRAMS. Invest in oil, gas or mineral exploration or
developmental programs, except that it may invest in the securities of
companies which operate, invest in, or sponsor such

B-15
<PAGE>

programs; (13) RESTRICTED OR NOT READILY MARKETABLE SECURITIES. Purchase a
security if, as a result, more than 10% of the Fund's total assets would be
invested in illiquid securities; (14) SHORT SALES. Effect short sales of
securities, except short sales "against the box;" (15) MORTGAGING. Mortgage,
pledge, hypothecate or, in any other manner, transfer as security for
indebtedness any security owned by the Fund, except as may be necessary in
connection with permissible borrowings (including reverse repurchase
agreements) financial options and other hedging activities.

- --------------------------------------------------------------------------------
FLEXIBLY MANAGED FUND

Investment restrictions (1), (3), (5), (7) through (11), (13), and (14) are
fundamental policies of the Flexibly Managed Fund, except as otherwise
indicated. Restrictions (2), (4), (6) and (12) are operating policies and are
subject to change by the Board of Directors without shareholder approval.

The Flexibly Managed Fund may not: (1) purchase the securities of any issuer
(other than obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS
INVESTED IN ANY ONE ISSUER. With respect to 75% of the Fund's total assets,
more than 5% of the value of the Fund's total assets would be invested in the
securities of a single issuer (including repurchase agreements with any one
issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE. With respect to
75% of the Fund's total assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Fund; (C) INDUSTRY CONCENTRATION.
Twenty-five percent or more of the value of the Fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry; provided, however, that the Fund will normally
concentrate 25% or more of its assets in the banking industry when the Fund's
position in issues maturing in one year or less equals 35% or more of the
Fund's total assets; (2) RESTRICTED OR ILLIQUID SECURITIES. Purchase a security
if, as a result, more than 15% of the value of the Fund's net assets would be
invested in repurchase agreements maturing in more than seven days and
restricted securities, illiquid securities, and securities without readily
available market quotations; (3) REAL ESTATE. Purchase or sell real estate,
including limited partnership interests therein, unless acquired as a result of
ownership of securities or other instruments (this restriction shall not
prevent the Fund from investing in securities of other instruments backed by
real estate or in securities of companies engaged in the real estate business);
(4) INVESTMENT COMPANIES. Purchase securities of open-end and closed-end
investment companies, except to the extent permitted by the Investment Company
Act of 1940 and any rules adopted thereunder; (5) COMMODITIES. Purchase or sell
commodities or commodity contracts; except that it may enter into futures
contracts, subject to (15) below; (6) OIL AND GAS PROGRAMS. Purchase
participations or other direct interests in oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5% of
its total assets would be invested in such programs; (7) SHORT SALES AND
PURCHASES ON MARGIN. Effect short sales of securities or purchase securities on
margin, except for use of short-term credit necessary for clearance of
purchases of portfolio securities; except that it may make margin deposits in
connection with futures contracts, subject to (15) below; (8) LOANS. Make
loans, although the Fund may (i) purchase money market securities and enter
into repurchase agreements, and (ii) lend portfolio securities provided that no
such loan may be made if, as a result, the aggregate of such loans would exceed
30% of the value of the Fund's total assets; provided, however, that the Fund
may acquire publicly distributed bonds, debentures, notes and other debt
securities and may purchase debt securities at private placement within the
limits imposed on the acquisition of restricted securities; (9) BORROWING.
Borrow money, except the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes, and then only in amounts not exceeding 15%
of its total assets valued at market; the Fund will not borrow in order to
increase income (leveraging), but only to facilitate redemption requests which
might otherwise require untimely disposition of portfolio securities. Interest
paid on any such borrowings will reduce net investment income. The Fund may
enter into futures contracts as set forth in (15) below; (10) MORTGAGING.
Mortgage, pledge, hypothecate or, in any other manner, transfer as security for
indebtedness any security owned by the Fund, except (i) as may be necessary in
connection with permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's assets, valued at
cost; provided, however, that as a matter of operating policy, which may be
changed without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market, and (ii)
it may enter into futures contracts; (11) UNDERWRITING. Underwrite securities
issued by other persons, except: (i) to the extent that the Fund may be deemed
to be an underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase of government securities directly from the issuer
in accordance with the Fund's investment objectives, program, and restrictions;
and (ii) the later disposition of restricted securities acquired within the
limits imposed on the acquisition of restricted securities; (12) CONTROL OF
PORTFOLIO COMPANIES. Invest in companies for the purpose of exercising
management or control; (13) SENIOR SECURITIES. Issue any class of securities
senior to any other class of securities; or (14) FUTURES CONTRACTS. Enter into
a futures contract if, as a result thereof, (i) the then current aggregate
futures market prices of securities required to be delivered under open futures
contract sales plus the then current aggregate purchase prices of securities
required to be purchased under open futures contract purchases would exceed 30%
of the Fund's total assets (taken at market value at the time of entering into
the contract) or (ii) more than 5% of

B-16
<PAGE>

the Fund's total assets (taken at market value at the time of entering into the
contract) would be committed to margin on such futures contracts or to premiums
on options thereon.

- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND

Investment restrictions (1), (2), (3), (5), (7) through (11), (14), and (15)
are fundamental policies of the International Equity Fund, except as otherwise
indicated. Restrictions (4), (6), (12) and (13) are operating policies and are
subject to change by the Board of Directors without shareholder approval.

The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; (D) UNSEASONED
ISSUERS. More than 5% of the value of the Fund's total assets would be invested
in the securities of issuers which at the time of purchase had been in
operation for less than three years, including predecessors and unconditional
guarantors; (2) RESTRICTED OR NOT READILY MARKETABLE SECURITIES. Purchase a
security if, as a result, more than 10% of the Fund's total assets would be
invested in (a) securities with legal or contractual restrictions on resale;
(b) repurchase agreements maturing in more than seven (7) days; and (c) other
securities that are not readily marketable; (3) REAL ESTATE. Purchase or sell
real estate (although it may purchase money market securities secured by real
estate or interests therein, or issued by companies which invest in real estate
or interests therein); (4) INVESTMENT COMPANIES. Purchase securities of open-
end and closed-end investment companies, except to the extent permitted by the
Investment Company Act of 1940 and any rules adopted thereunder; (5)
COMMODITIES. Purchase or sell commodities or commodity contracts; except that
it may enter into futures contracts subject to (15) below; (6) OIL AND GAS
PROGRAMS. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (7) SHORT SALES AND
PURCHASES ON MARGIN. Effect short sales of securities or purchase securities on
margin, except for use of short-term credit necessary for clearance of
purchases of portfolio securities, except that it may make margin deposits in
connection with futures contracts, subject to (15) below; (8) LOANS. Make
loans, although the Fund may (i) purchase money market securities and enter
into repurchase agreements, and (ii) lend portfolio securities provided that no
such loan may be made if, as a result, the aggregate of such loans would exceed
30% of the value of the Fund's total assets; provided, however, that the Fund
may acquire publicly distributed bonds, debentures, notes and other debt
securities and may purchase debt securities at private placement within the
limits imposed on the acquisition of restricted securities; (9) BORROWING.
Borrow money, except from banks as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 15% of its total
assets valued at market. The Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities. Interest paid on any such
borrowings will reduce net investment income. The Fund may also enter into
futures contracts as set forth in (15) below; (10) MORTGAGING. Mortgage,
pledge, or hypothecate or, in any other manner, transfer as security for
indebtedness any security owned by the Fund, except (i) as may be necessary in
connection with permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's assets, valued at
cost; provided, however, that as a matter of operating policy, which may be
changed without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market; and (ii)
it may enter into futures contracts; (11) UNDERWRITING. Underwrite securities
issued by other persons except: (i) to the extent that the Fund may be deemed
to be an underwriter within the meaning of the Securities Act of 1933 in
connection with the purchase of government securities directly from the issuer
in accordance with the Fund's investment objectives, program, and restrictions;
and (ii) the later disposition of restricted securities acquired within the
limits imposed on the acquisition of restricted securities; (12) CONTROL OF
PORTFOLIO COMPANIES. Invest in companies for the purpose of exercising
management or control; (13) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND
DIRECTORS. Purchase or retain the securities of any issuer if, to the knowledge
of the Fund's management or investment adviser, those officers and directors of
Penn Series, and of its investment adviser, who each owns beneficially more
than .5% of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities; (14) SENIOR SECURITIES. Issue any
class of securities senior to any other class of securities; or (15) FUTURES
CONTRACTS. Enter into a futures contract if, as a result thereof, (i) the then
current aggregate futures market prices of securities required to be delivered
under open futures contract sales plus the then current aggregate purchase
prices of securities required to be purchased under open futures contract
purchases would exceed 30% of the Fund's total assets (taken at market value at
the time of entering into the contract) or (ii) more than 5% of the Fund's
total assets (taken at market value at the time of entering into the contract)
would be committed to margin on such futures contracts or to premiums on
options thereon.

B-17
<PAGE>

- --------------------------------------------------------------------------------
QUALITY BOND FUND

Investment restrictions (1), (2), (4) through (9), (14) and (15) have been
adopted by the Quality Bond Fund as fundamental policies, except as otherwise
indicated. Restrictions (3) and (10) through (13) are operating policies
subject to change by the Board of Directors without shareholder approval.

The Fund may not (1) purchase a security if, as a result: (A) PERCENT LIMIT
ON ASSETS INVESTED IN ANY ONE ISSUER. More than 5% of the value of the Fund's
total assets would be invested in the securities of a single issuer, except
securities issued or guaranteed by the U.S. Government, or any of its agencies
or instrumentalities; (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund, except securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities; (C) INDUSTRY CONCENTRATION. Twenty-
five percent or more of the value of the Fund's total assets would be invested
in the securities of issuers having their principal activities in the same
industry; provided, however, that the Fund will invest 25% or more of its
assets, but not more than 50%, in any one of the gas utility, gas transmission
utility, electric utility, telephone utility, and petroleum industries under
certain circumstances (see THE QUALITY BOND FUND'S POLICY REGARDING INDUSTRY
CONCENTRATION above), but this limitation does not apply to bank certificates
of deposit; (D) UNSEASONED ISSUERS. More than 5% of the value of the Fund's
total assets would be invested in the securities (taken at cost) of issuers
which at the time of purchase had been in operation less than three years (for
this purpose, the period of operation of any issuer shall include the period of
operation of any predecessor or unconditional guarantor of the issuer) and in
equity securities which are not readily marketable for reasons other than
restrictions against sale to the public without registration under the
Securities Act of 1933; (E) RESTRICTED SECURITIES. More than 10% of the value
of the total assets of the Fund would be invested in securities which are
subject to legal or contractual restrictions on resale; or (F) WARRANTS. More
than 2% of the value of the total assets of the Fund would be invested in
warrants which are not listed on the New York Stock Exchange or the American
Stock Exchange, or more than 5% of the value of the total assets of the Fund
would be invested in warrants whether or not so listed, such warrants in each
case to be valued at the lesser of cost or market, but assigning no value to
warrants acquired by the Fund in units with or attached to debt securities; (2)
REAL ESTATE. Purchase or sell real estate (although it may purchase securities
of companies whose business involves the purchase or sale of real estate); (3)
INVESTMENT COMPANIES. Purchase securities of open-end and closed-end investment
companies, except to the extent permitted by the Investment Company Act of 1940
and any rules adopted thereunder; (4) COMMODITIES. Purchase or sell commodities
or commodity contracts, except that the Fund may enter into interest rate
futures contracts, subject to (15) below; (5) SHORT SALES AND PURCHASES ON
MARGIN. Purchase securities on margin or effect short sales of securities, but
the Fund may make margin deposits in connection with interest rate futures
transactions subject to (15) below; (6) LOANS. Make loans (although it may
acquire publicly-distributed bonds, debentures, notes, and other debt
securities, may enter into repurchase agreements, may lend portfolio
securities, and may purchase debt securities at private placement within the
limits imposed above on the acquisition of restricted securities); (7)
BORROWING. Borrow money, except the Fund may (i) borrow money for temporary
administrative purposes and then only in amounts not exceeding the lesser of
10% of its total assets valued at cost, or 5% of its total assets valued at
market and, in any event, only if immediately thereafter there is an asset
coverage of at least 300%, and (ii) enter into interest rate futures contracts;
(8) MORTGAGING. Mortgage, pledge, or hypothecate securities, except (i) in
connection with permissible borrowings where the market value of the securities
mortgaged, pledged, or hypothecated does not exceed 15% of the Fund's assets
taken at cost; provided, however, that as a matter of operating policy, the
Fund will limit any such mortgaging, pledging, or hypothecating to 10% of its
net assets, taken at market, in order to comply with certain state investment
restrictions, and (ii) interest rate futures contracts; (9) UNDERWRITING. Act
as an underwriter of securities, except insofar as it might be deemed to be
such for purposes of the Securities Act of 1933 upon the disposition of certain
portfolio securities acquired within the limitations of restriction (e) above;
(10) OWNERSHIP OF PORTFOLIO SECURITIES BY OFFICERS AND DIRECTORS. Purchase or
retain securities of any issuer if, to the knowledge of the Fund's management
or investment adviser, those officers or directors of Penn Series, or of its
investment adviser, who each owns beneficially more than .5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; (11) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the
purpose of exercising management or control; (12) PUTS, CALLS, ETC. Invest in
puts, calls, straddles, spreads, or any combination thereof, except the Fund
reserves the right to write covered call options and purchase put and call
options; (13) OIL AND GAS PROGRAMS. Purchase participations or other direct
interests in oil, gas, or other mineral exploration or development programs;
(14) SENIOR SECURITIES. Issue any class of securities senior to any other class
of securities; or (15) FUTURES CONTRACTS. Enter into an interest rate futures
contract if, as a result thereof, (i) the then current aggregate futures market
prices of financial instruments required to be delivered under open futures
contract sales plus the then current aggregate purchase prices of financial
instruments required to be purchased under open futures contract purchases
would exceed 30% of the Fund's total assets (taken at market value at the time
of entering into the contract) or (ii) more than 5% of the Fund's total assets
(taken at market value at the time of entering into the contract) would be
committed to margin on such futures contracts or to premiums on options
thereon.

B-18
<PAGE>

- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND

Investment restrictions (1), (2), (4), (6), (8) through (12), and (15)
through (16) have been adopted by the High Yield Bond Fund as fundamental
policies, except as otherwise indicated. Restrictions (3), (5), (7), (13)
through (14), and (17) through (18) are operating policies subject to change by
the Board of Directors without shareholder approval.

The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. With respect to 75% of the Fund's total assets, more than 5% of the
value of the Fund's total assets would be invested in the securities of a
single issuer (including repurchase agreements with any one issuer); (B)
PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE. With respect to 75% of the
Fund's total assets, more than 10% of the outstanding voting securities of any
issuer would be held by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five
percent or more of the value of the Fund's total assets would be invested in
the securities of issuers having their principal business activities in the
same industry; provided, however, that the Fund will normally concentrate 25%
or more of its assets in the securities of the banking industry when the Fund's
position in issues maturing in one year or less equals 35% or more of the
Fund's total assets; (2) EQUITY SECURITIES. Invest more than 20% of the Fund's
total assets in common stocks (including up to 10% in warrants); (3) RESTRICTED
OR ILLIQUID SECURITIES. Invest more than 15% of its net assets in repurchase
agreements maturing in more than seven days and restricted securities, illiquid
securities and securities without readily available market quotations; (4) REAL
ESTATE. Purchase or sell real estate, including limited partnership interests
therein, unless acquired as a result of ownership of securities or other
instruments (this restriction shall not prevent the Fund from investing in
securities of other instruments backed by real estate or in securities of
companies engaged in the real estate business); (5) INVESTMENT COMPANIES.
Purchase securities of open-end or closed-end investment companies except in
compliance with the Investment Company Act of 1940; (6) COMMODITIES. Purchase
or sell commodities or commodity contracts, except that it may enter into
interest rate futures contracts, subject to (17) below; (7) OIL AND GAS
PROGRAMS. Purchase participations or other direct interests in or enter into
leases with respect to oil, gas, or other mineral exploration or development
programs if, as a result, more than 5% of the Fund's total assets would be
invested in such programs; (8) PURCHASES ON MARGIN. Purchase securities on
margin, except for use of short-term credit necessary for clearance of
purchases of portfolio securities; except that it may make margin deposits in
connection with interest rate futures contracts, subject to (17) below;
(9) LOANS. Make loans, although the Fund may (i) purchase money market
securities and enter into repurchase agreements, and (ii) lend portfolio
securities provided that no such loan may be made if as a result the aggregate
of such loans would exceed 30% of the value of the Fund's total assets;
provided, however, that the Fund may acquire publicly distributed bonds,
debentures, notes and other debt securities and may purchase debt securities at
private placement within the limits imposed on the acquisition of restricted
securities; (10) BORROWING. Borrow money, except the Fund may borrow from banks
as a temporary measure for extraordinary or emergency purposes, and then only
in amounts not exceeding 15% of its total assets valued at market; the Fund
will not borrow in order to increase income (leveraging), but only to
facilitate redemption requests which might otherwise require untimely
disposition of portfolio securities. Interest paid on any such borrowings will
reduce net investment income; the Fund may enter into interest rate futures
contracts as set forth in (17) below; (11) MORTGAGING. Mortgage, pledge,
hypothecate or, in any other manner, transfer as security for indebtedness any
security owned by the Fund, except (i) as may be necessary in connection with
permissible borrowings, in which event such mortgaging, pledging, or
hypothecating may not exceed 15% of the Fund's assets, valued at cost;
provided, however, that as a matter of operating policy, which may be changed
without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market, and (ii)
it may enter into interest rate futures contracts; (12) UNDERWRITING.
Underwrite securities issued by other persons, except: (i) to the extent that
the Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase of government securities
directly from the issuer in accordance with the Fund's investment objectives,
program, and restrictions; and (ii) the later disposition of restricted
securities acquired within the limits imposed on the acquisition of restricted
securities; (13) CONTROL OF PORTFOLIO COMPANIES. Invest in companies for the
purpose of exercising management or control; (14) PUTS, CALLS, ETC. Invest in
puts, calls, straddles, spreads, or any combination thereof, except to the
extent permitted by the prospectus and Statement of Additional Information;
(15) SENIOR SECURITIES. Issue any class of securities senior to any other class
of securities; (16) FUTURES CONTRACTS. Enter into an interest rate futures
contract if, as a result thereof, (i) the then current aggregate futures market
prices of financial instruments required to be delivered under open futures
contract sales plus the then current aggregate purchase prices of financial
instruments required to be purchased under open futures contract purchases
would exceed 30% of the Fund's total assets (taken at market value at the time
of entering into the contract) or (ii) more than 5% of the Fund's total assets
(taken at market value at the time of entering into the contract) would be
committed to margin on such futures contracts or to premiums on options
thereon; (17) PURCHASES WHEN BORROWINGS OUTSTANDING. Purchase additional
securities when money borrowed exceeds 5% of the Fund's total assets; (18)
SHORT SALES. Effect short sales of securities; or (19) WARRANTS. Invest in
warrants if, as a result, more than 10% of the value of the net assets of the
Fund would be invested in warrants.

B-19
<PAGE>

- --------------------------------------------------------------------------------
MONEY MARKET FUND

Investment restrictions (1) through (4), (6), (8) through (12), and (16)
described below have been adopted by the Money Market Fund and are fundamental
policies, except as otherwise indicated. Restrictions (5), (7), and (13)
through (15) are operating policies subject to change by the Board of Directors
without shareholder approval.

The Fund may not: (1) purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) if, as a result: (A) PERCENT LIMIT ON ASSETS INVESTED IN ANY
ONE ISSUER. More than 5% of the value of the Fund's total assets would be
invested in the securities of a single issuer (including repurchase agreements
with any one issuer); (B) PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUE.
More than 10% of the outstanding voting securities of any issuer would be held
by the Fund; (C) INDUSTRY CONCENTRATION. Twenty-five percent or more of the
value of the Fund's total assets would be invested in the securities of issuers
having their principal business activities in the same industry; provided that
this limitation does not apply to obligations issued or guaranteed by the U.S.
Government, or its agencies or instrumentalities, or to certificates of
deposit, or bankers' acceptances; (D) UNSEASONED ISSUERS. More than 5% of the
value of the Fund's total assets would be invested in the securities of issuers
which at the time of purchase had been in operation for less than three years,
including predecessors and unconditional guarantors; (2) EQUITY SECURITIES.
Purchase any common stocks or other equity securities, or securities
convertible into equity securities; (3) RESTRICTED OR ILLIQUID SECURITIES.
Purchase restricted securities, illiquid securities, or securities without
readily available market quotations, or invest more than 10% of the value of
its total assets in repurchase agreements maturing in more than seven days and
in the obligations of small banks and savings and loan associations which do
not have readily available market quotations; (4) REAL ESTATE. Purchase or sell
real estate (although it may purchase money market securities secured by real
estate or interests therein, or issued by companies which invest in real estate
or interests therein); (5) INVESTMENT COMPANIES. Purchase securities of open-
end and closed-end investment companies, except to the extent permitted by the
Investment Company Act of 1940 and any rules adopted thereunder; (6)
COMMODITIES. Purchase or sell commodities or commodity contracts; (7) OIL AND
GAS PROGRAMS. Purchase participations or other direct interests in oil, gas, or
other mineral exploration or development programs; (8) PURCHASES ON MARGIN.
Purchase securities on margin, except for use of short-term credit necessary
for clearance of purchases of portfolio securities; (9) LOANS. Make loans,
although the Fund may (i) purchase money market securities and enter into
repurchase agreements, and (ii) lend portfolio securities provided that no such
loan may be made if, as a result, the aggregate of such loans would exceed 30%
of the value of the Fund's total assets; (10) BORROWING. Borrow money, except
that the Fund may borrow from banks as a temporary measure for extraordinary or
emergency purposes, and then only from banks in amounts not exceeding the
lesser of 10% of its total assets valued at cost or 5% of its total assets
valued at market. The Fund will not borrow in order to increase income
(leveraging), but only to facilitate redemption requests which might otherwise
require untimely disposition of portfolio securities. Interest paid on any such
borrowings will reduce net investment income; (11) MORTGAGING. Mortgage,
pledge, hypothecate or, in any other manner, transfer as security for
indebtedness any security owned by the Fund, except as may be necessary in
connection with permissible borrowings, in which event such mortgaging,
pledging, or hypothecating may not exceed 15% of the Fund's assets, valued at
cost; provided, however, that as a matter of operating policy, which may be
changed without shareholder approval, the Fund will limit any such mortgaging,
pledging, or hypothecating to 10% of its net assets, valued at market; (12)
UNDERWRITING. Underwrite securities issued by other persons, except to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933 in connection with the purchase of government
securities directly from the issuer in accordance with the Fund's investment
objectives, program, and restrictions; (13) CONTROL OF PORTFOLIO COMPANIES.
Invest in companies for the purpose of exercising management or control; (14)
PUTS, CALLS, ETC. Invest in puts, calls, straddles, spreads, or any combination
thereof; or (15) SENIOR SECURITIES. Issue any class of securities senior to any
other class of securities.
In addition to the foregoing, the Money Market Fund will restrict its
investments in accordance with the portfolio quality, diversification and
maturity standards contained in Rule 2a-7 under the Investment Company Act of
1940. See "INVESTMENT OBJECTIVES AND POLICIES - MONEY MARKET FUND" in the
prospectus for certain of the restrictions contained in the Rule.

B-20
<PAGE>

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

- --------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES

INDEPENDENCE CAPITAL MANAGEMENT, INC. Independence Capital Management, Inc.
("ICMI") has served as investment adviser to the GROWTH EQUITY, QUALITY BOND
and MONEY MARKET FUNDS since November 21, 1992. See "INVESTMENT ADVISER" in the
prospectus for information regarding ownership of ICMI, investment advisory and
management services provided to the Funds by ICMI and the method of computing
the advisory fees payable by the Funds to ICMI.

ICMI has served as investment adviser and RS Investment Management, Inc.
(formerly "Robertson Stephens Investment Management, Inc.") as sub-adviser to
the EMERGING GROWTH FUND since its inception on May 1, 1997. See "INVESTMENT
ADVISER" in the prospectus for information regarding investment advisory
services provided to the Fund by ICMI and the method of computing the advisory
fees payable by the Funds to ICMI. The advisory fee paid by the Fund to ICMI
for the eight months ended December 31, 1997 was $50,608.

ICMI commenced serving as investment adviser to the VALUE EQUITY, SMALL
CAPITALIZATION, FLEXIBLY MANAGED, HIGH YIELD BOND and INTERNATIONAL EQUITY
FUNDS on May 1, 1998. Also on that date, OpCap Advisors (who formerly served as
investment adviser to the VALUE EQUITY and SMALL CAPITALIZATION FUNDS), T. Rowe
Price Associates, Inc. (who formerly served as investment adviser to the
FLEXIBLY MANAGED and HIGH YIELD BOND FUNDS), and Vontobel USA Inc. (who
formerly served as investment adviser to the INTERNATIONAL EQUITY FUND),
commenced serving as sub-advisers to the respective Funds -performing
substantially the same day-to-day investment management services as they
performed as investment adviser. See "INVESTMENT ADVISER" in the prospectus for
information regarding the investment advisory services provided to the Funds by
the ICMI and the method of computing the advisory fees payable by the Funds to
ICMI.

OPCAP ADVISORS. OpCap Advisors ("OpCap") served as investment adviser to the
VALUE EQUITY FUND from November 1, 1992 to May 1, 1998 and as investment
adviser to the SMALL CAPITALIZATION FUND from March 1, 1995 (the date of
inception of the Fund) to May 1, 1998. On May 1, 1998 OpCap commenced serving
as sub-adviser to the Funds and performs substantially the same day-to-day
investment management services as it performed as investment adviser. See
"INVESTMENT SUB-ADVISERS" in the prospectus for information regarding the sub-
advisory services provided to the Funds and the method of computing the sub-
advisory fees payable by ICMI to the OpCap.

OpCap is a subsidiary of Oppenheimer Capital, a registered investment adviser
with approximately $61.4 billion in assets under management on December 31,
1997. All investment management services performed by OpCap are performed by
employees of Oppenheimer Capital. On November 4, 1997, PIMCO Advisors L.P.
("PIMCO Advisors"), a registered investment adviser with $125 billion in assets
under management through various subsidiaries, and its affiliates acquired
control of Oppenheimer Capital and its subsidiary OpCap Advisors. On November
30, 1997, Oppenheimer Capital merged with a subsidiary of PIMCO Advisors and,
as a result, Oppenheimer Capital and OpCap Advisors became indirect wholly-
owned subsidiaries of PIMCO Advisors. PIMCO Advisors has two general partners:
PIMCO Partners, G.P. ("PIMCO G.P.") a California general partnership, and PIMCO
Advisors Holding L.P. (formerly Oppenheimer Capital, L.P.), an NYSE-listed
Delaware limited partnership of which PIMCO G.P. is the sole general partner.
PIMCO GP beneficially owns or controls (through its general partner interest in
PIMCO Advisors Holdings, L.P. formerly Oppenheimer Capital, L.P.) greater than
80% of the units of limited partnership ("Units") of PIMCO Advisors. PIMCO GP
has two general partners. The first of these is Pacific Investment Management
Company, a wholly-owned subsidiary of Pacific Financial Asset Management
Company, which is a direct subsidiary of Pacific Life Insurance Company
("Pacific Life"). The managing general partner of PIMCO GP is PIMCO Partners
L.L.C. ("PPLLC"), a California limited liability company. PPLLC's members are
the Managing Directors (the "PIMCO Managers") of Pacific Investment Management
Company, a subsidiary of PIMCO Advisors (the "PIMCO Subpartnership"). The PIMCO
Managers are: William H. Gross, Dean S. Meiling, James F. Muzzy, William F.
Podlich, III, Brent R. Harris, John L. Hague, William S. Thompson Jr., William
S. Powers, David H. Edington, Benjamin Trosky, William R. Benz, II and Lee R.
Thomas, III. PIMCO Advisors is governed by a Management Board, which consists
of sixteen members, pursuant to a delegation by its general partners PIMCO GP
has the power to designate up to nine members of the Management Board and the
PIMCO Subpartnership, of which the PIMCO Managers are the Managing Directors,
has the power to designate up to two members. In addition, PIMCO GP, as the
controlling general partner of PIMCO Advisors, has the power to revoke the
delegation to the Management Board and exercise control of PIMCO Advisors. As a
result, Pacific Life and/or the PIMCO Managers may be deemed to control PIMCO
Advisors. Pacific Life and the PIMCO Managers disclaim such control. Because of
direct or indirect power to appoint 25% of the members of the Equity Board, (i)
Pacific Life and (ii) the PIMCO Managers and/or the PIMCO Subpartnership may
each be deemed, under applicable provisions of the Investment Company Act, to
control PIMCO Advisors. Pacific Life, the PIMCO Subpartnership and the PIMCO
Managers disclaim such control.

B-21
<PAGE>

T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price Associates, Inc. ("Price
Associates") served as investment adviser to the FLEXIBLY MANAGED and HIGH
YIELD BOND FUNDS from March 1, 1987 to May 1, 1998. On May 1, 1998 Price
Associates commenced serving as sub-adviser to the Funds and performs
substantially the same day-to-day investment management services as it
performed as investment adviser. See "INVESTMENT SUB-ADVISERS" in the
prospectus for information regarding ownership of Price Associates, the sub-
advisory services provided to the Funds and the method of computing the sub-
advisory fees payable by ICMI to the Price Associates.

VONTOBEL USA INC. Vontobel USA Inc. ("Vontobel") served as investment adviser
to the INTERNATIONAL EQUITY FUND from November 1, 1992 to May 1, 1998. On May
1, 1998 Vontobel commenced serving as sub-adviser to the Fund and performs
substantially the same day-to-day investment management services as it
performed as investment adviser. See "INVESTMENT SUB-ADVISERS" in the
prospectus for information regarding ownership of Vontobel, the sub-advisory
services provided to the Fund and the method of computing the sub-advisory fees
payable by ICMI to the Vontobel.

RS INVESTMENT MANAGEMENT, INC. RS Investment Management, Inc. (formerly
"Robertson Stephens Investment Management, Inc.") ("RS") commenced serving as
sub-adviser to the EMERGING GROWTH FUND on May 1, 1997. See "INVESTMENT SUB-
ADVISERS" in the prospectus for information regarding the ownership of RS, the
sub-advisory services provided to the Fund and the method of computing the sub-
advisory fees payable by ICMI to the RS.

For fiscal years 1997, 1996 and 1995, the advisory fees paid by each of the
Funds then in existence were as follows:

<TABLE>
<CAPTION>
FUND ADVISER 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Growth Equity Fund ICMI $ 600,772 $ 494,636 $ 400,482
---------------------------------------------------------------------------
Value Equity Fund OpCap 1,279,429 800,404 523,127
---------------------------------------------------------------------------
Small Capitalization
Fund OpCap 137,566 51,982 12,149
---------------------------------------------------------------------------
Emerging Growth Fund** ICMI 50,608* N/A N/A
---------------------------------------------------------------------------
Flexibly Managed Fund Price Associates 2,310,427 1,645,769 1,090,740
---------------------------------------------------------------------------
International Equity
Fund Vontobel 912,368 646,040 462,151
---------------------------------------------------------------------------
Quality Bond Fund ICMI 164,758 175,993 138,201
---------------------------------------------------------------------------
High Yield Bond Fund Price Associates 254,474 196,230 170,581
---------------------------------------------------------------------------
Money Market Fund ICMI 148,226 119,842 67,864
---------------------------------------------------------------------------
</TABLE>

* For the eight months ended December 31, 1997, ICMI paid sub-advisory
fees to RS in the amount of $45,346.

** The Emerging Growth Fund commenced operations on May 1, 1997.

In 1997, the advisory fee paid by the Emerging Growth Fund is after a
voluntary fee waiver of $9,862. In 1996, the advisory fees paid by the Growth
Equity Fund, Small Capitalization Fund, International Equity Fund, Quality Bond
Fund and Money Market Fund are after a voluntary fee waiver of $10,173, $7,964,
$1,262, $4,132 and $2,778, respectively. In 1995, the advisory fees paid by the
Growth Equity Fund, Quality Bond Fund and Money Market Fund are after voluntary
fee waivers of $44,498, $17,275 and $9,700, respectively.

- --------------------------------------------------------------------------------
ADMINISTRATIVE AND CORPORATE SERVICES

On March 1, 1987, Penn Mutual began serving as the administrative and
corporate services agent for Penn Series, pursuant to the Original
Administrative and Corporate Services Agreement. On February 27, 1989, the
Board of Penn Series, including a majority of directors who were not interested
persons of Penn Series, approved the current Administrative and Corporate
Services Agreement with Penn Mutual. The current Agreement was approved by
shareholders in accordance with instructions from contract owners and payees at
their 1989 Annual Meeting on April 27, 1989, and on May 1, 1989, the Original
Administrative Services Agreement terminated and the current Agreement became
effective. The current Agreement, as amended and restated, was approved by the
shareholders on October 15, 1992. As administrative and corporate services
agent, Penn Mutual receives a fee equal to the annual rate of 0.15% of each
Fund's average daily net assets and provides a variety of services including:
(a) the maintenance of records pertaining to Penn Series' affairs, except those
that are required to be maintained by Penn Series' investment adviser,
accounting services agent, custodian, or transfer agent; (b) the preparation of
certain filings, reports and proxy statements required by the federal
securities laws; (c) the preparation of Penn Series' federal and state tax
returns and any other filings required for tax purposes other than those
required to be made by Penn Series' custodian, transfer agent, accounting
services agent, or investment adviser; (d) such services as Penn Series' Board
of Directors may require in connection with its oversight of Penn Series'
investment adviser, accounting services agent, custodian, or

B-22
<PAGE>

transfer agent, including the periodic collection and presentation of data
concerning the investment performance of Penn Series' various investment
portfolios; (e) the organization of all meetings of Penn Series' Board of
Directors; (f) the organization of all meetings of Penn Series' shareholders;
(g) the collection and presentation of any financial or other data required by
Penn Series' Board of Directors, accountants, or counsel; and (h) the
preparation and negotiation of any amendments to, or substitutes for, the
present agreements with Penn Series' investment adviser, accounting services
agent, custodian, or transfer agent. Penn Mutual also bears certain expenses in
connection with the services it renders as administrative and corporate
services agent, including all rent and other expense involved in the provision
of office space for Penn Series and in connection with Penn Mutual's
performance of its services as administrative and corporate services agent.

For fiscal years 1997, 1996, and 1995 the administrative fees paid to Penn
Mutual by each of the Funds then in existence were as follows:

<TABLE>
<CAPTION>
FUND 1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Growth Equity Fund $186,580 $149,014 $133,494
------------------------------------------------------
Value Equity Fund 383,864 240,121 157,021
------------------------------------------------------
Small Capitalization Fund 41,270 15,135 3,644
------------------------------------------------------
Emerging Growth Fund* 1,483 N/A N/A
------------------------------------------------------
Flexibly Managed Fund 693,190 493,731 327,756
------------------------------------------------------
International Equity Fund 182,487 129,460 92,430
------------------------------------------------------
Quality Bond Fund 56,299 58,663 51,238
------------------------------------------------------
High Yield Bond Fund 76,344 58,869 51,240
------------------------------------------------------
Money Market Fund 56,455 45,111 29,059
------------------------------------------------------
</TABLE>

* The Emerging Growth Fund commenced operations on May 1, 1997.

In 1997, the administration fees paid by the Emerging Growth Fund is after a
voluntary fee waiver of $9,862.

- --------------------------------------------------------------------------------
ACCOUNTING SERVICES

On May 1, 1989, PFPC Inc. ("PFPC") began serving as the accounting services
agent for Penn Series. In that capacity, PFPC provides certain accounting and
related services to Penn Series, including: (a) the maintenance for each Fund
of a daily trial balance, general ledger, subsidiary records, capital stock
accounts (other than those maintained by the transfer agent for Penn Series),
investment ledger and all other books, accounts and other documents which Penn
Series is required to maintain and keep current pursuant to Rule 31a-1(a) and
(b) under the 1940 Act (other than those documents listed in subparagraph (4)
of Rule 31a-1(b)); (b) the daily valuation of the securities held by, and the
net asset value per share of, each Fund; (c) the preparation of such financial
information as may reasonably be necessary for reports to shareholders, the
Board of Directors and officers, the Securities and Exchange Commission and
other federal and state regulatory agencies; and (d) the maintenance for each
Fund of all records that may reasonably be required in connection with the
audits of such Fund. The fee for the accounting services is based on a
predetermined percentage of daily average net assets of each Fund.

For fiscal years 1997, 1996, and 1995, the accounting fees paid by each of
the Funds then in existence were as follows:

<TABLE>
<CAPTION>
FUND 1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Growth Equity Fund $ 87,177 $ 74,103 $ 67,062
------------------------------------------------------
Value Equity Fund 152,928 105,040 76,467
------------------------------------------------------
Emerging Growth Fund* 6,127 N/A N/A
------------------------------------------------------
Flexibly Managed Fund 223,627 182,975 133,697
------------------------------------------------------
International Equity Fund 97,981 73,307 52,431
------------------------------------------------------
Quality Bond Fund 28,211 29,335 27,616
------------------------------------------------------
High Yield Bond Fund 38,169 29,453 27,418
------------------------------------------------------
Small Capitalization Fund 27,518 27,268 8,559
------------------------------------------------------
Money Market Fund 28,227 22,555 14,917
------------------------------------------------------
</TABLE>

* The Emerging Growth Fund commenced operations on May 1, 1997.

B-23
<PAGE>

- --------------------------------------------------------------------------------
LIMITATION ON FUND EXPENSES

See "EXPENSES AND LIMITATIONS THEREON" in the prospectus for information on
limitations on expenses of the Funds.

- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS

Decisions with respect to the purchase and sale of portfolio securities on
behalf of each Fund that makes up Penn Series are made by the respective
investment adviser or sub-adviser of that Fund. Each Fund's adviser or sub-
adviser is responsible for implementing these decisions, including the
negotiation of commissions and the allocation of principal business and
portfolio brokerage. Most purchases and sales of portfolio debt securities are
transacted with the issuer or with a primary market maker acting as principal
for the securities on a net basis, with no brokerage commission being paid by a
Fund. Transactions placed through dealers serving as primary market makers
reflect the spread between the bid and the asked prices. Occasionally, a Fund
may make purchases of underwritten debt issues at prices which include
underwriting fees.

In purchasing and selling portfolio securities, the policies of the
investment advisers and sub-adviser are to seek quality execution at the most
favorable prices through responsible broker-dealers and, in the case of agency
transactions, at competitive commission rates. In selecting broker-dealers to
execute a Fund's portfolio transactions, the investment advisers will consider
such factors as the price of the security, the rate of the commission, the size
and difficulty of the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing broker-dealers, and
the brokerage and research services they provide to the adviser or the Fund.

Any of the investment advisers or sub-advisers may effect principal
transactions on behalf of a Fund with a broker-dealer who furnishes brokerage
and/or research services, designate any such broker-dealer to receive selling
concessions, discounts or other allowances, or otherwise deal with any such
broker-dealer in connection with the acquisition of securities in
underwritings. Additionally, purchases and sales of fixed income securities may
be transacted with the issuer, the issuer's underwriter, or with a primary
market maker acting as principal or agent. A Fund does not usually pay
brokerage commissions for these purchases and sales, although the price of the
securities generally includes compensation which is not disclosed separately.
The prices the Fund pays to underwriters of newly-issued securities usually
include a commission paid by the issuer to the underwriter. Transactions placed
through dealers who are serving as primary market makers reflect the spread
between the bid and asked prices.

The investment advisers and sub-advisers may receive a wide range of research
services from broker-dealers, including information on securities markets, the
economy, individual companies, statistical information, accounting and tax law
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services are received primarily in the form of
written reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to each investment
adviser's and sub-adviser's own research efforts and, when utilized, are
subject to internal analysis before being incorporated into the investment
process.

With regard to payment of brokerage commissions, the investment advisers and
sub-advisers have adopted brokerage allocation policies embodying the concepts
of Section 28(e) of the Securities Exchange Act of 1934, as amended, which
permit investment advisers to cause a fund or portfolio to pay a commission in
excess of the rate another broker or dealer would have charged for the same
transaction, if the adviser determines in good faith that the commission paid
is reasonable in relation to the value of the brokerage and research services
provided. The determination to pay commissions may be made in terms of either
the particular transaction involved or the overall responsibilities of the
adviser or sub-adviser with respect to the accounts over which it exercises
investment discretion. In some cases, research services are generated by third
parties, but are provided to the advisers by or through brokers and dealers.
The advisers and sub-advisers may receive research service in connection with
selling concessions and designations in fixed price offerings in which the Fund
participates.

In allocating to brokers purchase and sale orders for portfolio securities,
the investment advisers and sub-advisers may take into account the sale of Penn
Mutual variable annuity contracts and variable life insurance policies that
invest in those Funds. Before brokerage business may be allocated on the basis
of those sales, the investment adviser or sub-adviser must be satisfied that
the quality of the transaction and commission payable are comparable to what
they would have been had other qualified brokers been selected to execute the
transaction.

In allocating brokerage business the advisers and sub-advisers annually
assesses the contribution of the brokerage and research services provided by
broker-dealers, and allocates a portion of the brokerage business of their
clients on the basis of these assessments. The advisers and sub-advisers seek
to evaluate the brokerage and research services they receive from
broker/dealers and make judgements as to the level of business which would
recognize such services. In addition, broker-dealers sometimes suggest a level
of business they would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any firm may be
less than the suggested allocations, but can (and often

B-24
<PAGE>

does) exceed the suggestions because total brokerage is allocated on the basis
of all the considerations described above. In no instance is a broker-dealer
excluded from receiving business because it has not been identified as
providing research services. The advisers and sub-advisers cannot readily
determine the extent to which net prices or commission rates charged by broker-
dealers reflect the value of their research services. However, commission rates
are periodically reviewed to determine whether they are reasonable in relation
to the services provided. In some instances, the advisers and sub-advisers
receive research services they might otherwise have had to perform for
themselves. The research services provided by broker-dealers can be useful to
the advisers and sub-advisers in serving the Funds, as well as its other
clients.

For fiscal years 1997, 1996, and 1995, the total brokerage commissions paid
by the Growth Equity Fund, including the discounts received by securities
dealers in connection with underwritings, were $595,881, $641,514 and $522,493,
respectively. During 1997, the adviser directed transactions of $590,436,903
(with related commissions of $536,298) to brokers who provided research
services.

For fiscal years 1997, 1996, and 1995, the total brokerage commissions paid
by the Value Equity Fund, including discounts received by securities dealers in
connection with underwritings, were $111,699, $119,775 and $98,671,
respectively. During 1997, the adviser directed transactions of $679,520,700
(with related commissions of $14,832) to brokers who provided research
services.

For fiscal years 1997, 1996, and 1995, the total brokerage commissions paid
by the Flexibly Managed Fund, including the discounts received by securities
dealers in connection with underwritings, were $368,415, $323,511 and $221,716,
respectively. During 1997, the adviser directed transactions of $2,150,925,921
(with related commissions of $294,941) to brokers who provided research
services.

For fiscal years 1997, 1996, and 1995, the total brokerage commissions paid
by the International Equity Fund, including the discounts received by the
securities dealers in connection with underwritings, were $248,517, $282,591
and $280,461, respectively. During 1997, the adviser allocated transactions of
$383,928,743 (with related commissions of $130,090) to brokers who provided
third-party research services.

For fiscal years 1997, 1996 and the period March 1, 1995 (commencement of
operations) through December 31, 1995, the total brokerage commissions paid by
the Small Capitalization Fund, including the discounts received by the
Securities division in connection with underwritings, were $82,820, $28,271 and
$14,492, respectively. During 1997, the adviser directed transactions of
$112,286,633 (with related commissions of $10,390) to brokers who provided
research services.

For the period May 1, 1997 (commencement of operations) through December 31,
1997, the total brokerage commissions paid by the Emerging Growth Fund,
including the discounts received by the Securities division in connection with
underwritings was $32,800. During 1997, the adviser directed transactions of
$106,157,037 (with related commissions of $12,017) to brokers who provided
research services.

For fiscal years 1997, 1996, and 1995, the Quality Bond Fund engaged in
portfolio transactions involving broker-dealers totaling $1,504,902,144,
$838,148,194 and $458,184,878, respectively. For fiscal years 1997, 1996, and
1995, the High Yield Bond Fund engaged in portfolio transactions involving
broker-dealers totaling $362,910,185, $263,291,031 and $236,641,374,
respectively, and the Money Market Fund engaged in portfolio transactions
involving broker-dealers totaling $337,784,744, $329,947,899 and $138,010,705,
respectively. The entire amounts for each of these years represented principal
transactions as to which the Funds have no knowledge of the profits or losses
realized by the respective broker-dealers. Of all such portfolio transactions,
none were placed with firms which provided research, statistical, or other
services to the Funds or its adviser.

Some of the investment advisers' and sub-advisers' other clients have
investment objectives and programs similar to those of the Funds. An investment
adviser or sub-adviser may occasionally make recommendations to other clients
which result in their purchasing or selling securities simultaneously with a
Fund. As a result, the demand for securities being purchased or the supply of
securities being sold may increase, and this could have an adverse effect on
the price of those securities. It is each of the investment adviser's and sub-
adviser's policy not to favor one client over another in making recommendations
or in placing orders. If two or more of an investment adviser's or sub-
adviser's clients are purchasing a given security at the same time from the
same broker-dealer, the investment adviser or sub-adviser will average the
price of the transactions and allocate the average among the clients
participating in the transaction. In addition, the advisers and sub-advisers in
general follow the policy that they will ordinarily not make additional
purchases of a common stock for its clients (including the Penn Series) if, as
a result of such purchases, 10% or more of the outstanding common stock of such
company would be held by its clients in the aggregate.

B-25
<PAGE>

- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS

The directors and principal officers of Penn Series, their business addresses
and principal occupations during the past five years are set forth in the
following table.

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS PENN SERIES DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------
<C> <C> <S>
Eugene Bay Director Senior Pastor, Bryn Mawr Presbyterian
121 Fishers Road Church, Bryn Mawr, PA.
Bryn Mawr, PA 19010
- -------------------------------------------------------------------------------
James S. Greene Director Retired: Vice President and Director,
P.O. Box 3761 International Raw Materials, Inc.,
Vero Beach, FL 32964-3761 Philadelphia, PA (commodities
trading), prior to September 1990.
- -------------------------------------------------------------------------------
Robert E. Chappell* Director Chairman of the Board and Chief
600 Dresher Road Executive Officer (since December
Horsham, PA 19044 1996), President and Chief Executive
Officer (April 1995-December 1996),
President and Chief Operating
Officer, The Penn Mutual Life
Insurance Company (January 1994 to
April 1995); Executive Vice
President, PNC Bank Corp. (January
1992 to December 1993); Chairman of
the Board (June 1991 to January 1992)
and Chairman, President and Chief
Executive Officer, Provident National
Bank (prior thereto).
- -------------------------------------------------------------------------------
Larry L. Mast* Director Executive Vice President, The Penn
The Penn Mutual Life Mutual Life Insurance Company (May
Insurance Company 1997 to present). Formerly Senior
600 Dresher Road Vice President, Lafayette Life
Horsham, PA 19044 [Insurance Company] (September 1994
to May 1997); Vice President,
Security Benefit [Insurance Company]
(May 1993 to September 1994); Vice
President, Home Life [Insurance
Company] (July 1990 to May 1993);
Agency Manager, The Equitable Life
Insurance Company, (August 1978 to
July 1990).
- -------------------------------------------------------------------------------
Daniel J. Toran* Director President and Chief Operating
The Penn Mutual Life Officer, The Penn Mutual Life
Insurance Company Insurance Company (January 1997 to
600 Dresher Road present); Executive Vice President,
Horsham, PA 19044 Sales and Marketing (May 1996 to
January 1997). Formerly Executive
Vice President, The New England
Mutual Life Insurance Company, prior
thereto.
- -------------------------------------------------------------------------------
William H. Loesche, Jr. Director Retired, Adviser (since April 1988);
100 Gray'sLane Director (prior thereto), Keystone
Apt. 101 Insurance Company and Keystone
Haverford, PA 19041 Automobile Club, Philadelphia, PA.
- -------------------------------------------------------------------------------
M. Donald Wright Director President, M. Donald Wright
100 Chetwynd Drive Professional Corporation, Bryn Mawr,
Rosemont, PA 19010 PA (financial planning and
consulting); Director, Graduate
School of Financial Services, The
American College, since April 1991.
- -------------------------------------------------------------------------------
James B. McElwain President Assistant Vice President, Investment
600 Dresher Road Marketing and Operations (since
Horsham, PA 19044 August 1995); Assistant Vice
President, Retirement and Investment
Sales Operation, The Penn Mutual Life
Insurance Company, (November 1991-
August 1995); National Director of
Marketing, Asset Management Sales,
The Metropolitan Life Insurance
Company, prior thereto.
- -------------------------------------------------------------------------------
Richard F. Plush Vice President Assistant Vice President and Senior
600 Dresher Road Actuary, The Penn Mutual Life
Horsham, PA 19044 Insurance Company (1973 to present).
- -------------------------------------------------------------------------------
Lee J. Anderson Vice President Senior Investment Consultant, The
600 Dresher Road Penn Mutual Life Insurance Company
Horsham, PA 19044 (March 1995 to present); Investment
Statistical Analyst, Independence
Capital Management, Inc., prior
thereto.
- -------------------------------------------------------------------------------
C. Ronald Rubley Secretary Attorney, Morgan, Lewis & Bockius
2000 One Logan Square LLP, Philadelphia, PA (since January
Philadelphia, PA 19103 1996); Associate General Counsel, The
Penn Mutual Life Insurance Company,
prior thereto.
- -------------------------------------------------------------------------------
Steven M. Herzberg Treasurer Assistant Vice President and
600 Dresher Road Treasurer, The Penn Mutual Life
Horsham, PA 19044 Insurance Company (December 1997 to
present); Director of Financial
Planning and Treasurer (November 1995
to December 1997); Director, Cost and
Budget (November 1991 to November
1995); Director, Benefits
Administration, prior thereto.
- -------------------------------------------------------------------------------
Ann M. Strootman Controller Vice President and Controller (since
600 Dresher Road January 1996), Assistant Vice
Horsham, PA 19044 President, Financial and Management
Accounting (since 1994), Director of
Financial Accounting (prior thereto),
The Penn Mutual Life Insurance
Company.
- -------------------------------------------------------------------------------
</TABLE>

* Director is an "interested person" of Penn Series, as defined in the
Investment Company Act of 1940, as amended.

Directors and officers of Penn Series who are employed by Penn Mutual will
not receive any special compensation for serving in such capacities. Penn
Series has made no provision for the payment of retirement or pension benefits
to any director or officer. In 1997, Penn Series paid directors' fees in the
aggregate amount of $47,500 to directors who are not "interested persons" of
Penn Series.

B-26
<PAGE>

The Board of Directors has an Executive Committee currently consisting of
Messrs. Greene and Illoway. Subject to limits under applicable law, during
intervals between meetings of the Board, the Committee may exercise the powers
of the Board.

- --------------------------------------------------------------------------------
CUSTODIAL SERVICES

PNC Bank, Broad & Chestnut Streets, Philadelphia, PA 19107 is custodian of
the assets of the Funds of Penn Series. The custodial services performed by PNC
Bank are those customarily performed for registered investment companies by
qualified financial institutions. Penn Series has authorized the Bank to
deposit certain portfolio securities in a central depository system as allowed
by federal law.

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

INDEPENDENT AUDITORS

Ernst & Young LLP serves as the independent auditors of Penn Series Funds,
Inc. Their offices are located at 2001 Market Street, Suite 4000, Philadelphia,
PA 19103. Ernst & Young LLP is also the independent auditors of The Penn Mutual
Life Insurance Company.

- --------------------------------------------------------------------------------
LEGAL MATTERS

Morgan, Lewis & Bockius LLP of Philadelphia, Pennsylvania, has provided
advice on certain matters relative to the federal securities laws and the
offering of shares of Penn Series Funds, Inc.

- --------------------------------------------------------------------------------
NET ASSET VALUE OF SHARES

The following information supplements the information on net asset value of
shares set forth in "Net Asset Value of Shares" in the Prospectus.

The purchase and redemption price of each Fund's shares is equal to that
Fund's net asset value per share. Each Fund determines its net asset value per
share by subtracting the Fund's liabilities (including accrued expenses and
dividends payable) from its total assets (the market value of the securities
the Fund holds plus cash and other assets, including income accrued but not yet
received) and dividing the result by the total number of shares outstanding.
The net asset value per share of each Fund is calculated every day the New York
Stock Exchange ("Exchange") is open for trading. The Exchange is closed when
the following holidays are observed: New Year's Day, Martin Luther King, Jr.
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Presidential Election Day, Thanksgiving Day, and Christmas Day.
Debt securities held in the Funds may be valued on the basis of valuations
provided by a pricing service when such prices are believed to reflect the fair
value of such securities. Use of the pricing service may be determined without
exclusive reliance on quoted prices and may take into account appropriate
factors such as institution-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data.
The Money Market Fund uses the amortized cost method of valuation. Under the
amortized cost method of valuing portfolio securities, the security is valued
at cost on the date of purchase and thereafter a proportionate amortization of
any discount or premium until maturity of the security is assumed. The value of
the security for purposes of determining net asset value normally does not
change in response to fluctuating interest rates. While the amortized cost
method is believed to provide certainty in portfolio valuation, it may result
in periods during which values are higher or lower than the amount the Money
Market Fund would receive if the security was sold.

In accordance with Rule 2a-7 under the Investment Company Act of 1940, the
Penn Series Board of Directors has established procedures reasonably designed,
taking into account current conditions and the Money Market Fund's objectives,
to stabilize the net asset value per share of the Fund, as computed for
purposes of distribution and redemption, at $1.00. Penn Series will maintain a
dollar weighted average portfolio maturity in the Money Market Fund appropriate
to the objective of maintaining a stable net asset value per share, and to that
end the Fund will neither purchase any instrument with a remaining maturity of
more than 397 days nor maintain a dollar weighted average portfolio maturity
which exceeds 90 days. The Board of Directors will review, at such intervals as
it determines appropriate, the extent, if any, to which the net asset value per
share calculated by using available market quotations deviates from the $1.00
per share. In the event such deviation exceeds 1/2 of 1%, the Board will
promptly consider what action, if any, should be initiated. If the Board
believes that the extent of any deviation from the Money Market Fund's $1.00
amortized cost price per share may result in material dilution or other unfair
results to prospective or existing shareholders or contract holders, it has
agreed to take such steps as it considers appropriate to

B-27
<PAGE>

eliminate or reduce to the extent reasonably practicable any such dilution or
unfair results. These steps may include redeeming shares in kind; selling
portfolio instruments prior to maturity to realize capital gains or losses or
to shorten the average portfolio maturity of the Money Market Fund; reducing or
withholding dividends; utilizing a net asset value per share as determined by
using available market quotations; or reducing the number of shares outstanding
by requesting shareholders to contribute to capital shares of the Money Market
Fund.

- --------------------------------------------------------------------------------
OWNERSHIP OF SHARES

The outstanding shares of each of the Funds of Penn Series are owned by The
Penn Mutual Life Insurance Company ("Penn Mutual") and its subsidiary, The Penn
Insurance and Annuity Company ("PIA") and are held in their Separate Accounts
pursuant to variable annuity contracts and variable life insurance policies.

On January 31, 1998, the outstanding shares of Penn Series were owned as
follows:*

<TABLE>
<CAPTION>
GROWTH VALUE EMERGING FLEXIBLY QUALITY SMALL MONEY
EQUITY EQUITY GROWTH MANAGED INTERNATIONAL BOND HIGH YIELD CAPITALIZATION MARKET
FUND FUND FUND FUND EQUITY FUND FUND BOND FUND FUND FUND
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Percentage of
Outstanding Shares
Owned by Penn Mutual
and Held in Separate
Accounts Pursuant to
Variable Annuity
Contracts 89% 80% 60% 77% 79% 76% 77% 59% 58%
- ---------------------------------------------------------------------------------------------------------------
Percentage of
Outstanding Shares
Owned by PIA and Held
in a Separate Account
Pursuant to Variable
Annuity Contracts 5% 11% 14% 14% 10% 13% 14% 28% 21%
- ---------------------------------------------------------------------------------------------------------------
Percentage of
Outstanding Shares
Owned by Penn Mutual
and Held in a Separate
Account Pursuant to
Variable Life
Insurance Contracts 6% 9% 8% 9% 11% 11% 9% 13% 21%
- ---------------------------------------------------------------------------------------------------------------
Percentage of Outstand-
ing Shares Owned by
Penn Mutual and Held
in its General Account
as an Equity Invest-
ment 0% 0% 18% 0% 0% 0% 0% 0% 0%*
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

* Unaudited.

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

TAX STATUS

The following is only a summary of certain federal tax considerations
generally affecting a Fund and its shareholders, and is not intended as a
substitute for careful tax planning. Shareholders are urged to consult their
tax advisers with specific reference to their own tax situations, including
their state and local tax liabilities.

The following discussion of certain Federal income tax consequences is based
on the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, certain administrative changes, or
court decisions may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.

B-28
<PAGE>

It is the policy of each of the Funds to continue to qualify for the
favorable tax treatment accorded regulated investment companies under
Subchapter M of the Code. By following such policy, each of the Funds expect to
be relieved of the Federal income taxes on net investment company taxable
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss) distributed to shareholders.

In order to continue to qualify as a regulated investment company each Fund
must, among other things, (1) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in stock,
securities or currencies; and (2) diversify its holdings so that at the end of
each quarter of each taxable year (i) at least 50% of the market value of the
Fund's total assets is represented by cash or cash items, U.S. Government
securities, securities of other regulated investment companies, and other
securities limited, in respect of any one issuer, to a value not greater than
5% of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities or securities of any other regulated investment company)
or of two or more issuers that the Fund controls and that are engaged in the
same, similar, or related trades or businesses. These requirements may restrict
the degree to which the Funds may engage in short-term trading and in certain
hedging transactions and may limit the range of the Fund's investments. If a
Fund qualifies as a regulated investment company, it will not be subject to
Federal income tax on the part of it's net investment income and net realized
capital gains, if any, which it distributes each year to the shareholders,
provided the Fund distributes at least (a) 90% of its "investment company
taxable income" (generally, net investment income plus the excess, if any, of
net short-term capital gain over net long-term capital losses) and (b) 90% of
its net exempt interest income (the excess of (i) its tax-exempt interest
income over (ii) certain deductions attributable to that income).

If for any taxable year, a Fund does not qualify as a regulated investment
company under Sub-chapter M of the Code, all of its taxable income will be
subject to tax at regular corporate tax rates without any deduction for
distributions to shareholders and all such distributions will be taxable to
shareholders as ordinary dividends to the extent of the fund's current or
accumulated earnings and profits. Such distributions will generally qualify for
the corporate dividends received deduction for corporate shareholders.

If a Fund fails to distribute in a calendar year at least 98% of its ordinary
income for the year and 98% of its net realized gains (the excess of short and
long term capital gain over short and long term capital losses) for the one-
year period ending October 31 of that year (and any retained amount from the
prior calendar year), the Fund will be subject to a nondeductible 4% Federal
excise tax on the undistributed amounts. The Fund intends to make sufficient
distributions to avoid imposition of this tax.

Distributions declared in October, November, or December to shareholders of
record during those months and paid during the following January are treated as
if they were received by each shareholder on December 31 of the prior year for
tax purposes.

A Fund's transactions in certain futures contracts, options, forward
contracts, foreign currencies, foreign debt securities, and certain other
investment and hedging activities will be subject to special tax rules. In a
given case, these rules may accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's assets, convert
short-term capital losses into long-term capital losses, or otherwise affect
the character of the Fund's income. These rules could therefore affect the
amount, timing, and character of distributions to shareholders. Each Fund will
endeavor to make any available elections pertaining to such transactions in a
manner believed to be in the best interest of the Fund.

- --------------------------------------------------------------------------------
RATINGS OF COMMERCIAL PAPER

MOODY'S INVESTORS SERVICE, INC. The rating of Prime-1 is the highest
commercial paper rating assigned by Moody's. Among the factors considered by
Moody's in assigning ratings are the following: valuation of the management of
the issuer; economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas;
evaluation of the issuer's products in relation to competition and customer
acceptance; liquidity; amount and quality of long-term debt; trend of earnings
over a period of 10 years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations. These factors are all
considered in determining whether the commercial paper is rated P1, P2, or P3.

B-29
<PAGE>

STANDARD & POOR'S CORPORATION. Commercial paper rated A (highest quality) by
S&P has the following characteristics: liquidity ratios are adequate to meet
cash requirements; long-term senior debt is rated "A" or better, although in
some cases "BBB" credits may be allowed. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an upward
trend with allowance made for unusual circumstances. Typically, the issuer's
industry is well established and the issuer has a strong position within the
industry. The reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A1, A2, or A3.
FITCH INVESTORS SERVICE, INC.: FITCH 1--HIGHEST GRADE. Commercial paper
assigned this rating is regarded as having the strongest degree of assurance
for timely payment. FITCH 2--VERY GOOD GRADE. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree than the
strongest issues.

B-30
<PAGE>

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

RATINGS OF CORPORATE DEBT SECURITIES

The quality of a bond is measured by credit risk--the continuing ability of
the issuer to meet interest and principal payments. Issuers who are believed to
be good credit risks receive high quality ratings, and those believed to be
poor credit risks receive low quality ratings. As a result of the greater
credit risk involved, medium and low quality bonds typically offer a higher
yield than bonds of high quality.

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

MOODY'S INVESTORS SERVICE, INC.

Aaa Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edge."
- --------------------------------------------------------------------------------

Aa Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds.
- --------------------------------------------------------------------------------

A Bonds rated A possess many favorable investment attributes and are
generally considered as upper medium grade obligations.
- --------------------------------------------------------------------------------

Baa Bonds rated Baa are considered medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
- --------------------------------------------------------------------------------

Ba Bonds rated Ba are judged to have speculative elements: their future
cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterize bonds in this class.
- --------------------------------------------------------------------------------

B Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance
of other terms of the contract over any long period of time may be
small.
- --------------------------------------------------------------------------------

Caa Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest.
- --------------------------------------------------------------------------------

Ca Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-
comings.
- --------------------------------------------------------------------------------

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

STANDARD & POOR'S CORPORATION

AAA This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal
and interest.
- --------------------------------------------------------------------------------

AA Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong.
- --------------------------------------------------------------------------------

A Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
- --------------------------------------------------------------------------------

BBB Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
principal and interest for bonds in this category than for bonds in the
A category.
- --------------------------------------------------------------------------------

BB, B, CCC, CC

Bonds rated BB, B, CCC, and CC are regarded on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.

B-31
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS OF PENN SERIES

The following pages include audited financial statements and financial
highlights as of December 31, 1997 for the Growth Equity Fund, Value Equity
Fund, Small Capitalization Fund, Emerging Growth Fund, Flexibly Managed Fund,
International Equity Fund, Quality Bond Fund, High Yield Bond Fund and Money
Market Fund.

B-32
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE MONEY MARKET FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------- ------ -----------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (32.9%)
- ------------------------
Carolina Power and Light 5.70%............ 02/27/98 NR $1,500 $ 1,486,462
Caterpillar Inc.
5.55%.................................... 04/03/98 A-1 1,100 1,084,398
5.72%.................................... 02/23/98 A-1 375 371,842
Dekalb County for Emory University 5.70%.. 01/06/98 A-1 1,500 1,500,000
General Electric Capital Corp. 5.72%...... 03/20/98 A-1 750 740,705
General Motors Acceptance Corp. 5.80%..... 01/06/98 A-2 1,500 1,498,792
IBM Credit Corp. 5.65%.................... 01/06/98 A-1 750 749,411
Merrill Lynch & Co., Inc. 5.68%........... 03/13/98 A-1 2,000 1,977,596
San Diego Gas & Electric Co. 5.65%........ 01/02/98 A-1 1,400 1,400,000
Sears Roebuck Acceptance Corp. 5.71%...... 04/02/98 A2 1,500 1,478,350
-----------
TOTAL COMMERCIAL PAPER
(Cost $12,287,556)................................................ 12,287,556
-----------
CORPORATE BONDS (8.0%)
- ----------------------
Allstate Corp. 5.875%..................... 06/15/98 A+ 125 124,913
Associates Corporation North America
5.25%.................................... 09/01/98 AA- 350 348,266
Ford Global Bond 6.25%.................... 02/26/98 A 300 300,096
GTE California Inc. 6.25%................. 01/15/98 AA- 680 680,025
International Lease Finance Corp. 5.75%... 07/01/98 A+ 465 464,843
NationsBank Corp. 6.625%.................. 01/15/98 A+ 390 390,062
PepsiCo. Inc. 6.125%...................... 01/15/98 A 115 114,996
Rockwell International 7.625%............. 02/17/98 AA+ 215 215,396
Sears Roebuck Co. 8.45%................... 11/01/98 A- 100 101,755
Southwestern Bell Telephone 6.05%......... 02/04/98 AA 250 249,978
-----------
TOTAL CORPORATE BONDS
(Cost $2,990,330)................................................. 2,990,330
-----------
VARIABLE RATE DEMAND NOTES (39.6%)+
- -----------------------------------
Alabama State Development Authority
6.00%.................................... 01/07/98 A+/A-1 550 550,000
Barton Healthcare 5.80%................... 01/07/98 A1 430 430,000
Baylis Group Partnership 6.10%............ 01/07/98 A-1 700 700,000
Berks County Industrial Development
Authority 5.90%.......................... 01/07/98 A-1/P-1 540 540,000
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- -------- ------ -----------
<S> <C> <C> <C> <C>
Bloomfield, New Mexico 6.00%............. 01/07/98 A1/P-1 $ 600 $ 600,000
Columbia County Georgia Development
Authority 6.15%......................... 01/07/98 Aa3 1,470 1,470,000
Community Health Systems, Inc. 6.15%..... 01/07/98 A-1 1,465 1,465,000
Durham Risk Management Co. 5.75%......... 01/07/98 AAA/A-1+ 500 500,000
Fairview Hospital and Healthcare Services
6.05%................................... 01/07/98 AAA/A-1 500 500,000
GMG Warehouse American National 5.80%.... 01/07/98 AA- 975 975,000
Health Insurance Plan of Greater NY
6.15%................................... 01/07/98 AAA/A-1+ 1,500 1,500,000
Illinois Development Finance Authority
5.80%................................... 01/07/98 Aa2 600 600,000
Liliha Partners Lp 6.20%................. 01/07/98 AA+/A-1+ 1,455 1,455,000
Montgomery County PA Industrial
Development Authority 5.90%............. 01/07/98 P-1 805 805,000
New York, New York 5.75%................. 01/07/98 AAA 1,600 1,600,000
Saint Francis Health 6.20%............... 01/07/98 A1/P-1 490 490,000
Silver City New Mexico 6.00%............. 01/07/98 A1/P-1 600 600,000
-----------
TOTAL VARIABLE RATE DEMAND NOTES
(Cost $14,780,000)................................................ 14,780,000
-----------
MEDIUM TERM NOTES (16.8%)
- -------------------------
Caterpillar, Inc. 7.47%.................. 01/15/98 A+ 600 600,344
Ford Motor Credit 6.35%.................. 02/12/98 A 980 980,535
IBM Credit Corp. 6.75%................... 04/20/98 A 250 250,579
Lehman Brothers Holdings, Inc.
5.75%................................... 02/15/98 A 780 779,757
8.38%................................... 02/24/98 A 1,000 1,003,334
6.25%................................... 06/29/98 A 100 100,055
6.65%................................... 07/14/98 A 190 190,489
Salomon, Inc. 8.64%...................... 02/27/98 A 1,950 1,957,961
Sears Roebuck Co. 7.94%.................. 02/06/98 A- 400 400,733
-----------
TOTAL MEDIUM TERM NOTES
(Cost $6,263,787)................................................. 6,263,787
-----------
</TABLE>

B-33
<PAGE>

+ The rate shown is the rate as of December 31, 1997, and the maturity shown
is the next interest readjustment date.

The Standard & Poor's Corporation, Moody's Investors Service, Fitch
Investors Service and Duff & Phelps Credit Rating Co. Ratings are the most
recent ratings available at December 31, 1997.

<TABLE>
<CAPTION>
PERCENTAGE OF PORTFOLIO
MATURITY AMOUNT --------------------------------------------------
SCHEDULE PAR (CUM)
-------- ----------- --------------
<S> <C> <C> <C>
1 - 7 days $19,930,000 54.8% 54.8%
15 - 30 days 1,785,000 4.9% 59.7%
31 - 60 days 7,750,000 21.3% 81.0%
61 - 90 days 2,750,000 7.6% 88.6%
91 - 120 days 2,850,000 7.8% 96.4%
Over 150 days 1,330,000 3.6% 100.0%
----------- -----------
$36,395,000 100.0%
=========== ===========
</TABLE>
Average Weighted Maturity - 35 days

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

B-34
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE QUALITY BOND FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
CORPORATE BONDS (13.9%)
- -----------------------
BROADCASTING (0.9%)
News America Holdings 8.50%................. 02/23/25 BBB- $ 360 $ 412,650
-----------
CANADIAN GOV'T AGENCYED FRUIT (3.0%)
Hydro-Quebec 8.05%.......................... 07/07/24 A+ 1,150 1,334,000
-----------
ELECTRIC POWER (0.7%)
Korea Electric Power 7.75%.................. 04/01/13 BBB- 500 331,875
-----------
FINANCIAL (3.0%)
Associates Corp. N.A. 7.75%................. 02/15/05 AA- 500 540,000
General Electric Capital Corp. 8.125%....... 02/01/99 AAA 500 511,875
Morgan Stanley Financial PLC 8.03%.......... 02/28/17 A- 250 266,250
-----------
1,318,125
-----------
GENERAL OBLIGATION BONDS (2.3%)
General Electric Capital Corp. 6.66%........ 05/01/18 AAA 1,000 1,016,250
-----------
RAILROADS (0.6%)
Union Pacific Co. 8.35%..................... 05/01/25 BBB 250 277,500
-----------
RETAIL (1.6%)
Penney (J.C.) Inc. Note 9.45%............... 07/15/02 A 175 187,688
Rite Aid Corp. 7.70%........................ 02/15/27 BBB+ 500 543,750
-----------
731,438
-----------
SERVICES-EQUIPMENT RENTING & LEASING (0.2%)
Service Corp. International 7.00%........... 06/01/15 BBB+ 100 103,250
-----------
TRANSPORTATION (1.6%)
CSX Corp. 7.05%............................. 05/01/02 BBB 660 674,850
-----------
TOTAL CORPORATE BONDS
(Cost $6,019,575).................................................. 6,199,938
-----------
U.S. TREASURY OBLIGATIONS (15.2%)
- ---------------------------------
U.S. Treasury Notes
5.75%...................................... 11/30/02 NR 2,500 2,503,000
7.875%..................................... 11/15/99 NR 750 779,130
7.75%...................................... 12/31/99 NR 1,000 1,039,330
6.625%..................................... 02/15/27 NR 1,370 1,487,067
-----------
5,808,527
-----------
U.S. Treasury Bond 6.375%................... 08/15/27 NR 950 1,003,076
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $6,707,031).................................................. 6,811,603
-----------
AGENCY OBLIGATIONS (37.9%)
- --------------------------
Federal Home Loan Bank 4.75%................ 01/02/98 NR 8,100 8,098,931
Federal National Mortgage
6.45%...................................... 12/01/03 NR 1,220 1,229,203
6.67%...................................... 01/01/05 NR 1,775 1,809,435
6.825%..................................... 09/01/07 NR 2,741 2,768,131
Federal National Mortgage 6.00%............. 01/01/13 NR 3,100 3,052,531
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $16,922,957)................................................. 16,958,231
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------ -----------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES (18.4%)
- -------------------------------
MBNA Master Credit Card Trust, 1995-C
6.45%..................................... 02/15/08 AAA $4,300 $ 4,356,585
Morgan Stanley 6.95%....................... 12/12/05 AA 471 485,761
Railcar Leasing L.L.C. 7.125%.............. 01/15/13 AAA 1,000 1,047,500
Sasco 1996- CFL Class B 6.303%............. 02/25/28 AA 500 498,446
Southern California Edison 6.28%........... 09/25/05 AAA 1,850 1,853,330
-----------
TOTAL ASSET-BACKED SECURITIES
(Cost $8,209,448)................................................. 8,241,622
-----------
VARIABLE RATE OBLIGATION (6.2%)
- -------------------------------
Signet Credit Card Master Trust, 1993-4
6.23%+ (Cost $2,754,727).................. 05/15/02 AAA 2,750 2,754,675
-----------
</TABLE>

<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS
(8.4%)
- ----------------------
Janus Money
Market
Fund........ 1,920,392 1,920,392
Temporary
Investment
Fund Class
B........... 1,815,395 1,815,395
-----------
TOTAL SHORT TERM
INVESTMENTS
(Cost $3,735,787)...... 3,735,787
-----------
TOTAL INVESTMENTS
(100.0%)
(Cost $44,349,525)(a).. $44,701,856
===========
</TABLE>
- -------
+ The rate shown is the rate as of December 31, 1997.

(a) Also cost for Federal income tax purposes. At December 31, 1997, Net
unrealized appreciation was $352,331. This consisted of aggregate gross
unrealized appreciation for all securities in which there was an excess of
market value over tax cost of $545,769 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $193,438.

The Standard & Poor's corporation ratings are the most recent ratings
available at December 31, 1997.

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

B-35
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- -----------
<S> <C> <C> <C> <C>
ASSET-BACKED SECURITIES (1.0%)
- ------------------------------
Airplanes Pass Through Trust 10.875%
(Cost $506,762).......................... 03/15/19 BB $ 500 $ 560,000
-----------
CORPORATE BONDS (87.5%)
- -----------------------
ADVERTISING (0.6%)
ITT Publimedia BV 9.375%.................. 09/15/07 NR 350 369,250
-----------
AEROSPACE & DEFENSE (3.7%)
BE Aerospace, Inc. 9.875%................. 02/01/06 B 500 527,500
Communications & Power Industries 12.00%.. 08/01/05 B 750 840,000
Dyncorp, Inc. 9.50%....................... 03/01/07 B 425 433,500
L-3 Communications Corp. 10.375%.......... 05/01/07 B- 325 352,625
-----------
2,153,625
-----------
AUTOMOBILES & RELATED (1.1%)
Chief Auto Parts Inc. 10.50%.............. 05/15/05 B 125 123,750
Trident Automotive 10.00%................. 12/15/05 B- 250 255,625
Venture Holdings Trust 9.50%.............. 07/01/05 B+ 250 253,750
-----------
633,125
-----------
BROADCASTING (2.1%)
Azteca Holdings SA 11.00%................. 06/15/02 B- 200 206,000
Muzak Limited Partners 10.00%............. 10/01/03 B+ 500 530,000
Pegasus Communications 9.625%............. 10/15/05 B- 150 153,750
Sinclair Broadcast Group 8.75%............ 12/15/07 B 350 349,125
-----------
1,238,875
-----------
BUILDING & REAL ESTATE (0.9%)
B.F. Saul 11.625%......................... 04/01/02 B- 500 532,500
-----------
BUILDING PRODUCTS (2.1%)
American Builders and Contractors
10.625%.................................. 05/15/07 B 500 518,750
Maxxam Group, Inc. 11.25%................. 08/01/03 CCC+ 500 528,750
Werner Holdings Co., INC. 10.00%.......... 11/15/07 B- 200 205,500
-----------
1,253,000
-----------
CABLE OPERATORS (3.8%)
Comcast U.K. Cable 11.4683%++............. 11/15/07 B- 450 365,625
Diamond Cable Communication PLC
9.1803%++................................ 12/15/05 B- 350 272,125
Frontiervision L.P. 11.00%................ 10/15/06 B 300 333,000
Fundy Cable Ltd. 11.00%................... 11/15/05 BB 500 535,000
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- -----------
<S> <C> <C> <C> <C>
Galaxy Telecom L.P. 12.375%............... 10/01/05 B- $ 250 $ 275,000
Telewest Communication PLC
9.625%................................... 10/01/06 B+ 125 131,875
11.0672%++............................... 10/01/07 B+ 250 194,375
UIh Australia Pacific 4.3227%++........... 05/15/06 B 175 120,750
-----------
2,227,750
-----------
CHEMICALS (2.5%)
International Specialty Products Holdings,
Inc. 9.75%............................... 02/15/02 BB- 500 528,750
Sovereign Specialty Chemicals 9.50%....... 08/01/07 B- 500 513,750
Sterling Chemicals Holdings 10.3802%++.... 08/15/08 B+ 200 122,000
Sterling Chemicals Inc. 11.25%............ 04/01/07 NR 300 300,000
-----------
1,464,500
-----------
CONGLOMERATES (0.8%)
ICF Kaiser International, Inc. 13.00%..... 12/31/03 NR 400 449,500
-----------
CONSUMER PRODUCTS (0.3%)
Color Spot Nurseries 10.50%............... 12/15/07 B- 200 202,000
-----------
CONTAINER (2.2%)
BWAY Corp. 10.25%......................... 04/15/07 B 350 379,750
Plastic Containers, Inc. 10.00%........... 12/15/06 B+ 500 537,500
U.S. Can Corp. 10.125%.................... 10/15/06 B 350 370,125
-----------
1,287,375
-----------
DIVERSIFIED CHEMICALS (0.2%)
Koppers Industry, Inc. 9.875%............. 12/01/07 B- 125 128,750
-----------
ELECTRONIC COMPONENTS (3.2%)
Celestica International 10.50%............ 12/31/06 NR 275 290,125
Details Holdings Inc.
10.00%................................... 11/15/05 B- 275 282,563
6.1500%++................................ 11/15/07 B- 250 146,250
DII Group, Inc. 8.50%..................... 09/15/07 B 375 367,500
Fairchild Semiconductor 10.125%........... 03/15/07 B 250 262,500
Viasystems, Inc. 9.75%.................... 06/01/07 B- 500 516,250
-----------
1,865,188
-----------
ENERGY SERVICES (4.8%)
Amerigas Partners L.P. 10.125%............ 04/15/07 BB+ 400 434,000
Falcon Drilling Co. 8.875%................ 03/15/03 B+ 150 157,500
Kelley Oil & Gas Corp. 10.375%............ 10/15/06 B- 350 373,625
Ocean Energy, Inc. 9.75%.................. 10/01/06 B- 275 301,813
Plains Resources, Inc. 10.25%............. 03/15/06 B 550 592,625
</TABLE>

B-36
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997 (CONTINUED)
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- -----------
<S> <C> <C> <C> <C>
Pride Petroleum Services 9.375%.......... 05/01/07 BB- $ 425 $ 456,875
Rutherford-Moran Oil 10.75%.............. 10/01/04 CCC+ 450 459,000
-----------
2,775,438
-----------
ENTERTAINMENT & LEISURE (4.4%)
Bally Total Fitness Holdings 9.875%...... 10/15/07 B- 500 507,500
Hollywood Theaters Inc. 10.625%.......... 08/01/07 B- 200 212,500
Regal Cinemas Inc. 8.50%................. 10/01/07 B+ 400 397,500
Six Flags Theme Parks 9.7780%++.......... 06/15/05 B 400 426,000
Speedway Motorsports Inc. 8.50%.......... 08/15/07 B+ 500 511,250
United Artists Theatre 9.30%............. 07/01/15 BB 487 491,936
-----------
2,546,686
-----------
FINANCIAL SERVICES (1.9%)
Ocwen Capital Trust I 10.875%............ 08/01/27 B+ 250 272,500
Ocwen Financial Corp. 11.875%............ 10/01/03 B+ 500 561,250
Superior National Capital Trust 10.75%... 12/01/17 BB 250 256,250
-----------
1,090,000
-----------
FOOD PROCESSING (0.4%)
Mrs. Fields Original 10.125%............. 12/01/04 B+ 250 251,875
-----------
FOOD/TOBACCO (4.4%)
Ameriserve Food Co. 10.125%.............. 07/15/07 NR 350 364,000
Archibald Candy Corp. 10.25%............. 07/01/04 B 500 521,250
Aurora Foods Inc. 9.875%................. 02/15/07 B- 325 342,875
Del Monte Foods Co. 6.1518%++............ 12/15/07 B- 225 128,813
Keebler Corporation 10.75%............... 07/01/06 BB- 600 676,500
Southern Foods 9.875%.................... 09/01/07 B 500 522,500
-----------
2,555,938
-----------
HEALTHCARE (1.3%)
Kinetic Concepts, Inc. 9.625%............ 11/01/07 B- 150 152,438
Owens & Minor, Inc. 10.875%.............. 06/01/06 B+ 250 277,500
Paragon Health Networks 5.2545%++........ 11/01/07 B- 500 310,000
-----------
739,938
-----------
HOTEL & GAMING (5.5%)
#@Capital Gaming International, Inc.
45.6951%++............................. 02/01/01 NR 5 250
Casino America Inc. 12.50%............... 08/01/03 B 250 271,250
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- -----------
<S> <C> <C> <C> <C>
Courtyards By Marriott 10.75%.............. 02/01/08 B- $ 500 $ 550,000
Grand Casinos Inc. 10.125%................. 12/01/03 BB 200 216,000
HMC Acquisition Properties 9.00%........... 12/15/07 BB 400 418,000
Horseshoe Gaming L.L.C. 9.375%............. 06/15/07 B 150 157,875
Majestic Star Casino L.L.C. 12.75%......... 05/15/03 B 500 536,250
Red Roof Inns Senior Note 9.625%........... 12/15/03 B 500 517,500
Rio Hotel & Casino, Inc. 10.625%........... 07/15/05 B+ 350 378,875
Rio Hotel & Casino, Inc. 9.50%............. 04/15/07 B+ 50 53,000
Trump Atlantic City, Inc. 11.25%........... 05/01/06 B 75 74,063
-----------
3,173,063
-----------
MANUFACTURING (3.4%)
Amtrol, Inc. 10.625%....................... 12/31/06 B- 250 255,625
Axiohm Transaction Corp. 9.75%............. 10/01/07 B- 250 253,750
Hawk Corp. 10.25%.......................... 12/01/03 B+ 350 373,625
HCC Industries, Inc. 10.75%................ 05/15/07 B- 500 518,750
International Wire Group 11.75%............ 06/01/05 B- 500 548,750
-----------
1,950,500
-----------
MEDIA AND COMMUNICATIONS (1.3%)
Northland Cable Television 10.25%.......... 11/15/07 B- 500 526,875
Transwestern Holdings 5.0971%++............ 11/15/08 B- 250 150,000
Transwestern Publishing 9.625%............. 11/15/07 B- 100 104,000
-----------
780,875
-----------
METALS (1.6%)
AEI Holding Co. 10.00%..................... 11/15/07 B- 500 515,000
Haynes International, Inc. 11.625%......... 09/01/04 B- 350 399,000
-----------
914,000
-----------
MISCELLANEOUS CONSUMER PRODUCTS (7.2%)
American Safety Razor Co. 9.875%........... 08/01/05 BB- 500 536,875
Chattem Inc. 12.75%........................ 06/15/04 B- 500 565,000
CLN Holdings, Inc. 11.4322%++.............. 05/15/01 B 500 332,500
Doane Products Co. 10.625%................. 03/01/06 B 500 540,000
Hedstrom Corp. 10.00%...................... 06/01/07 B- 400 403,000
Hedstrom Holdings Inc. 5.1948%++........... 06/01/09 NR 100 60,000
Herff Jones Inc. 11.00%.................... 08/15/05 B 500 548,750
PM Holdings Corp. 10.6203%++............... 09/01/05 B 400 322,000
</TABLE>

B-37
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997 (CONTINUED)
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- -----------
<S> <C> <C> <C> <C>
Revlon Worldwide 10.65046%++............... 03/15/01 B- $ 500 $ 348,750
Windy Hill Pet Food Co. 9.75%.............. 05/15/07 NR 500 520,000
-----------
4,176,875
-----------
PAPER & PAPER PRODUCTS (1.6%)
Repap New Brunswick 10.625%................ 04/15/05 CC 500 475,000
Riverwood Intl. Corp.
10.875%................................... 04/01/08 CCC+ 250 236,250
10.625%................................... 08/01/07 B- 200 202,000
-----------
913,250
-----------
PRINTING AND PUBLISHING (1.4%)
American Lawyer Media Holdings
5.4660%++................................. 12/15/08 CCC+ 175 98,875
9.75%..................................... 12/15/07 B 150 152,250
Sun Media Corp. 9.50%...................... 02/15/07 B- 500 540,000
-----------
791,125
-----------
RETAIL (2.6%)
Community Distributors 10.25%.............. 10/15/04 B+ 250 256,250
Pantry Inc. 10.25%......................... 10/15/07 B- 500 512,500
Safelite Glass Corp. 9.875%................ 12/15/06 B 400 422,000
Specialty Retailers, Inc. 8.50%............ 07/15/05 BB- 325 329,875
-----------
1,520,625
-----------
SAVINGS & LOAN ASSOCIATIONS (1.6%)
First Federal Financial Corp. 11.75%....... 10/01/04 B+ 500 560,000
ML Capital Trust I 9.875%.................. 03/01/27 NR 300 342,342
-----------
902,342
-----------
SERVICE (6.5%)
Alliance Imaging 9.625%.................... 12/15/05 B- 450 455,063
Allied Waste Industries 11.3000%++......... 06/01/07 B+ 500 351,250
Coinmach Corp. 11.75%...................... 11/15/05 B+ 682 757,020
Decisionone Corp. 9.75%.................... 08/01/07 B- 200 205,000
Decisionone Holdings 5.0011%++............. 08/01/08 B- 300 192,000
International Logistics Ltd 9.75%.......... 10/15/07 B+ 250 248,125
Intertek Finance PLC. 10.25%............... 11/01/06 NR 445 467,250
Iron Mountain Inc. 8.75%................... 09/30/09 B- 500 512,500
Protection One Alarm 10.3600%++............ 06/30/05 B- 400 437,000
Town Sports International 9.75%............ 10/15/04 B 150 147,000
-----------
3,772,208
-----------
SUPERMARKETS (0.4%)
Pathmark Stores 9.625%..................... 05/01/03 CCC+ 250 230,000
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- -----------
<S> <C> <C> <C> <C>
TELECOMMUNICATIONS (9.9%)
American Communications Services
3.3804%++................................ 11/01/05 NR $ 250 $ 201,250
Colt Telecom Group PLC 12.0002%++......... 12/15/06 NR 700 542,500
Concentric Network Corp. 12.75%........... 12/15/07 NR 150 154,125
Globalstar L.P. 11.375%................... 02/15/04 B 350 353,500
Hyperion Telecommunication
6.1118%++................................ 04/15/03 B 150 109,875
12.25%................................... 09/01/04 B 150 165,000
Intermedia Communications, Inc.
10.3404%++............................... 05/15/06 B 200 159,000
11.2502%++............................... 07/15/07 B 250 181,875
Mcleodusa, Inc. 9.25%..................... 07/15/07 B 350 367,500
Metrocall, Inc. 9.75%..................... 11/01/07 CCC 500 490,000
Metronet Communications
12.00%................................... 08/15/07 NR 150 172,500
5.1757%++................................ 11/01/07 NR 500 305,000
Microcell Telecommunications 11.2496%++... 06/01/06 NR 500 337,500
Netia Holdings
4.4225%++................................ 11/01/07 NR 100 57,000
10.25%................................... 11/01/07 NR 250 240,000
Nextel Commmunication
5.0159%++................................ 10/31/07 CCC 250 153,438
8.9111%++................................ 08/15/04 CCC 100 89,000
5.2530%++................................ 09/15/07 CCC 250 158,125
Nextlink Communications 9.625%............ 10/01/07 B 250 258,125
Omnipoint Corp. 11.625%................... 08/15/06 CCC+ 150 159,563
Pricellular Wireless 10.75%............... 11/01/04 B 250 274,063
Qwest Communications International
4.6803%++................................ 10/15/07 B+ 350 238,875
RCN Corp.
5.4842%++................................ 10/15/07 B 250 156,875
10.00%................................... 10/15/07 B 125 129,683
Sprint Spectrum L.P. 11.00%............... 08/15/06 B+ 200 224,500
Vialog Corp. 12.75%....................... 11/15/01 B- 75 78,375
-----------
5,757,247
-----------
TEXTILES & APPAREL (1.6%)
Delta Mills, Inc. 9.625%.................. 09/01/07 B+ 500 510,000
Dyersburg Corp. 9.75%..................... 09/01/07 NR 100 104,500
Glenoit Corp. 11.00%...................... 04/15/07 B- 300 322,500
#@Plaid Clothing Corp. 11.00%.............. 08/01/03 D 375 450
-----------
937,450
-----------
</TABLE>

B-38
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997 (CONTINUED)
THE HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- -----------
<S> <C> <C> <C> <C>
TRANSPORTATION (2.2%)
Greyhound Lines 11.50%..................... 04/15/07 NR $ 500 $ 553,125
Sea Containers Ltd. 12.50%................. 12/01/04 BB- 215 243,488
Travelcenters of America 10.25%............ 04/01/07 B 450 472,500
-----------
1,269,113
-----------
TOTAL CORPORATE BONDS
(Cost $49,347,591)................................................. 50,853,986
-----------
U.S. TREASURY OBLIGATION (1.7%)
- -------------------------------
U.S. Treasury Note 6.00% (Cost $972,188)... 02/15/26 NR 1,000 998,750
-----------
COMMERCIAL PAPER (1.9%)
- -----------------------
UBS Finance 6.75% (Cost $1,108,792)........ 01/02/98 NR 1,109 1,108,792
-----------
</TABLE>

<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C>
COMMON STOCKS (1.8%)
- --------------------
@Berg Electronics Corp....................................... 7,396 168,259
@+Capital Gaming Intl., Inc.................................. 34 394
@+Dr. Pepper Bottling Holdings, Inc.......................... 14,800 355,200
+Gaylord Containers Corp., Class A........................... 7,500 43,125
+Hedstrom Holdings........................................... 6,065 7,581
Imperial Credit Commercial Mortgage Investment Corp......... 16,500 241,313
+Nextel Communications, Inc.................................. 232 6,032
Ocwen Assest Investment Corp................................ 5,000 102,500
Protection One, Inc......................................... 8,400 95,025
-----------
TOTAL COMMON STOCK
(Cost $694,037).................................................... 1,019,429
-----------
PREFERRED STOCKS (6.0%)
- -----------------------
American Communication Services............................. 1,548 155,942
American Radio Systems...................................... 2,631 310,787
Anvil Holdings, Inc......................................... 4,001 96,023
Bank United Capital Trust................................... 250 257,500
Cablevision Systems Corp.................................... 8,455 981,337
Capstar Broadcasting Partners............................... 3,194 348,146
Chancellor Media Corp....................................... 2,806 319,863
Chevy Chase Pfd............................................. 5,185 269,620
Clarke USA, Inc............................................. 2,500 265,000
Criimi Mae, Inc............................................. 10,000 341,875
Intermedia Communications, Inc. Series B.................... 5,573 68,270
Nextel Communications....................................... 920 105,340
-----------
TOTAL PREFERRED STOCK
(Cost $3,193,344).................................................. 3,519,703
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C>
WARRANTS (0.1%)
- ---------------
+Globalstar Inc............................................. 350 $ 35,350
+ICF Kaiser Intl. Inc....................................... 2,800 2,800
+Intermedia Communicaton.................................... 50 3,562
+Microcell Telecom.......................................... 800 11,600
+Microcell Telecom.......................................... 800 8
@+President Casinos, Inc.................................... 4,415 1,104
+Primus Telecommunications.................................. 200 2,000
@+Wright Medical Technology, Inc............................ 2,676 26,765
+Wireless One, Inc.......................................... 450 112
-----------
TOTAL WARRANTS
(Cost $38,000).................................................... 83,301
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $55,860,714)(a)............................................. $58,143,961
===========
</TABLE>
- -------
@ Restricted Security.
+ Non-income producing.
++ Effective yield.
# Securities in default.

(a) At December 31, 1997, the cost for Federal income tax purposes was
$55,868,331. Net unrealized appreciation was $2,275,630. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $2,968,233 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $692,603.

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

B-39
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE GROWTH EQUITY FUND
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK (93.8%)
- --------------------
BEVERAGES - SOFT DRINKS (2.7%)
PepsiCo, Inc. ........................................... 100,000 $ 3,643,750
------------
CHEMICALS (0.9%)
Du Pont (E.I.) de Nemours & Co. ......................... 20,000 1,201,250
------------
COMPUTER SOFTWARE & SERVICES (6.2%)
+ Cisco Systems, Inc. .................................... 45,000 2,511,563
Computer Associates Intl., Inc. ......................... 40,000 2,115,000
+ Microsoft Corp. ........................................ 30,000 3,876,563
------------
8,503,126
------------
COMPUTER SYSTEMS (6.1%)
Compaq Computer Corp. ................................... 60,000 3,386,250
+ Dell Computer Corp. .................................... 15,000 1,260,469
Hewlett-Packard Co. ..................................... 20,000 1,250,000
Intel Corp. ............................................. 35,000 2,457,656
------------
8,354,375
------------
CONSUMER GOODS & SERVICES (2.3%)
+ Cendant Corp. .......................................... 90,000 3,093,750
------------
DIVERSIFIED OPERATIONS (5.0%)
General Electric Co. .................................... 70,000 5,136,250
Tyco International Limited............................... 40,000 1,802,500
------------
6,938,750
------------
ELECTRONICS - SEMICONDUCTORS (1.3%)
+ Adaptec, Inc. .......................................... 50,000 1,859,375
------------
ENTERTAINMENT (2.2%)
The Walt Disney Co. ..................................... 30,000 2,971,875
------------
FINANCIAL SERVICES (13.9%)
Ahmanson (H.F.) & Co. ................................... 30,000 2,008,125
American Express Co. .................................... 20,000 1,785,000
BankAmerica Corp. ....................................... 20,000 1,460,000
The Charles Schwab Corp. ................................ 40,000 1,677,500
Chase Manhattan Corp. ................................... 15,000 1,642,500
Citicorp................................................. 15,000 1,896,563
Fannie Mae............................................... 40,000 2,282,500
MBNA Corp. .............................................. 60,000 1,638,750
Merrill Lynch & Co., Inc. ............................... 40,000 2,917,500
SunAmerica, Inc. ........................................ 40,000 1,710,000
------------
19,018,438
------------
HOUSEHOLD PRODUCTS (2.6%)
The Procter & Gamble Co. ................................ 45,000 3,591,562
------------
INSURANCE (4.9%)
Allstate Corp. .......................................... 20,000 1,817,500
American International Group, Inc. ...................... 20,000 2,175,000
Travelers Group, Inc. ................................... 50,000 2,693,750
------------
6,686,250
------------
MEDICAL SUPPLIES (2.4%)
Guidant Corp. ........................................... 30,000 1,867,500
HBO & Co. ............................................... 30,000 1,439,062
------------
3,306,562
------------
OIL & GAS (3.7%)
+ Global Marine Inc. ..................................... 50,000 1,225,000
Halliburton Co. ......................................... 20,000 1,038,750
Schlumberger Limited..................................... 35,000 2,817,500
------------
5,081,250
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PHARMACEUTICALS (14.9%)
Bristol-Myers Squibb Co. .............................. 40,000 $ 3,785,000
Eli Lilly & Co. ....................................... 30,000 2,088,750
Johnson & Johnson...................................... 60,000 3,952,500
Merck & Co., Inc. ..................................... 40,000 4,250,000
Pfizer, Inc. .......................................... 40,000 2,982,500
Schering-Plough Corp. ................................. 35,000 2,174,375
Warner-Lambert Co. .................................... 10,000 1,240,000
------------
20,473,125
------------
RETAIL STORES (17.3%)
+ Costco Companies, Inc. ............................... 80,000 3,567,500
CVS Corp. ............................................. 50,000 3,203,125
+ Kroger Co. ........................................... 50,000 1,846,875
The Home Depot, Inc. .................................. 70,000 4,121,250
+ Safeway Inc. ......................................... 60,000 3,795,000
+ Staples, Inc. ........................................ 120,000 3,337,500
Wal-Mart Stores, Inc. ................................. 100,000 3,943,750
------------
23,815,000
------------
TELECOMMUNICATIONS (7.4%)
+ AirTouch Communications, Inc. ........................ 50,000 2,078,125
AT&T Corp. ............................................ 40,000 2,450,000
SBC Communications, Inc. .............................. 40,000 2,930,000
+ WorldCom, Inc. ....................................... 90,000 2,725,312
------------
10,183,437
------------
TOTAL COMMON STOCK
(Cost $94,983,039)............................................... 128,721,875
------------
SHORT TERM INVESTMENTS (6.2%)
- -----------------------------
Temporary Cash Investment Fund, Inc. .................. 4,254,155 4,254,155
Temporary Investment Fund, Inc. ....................... 4,254,117 4,254,117
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $8,508,272)................................................ 8,508,272
------------
TOTAL INVESTMENTS (100.0%)
(Cost $103,491,311)(a)........................................... $137,230,147
============
</TABLE>
- -------
+Non-income producing.
(a) At December 31, 1997, the cost for Federal income tax purposes was
$103,736,261. Net unrealized appreciation was $33,493,886. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $33,871,198 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $377,312.

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

B-40
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE VALUE EQUITY FUND
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMMON STOCK (82.5%)
- --------------------
ADVERTISING (1.4%)
Omnicom Group, Inc. ...................................... 100,000 $ 4,237,500
-----------
AEROSPACE & DEFENSE (4.5%)
The Boeing Company........................................ 25,300 1,238,119
Lockheed Martin Corp. .................................... 126,000 12,411,000
-----------
13,649,119
-----------
AIRLINES (1.8%)
+ AMR Corp. ............................................... 43,000 5,525,500
-----------
AUTOMOTIVE PARTS - EQUIPMENT (2.0%)
LucasVarity PLC........................................... 178,520 6,225,885
-----------
BUILDING PRODUCTS (0.9%)
Armstrong World Industries, Inc. ......................... 35,000 2,616,250
-----------
CHEMICALS (3.5%)
Dupont (E.I.) de Nemours & Co. ........................... 80,000 4,805,000
Hercules, Inc. ........................................... 50,000 2,503,125
Monsanto Co. ............................................. 72,000 3,024,000
Solutia, Inc. ............................................ 15,400 410,988
-----------
10,743,113
-----------
COSMETICS (1.3%)
Avon Products, Inc. ...................................... 65,000 3,989,375
-----------
DIVERSIFIED (6.4%)
Canadian Pacific, Ltd. ................................... 180,000 4,905,000
General Electric Co. ..................................... 80,000 5,870,000
Tenneco, Inc. ............................................ 68,000 2,686,000
Textron, Inc. ............................................ 95,000 5,937,500
-----------
19,398,500
-----------
ENTERTAINMENT & LEISURE (2.3%)
Carnival Corp. - Class A.................................. 125,000 6,921,875
-----------
ELECTRONIC SEMICONDUCTORS (1.0%)
+ Adaptec, Inc. ........................................... 81,000 3,012,188
-----------
ELECTRONICS (2.2%)
+ Arrow Electronics, Inc. ................................. 96,000 3,114,000
Avnet, Inc. .............................................. 56,000 3,696,000
-----------
6,810,000
-----------
FINANCIAL SERVICES (13.1%)
BankBoston Corp. ......................................... 51,000 4,790,812
Citicorp.................................................. 63,000 7,965,562
Countrywide Credit Industries, Inc. ...................... 190,000 8,146,250
Freddie Mac............................................... 220,000 9,226,250
Wells Fargo & Co. ........................................ 28,333 9,617,283
-----------
39,746,157
-----------
HEALTHCARE (3.1%)
+ Tenet Healthcare Corp. .................................. 282,500 9,357,813
-----------
INSURANCE (20.1%)
Ace Limited............................................... 175,000 16,887,500
AFLAC, Inc. .............................................. 105,375 5,387,297
American International Group, Inc. ....................... 30,250 3,289,687
Everest Reinsurance Holdings, Inc. ....................... 120,000 4,950,000
EXEL Limited.............................................. 247,600 15,691,650
General Re Corp. ......................................... 41,000 8,692,000
Mid Ocean Limited......................................... 113,900 6,179,075
-----------
61,077,209
-----------
MACHINERY - DIVERSIFIED (5.6%)
Caterpillar, Inc. ........................................ 237,000 11,509,312
Dover Corp. .............................................. 156,000 5,635,500
-----------
17,144,812
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
MEDICAL SUPPLIES (2.2%)
Becton, Dickinson & Co. .................................. 134,000 $ 6,700,000
-----------
PAPER & PAPER PRODUCTS (0.3%)
Champion International Corp. ............................. 20,000 906,250
-----------
PHOTOGRAPHIC EQUIPMENT (1.8%)
Polaroid Corp. ........................................... 115,000 5,599,063
-----------
RESTAURANTS (2.1%)
McDonald's Corp. ......................................... 136,000 6,494,000
-----------
RETAIL (2.7%)
The May Department Stores Co. ............................ 154,000 8,113,875
-----------
TELECOMMUNICATIONS (1.4%)
Sprint Corp. ............................................. 72,250 4,235,656
-----------
TEXTILES (0.2%)
Shaw Industries, Inc. .................................... 55,000 639,375
-----------
TOYS (1.4%)
Mattel, Inc. ............................................. 114,531 4,266,280
-----------
TRAVEL SERVICES (1.2%)
+ The SABRE Group Holdings, Inc. .......................... 125,000 3,609,375
-----------
TOTAL COMMON STOCK
(Cost $160,697,458)............................................... 251,019,170
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C> <C>
COMMERCIAL PAPER (14.2%)
- ------------------------
American Express Credit Corp. 5.75%.............. 01/28/98 $14,786 14,722,235
General Motors Acceptance Corp. 5.86%............ 01/14/98 14,500 14,469,316
John Deere Capital Corp. 5.65%................... 01/07/98 14,152 14,138,674
------------
TOTAL COMMERCIAL PAPER
(Cost $43,330,225)................................................ 43,330,225
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
SHORT TERM INVESTMENTS (3.3%)
- -----------------------------
Temporary Cash Investment Fund, Inc. ................... 4,997,559 4,997,559
Temporary Investment Fund, Inc. ........................ 5,001,360 5,001,360
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $9,998,919)................................................. 9,998,919
------------
TOTAL INVESTMENTS (100.0%)
(Cost $214,026,602)(a)............................................ $304,348,314
============
</TABLE>
- -------
+ Non-income producing.
(a) Also cost for Federal income tax purposes. At December 31, 1997, net
unrealized appreciation was $90,321,712. This consisted of aggregate gross
unrealized appreciation for all securities in which there was an excess of
market value over tax cost of $90,738,552 and aggregate gross unrealized
depreciation for all securities in which there was an excess of tax cost
over market value of $416,840.

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

B-41
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE FLEXIBLY MANAGED FUND
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
COMMON STOCK (51.8%)
- --------------------
AUTOMOTIVE PARTS - EQUIPMENT (0.2%)
Exide Corp. ............................................ 35,000 $ 905,625
-----------
BANKS (0.1%)
Bank fuer International Zahlungs........................ 124 775,770
-----------
BUILDING PRODUCTS (0.6%)
Hanson PLC (ADR)........................................ 53,125 1,225,195
Johns Manville Corp. ................................... 190,000 1,911,875
-----------
3,137,070
-----------
CHEMICALS (1.8%)
Great Lakes Chemical Corp. ............................. 169,900 7,624,263
Millenium Chemicals, Inc. .............................. 60,000 1,413,750
-----------
9,038,013
-----------
COMPUTERS (0.9%)
International Business Machines Corp. .................. 42,500 4,443,906
-----------
ELECTRIC UTILITIES (9.5%)
Energy Group PLC (ADR).................................. 76,000 3,391,500
+ FirstEnergy Corp. ..................................... 935,000 27,115,000
+ Niagara Mohawk Power Corp. ............................ 377,000 3,958,500
Unicom Corp. ........................................... 475,000 14,606,250
-----------
49,071,250
-----------
ENERGY SERVICES (1.4%)
Wheelabrator Technologies, Inc. ........................ 451,000 7,244,187
-----------
FINANCIAL SERVICES (1.6%)
American Express Co. ................................... 24,000 2,142,000
Fannie Mae.............................................. 35,000 1,997,187
Fund American Enterprises Holdings, Inc. ............... 35,000 4,235,000
-----------
8,374,187
-----------
FOOD PROCESSING (0.6%)
McCormick & Co., Inc. .................................. 108,000 3,030,750
-----------
FOREST & PAPER PRODUCTS (2.2%)
Deltic Timber Corp. .................................... 10,000 273,750
International Paper Co. ................................ 28,000 1,207,500
Louisiana-Pacific Corp. ................................ 65,000 1,235,000
MacMillan Bloedel Limited............................... 396,000 4,145,625
Weyerhaeuser Co. ....................................... 90,000 4,415,625
-----------
11,277,500
-----------
HOLDINGS COMPANY DIVERSIFIED (3.5%)
Loews Corp. ............................................ 136,000 14,433,000
Lonrho PLC.............................................. 2,400,000 3,672,563
-----------
18,105,563
-----------
INSURANCE (1.9%)
Leucadia National Corp. ................................ 74,000 2,553,000
Unitrin, Inc. .......................................... 57,000 3,697,875
Willis Corroon Group PLC (ADR).......................... 277,000 3,410,563
-----------
9,661,438
-----------
MANUFACTURING (0.5%)
Corning Inc. ........................................... 77,000 2,858,625
-----------
MEDIA AND COMMUNICATIONS (2.2%)
+ Chris-Craft Industries, Inc. .......................... 145,000 7,585,313
Meredith Corp. ......................................... 100,000 3,568,750
-----------
11,154,063
-----------
MEDICAL (0.5%)
Smith and Nephew PLC.................................... 950,000 2,821,473
-----------
MINING (2.2%)
Homestake Mining Co. ................................... 230,000 2,041,250
Newmont Mining Corp. ................................... 255,000 7,490,625
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Prime Resources Group, Inc. ............................ 252,000 $ 1,672,932
------------
11,204,807
------------
MISCELLANEOUS CONSUMER PRODUCTS (1.5%)
Philip Morris Companies, Inc. .......................... 165,000 7,476,562
------------
OFFICE SUPPLIES (0.1%)
Cross (A.T.) Co., Class A............................... 38,000 384,750
------------
OIL & GAS (9.1%)
Amerada Hess Corp. ..................................... 300,000 16,462,500
Atlantic Richfield Co. ................................. 66,000 5,288,250
Kerr-McGee Corp. ....................................... 14,000 886,375
Mitchell Energy & Development Corp. Class B............. 120,000 3,495,000
Murphy Oil Corp. ....................................... 126,000 6,827,625
Texaco, Inc. ........................................... 144,973 7,882,907
Union Texas Petroleum Holdings, Inc. ................... 295,000 6,139,688
------------
46,982,345
------------
PHARMACEUTICALS (3.7%)
Genentech, Inc. Special Common.......................... 275,000 16,671,875
Pharmacia & Upjohn, Inc. ............................... 12,000 439,500
Schering-Plough Corp. .................................. 36,000 2,236,500
------------
19,347,875
------------
PHOTO EQUIPMENT (0.7%)
Polaroid Corp. ......................................... 74,000 3,602,875
------------
PUBLISHING (4.6%)
New York Times Co., Class A............................. 160,000 10,580,000
The Washington Post Co., Class B........................ 24,000 11,676,000
Readers Digest Assoc., Inc., Class A.................... 10,000 236,250
Readers Digest Assoc., Inc., Class B.................... 50,300 1,226,063
------------
23,718,313
------------
RETAIL (1.4%)
Hills Stores Co. ....................................... 111,000 353,813
The Limited, Inc. ...................................... 75,000 1,912,500
+ Petrie Stores Corp. ................................... 1,130,000 3,454,975
+ Toys 'R' Us, Inc. ..................................... 10,000 314,375
Wal-Mart Stores, Inc. .................................. 36,000 1,419,750
------------
7,455,413
------------
TRANSPORTATION SERVICES (1.0%)
Overseas Shipholding Group, Inc. ....................... 139,000 3,031,936
Ryder System, Inc. ..................................... 60,000 1,965,000
------------
4,996,936
------------
TOTAL COMMON STOCK
(Cost $204,817,836)............................................... 267,069,296
------------
PREFERRED STOCK (4.1%)
- ----------------------
Cleveland Electric Illum. Series L 7.00%................ 34,550 3,316,800
Cleveland Electric Illum. Series R 8.80%................ 2,550 2,708,330
Cleveland Electric Illum. Series S 9.00%................ 2,500 2,684,475
Entergy Gulf States Utilities Inc. Series B 7.20%....... 15,853 797,604
International Paper Capital 5.25% Convertible........... 5,000 240,000
Kemper Co. Series e 5.75%............................... 100,000 5,200,000
Niagara Mohawk Power Corp. Series A 6.50%............... 24,000 537,000
Niagara Mohawk Power Corp. Series B 7.50%............... 7,000 178,062
Niagra Mohawk Power Corp. Series C 7.20%................ 5,500 132,000
Rouse Co. $3 Series B Convertible....................... 111,000 5,605,500
------------
TOTAL PREFERRED STOCK
(Cost $18,553,823)................................................ 21,399,771
------------
</TABLE>

B-42
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997 (CONTINUED)
THE FLEXIBLY MANAGED FUND
<TABLE>
<CAPTION>
NUMBER
OF CONTRACTS VALUE
------------ ------------
<S> <C> <C>
PUT OPTIONS (0.2%)
- ------------------
+Automatic Data Processing $55, February 21, 1998.... 110 $ 7,563
+Automatic Data Processing $60, May 16, 1998......... 120 38,250
+Cendant Corp. $27, January 17, 1998................. 90 3,645
+Deomi $45, January 17, 1998......................... 5 3,625
+IBM $100, January 17, 1998.......................... 140 18,375
+IBM $105, January 17, 1998.......................... 110 34,375
+IBM $115, January 17, 1998.......................... 120 126,000
+IBM $120, July 18, 1998............................. 120 219,000
+IBM $95, January 17, 1998........................... 100 6,250
+Limited $25, February 21, 1998...................... 115 10,781
+Pharmacia & Upjohn $40.00, April 4, 1998............ 120 51,750
+Polaroid $60, April 18, 1998........................ 48 55,200
+Schering-Plough $55, February 21, 1998.............. 220 11,000
+Schering-Plough $65, August 22, 1998................ 120 75,000
+Schering-Plough $65, February 21, 1998.............. 120 51,750
+Texaco $70, April 18, 1998.......................... 120 189,000
+Wal-Mart $42.50, June 20, 1998...................... 120 53,250
------------
TOTAL OPTIONS
(Cost $1,737,588)................................................ 954,814
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000)
-------- ------ -------
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS (3.3%)
- --------------------------------
U.S. TREASURY NOTES
6.25%.................................... 06/30/98 NR $ 1,250 1,254,688
5.50%.................................... 02/28/99 NR 10,000 9,984,400
6.75%.................................... 05/31/99 NR 2,000 2,029,380
6.125%................................... 07/31/00 NR 1,250 1,262,887
6.25%.................................... 04/30/01 NR 2,500 2,539,050
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $17,015,527)............................................... 17,070,405
------------
AGENCY OBLIGATIONS (4.7%)
- -------------------------
Tennessee Valley Authority
5.88%................................... 04/01/36 NR 13,750 13,767,188
5.98%................................... 04/01/36 AAA 4,600 4,605,750
6.235%.................................. 07/15/45 NR 5,600 5,727,680
------------
TOTAL AGENCY OBLIGATIONS
(Cost $24,235,795)............................................... 24,100,618
------------
MEDIUM TERM NOTES (1.7%)
- ------------------------
Federal National Mortgage Association
5.70%................................... 01/21/98 AAA 2,600 2,591,767
FNMA Medium Term Note 5.37%.............. 02/07/01 AAA 1,600 1,577,088
FNMA Global Bond 6.375%.................. 01/16/02 AAA 3,200 3,251,519
Merck & Company 5.76%.................... 05/03/37 AAA 1,150 1,172,160
------------
TOTAL MEDIUM TERM NOTES
(Cost $8,522,023)................................................ 8,592,534
------------
COMMERCIAL PAPER (11.7%)
- ------------------------
Abbott Laboratories 5.80%................ 01/07/98 A-1+ 5,000 4,995,167
Bell Atlantic Financial Services 5.85%... 01/27/98 A-1 5,000 4,978,875
Ciesco L.P. 6.40%........................ 01/02/98 A-1+ 10,000 9,998,222
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- ------------
<S> <C> <C> <C> <C>
Coca-Cola Company 5.80%................... 01/09/98 A-1+ $ 7,355 $ 7,345,520
5.56%.................................... 02/09/98 A-1+ 10,000 9,938,575
Hewlett-Packard Company 5.95%............. 01/21/98 A-1+ 597 595,027
Minnesota Mining & Manufacturer 5.80%..... 01/09/98 A-1+ 5,000 4,993,555
Procter & Gamble 5.90%.................... 01/16/98 A-1+ 12,557 12,526,131
Procter & Gamble Co. 5.48%................ 01/07/98 A-1+ 5,000 4,995,505
------------
TOTAL COMMERCIAL PAPER
(Cost $60,367,697)................................................ 60,366,577
------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS (10.9%)
- -------------------------
BellSouth Telecommunications Debentures
5.85%...................................... 11/15/45 AAA 3,800 3,805,928
Chiron Corp. 1.90%.......................... 11/17/00 BBB+ 5,700 5,094,375
Ensearch Corp. 6.375%....................... 04/01/02 BBB- 5,650 5,734,750
Grand Metro PLC Euro-Bond 6.50%............. 01/31/00 A+ 2,000 2,789,440
Homestake Mining Co. 5.50%.................. 06/23/00 BBB- 4,900 4,532,500
Inco Limited 7.75%.......................... 03/15/16 BBB- 1,750 1,750,980
Inco Limited 5.75%.......................... 07/01/04 BBB- 3,790 3,654,204
Istituto Nazionale Delle Assicurazioni
(Republic of Italy) Convertible Bond
5.00%...................................... 06/28/01 AA 980 1,205,400
Lonhro Conv. Euro Bond 6.00%................ 02/27/04 NR 1,825 2,612,505
McKesson Corp. 4.50%........................ 03/01/04 A- 1,500 1,357,500
Ogden Corp. 5.75%........................... 10/20/02 BBB 250 240,625
Peninsular & Oriental 7.25%................. 05/19/03 NR 1,900 3,579,597
Pep Boys 4.00%.............................. 09/01/99 BBB 1,000 988,330
Potomac Electric Power Co. 5.00%............ 09/01/02 A- 2,300 2,213,750
Rouse Company 5.75%......................... 07/23/02 BBB- 6,425 7,424,987
Thomas Nelson 5.75%......................... 11/30/99 B 500 483,750
UBS Finance 2.00%........................... 12/15/00 AA+ 300 290,019
WMX Technologies 2.00%...................... 01/24/05 BBB+ 9,700 8,338,993
------------
TOTAL CONVERTIBLE BONDS
(Cost $54,124,771)............................................... 56,097,633
------------
ZERO COUPON BONDS (11.5%)
- -------------------------
Alza Corp. 5.0261%++........................ 07/14/14 BBB- 14,250 6,697,500
Automatic Data Processing, Inc. 5.1212%++... 02/20/12 AA 19,500 15,497,430
Marriott International 3.9190%++............ 03/25/11 BBB 4,950 3,230,222
News America Holdings Lyons 5.3521%++....... 03/11/13 BBB 8,400 3,992,604
Office Depot Inc. 4.2615%++................. 11/01/08 BB- 3,200 2,092,768
Pep Boys 4.0068%++.......................... 09/20/11 BBB 6,700 3,605,404
Roche Holdings, Inc. 6.375%++............... 05/06/04 NR 17,600 8,206,000
Times Mirror Co. 4.5427%++.................. 04/15/12 A 2,800 1,180,900
Time Warner Inc. 6.2910%++.................. 06/22/13 BBB- 19,000 9,737,500
</TABLE>

B-43
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997 (CONTINUED)
THE FLEXIBLY MANAGED FUND
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000) VALUE
-------- ------ ------- ------------
<S> <C> <C> <C> <C>
U.S. Cellular Corp. 6.017%++............. 06/15/15 BBB- $14,000 $ 5,141,220
------------
TOTAL ZERO COUPON BONDS
(Cost $50,294,327)............................................... 59,381,548
------------
<CAPTION>
SHARES
-------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS (0.1%)
- -----------------------------
Temporary Investment Fund, Inc.
(Cost $498,155) ........................................ 498,155 498,155
------------
TOTAL INVESTMENTS (100.0%)
(Cost $440,167,542)(a)........................................... $515,531,351
------------
</TABLE>
- -------
+Non-income producing.
++Effective Yield.
(a) At December 31, 1997, the cost for Federal income tax purposes was
$440,317,174. Net unrealized appreciation was $75,214,177. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $87,231,463 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $12,017,286.
ADR--American Depository Receipt.

The Standards & Poors corporation ratings are the most recent ratings
available at December 31, 1997.

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

B-44
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMMON STOCK (89.0%)
- --------------------
AUSTRALIA (1.7%)
National Australia Bank Limited........................... 156,025 $ 2,178,592
-----------
BELGIUM (0.8%)
Barco N.V................................................. 5,500 1,009,449
-----------
FINLAND (0.5%)
Cultor Oyj................................................ 12,000 650,080
-----------
FRANCE (9.5%)
Axa-AUP................................................... 20,000 1,548,241
Carrefour Supermarche SA.................................. 2,900 1,513,666
+ Dassault Systemes SA..................................... 35,000 1,067,595
L.D.C. SA................................................. 1,000 152,098
L'OREAL................................................... 2,700 1,056,956
Rhone-Poulenc............................................. 16,000 717,038
Scor...................................................... 35,000 1,674,407
Societe BIC SA............................................ 28,566 2,085,993
Total SA-B................................................ 14,185 1,544,447
Valeo SA.................................................. 13,063 886,376
-----------
12,246,817
-----------
GERMANY (6.0%)
Adidas AG................................................. 11,000 1,456,030
Axa Colonia Konzern AG.................................... 9,000 860,937
Bayer AG.................................................. 35,000 1,299,331
Bayerische Motoren Werke (BMW) AG......................... 1,000 748,037
Deutsche Lufthansa AG..................................... 85,000 1,597,851
Gehe AG................................................... 10,800 546,595
SGL Carbon AG............................................. 9,700 1,240,796
-----------
7,749,577
-----------
HONG KONG (1.0%)
Dah Sing Financial Group.................................. 130,800 314,834
Sun Hung Kai Properties Limited........................... 150,000 1,045,395
-----------
1,360,229
-----------
IRELAND (4.1%)
Allied Irish Banks PLC.................................... 150,290 1,452,824
CRH PLC................................................... 85,021 986,258
+ Elan Corp. PLC (ADR)..................................... 31,000 1,586,813
Greencore Group PLC....................................... 202,027 970,660
Northern Ireland Electricity PLC.......................... 40,000 346,524
-----------
5,343,079
-----------
JAPAN (22.7%)
The Bank of Tokyo-Mitsubishi, Limited..................... 75,000 1,038,293
Bridgestone Corp.......................................... 90,000 1,958,913
Canon, Inc................................................ 46,000 1,075,518
Credit Saison Co., Limited................................ 80,000 1,981,217
Ezaki Glico Co., Limited.................................. 82,000 531,652
Fuji Photo Film Co. Limited............................... 64,000 2,461,139
Hitachi Maxell Limited.................................... 45,000 796,025
Hoya Corp................................................. 33,000 1,040,600
The Industrial Bank of Japan.............................. 95,000 679,505
Ito-Yokado Co. Limited.................................... 18,000 920,620
JUSCO Co. Limited......................................... 56,000 792,487
Komatsu Limited........................................... 150,000 755,647
Murata Manufacturing Co. Limited.......................... 25,000 630,667
Nintendo Co. Limited...................................... 17,000 1,673,575
NTT Data Corp............................................. 26,000 1,405,772
Omron Corp................................................ 93,000 1,459,148
Rohm Co. Limited.......................................... 20,000 2,045,822
SMC Corp.................................................. 13,500 1,194,037
Sony Corp................................................. 18,000 1,605,893
Takeda Chemical Industries................................ 93,000 2,660,799
Taisho Pharmaceutical Co. Limited......................... 65,000 1,664,730
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
Tokyo Broadcasting System, Inc............................ 30,000 $ 380,707
Yasuda Fire & Marine Insurance Co. Limited................ 145,000 622,284
-----------
29,375,050
-----------
MALAYSIA (0.3%)
Malayan Banking Berhad.................................... 80,000 232,249
Telekom Malaysia Berhad................................... 45,000 132,952
-----------
365,201
-----------
NETHERLANDS (7.0%)
AEGON N.V. (ADR).......................................... 12,005 1,075,948
AEGON N.V................................................. 18,336 1,632,596
Elsevier N.V.............................................. 105,000 1,698,870
Hagemeyer N.V............................................. 28,418 1,187,337
ING Groep N.V............................................. 31,710 1,335,830
Vendex International N.V.................................. 39,714 2,192,152
-----------
9,122,733
-----------
NORWAY (0.4%)
Smedvig-ASA (ADR)-B....................................... 25,000 525,000
-----------
SINGAPORE (0.3%)
City Developments Limited................................. 80,000 370,340
-----------
SPAIN (1.3%)
Banco Intercontinental Espanol SA......................... 7,800 442,160
Banco Popular Espanol SA.................................. 18,000 1,257,747
-----------
1,699,907
-----------
SWEDEN (5.6%)
Assa Abloy AB-B........................................... 66,000 1,746,833
Astra AB-B................................................ 80,000 1,346,044
Autoliv, Inc. (ADR)....................................... 27,000 884,250
Hennes & Mauritz AB-B..................................... 35,000 1,543,918
OM Gruppen AB............................................. 15,700 571,855
Skandia Forsakrings AB.................................... 24,000 1,132,794
-----------
7,225,694
-----------
SWITZERLAND (9.0%)
Credit Suisse Group....................................... 14,000 2,169,278
Nestle SA................................................. 1,250 1,876,007
+ Pharma Vision 2000 AG.................................... 2,150 1,336,978
Roche Holding AG.......................................... 330 3,281,787
Schweizerische Bankgesellschaft........................... 2,102 3,043,724
-----------
11,707,774
-----------
UNITED KINGDOM (18.8%)
BAA PLC................................................... 765 6,268
Barclays PLC.............................................. 1 27
British Petroleum Co. PLC (ADR)........................... 20,467 1,630,964
Compass Group PLC......................................... 120,000 1,469,025
Dixons Group PLC.......................................... 145,000 1,457,754
EMI Group PLC............................................. 84,185 703,675
General Accident PLC...................................... 73,000 1,267,215
HSBC Holdings PLC......................................... 45,000 1,155,080
Lloyds TSB Group PLC...................................... 150,000 1,942,411
Misys PLC................................................. 76,528 2,304,340
+ Norwich Union PLC........................................ 200,000 1,283,422
Powerscreen International PLC............................. 111,691 1,116,451
Provident Financial PLC................................... 118,293 1,551,288
Rentokil Initial PLC...................................... 350,000 1,526,121
Reuters Holdings PLC...................................... 90,000 984,779
Shell Transport & Trading Co. PLC......................... 265,000 1,918,552
Siebe PLC................................................. 74,090 1,456,809
Smiths Industries PLC..................................... 90,000 1,255,780
Zeneca Group PLC.......................................... 35,000 1,230,687
-----------
24,260,648
-----------
</TABLE>

B-45
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997 (CONTINUED)
THE INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
SHARES VALUE
------ ------------
<S> <C> <C>
TOTAL COMMON STOCK
(Cost $95,578,835)................................................ $115,190,170
------------
PREFERRED STOCK (1.6%)
- ----------------------
SAP AG (Cost $1,337,258)................................... 6,300 2,046,929
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY RATING (000)
-------- ------ -----
<S> <C> <C> <C> <C>
CORPORATE BOND (0.7%)
- ---------------------
SWITZERLAND
Union Bank of Switzerland 2.75%
(Cost $920,625)............................ 06/16/02 NR $750 889,688
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES
---------
<S> <C> <C>
WARRANTS (0.6%)
- ---------------
+ Compagnie Generale de Eaux............................ 4,700 3,195
+ Rhone Poulenc Wts..................................... 16,000 55,055
+ Credit Suisse......................................... 95,000 781,598
------------
TOTAL WARRANTS
(Cost $623,382).................................................. 839,848
------------
SHORT TERM INVESTMENTS (8.1%)
- -----------------------------
Temporary Cash Investment Fund, Inc.................... 5,236,270 5,236,270
Temporary Investment Fund, Inc......................... 5,235,079 5,235,079
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $10,471,349)............................................... 10,471,349
------------
TOTAL INVESTMENTS (100.0%)
(Cost $108,931,449)(a)........................................... $129,437,984
============
</TABLE>
- -------
+ Non income producing.
(a) At December 31, 1997, the cost for Federal income tax purposes was
$110,039,158. Net unrealized appreciation was $19,398,826. This consisted
of aggregate gross unrealized depreciation for all securities in which
there was an excess of market value over tax cost of $24,875,638 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $5,476,812.
ADR--American Depository Receipt.

COMMON AND PREFERRED STOCK SECTOR DIVERSIFICATION

<TABLE>
<CAPTION>
% OF
MARKET VALUE
VALUE (000'S)
------ --------
<S> <C> <C>
Manufacturing................................................... 21.7% $ 25,418
Financial Services.............................................. 19.5% 22,816
Retail.......................................................... 15.5% 18,208
Insurance....................................................... 9.5% 11,098
Electronics..................................................... 7.0% 8,208
Computers....................................................... 5.8% 6,825
Pharmaceuticals................................................. 5.0% 5,912
Oil............................................................. 4.8% 5,619
Telecommunication............................................... 2.7% 3,197
Automotive...................................................... 2.2% 2,519
Airlines........................................................ 1.4% 1,604
Miscellaneous................................................... 1.3% 1,526
Real Estate..................................................... 1.2% 1,416
Investment Co. ................................................. 1.1% 1,337
Consumer Products............................................... 1.0% 1,187
Utilities....................................................... 0.3% 347
------ --------
100.0% $117,237
====== ========
</TABLE>

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

B-46
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE SMALL CAPITALIZATION FUND
<TABLE>
<CAPTION>
SHARES VALUE
------ ----------
<S> <C> <C>
COMMON STOCK (87.3%)
- --------------------
AUTOMOTIVE PARTS (1.2%)
Borg-Warner Automotive, Inc. ............................... 9,400 $ 488,800
----------
BUILDING MATERIALS (1.3%)
Chicago Bridge & Iron Company N.V. ......................... 21,000 341,250
Medusa Corp. ............................................... 4,400 183,975
----------
525,225
----------
CABLE OPERATORS (1.6%)
TCA Cable TV, Inc. ......................................... 14,100 653,006
----------
CHEMICALS (3.8%)
+ McWhorter Technologies, Inc. .............................. 13,200 339,900
Schulman, A. Inc. .......................................... 46,600 1,176,650
----------
1,516,550
----------
COMPUTER SERVICES & SOFTWARE (10.9%)
+ Auspex Systems, Inc. ...................................... 75,500 759,719
+ BA Merchant Services, Inc. ................................ 27,400 486,350
+ BancTec, Inc. ............................................. 22,000 589,875
+ The BISYS Group, Inc. ..................................... 28,900 964,537
+ Wang Laboratories, Inc. ................................... 69,500 1,542,031
----------
4,342,512
----------
ELECTRICAL EQUIPMENT (1.2%)
AMETEK, Inc. ............................................... 16,900 456,300
----------
ELECTRONICS (6.7%)
Belden, Inc. ............................................... 7,000 246,750
+ Exar Corp. ................................................ 28,000 465,500
+ General Semiconductor, Inc. ............................... 48,300 558,469
+ Oak Industries, Inc. ...................................... 10,160 301,625
+ Tracor, Inc. .............................................. 10,700 328,356
Watkins-Johnson Co. ........................................ 29,400 762,562
----------
2,663,262
----------
HEALTHCARE (5.2%)
+ CorVel Corp. .............................................. 21,500 822,375
+ Magellan Health Services, Inc. ............................ 35,500 763,250
+ Trigon Healthcare, Inc. ................................... 17,800 465,025
----------
2,050,650
----------
HOLDING COMPANY (1.9%)
Triarc Companies, Inc. ..................................... 27,000 735,750
----------
INFORMATION PROCESSING (1.6%)
National Data Corp. ........................................ 18,100 653,863
----------
INSURANCE (14.8%)
+ CNA Surety Corporation..................................... 36,100 557,294
+ Delphi Financial Group, Inc. .............................. 18,014 810,630
Enhance Financial Services Group, Inc. ..................... 6,900 410,550
E.W. Blanch Holdings, Inc. ................................. 26,400 909,150
+ Gryphon Holdings, Inc. .................................... 26,700 448,894
Horace Mann Educators Corp. ................................ 13,800 392,437
RenaissanceRe Holdings Ltd. ................................ 32,500 1,434,062
United Wisconsin Services, Inc. ............................ 35,200 906,400
----------
5,869,417
----------
MACHINERY - DIVERSIFIED (2.5%)
+ Baldwin Technology Company, Inc. .......................... 87,600 438,000
OmniQuip International, Inc. ............................... 27,800 556,869
----------
994,869
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ ----------
<S> <C> <C>
MANUFACTURING (12.7%)
+ Champion Enterprises, Inc. ................................ 35,000 $ 719,688
Flowserve Corp. ............................................ 31,000 866,062
Harman International Industries, Inc. ...................... 11,200 475,300
+ Lydall, Inc. .............................................. 47,300 922,350
+ National Patent Development Corp. ......................... 32,500 450,938
+ Paxar Corp. ............................................... 45,750 677,672
Roper Industries, Inc. ..................................... 11,500 324,875
Watts Industries, Inc. ..................................... 16,700 472,819
Woodhead Industries, Inc. .................................. 7,200 135,000
----------
5,044,704
----------
MEDICAL SUPPLIES (2.7%)
DENTSPLY International Inc. ................................ 13,000 401,781
+ Spacelabs Medical, Inc. ................................... 20,100 378,131
Vital Signs, Inc. .......................................... 15,400 294,525
----------
1,074,437
----------
METAL FABRICATE/HARDWARE (2.3%)
EASCO, Inc. ................................................ 21,400 280,875
Kaydon Corp. ............................................... 19,300 629,663
----------
910,538
----------
OIL & GAS (5.9%)
+ Basin Exploration, Inc. ................................... 15,500 275,125
Cabot Oil & Gas Corp. ...................................... 29,700 577,294
KCS Energy, Inc. ........................................... 15,200 315,400
+ Nuevo Energy Co. .......................................... 12,500 509,375
St. Mary Land & Exploration Co. ............................ 18,700 648,656
----------
2,325,850
----------
PAPER AND FOREST PRODUCTS (0.6%)
Rock-Tenn Co. .............................................. 11,000 225,500
----------
PUBLISHING & PRINTING (2.9%)
Bowne & Co., Inc. .......................................... 9,200 366,850
Harland Co., John H. ....................................... 7,600 159,600
Hollinger International, Inc. .............................. 44,600 624,400
----------
1,150,850
----------
RECYCLING (0.4%)
Newfield Exploration Company................................ 6,600 153,862
----------
RETAIL (0.4%)
Longs Drug Stores, Inc. .................................... 4,400 141,350
----------
TELECOMMUNICATIONS (1.9%)
+ ACC Corp. ................................................. 4,900 248,062
+ CommScope, Inc. ........................................... 37,700 506,594
----------
754,656
----------
TEXTILES (4.0%)
+ Burlington Industries, Inc. ............................... 14,200 196,138
Guilford Mills, Inc. ....................................... 25,200 689,850
+ WestPoint Stevens, Inc. ................................... 14,400 684,900
----------
1,570,888
----------
TRANSPORTATION (0.8%)
Interpool, Inc. ............................................ 22,800 337,725
----------
TOTAL COMMON STOCK
(Cost $30,468,479)................................................. 34,640,564
----------
</TABLE>

B-47
<PAGE>

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

B-48
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997
THE EMERGING GROWTH FUND
<TABLE>
<CAPTION>
SHARES VALUE
------ ----------
<S> <C> <C>
COMMON STOCK (87.9%)
- --------------------
AEROSPACE & DEFENSE (0.6%)
The Boeing Co. ............................................. 2,000 $ 97,875
----------
AIRLINES (1.1%)
+ Alaska Air Group, Inc. .................................... 1,000 38,750
+ Atlantic Coast Airlines Inc. .............................. 3,000 94,688
+ Midwest Express Holdings, Inc. ............................ 1,000 38,813
----------
172,251
----------
COMPUTER SERVICES & SOFTWARE (19.5%)
+ Aspect Development, Inc. .................................. 3,000 156,375
+ Check Point Software Technologies Ltd. .................... 6,900 282,038
+ CHS Electronics, Inc. ..................................... 1,000 16,938
+ Citrix Systems, Inc. ...................................... 2,300 174,872
+ Cognicase, Inc. ........................................... 7,400 89,031
+ Computer Horizons Corp. ................................... 1,000 45,750
+ Compuware Corp. ........................................... 400 12,813
+ Crystal Systems Solutions ................................. 1,500 37,688
+ ECsoft Group (ADR) ........................................ 20,400 360,825
+ Excite, Inc. .............................................. 3,000 90,094
+ HNC Software, Inc. ........................................ 3,800 164,113
+ Information Management Resources, Inc. .................... 4,000 150,750
+ Intelligroup, Inc. ........................................ 3,000 56,250
+ INTERSOLV, Inc. ........................................... 6,000 121,875
+ Metro Information Services, Inc. .......................... 2,400 67,350
+ New Era of Networks, Inc. ................................. 5,200 57,200
+ Peritus Software Services, Inc. ........................... 2,000 40,813
+ Pervasive Software, Inc. .................................. 16,200 119,475
+ PRT Group, Inc. ........................................... 6,800 76,075
+ PSW Technologies, Inc. .................................... 3,000 42,938
+ RealNetworks, Inc. ........................................ 2,700 37,631
+ Saville Systems Ireland ................................... 7,000 290,281
+ Security Dynamics Technologies, Inc. ...................... 1,500 53,719
+ SMART Modular Technologies, Inc. .......................... 4,600 105,225
+ Software AG Systems, Inc. ................................. 1,700 24,650
+ SunGard Data Systems Inc. ................................. 952 29,512
+ Tier Technologies, Inc. ................................... 18,100 193,444
+ UBICS, Inc. ............................................... 1,000 15,250
+ Yahoo! Inc. ............................................... 2,000 138,688
----------
3,051,663
----------
DISTRIBUTION SERVICES (3.2%)
+ Brightpoint, Inc. ......................................... 9,400 130,425
+ Innovative Valve Technologies, Inc. ....................... 4,200 84,525
+ NBTY, Inc. ................................................ 2,000 66,875
+ U.S.A. Floral Products, Inc ............................... 13,500 214,313
----------
496,138
----------
EDUCATION SERVICES (3.0%)
+ Bright Horizons, Inc. ..................................... 2,000 37,875
+ Caribiner International, Inc. ............................. 1,500 66,750
+ Computer Learning Centers, Inc. ........................... 1,800 110,363
+ Education Management Corp. ................................ 8,000 250,500
----------
465,488
----------
ELECTRONIC COMPONENTS (4.6%)
+ Aavid Thermal Technologies, Inc. .......................... 2,700 64,125
+ Flextronics International Ltd. ............................ 2,000 31,500
+ InTest Corp. .............................................. 6,000 44,250
+ Level One Communications, Inc. ............................ 2,300 64,831
+ Micrel, Inc. .............................................. 3,000 84,938
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ ---------
<S> <C> <C>
+ Integrations, Inc. ......................................... 1,300 $ 12,391
+ Powerwave Technologies, Inc. ............................... 4,000 66,626
+ Rambus Inc. ................................................ 2,000 91,750
+ Sawtek Inc. ................................................ 6,000 157,875
+ Semtech Corp. .............................................. 2,400 93,600
---------
711,886
---------
FINANCIAL SERVICES (3.8%)
Citicorp..................................................... 1,000 126,438
+ Franchise Mortgage Acceptance Co. LLC....................... 7,000 129,063
Liberty Financial Companies, Inc. ........................... 950 35,863
MBNA Corp. .................................................. 7,000 191,188
Sirrom Capital Corp. ........................................ 2,200 115,225
---------
597,777
---------
FOOD SERVICES (1.8%)
+ American Italian Pasta Co. ................................. 11,100 277,500
---------
HEALTHCARE (1.0%)
+ Sunrise Assisted Living, Inc. .............................. 3,700 158,638
---------
HOTELS & LODGING (5.0%)
+ BridgeStreet Accommodations, Inc. .......................... 22,900 230,431
+ Fairfield Communities, Inc. ................................ 1,700 74,995
Four Seasons Hotels, Co. .................................... 8,600 271,975
+ Interstate Hotels Co. ...................................... 3,000 105,188
+ Silverleaf Resorts, Inc. ................................... 3,700 90,650
+ Vistana, Inc. .............................................. 100 2,288
---------
775,527
---------
HUMAN RESOURCES (7.4%)
+ AccuStaff, Inc. ............................................ 4,000 92,000
+ AHL Services, Inc. ......................................... 7,000 172,375
+ Interim Services, Inc. ..................................... 5,000 129,375
+ MAXIMUS, Inc. .............................................. 10,900 263,644
+ RCM Technologies, Inc. ..................................... 2,400 40,500
+ Romac International, Inc. .................................. 9,600 234,600
Select Appointments Holdings LTD (ADR)....................... 12,200 224,938
---------
1,157,432
---------
INSURANCE (3.2%)
+ ARM Financial Group, Inc. .................................. 3,400 89,675
Travelers Group, Inc. ....................................... 7,500 404,063
---------
493,738
---------
INVESTMENT COMPANIES (3.1%)
+ Affiliated Managers Group, Inc. ............................ 8,500 246,500
T. Rowe Price Associates, Inc. .............................. 3,000 189,000
The Charles Schwab Corp. .................................... 1,000 41,938
---------
477,438
---------
LEASING (1.8%)
+ Financial Federal Corp. .................................... 2,500 59,063
+ Granite Financial Inc. ..................................... 12,200 215,025
---------
274,088
---------
LEISURE (2.5%)
+ American Coin Merchandising, Inc. .......................... 6,000 106,500
+ Steiner Leisure Ltd. ....................................... 9,150 281,363
---------
387,863
---------
</TABLE>

B-49
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS - DECEMBER 31, 1997 (CONTINUED)
THE EMERGING GROWTH FUND
<TABLE>
<CAPTION>
SHARES VALUE
------ --------
<S> <C> <C>
MANUFACTURING (1.3%)
+ Power-One, Inc. ............................................. 4,000 $ 55,250
+ Wesley Jessen VisionCare, Inc. .............................. 3,800 148,675
--------
203,925
--------
MARKETING (1.3%)
+ Abacus Direct Corp. ......................................... 4,500 186,188
+ Boron, LePore & Associates, Inc. ............................ 1,000 27,563
--------
213,751
--------
MEDIA (0.9%)
+ Emmis Broadcasting Corp. .................................... 1,700 77,775
+ Jacor Communications, Inc. .................................. 1,400 74,463
--------
152,238
--------
MEDICAL INSTRUMENTS & DEVICES (1.1%)
+ Cytyc Corp. ................................................. 1,900 47,381
+ Vista Medical Technologies, Inc. ............................ 9,800 121,275
--------
168,656
--------
MEDICAL SERVICES (2.7%)
+ BioReliance Corp. ........................................... 5,300 121,900
HBO & Co. .................................................... 3,500 167,891
+ IMPATH, Inc. ................................................ 1,000 32,250
+ Lincare Holdings, Inc. ...................................... 1,600 91,600
+ Serologicals Corp. .......................................... 500 12,781
--------
426,422
--------
MISCELLANEOUS (0.5%)
+ The Profit Recovery Group International, Inc. ............... 4,500 80,719
--------
NETWORK SYSTEMS (0.7%)
+ Concord Communications, Inc. ................................ 600 12,338
+ MMC Networks, Inc. .......................................... 3,500 58,516
+ Network Solutions, Inc. ..................................... 3,200 42,100
--------
112,954
--------
PUBLISHING (0.8%)
+ The Petersen Companies, Inc. ................................ 5,300 121,900
--------
REAL ESTATE (4.3%)
+CB Commercial Real Estate Services Group, Inc. ............... 10,700 344,406
Intrawest Corp. .............................................. 7,000 121,625
+ LaSalle Partners, Inc. ...................................... 4,400 156,750
+ Trammell Crow Co. ........................................... 2,100 54,075
--------
676,856
--------
RESTAURANTS (0.3%)
+ Star Buffet, Inc. ........................................... 4,000 46,000
--------
RETAIL (3.5%)
+ DM Management Co. ........................................... 2,900 45,856
+ Fossil, Inc. ................................................ 1,000 25,250
+ Gadzooks, Inc. .............................................. 6,000 126,750
+ ONSALE, Inc. ................................................ 3,000 54,000
+ Rocky Shoes and Boots, Inc. ................................. 14,200 213,888
+ Tropical Sportswear International Corp. ..................... 8,200 83,538
--------
549,282
--------
TELECOMMUNICATIONS (5.8%)
+ CellStar Corp. .............................................. 3,500 69,891
+ CIENA Corp. ................................................. 3,100 189,875
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
+ ITC DeltaCom, Inc. ...................................... 11,300 $ 185,038
+ LCC International, Inc. ................................. 2,700 38,644
+ Lightbridge, Inc. ....................................... 9,000 169,313
+STARTEC Global Communications. Corp. ..................... 2,300 51,319
+ Tekelec.................................................. 6,000 183,750
+ Transcrypt International, Inc. .......................... 1,000 25,000
-----------
912,830
-----------
TRANSPORTATION (1.3%)
C.H. Robinson Worldwide, Inc. ............................ 2,400 54,150
+ Pegasus Systems, Inc. ................................... 3,000 44,625
Travel Services International, Inc. ...................... 4,800 112,200
-----------
210,975
-----------
VIDEO COMPONENTS (1.8%)
+ Gemstar International Group Ltd ......................... 11,600 279,125
-----------
TOTAL COMMON STOCK
(Cost $13,246,111)................................................ 13,750,935
-----------
SHORT TERM INVESTMENTS (12.1%)
- ------------------------------
Temporary Investment Fund--Temp Cash...................... 950,091 950,091
Temporary Investment Fund Class B......................... 950,092 950,092
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $1,900,183)................................................. 1,900,183
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $15,146,294)(a)............................................. $15,651,118
===========
</TABLE>
- -------
+ Non income producing.
(a) At December 31, 1997, the cost for Federal income tax purposes was
$15,197,114. Net unrealized appreciation was $454,004. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $1,303,496 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $849,492.

ADR-American Depository Receipt

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

B-50
<PAGE>

- ----------------------------------------------------
THIS PAGE LEFT INTENTIONALLY BLANK

B-51
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997

MONEY QUALITY HIGH YIELD GROWTH
MARKET FUND BOND FUND BOND FUND EQUITY FUND
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS:
Investments at value (1).. $37,333,851 $44,701,856 $58,143,961 $137,230,147
Cash...................... 1,000 1,184 127 --
Interest, dividends and
reclaims receivable...... 353,126 313,633 1,097,027 139,944
Receivable for investment
securities sold.......... -- -- -- --
Receivable for capital
stock sold............... -- 4,492 2,399 76,656
Other assets.............. 313 278 505 1,254
----------- ----------- ----------- ------------
Total Assets............. 37,688,290 45,021,443 59,244,019 137,448,001
----------- ----------- ----------- ------------
LIABILITIES:
Cash overdraft............ -- -- -- 6,654
Payable for investment
securities purchased..... -- 4,847,231 -- 1,119,150
Payable for capital stock
redeemed................. -- 59,323 50,623 139,931
Dividends payable......... 176,454 -- -- --
Payable to the investment
advisor.................. 13,646 15,144 24,663 55,891
Payable to The Penn Mutual
Life Insurance Co........ 15,112 14,704 21,465 51,332
Net unrealized
depreciation on forward
foreign currency
contracts................ -- -- -- --
Other liabilities......... 6,694 8,013 9,604 16,797
----------- ----------- ----------- ------------
Total Liabilities........ 211,906 4,944,415 106,355 1,389,755
----------- ----------- ----------- ------------
NET ASSETS................. $37,476,384 $40,077,028 $59,137,664 $136,058,246
=========== =========== =========== ============
Shares of $.10 par value
capital stock issued and
outstanding............... 37,478,141 3,929,034 6,214,249 5,583,243
NET ASSET VALUE, OFFERING
AND REDEMPTION PRICE PER
SHARE..................... $ 1.00 $ 10.20 $ 9.52 $ 24.37
NET ASSETS CONSIST OF:
Capital paid in........... $37,478,141 $39,724,697 $58,440,118 $102,355,392
Undistributed net
investment income
(loss)................... -- -- -- --
Accumulated net realized
gain (loss) on investment
transactions and foreign
exchange................. (1,757) -- (1,585,701) (35,982)
Net unrealized
appreciation in value of
investments, futures
contracts and foreign
currency related items... -- 352,331 2,283,247 33,738,836
----------- ----------- ----------- ------------
TOTAL NET ASSETS......... $37,476,384 $40,077,028 $59,137,664 $136,058,246
=========== =========== =========== ============
(1) Investments at cost.... $37,333,851 $44,349,525 $55,860,714 $103,491,311
</TABLE>

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

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

B-52
<PAGE>

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

<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE MANAGED INTERNATIONAL CAPITALIZATION GROWTH
EQUITY FUND FUND EQUITY FUND FUND FUND
------------ ------------ ------------- -------------- -----------
<S> <C> <C> <C> <C>
$304,348,314 $515,531,351 $129,437,984 $39,665,695 $15,651,118
-- -- 930,708 -- 2,523,632
346,648 2,462,097 247,018 18,975 2,256
-- 1,033,789 -- 570,879 823,537
-- 9,245 315,342 92,215 118,722
2,728 4,477 1,050 341 147
------------ ------------ ------------ ----------- -----------
304,697,690 519,040,959 130,932,102 40,348,105 19,119,412
------------ ------------ ------------ ----------- -----------
-- -- -- -- --
971,198 1,973,039 930,708 1,582,088 1,141,769
498,560 469,473 14,872 3,437 17,776
-- -- -- -- --
126,658 215,463 81,736 15,736 8,894
110,636 190,588 48,833 13,744 4
-- -- 176,660 -- --
30,170 53,672 41,737 7,006 9,251
------------ ------------ ------------ ----------- -----------
1,737,222 2,902,235 1,294,546 1,622,011 1,177,694
------------ ------------ ------------ ----------- -----------
$302,960,468 $516,138,724 $129,637,556 $38,726,094 $17,941,718
============ ============ ============ =========== ===========
13,432,474 26,029,570 8,038,534 2,683,387 1,395,974
$ 22.55 $ 19.83 $ 16.13 $ 14.43 $ 12.85
$212,638,756 $440,801,069 $110,276,873 $34,563,548 $17,535,073
-- -- (1,026,453) -- (56,325)
-- (26,314) 64,993 (9,484) (41,854)
90,321,712 75,363,969 20,322,143 4,172,030 504,824
------------ ------------ ------------ ----------- -----------
$302,960,468 $516,138,724 $129,637,556 $38,726,094 $17,941,718
============ ============ ============ =========== ===========
$214,026,602 $440,167,542 $108,931,449 $35,493,665 $15,146,294
</TABLE>

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

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

B-53
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENT OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1997

MONEY QUALITY HIGH YIELD GROWTH
MARKET FUND BOND FUND BOND FUND EQUITY FUND
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................... $ -- $ 28,350 $ 315,064 $ 1,172,790
Interest..................... 2,161,404 2,460,829 4,656,080 266,042
Foreign tax withheld......... -- -- -- (2,071)
---------- ---------- ---------- -----------
Total investment income..... 2,161,404 2,489,179 4,971,144 1,436,761
---------- ---------- ---------- -----------
EXPENSES:
Investment advisory fees..... 148,226 164,758 254,474 600,772
Administration fees.......... 56,455 56,299 76,344 186,580
Accounting fees.............. 28,227 28,211 38,169 87,177
Custodian fees and expenses.. 10,746 12,500 25,786 30,482
Other expenses............... 21,074 19,901 16,073 49,747
---------- ---------- ---------- -----------
Total expenses.............. 264,728 281,669 410,846 954,758
Less: Expense waivers....... -- -- -- --
---------- ---------- ---------- -----------
Net expenses................ 264,728 281,669 410,846 954,758
---------- ---------- ---------- -----------
NET INVESTMENT INCOME (LOSS).. 1,896,676 2,207,510 4,560,298 482,003
---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on
investment transactions..... (225) 912,980 2,964,765 13,834,988
Net realized gain from
foreign currency............ -- -- -- --
Change in unrealized
appreciation of investments,
futures contracts and
foreign currency during the
year........................ -- (208,702) (118,203) 14,267,440
---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS... (225) 704,278 2,846,562 28,102,428
---------- ---------- ---------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.... $1,896,451 $2,911,788 $7,406,860 $28,584,431
========== ========== ========== ===========
</TABLE>
- -----------------------
* For the period from May 1, 1997 (commencement of operations) to December 31,
1997.

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

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

B-54
<PAGE>

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

<TABLE>
<CAPTION>
FLEXIBLY SMALL EMERGING
VALUE MANAGED INTERNATIONAL CAPITALIZATION GROWTH
EQUITY FUND FUND EQUITY FUND FUND FUND *
- ----------- ----------- ------------- -------------- ----------
<S> <C> <C> <C> <C>
$ 3,097,369 $ 7,090,647 $ 1,683,459 $ 191,250 $ 15,587
2,524,642 10,789,548 564,878 226,303 15,001
(6,146) (34,053) (121,111) (1,384) --
- ----------- ----------- ----------- ---------- ----------
5,615,865 17,846,142 2,127,226 416,169 30,588
- ----------- ----------- ----------- ---------- ----------
1,279,429 2,310,427 912,368 137,566 60,470
383,864 693,190 182,487 41,270 11,345
152,928 223,627 97,981 27,518 6,127
37,846 86,208 117,952 13,884 20,621
98,182 186,575 61,601 14,480 8,074
- ----------- ----------- ----------- ---------- ----------
1,952,249 3,500,027 1,372,389 234,718 106,637
-- -- -- -- (19,724)
- ----------- ----------- ----------- ---------- ----------
1,952,249 3,500,027 1,372,389 234,718 86,913
- ----------- ----------- ----------- ---------- ----------
3,663,616 14,346,115 754,837 181,451 (56,325)
- ----------- ----------- ----------- ---------- ----------
16,381,602 29,490,467 4,305,835 2,278,532 1,331,710
-- 80,506 2,563,120 -- --
36,751,125 23,598,612 3,833,566 2,875,385 504,824
- ----------- ----------- ----------- ---------- ----------
53,132,727 53,169,585 10,702,521 5,153,917 1,836,534
- ----------- ----------- ----------- ---------- ----------
$56,796,343 $67,515,700 $11,457,358 $5,335,368 $1,780,209
=========== =========== =========== ========== ==========
</TABLE>

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

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

B-55
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
MONEY MARKET FUND QUALITY BOND FUND
------------------------ --------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/97 12/31/96
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS:
Net investment income
(loss)................. $ 1,896,676 $ 1,467,263 $ 2,207,510 $ 2,357,782
Net realized gain (loss)
on investment
transactions........... (225) -- 912,980 (117,033)
Net realized gain (loss)
from foreign currency.. -- -- -- --
Change in unrealized
appreciation
(depreciation) of
investments and foreign
currency during the
year................... -- -- (208,702) (692,970)
----------- ----------- ------------ ------------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............ 1,896,451 1,467,263 2,911,788 1,547,779
----------- ----------- ------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income... (1,896,676) (1,467,263) (2,207,510) (2,342,476)
Net realized gains...... -- -- (16,338) --
In excess of net
investment income...... -- -- (16,277) --
----------- ----------- ------------ ------------
TOTAL DISTRIBUTIONS.... (1,896,676) (1,467,263) (2,240,125) (2,342,476)
----------- ----------- ------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net increase in net
assets from capital
share transactions..... 2,975,990 9,775,026 1,794,024 357,633
----------- ----------- ------------ ------------
TOTAL INCREASE
(DECREASE) IN NET
ASSETS................ 2,975,765 9,775,026 2,465,687 (437,064)
Net Assets, beginning of
year.................... 34,500,619 24,725,593 37,611,341 38,048,405
----------- ----------- ------------ ------------
NET ASSETS, END OF YEAR.. $37,476,384 $34,500,619 $ 40,077,028 $ 37,611,341
=========== =========== ============ ============
<CAPTION>

HIGH YIELD BOND FUND GROWTH EQUITY FUND
------------------------ --------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/97 12/31/96
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
OPERATIONS:
Net investment income
(loss)................. $ 4,560,298 $ 3,194,439 $ 482,003 $ 475,615
Net realized gain (loss)
on investment
transactions........... 2,964,765 (499,838) 13,834,988 10,366,718
Net realized gain (loss)
from foreign currency.. -- -- -- --
Change in unrealized
appreciation
(depreciation) of
investments, futures
contracts and foreign
currency during the
year................... (118,203) 2,501,662 14,267,440 7,073,178
----------- ----------- ------------ ------------
NET INCREASE IN NET
ASSETS RESULTING FROM
OPERATIONS............ 7,406,860 5,196,263 28,584,431 17,915,511
----------- ----------- ------------ ------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income... (4,560,298) (3,194,439) (482,003) (475,615)
Net realized gains...... -- -- (13,678,856) (10,558,832)
In excess of net
investment income...... (10,576) (25,808) -- --
----------- ----------- ------------ ------------
TOTAL DISTRIBUTIONS.... (4,570,874) (3,220,247) (14,160,859) (11,034,447)
----------- ----------- ------------ ------------
CAPITAL SHARE
TRANSACTIONS:
Net increase in net
assets from capital
share transactions..... 12,260,119 5,623,807 15,595,214 3,565,102
----------- ----------- ------------ ------------
TOTAL INCREASE
(DECREASE) IN NET
ASSETS................ 15,096,105 7,599,823 30,018,786 10,446,166
Net Assets, beginning of
year.................... 44,041,559 36,441,736 106,039,460 95,593,294
----------- ----------- ------------ ------------
NET ASSETS, END OF YEAR.. $59,137,664 $44,041,559 $136,058,246 $106,039,460
=========== =========== ============ ============
</TABLE>
- -----------------------
* For the period from May 1, 1997 (commencement of operations) through December
31, 1997.

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

B-56
<PAGE>

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

<TABLE>
<CAPTION>
VALUE EQUITY FUND FLEXIBLY MANAGED FUND
- --------------------------------- -----------------------------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/97 12/31/96
- ------------ ------------ ------------ ------------
<S> <C> <C> <C>
$ 3,663,616 $ 2,210,027 $ 14,346,115 $ 12,850,451
16,381,602 8,252,470 29,490,467 16,818,384
-- -- 80,506 (2,411)
36,751,125 25,690,221 23,598,612 21,020,920
- ------------ ------------ ------------ ------------
56,796,343 36,152,718 67,515,700 50,687,344
- ------------ ------------ ------------ ------------
(3,663,616) (2,210,027) (14,346,115) (12,850,451)
(16,381,602) (8,252,470) (29,491,615) (16,768,765)
-- -- (99,694) (4,084)
- ------------ ------------ ------------ ------------
(20,045,218) (10,462,497) (43,937,424) (29,623,300)
- ------------ ------------ ------------ ------------
65,535,450 47,723,822 94,016,309 110,923,988
- ------------ ------------ ------------ ------------
102,286,575 73,414,043 117,594,585 131,988,032
200,673,893 127,259,850 398,544,139 266,556,107
- ------------ ------------ ------------ ------------
$302,960,468 $200,673,893 $516,138,724 $398,544,139
============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
EMERGING
INTERNATIONAL EQUITY FUND SMALL CAPITALIZATION FUND GROWTH FUND
- ----------------------------- ----------------------------- -----------
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97*
- ------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
$ 754,837 $ 567,625 $ 181,451 $ 87,435 $ (56,325)
4,305,835 5,713,489 2,278,532 588,102 1,331,710
2,563,120 3,145,612 -- -- --
3,833,566 4,322,244 2,875,385 1,130,459 504,824
- ------------- ------------- ------------ ------------ -----------
11,457,358 13,748,970 5,335,368 1,805,996 1,780,209
- ------------- ------------- ------------ ------------ -----------
(754,837) (567,625) (181,451) (87,435) --
(4,305,835) (4,589,862) (2,286,865) (607,875) (1,373,564)
(3,230,284) (2,877,835) -- -- --
- ------------- ------------- ------------ ------------ -----------
(8,290,956) (8,035,322) (2,468,316) (695,310) (1,373,564)
- ------------- ------------- ------------ ------------ -----------
22,053,566 29,173,205 19,725,010 10,195,439 17,535,073
- ------------- ------------- ------------ ------------ -----------
25,219,968 34,886,853 22,592,062 11,306,125 17,941,718
104,417,588 69,530,735 16,134,032 4,827,907 0
- ------------- ------------- ------------ ------------ -----------
$ 129,637,556 $ 104,417,588 $ 38,726,094 $ 16,134,032 $17,941,718
============= ============= ============ ============ ===========
</TABLE>

B-57
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
THE MONEY MARKET FUND

The following table includes selected data for a share outstanding throughout
each year and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income....... 0.0503 0.0489 0.0538 0.0365 0.0250
-------- -------- -------- -------- --------
Total from investment
operations................ 0.0503 0.0489 0.0538 0.0365 0.0250
-------- -------- -------- -------- --------
LESS DIVIDENDS:
Dividends from net
investment income.......... (0.0503) (0.0489) (0.0538) (0.0365) (0.0250)
-------- -------- -------- -------- --------
Total dividends............ (0.0503) (0.0489) (0.0538) (0.0365) (0.0250)
-------- -------- -------- -------- --------
Net asset value, end of
year....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ========
Total return................ 5.15% 5.00% 5.51% 3.71% 2.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................. $ 37,476 $ 34,501 $ 24,726 $ 16,531 $ 13,005
-------- -------- -------- -------- --------
Ratio of expenses to average
net assets (a)............. 0.70% 0.73% 0.69% 0.73% 0.74%
-------- -------- -------- -------- --------
Ratio of net investment
income to average net
assets (a)................. 5.04% 4.88% 5.37% 3.74% 2.51%
-------- -------- -------- -------- --------
- ---------------------------------------
</TABLE>
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been .74%,
.74%, .79% and .82%, and the ratios of net investment income to average net
assets would have been 4.87%, 5.32%, 3.68% and 2.43%, for the years ended
December 31, 1996, 1995, 1994, and 1993, respectively.

- --------------------------------------------------------------------------------
THE QUALITY BOND FUND

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................... $ 10.00 $ 10.24 $ 9.04 $ 10.19 $ 10.03
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... 0.60 0.66 0.61 0.61 0.46
Net realized and unrealized gain
(loss) on investment
transactions................... 0.20 (0.24) 1.21 (1.15) 0.71
------- ------- ------- ------- -------
Total from investment
operations.................... 0.80 0.42 1.82 (0.54) 1.17
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment
income......................... (0.60) (0.66) (0.61) (0.61) (0.46)
Distribution from net realized
gain........................... 0.00 0.00 0.00 0.00 (0.54)
Distribution in excess of net
realized gain.................. 0.00 0.00 (0.01) 0.00 (0.01)
------- ------- ------- ------- -------
Total distributions............ (0.60) (0.66) (0.62) (0.61) (1.01)
------- ------- ------- ------- -------
Net asset value, end of year.... $ 10.20 $ 10.00 $ 10.24 $ 9.04 $ 10.19
======= ======= ======= ======= =======
Total return.................... 8.03% 4.14% 20.14% (5.29)% 11.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)..................... $40,077 $37,611 $38,048 $31,338 $33,027
------- ------- ------- ------- -------
Ratio of expenses to average net
assets (a)..................... 0.75% 0.77% 0.73% 0.78% 0.79%
------- ------- ------- ------- -------
Ratio of net investment income
to average net assets (a)...... 5.87% 6.03% 6.20% 6.14% 5.21%
------- ------- ------- ------- -------
Portfolio turnover rate......... 317.3% 107.6% 449.2% 380.9% 389.4%
------- ------- ------- ------- -------
- ---------------------------------------
</TABLE>
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been .78%,
.78%, .83% and .84% , and the ratios of net investment income to average
net assets would have been 6.02%, 6.15%, 6.09% and 5.16% for the years
ended December 31, 1996, 1995, 1994, and 1993, respectively.

B-58
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
THE HIGH YIELD BOND FUND

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year............................ $ 8.91 $ 8.44 $ 7.94 $ 9.55 $ 8.63
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ 0.80 0.70 0.80 0.90 0.77
Net realized and unrealized gain
(loss) on investment
transactions.................... 0.61 0.47 0.50 (1.60) 0.94
------- ------- ------- ------- -------
Total from investment
operations..................... 1.41 1.17 1.30 (0.70) 1.71
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment
income.......................... (0.80) (0.70) (0.80) (0.90) (0.77)
Distribution in excess of net
investment income............... 0.00 0.00 0.00 (0.01) (0.02)
------- ------- ------- ------- -------
Total distributions............. (0.80) (0.70) (0.80) (0.91) (0.79)
------- ------- ------- ------- -------
Net asset value, end of year..... $ 9.52 $ 8.91 $ 8.44 $ 7.94 $ 9.55
======= ======= ======= ======= =======
Total return..................... 15.78% 13.87% 16.41% 7.33% 19.81%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)...................... $59,138 $44,042 $36,442 $32,081 $35,305
------- ------- ------- ------- -------
Ratio of expenses to average net
assets.......................... 0.81% 0.84% 0.87% 0.86% 0.87%
------- ------- ------- ------- -------
Ratio of net investment income to
average net assets.............. 8.96% 8.14% 9.20% 9.18% 9.21%
------- ------- ------- ------- -------
Portfolio turnover rate.......... 111.3% 118.5% 84.3% 90.7% 118.7%
------- ------- ------- ------- -------
Average commission rate paid (a)
................................ $0.0293 $0.0203 -- -- --
------- ------- ------- ------- -------
</TABLE>
- -----------------------
(a) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.
- --------------------------------------------------------------------------------
THE GROWTH EQUITY FUND

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year......................... $ 21.46 $ 20.00 $ 18.30 $ 20.49 $ 18.82
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... 0.10 0.11 0.09 0.13 0.06
Net realized and unrealized
gain (loss) on investment
transactions................. 5.64 3.85 4.75 (1.80) 2.28
-------- -------- ------- ------- -------
Total from investment
operations.................. 5.74 3.96 4.84 (1.67) 2.34
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment
income....................... (0.10) (0.11) (0.09) (0.13) (0.06)
Distribution from net realized
gains........................ (2.73) (2.39) (3.05) (0.39) (0.61)
-------- -------- ------- ------- -------
Total distributions.......... (2.83) (2.50) (3.14) (0.52) (0.67)
-------- -------- ------- ------- -------
Net asset value, end of year.. $ 24.37 $ 21.46 $ 20.00 $ 18.30 $ 20.49
======== ======== ======= ======= =======
Total return.................. 26.74% 19.76% 26.45% (8.12)% 12.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $136,058 $106,039 $95,593 $80,078 $83,938
-------- -------- ------- ------- -------
Ratio of expenses to average
net assets (a)............... 0.77% 0.80% 0.77% 0.79% 0.77%
-------- -------- ------- ------- -------
Ratio of net investment income
to average net assets (a).... 0.39% 0.48% 0.43% 0.70% 0.30%
-------- -------- ------- ------- -------
Portfolio turnover rate....... 169.1% 177.1% 169.8% 156.2% 185.3%
-------- -------- ------- ------- -------
Average commission rate paid
(b).......................... $ 0.0780 $ 0.0774 -- -- --
-------- -------- ------- ------- -------
</TABLE>
- -----------------------
(a) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratio of expenses to average net assets would have been .81%,
.82%, .84% and .82% and the ratios of net investment income to average net
assets would have been .47%, .38%, .65% and .25% for the years ended
December 31, 1996, 1995, 1994 and 1993, respectively.
(b) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

B-59
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year......................... $ 19.32 $ 16.28 $ 12.67 $ 12.68 $ 12.14
-------- -------- -------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income......... 0.29 0.22 0.25 0.20 0.17
Net realized and unrealized
gain on investment
transactions................. 4.53 3.88 4.50 0.17 0.69
-------- -------- -------- ------- -------
Total from investment
operations.................. 4.82 4.10 4.75 0.37 0.86
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment
income....................... (0.29) (0.22) (0.25) (0.20) (0.17)
Distribution from net realized
gains........................ (1.30) (0.84) (0.89) (0.18) (0.15)
-------- -------- -------- ------- -------
Total distributions.......... (1.59) (1.06) (1.14) (0.38) (0.32)
-------- -------- -------- ------- -------
Net asset value, end of year.. $ 22.55 $ 19.32 $ 16.28 $ 12.67 $ 12.68
======== ======== ======== ======= =======
Total return.................. 24.98% 25.19% 37.48% 2.92% 7.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................... $302,960 $200,674 $127,260 $79,021 $69,980
-------- -------- -------- ------- -------
Ratio of expenses to average
net assets................... 0.76% 0.78% 0.80% 0.82% 0.83%
-------- -------- -------- ------- -------
Ratio of net investment income
to average net assets........ 1.43% 1.38% 1.71% 1.59% 1.49%
-------- -------- -------- ------- -------
Portfolio turnover rate....... 18.7% 25.0% 34.3% 30.6% 17.2%
-------- -------- -------- ------- -------
Average commission rate paid
(a).......................... $ 0.0598 $ 0.0588 -- -- --
-------- -------- -------- ------- -------
</TABLE>
- -----------------------
(a) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.
- --------------------------------------------------------------------------------
THE FLEXIBLY MANAGED FUND

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year.................... $ 18.74 $ 17.40 $ 15.19 $ 15.70 $ 14.31
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income....... 0.61 0.65 0.53 0.43 0.34
Net realized and unrealized
gain on investment
transactions............... 2.33 2.19 2.86 0.22 1.92
-------- -------- -------- -------- --------
Total from investment
operations................ 2.94 2.84 3.39 0.65 2.26
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividend from net investment
income..................... (0.61) (0.65) (0.53) (0.43) (0.34)
Distribution in excess of
net investment income...... 0.00 0.00 (0.01) (0.02) 0.00
Distribution from net
realized gains............. (1.24) (0.85) (0.64) (0.71) (0.53)
-------- -------- -------- -------- --------
Total distributions........ (1.85) (1.50) (1.18) (1.16) (0.87)
-------- -------- -------- -------- --------
Net asset value, end of
year....................... $ 19.83 $ 18.74 $ 17.40 $ 15.19 $ 15.70
======== ======== ======== ======== ========
Total return................ 15.65% 16.37% 22.28% 4.14% 15.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)................. $516,139 $398,544 $266,556 $169,847 $113,492
-------- -------- -------- -------- --------
Ratio of expenses to average
net assets................. 0.76% 0.77% 0.79% 0.82% 0.85%
-------- -------- -------- -------- --------
Ratio of net investment
income to average net
assets..................... 3.10% 3.90% 3.45% 3.14% 2.62%
-------- -------- -------- -------- --------
Portfolio turnover rate..... 37.1% 32.9% 37.2% 37.3% 42.6%
-------- -------- -------- -------- --------
Average commission rate paid
(a)........................ $ 0.0362 $ 0.0627 -- -- --
-------- -------- -------- -------- --------
</TABLE>
- -----------------------
(a) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.

B-60
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................... $ 15.61 $ 14.47 $ 13.01 $ 13.94 $ 10.12
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... 0.58 0.63 0.13 0.09 0.03
Net realized and unrealized gain
(loss) on investments and
foreign currency related
transactions................... 1.04 1.81 1.67 (0.97) 3.83
-------- -------- ------- ------- -------
Total from investment
operations.................... 1.62 2.44 1.80 (0.88) 3.86
-------- -------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment
income......................... (0.53) (0.56) (0.12) (0.02) (0.01)
Distribution in excess of net
investment income.............. 0.00 (0.74) (0.22) 0.00 0.00
Distribution from net realized
gains.......................... (0.57) 0.00 0.00 0.00 (0.03)
Distribution from capital....... 0.00 0.00 0.00 (0.03) 0.00
-------- -------- ------- ------- -------
Total distributions............ (1.10) (1.30) (0.34) (0.05) (0.04)
-------- -------- ------- ------- -------
Net asset value, end of year.... $ 16.13 $ 15.61 $ 14.47 $ 13.01 $ 13.94
======== ======== ======= ======= =======
Total return.................... 10.41% 16.87% 13.80% 6.31% 38.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in
thousands)..................... $129,638 $104,418 $69,531 $59,393 $40,798
-------- -------- ------- ------- -------
Ratio of expenses to average net
assets......................... 1.13% 1.17% 1.23% 1.22% 1.21%
-------- -------- ------- ------- -------
Ratio of net investment income
to average net assets.......... 0.62% 0.66% 0.91% 0.82% 0.63%
-------- -------- ------- ------- -------
Portfolio turnover rate......... 35.7% 54.8% 62.5% 15.6% 11.1%
-------- -------- ------- ------- -------
Average commission rate paid
(a)............................ $ 0.0420 $ 0.0397 -- -- --
-------- -------- ------- ------- -------
</TABLE>
- -----------------------
(a) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.
- --------------------------------------------------------------------------------
THE SMALL CAPITALIZATION FUND

The following table includes selected data for a share outstanding throughout
each year or period and other performance information derived from the
financial statements. It should be read in conjunction with the financial
statements and notes thereto.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995*
-------- -------- --------
<S> <C> <C> <C>
Net asset value, beginning of period.... $ 12.53 $ 10.96 $ 10.00
-------- -------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... 0.07 0.07 0.09
Net realized and unrealized gain on
investment transactions................ 2.81 2.09 1.19
-------- -------- -------
Total from investment operations....... 2.88 2.16 1.28
-------- -------- -------
LESS DISTRIBUTIONS:
Dividend from net investment income..... (0.07) (0.07) (0.09)
Distribution from net realized gains.... (0.91) (0.52) (0.23)
-------- -------- -------
Total distributions.................... (0.98) (0.59) (0.32)
-------- -------- -------
Net asset value, end of period.......... $ 14.43 $ 12.53 $ 10.96
======== ======== =======
Total return............................ 23.02% 19.76% 12.76%(d)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 38,726 $ 16,134 $ 4,828
-------- -------- -------
Ratio of expenses to average net
assets................................. 0.85% 0.99%(b) 1.00%(a)(b)
-------- -------- -------
Ratio of net investment income to
average net assets..................... 0.66% 0.85%(b) 1.53%(a)(b)
-------- -------- -------
Portfolio turnover rate................. 71.1% 39.2% 64.3%
-------- -------- -------
Average commission rate paid (c)........ $ 0.0557 $ 0.0486 --
-------- -------- -------
</TABLE>
- -----------------------
(a) Annualized.
(b) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratios of expenses to average net assets would have been 1.06%
and 1.29%, and the ratios of net investment income to average net assets
would have been 0.78% and 1.24%, respectively, for the year ended December
31, 1996 and the period ended December 31, 1995.
(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.
(d) Not annualized.
* For the period from March 1, 1995 (commencement of operations) through
December 31, 1995.

B-61
<PAGE>

The following table includes selected data for a share outstanding throughout
the period and other performance information derived from the financial
statements. It should be read in conjunction with the financial statements and
notes thereto.

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997*
------------
<S> <C>
Net asset value, beginning of period......................... $ 10.00
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss.......................................... 0.00
Net realized and unrealized gain on investment transactions.. 3.92
-------
Total from investment operations............................ 3.92
-------
LESS DISTRIBUTIONS:
Dividend from net investment income.......................... 0.00
Distribution from net realized gains......................... (1.07)
-------
Total distributions......................................... (1.07)
-------
Net asset value, end of period............................... $ 12.85
=======
Total return................................................. 39.22% (d)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)..................... $17,942
-------
Ratio of expenses to average net assets...................... 1.15% (a)(b)
-------
Ratio of net investment loss to average net assets........... (0.73%)(a)(b)
-------
Portfolio turnover rate...................................... 392.3% (a)
-------
Average commission rate paid (c)............................. $0.0545
=======
</TABLE>
- -----------------------
(a) Annualized.
(b) Had fees not been waived by the investment advisor and administrator of the
Fund, the ratio of expenses to average net assets and the ratio of net
investment loss to average net assets would have been 1.41% and (0.99%),
respectively, for the period ended December 31, 1997.
(c) Computed by dividing the total amount of commissions paid by total number
of shares purchased and sold during the period for which commissions were
charged.
(d) Not annualized
* For the period from May 1, 1997 (commencement of operations) through
December 31, 1997.

B-62
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1 - SIGNIFICANT ACCOUNTING POLICIES

Penn Series Funds, Inc. (Penn Series) was incorporated in Maryland on April
22, 1982. Penn Series is registered under the Investment Company Act of 1940,
as amended, as an open-end, diversified management investment company.

Penn Series is presently offering shares in its Money Market, Quality Bond,
High Yield Bond, Growth Equity, Value Equity, Flexibly Managed, International
Equity, Small Capitalization and Emerging Growth Funds (the Funds). It is
authorized under its Articles of Incorporation to issue a separate class of
shares in one additional fund. The Fund would have its own investment objective
and policy.

The following is a summary of significant accounting policies followed by
Penn Series in the preparation of its financial statements. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.

INVESTMENT VALUATION:
MONEY MARKET FUND - Investments in securities are valued under the amortized
cost method, which approximates current market value. Under this method,
securities are valued at cost on the date of purchase and thereafter a
proportionate amortization of any discount or premium until maturity is
assumed. Penn Series maintains a dollar weighted average portfolio maturity
appropriate to the objective of maintaining a stable net asset value per share.
The Penn Series Board of Directors (The Board) has established procedures
reasonably designed to stabilize the net asset value per share for purposes of
sales and redemptions at $1.00. The Board performs regular review and
monitoring of the valuation in an attempt to avoid dilution or unfair results
to shareholders.

QUALITY BOND, HIGH YIELD BOND, GROWTH EQUITY, VALUE EQUITY, FLEXIBLY MANAGED,
INTERNATIONAL EQUITY, SMALL CAPITALIZATION AND EMERGING GROWTH FUNDS -
Portfolio securities listed on a national securities exchange are valued at
the last sale price on the securities exchange or securities market on which
such securities primarily are traded or, if there has been no sale on that day,
at the mean between the current closing bid and asked prices. All other
securities for which over-the-counter market quotations are readily available
will be valued on the basis of the mean between the last current bid and asked
prices. When market quotation are not readily available, or when restricted or
other assets are being valued, the securities or assets will be valued at fair
value as determined by The Board.

The high yield securities in which the High Yield Bond Fund may invest are
predominantly speculative as to the issuer's continuing ability to meet
principal and interest payments. The value of the lower quality securities in
which the High Yield Bond Fund may invest will be affected by the credit
worthiness of individual issuers, general economic and specific industry
conditions, and will fluctuate inversely with changes in interest rates. In
addition, the secondary trading market for lower quality bonds may be less
active and less liquid than the trading market for higher quality bonds.

FOREIGN CURRENCY TRANSLATION - The books and records of the Funds are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis: market value of investment securities, assets
and liabilities at the current rate of exchange, purchases and sales of
investment securities, income and expenses at the relevant rates of exchange
prevailing on the respective dates of such transactions.

The Funds do not isolate the portion of realized and unrealized gains and
losses on investments which is due to changes in the foreign exchange rate from
that which is due to changes in market prices of equity securities. Such
fluctuations are included with net realized and unrealized gain or loss from
investments.

Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. dollar denominated
transactions as a result of, among other factors, the level of governmental
supervision and regulation of foreign securities markets and the possibility of
political or economic instability.

SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on the trade date. Dividend income is recorded on the ex-dividend
date and interest income is accrued as earned. The cost of investment
securities sold is determined by using the specific identification method for
both financial reporting and income tax purposes.

DIVIDENDS TO SHAREHOLDERS: Dividends of investment income and realized
capital gains of each of the Funds, other than Money Market, will be declared
and paid annually. Dividends of net investment income of the Money Market Fund
are declared daily and paid monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for mortgage-backed securities, market
discount and foreign currency transactions.

FEDERAL INCOME TAXES: The Funds intend to continue to qualify as regulated
investment companies under Subchapter M of the Internal Revenue code and to
distribute all of their taxable income, including realized gains, to their
shareholders. Therefore, no federal income tax provision is required.

B-63
<PAGE>

OFF-BALANCE SHEET RISK

The Funds may trade financial instruments with off-balance sheet risk in the
normal course of investing activities and to assist in managing exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts and futures contracts.

The notional or contractual amounts of these instruments represent the
investment the Funds have in particular classes of financial instruments and do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.

DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

FUTURES CONTRACTS - Each of the Funds, other than Money Market, may enter
into financial futures contracts for the delayed delivery of securities,
currency or contracts based on financial indices on a future date. A Fund is
required to deposit either in cash or securities an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received by
a Fund each day, dependent on daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by a Fund. A Fund's investment in financial futures contracts is
designed only to hedge against anticipated future changes in interest or
exchange rates. Should interest or exchange rates move unexpectedly, a Fund may
not achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The Quality Bond Fund has entered into futures contracts during
the year ended December 31, 1997. There were no open futures contracts at
December 31, 1997.

OPTIONS - Each of the Funds, other than Money Market, may write covered
calls. Additionally, each of the Funds may buy put or call options for which
premiums are paid whether or not the option is exercised. Premiums received
from writing options which expire are treated as realized gains. Premiums
received from writing options which are exercised or are closed are offset
against the proceeds or amount paid on the transaction to determine the
realized gain or loss. If a put option is exercised the premium increases the
cost basis of the securities purchased by a Fund. As writer of an option, the
Fund may have no control over whether the underlying securities may be sold
(call) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. The Flexibly Managed
Fund has entered into put options during the year ended December 31, 1997.
Purchased put options open and outstanding at December 31, 1997 are disclosed
in the schedule of investments. There were no written options outstanding at
December 31, 1997.

FORWARD FOREIGN CURRENCY CONTRACTS - The Funds may enter into forward foreign
currency exchange contracts as a way of managing foreign exchange rate risk. A
Fund may enter into these contracts to fix the U.S. dollar value of a security
that it has agreed to buy or sell for the period between the date the trade was
entered into and the date the security is delivered and paid for. A Fund may
also use these contracts to hedge the U.S. dollar value of securities it
already owns denominated in foreign currencies.

Forward foreign currency contracts are valued at the forward rate, and are
marked-to-market daily. The change in market value is recorded by the Fund as
an unrealized gain or loss. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.

The use of forward foreign currency contracts does not eliminate fluctuations
in the underlying prices of the Fund's portfolio securities, but it does
establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain the might
result should the value of the currency increase. In addition, the Funds could
be exposed to risks if the counterparties to the contracts are unable to meet
the terms of their contracts. The Flexibly Managed and International Equity
funds have entered into forward foreign currency contracts for the year ended
December 31, 1997. At December 31, 1997 there were no open contracts in the
Flexibly Managed Fund. Open forward foreign currency contracts held by the
International Equity Fund at December 31, 1997 were as follows:

<TABLE>
<CAPTION>
UNREALIZED
FOREIGN FOREIGN
FORWARD FOREIGN EXPIRATION CURRENCY FORWARD CONTRACT CONTRACT EXCHANGE
CURRENCY CONTRACT DATE TO BE PURCHASED RATE AMOUNT VALUE (LOSS)
----------------- ---------- --------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
French Franc............ 02/05/98 5,000,000 5.99706 $ 869,338 $ 833,742 $ (35,596)
French Franc............ 04/16/98 22,000,000 5.97347 3,838,772 3,682,951 (155,821)
German Deutsche Mark.... 02/05/98 8,000,000 1.79492 4,655,629 4,457,023 (198,606)
German Deutsche Mark.... 04/16/98 18,000,000 1.78933 10,514,019 10,059,631 (454,388)
Japanese Yen............ 02/05/98 700,000,000 129.34399 5,902,192 5,411,925 (490,267)
Japanese Yen............ 04/14/98 1,600,000,000 128.02933 13,624,674 12,497,136 (1,127,538)
Swiss Franc............. 02/05/98 1,500,000 1.45146 1,078,671 1,033,442 (45,229)
Swiss Franc............. 04/16/98 7,500,000 1.44212 5,432,027 5,200,677 (231,350)
----------- ----------- -----------
$45,915,322 $43,176,527 $(2,738,795)
----------- ----------- -----------
</TABLE>

B-64
<PAGE>

<TABLE>
<CAPTION>
UNREALIZED
FOREIGN FOREIGN
FORWARD FOREIGN EXPIRATION CURRENCY FORWARD CONTRACT CONTRACT EXCHANGE
CURRENCY CONTRACT DATE TO BE SOLD RATE AMOUNT VALUE GAIN/(LOSS)
----------------- ---------- ------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
French Franc............ 02/05/98 5,000,000 5.99706 $ 806,491 $ 833,742 $ (27,251)
French Franc............ 04/16/98 22,000,000 5.97347 3,772,291 3,682,951 89,340
German Deutsche Mark.... 02/05/98 8,000,000 1.79492 4,353,504 4,457,023 (103,519)
German Deutsche Mark.... 04/16/98 18,000,000 1.78794 10,353,158 10,067,452 285,706
Japanese Yen............ 02/05/98 700,000,000 129.34399 6,082,725 5,411,925 670,800
Japanese Yen............ 02/17/98 2,000,000,000 129.13200 16,077,558 15,488,028 589,530
Japanese Yen............ 04/14/98 1,600,000,000 128.02833 13,555,876 12,497,136 1,058,740
Swiss Franc............. 02/05/98 1,500,000 1.45146 1,005,699 1,033,442 (27,743)
Swiss Franc............. 04/16/98 7,500,000 1.44212 5,227,209 5,200,677 26,532
----------- ----------- ----------
$61,234,511 $58,672,376 $2,562,135
----------- ----------- ----------
</TABLE>

3 - INVESTMENT ADVISORY AND OTHER CORPORATE SERVICES

INVESTMENT ADVISORY SERVICES

Under investment advisory agreements, the following advisors manage the
investments of the respective Fund and provide guidance on certain accounting
matters:

<TABLE>
<CAPTION>
ADVISOR PENN SERIES FUND
------- ----------------
<S> <C>
Independence Capital Management, Inc. Money Market Fund
(A wholly owned subsidiary of Penn Quality Bond Fund
Mutual Growth Equity Fund
Life Insurance Company) Emerging Growth Fund
T. Rowe Price Associates Flexibly Managed Fund
High Yield Bond Fund
Vontobel USA Inc. International Equity Fund
OpCap Advisors Value Equity Fund
Small Capitalization Fund
</TABLE>

Each of the Funds pays their respective advisors, on a monthly basis, an
annual advisory fee based on the average daily net assets of each Fund, at the
following rates pursuant to the investment advisory agreements: Money Market
Fund: 0.40% for first $100 million and 0.35% thereafter; Quality Bond Fund:
0.45% for first $100 million and 0.40% thereafter; Growth Equity Fund: 0.50%
for the first $100 million and 0.45% thereafter; Flexibly Managed Fund: 0.50%;
High Yield Bond Fund: 0.50%; International Equity Fund: 0.75%; Value Equity
Fund: 0.50%; Small Capitalization Fund: 0.50%; Emerging Growth Fund: 0.80% for
the first $25 million, 0.75% for next $25 million and 0.70% thereafter.
Robertson Stephens & Company is the subadvisor for the Emerging Growth Fund,
receiving fees from Independence Capital Management Inc. at the following
rates: 0.70% for the first $25 million, 0.66% for the next $25 million and
0.60% thereafter.

ADMINISTRATIVE AND CORPORATE SERVICES

Under an administrative and corporate services agreement, The Penn Mutual
Life Insurance Company ("Penn Mutual") serves as administrative and corporate
services agent for Penn Series. Each of the Funds pays Penn Mutual, on a
quarterly basis, an annual fee equal to 0.15% of each of the Fund's average
daily net assets.

EXPENSES AND LIMITATIONS THEREON

Each Fund bears all expenses of its operations other than those incurred by
the investment advisors under their respective investment advisory agreements
and those incurred by Penn Mutual under its administrative and corporate
services agreement. The investment advisors and Penn Mutual have each
voluntarily agreed to waive fees or reimburse expenses to the extent each of
the Fund's expense ratio (excluding interest, taxes, brokerage, other
capitalized expenses, but including investment advisory and administrative and
corporate services fees) exceeds the applicable expense limitations for each
Fund. The expense limitations for the Funds are as follows: Money Market,
0.80%; Quality Bond: 0.90%; High Yield Bond: 0.90%; Growth Equity: 1.00%; Value
Equity: 1.00%; Flexibly Managed: 1.00%; International Equity: 1.50%; Small
Capitalization 1.00%; and Emerging Growth 1.15%.

Fees were paid to non-affiliated Directors of Penn Series for the year ended
December 31, 1997. However, no person received compensation from Penn Series
who is an officer, director, or employee of Penn Series, the investment
advisors, administrator, accounting agent or any parent or subsidiary thereof.

B-65
<PAGE>

4 - CAPITAL STOCK

At December 31, 1997, there were one billion shares of $.10 par value capital
stock authorized for Penn Series. The shares are divided into ten classes of
100 million shares of capital stock. Nine of the classes designated are Penn
Series Money Market Fund Common Stock, Penn Series Quality Bond Fund Common
Stock, Penn Series High Yield Bond Fund Common Stock, Penn Series Growth Equity
Fund Common Stock, Penn Series Value Equity Fund Common Stock, Penn Series
Flexibly Managed Fund Common Stock, Penn Series International Equity Fund
Common Stock, Penn Series Small Capitalization Fund Common Stock and Penn
Series Emerging Growth Fund Common Stock. One of the classes of common stock is
presently designated Class I and no shares have been issued.

Transactions in capital stock of the Money Market Fund were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold............... 52,596,243 $ 52,596,243 44,071,472 $ 44,071,472
Shares issued to
shareholders in
reinvestment of net
investment income........ 1,857,904 1,857,904 1,440,949 1,440,949
Shares reacquired......... (51,478,157) (51,478,157) (35,737,395) (35,737,395)
----------- ------------ ----------- ------------
2,975,990 $ 2,975,990 9,775,026 $ 9,775,026
----------- ------------ ----------- ------------

Transactions in capital stock of the Quality Bond Fund were as follows:

<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold............... 695,043 $ 7,228,270 816,952 $ 8,374,183
Shares issued to
shareholders in
reinvestment of
Net investment income.... 216,422 2,207,510 234,248 2,342,476
Net realized gain from
investment
transactions............ 1,602 16,338 0 0
Distribution in excess of
net investment income... 1,596 16,277 0 0
Shares reacquired......... (745,923) (7,674,394) (1,006,891) (10,359,026)
----------- ------------ ----------- ------------
168,740 $ 1,794,001 44,309 $ 357,633
----------- ------------ ----------- ------------

Transactions in capital stock of the High Yield Bond Fund were as follows:

<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold............... 1,621,677 $ 15,567,712 1,055,047 $ 9,465,000
Shares issued to
shareholders in
reinvestment of
Net investment income.... 479,026 4,560,298 361,419 3,220,247
Distribution in excess of
net investment income... 1,111 10,576 0 0
Shares reacquired......... (829,328) (7,878,467) (792,896) (7,061,440)
----------- ------------ ----------- ------------
1,272,486 $ 12,260,119 623,570 $ 5,623,807
----------- ------------ ----------- ------------

Transactions in capital stock of the Growth Equity Fund were as follows:

<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Shares sold............... 560,843 $ 13,907,900 320,394 $ 7,089,450
Shares issued to
shareholders in
reinvestment of
Net investment income.... 19,779 482,003 22,163 475,615
Net realized gain from
investment
transactions............ 561,299 13,678,854 492,024 10,558,832
Shares reacquired......... (500,698) (12,473,543) (673,246) (14,558,795)
----------- ------------ ----------- ------------
641,223 $ 15,595,214 161,335 $ 3,565,102
----------- ------------ ----------- ------------
</TABLE>

B-66
<PAGE>

4 - CAPITAL STOCK, CONTINUED

Transactions in capital stock of the Value Equity Fund were as follows:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold.................. 2,867,800 $ 61,202,630 2,485,344 $ 45,626,673
Shares issued to shareholders
in reinvestment of
Net investment income....... 162,466 3,663,616 114,391 2,210,027
Net realized gain from
investment transactions.... 726,457 16,381,602 427,146 8,252,470
Shares reacquired............ (712,142) (15,712,398) (457,053) (8,365,348)
---------- ------------ --------- ------------
3,044,581 $ 65,535,450 2,569,828 $ 47,723,822
---------- ------------ --------- ------------

Transactions in capital stock of the Flexibly Managed Fund were as follows:

<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold.................. 4,061,684 $ 80,965,783 5,176,205 $ 96,448,634
Shares issued to shareholders
in reinvestment of
Net investment income....... 728,483 14,445,809 685,941 12,854,535
Net realized gain from
investment transactions.... 1,487,222 29,491,615 894,811 16,768,765
Shares reacquired............ (1,513,715) (30,886,898) (807,605) (15,147,946)
---------- ------------ --------- ------------
4,763,674 $ 94,016,309 5,949,352 $110,923,988
---------- ------------ --------- ------------

Transactions in capital stock of the International Equity Fund were as follows:

<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold.................. 1,665,223 $ 27,762,536 1,812,851 $ 28,060,006
Shares issued to shareholders
in reinvestment of
Net investment income....... 247,062 3,985,121 220,720 3,445,460
Net realized gain from
investment transactions.... 266,946 4,305,835 294,034 4,589,862
Shares reacquired............ (829,261) (13,999,926) (442,745) (6,922,123)
---------- ------------ --------- ------------
1,349,970 $ 22,053,566 1,884,860 $ 29,173,205
---------- ------------ --------- ------------

Transactions in capital stock of the Small Capitalization Fund were as follows:

<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Shares sold.................. 1,398,053 $ 19,734,987 1,108,381 $ 13,236,881
Shares issued to shareholders
in reinvestment of
Net investment income....... 12,575 181,452 6,978 87,435
Distribution in excess of
net investment income...... 158,480 2,286,864 48,711 607,875
Shares reacquired............ (173,037) (2,478,293) (317,129) (3,736,752)
---------- ------------ --------- ------------
1,396,071 $ 19,725,010 846,941 $ 10,195,439
---------- ------------ --------- ------------
</TABLE>

Transactions in capital stock of the Emerging Growth Fund were as follows:

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997*
-----------------------
SHARES AMOUNT
--------- ------------
<S> <C> <C>
Shares sold............................................. 1,427,602 $ 18,230,138
Net realized gain from investment transactions......... 106,892 1,373,564
Shares reacquired....................................... (138,520) (2,069,490)
--------- ------------
1,395,974 $ 17,534,212
--------- ------------
</TABLE>
* For the period from May 1, 1997 (commencement of operations) through December
31, 1997.

B-67
<PAGE>

5 - PURCHASES AND SALES OF INVESTMENTS

During the period ended December 31, 1997, the Funds made the following
purchases and sales of portfolios securities:

<TABLE>
<CAPTION>
QUALITY BOND FUND HIGH YIELD BOND FUND
--------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and
Agency Obligations..... $ 42,255,306 $ 55,785,705 $ 972,188 $ 0
Other Long-Term
Securities............. 54,752,504 42,327,625 68,812,015 54,810,439
------------- ------------- ------------ ------------
Totals................. $ 97,007,810 $ 98,113,330 $ 69,784,203 $ 54,810,439
------------- ------------- ------------ ------------
<CAPTION>
GROWTH EQUITY FUND VALUE EQUITY FUND
--------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and
Agency Obligations..... $ 0 $ 0 $ 0 $ 0
Other Long-Term
Securities............. 199,970,040 202,350,217 63,333,929 39,320,862
------------- ------------- ------------ ------------
Totals................. $ 199,970,040 $ 202,350,217 $ 63,333,929 $ 39,320,862
------------- ------------- ------------ ------------
<CAPTION>
FLEXIBLY MANAGED FUND INTERNATIONAL EQUITY FUND
--------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and
Agency Obligations..... $ 0 $ 0 $ 0 $ 0
Other Long-Term
Securities............. 238,034,883 149,775,022 55,389,023 39,484,122
------------- ------------- ------------ ------------
Totals................. $ 238,034,883 $ 149,775,022 $ 55,389,023 $ 39,484,122
------------- ------------- ------------ ------------
<CAPTION>
SMALL CAPITALIZATION FUND EMERGING GROWTH FUND*
--------------------------- -------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Long Term U.S. Govt. and
Agency Obligations..... $ 0 $ 0 $ 0 $ 0
Other Long-Term
Securities............. 32,757,668 16,994,193 41,948,023 30,946,266
------------- ------------- ------------ ------------
Totals................. $ 32,757,668 $ 16,994,193 $ 41,948,023 $ 30,946,266
------------- ------------- ------------ ------------
</TABLE>

*For the period from May 1, 1997 (commencement of operations) through December
31, 1997.

- --------------------------------------------------------------------------------
6 - CAPITAL LOSS CARRYOVERS

Capital loss carryovers expire as follows:

<TABLE>
<CAPTION>
HIGH YIELD
MONEY BOND
MARKET FUND
------ ----------
<S> <C> <C>
1998.......................................................... $ 872 $ 0
2000.......................................................... 61 0
2001.......................................................... 183 0
2003.......................................................... 416 1,052,436
2004.......................................................... 0 525,647
2005.......................................................... 225 0
------ ----------
Total........................................................ $1,757 $1,578,083
------ ----------
</TABLE>

B-68
<PAGE>

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

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PENN SERIES FUNDS, INC.

We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of Penn Series Funds, Inc. (comprising,
respectively, the Money Market Fund, Quality Bond Fund, High Yield Bond Fund,
Growth Equity Fund, Value Equity Fund, Flexibly Managed Fund, International
Equity Fund, Small Capitalization Fund, and Emerging Growth Fund) as of
December 31, 1997, and the related statements of operations, changes in net
assets and financial highlights for the year or period then ended. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements and
financial highlights of Penn Series Funds, Inc. for the years and periods ended
December 31, 1996, were audited by other auditors whose report dated February
11, 1997, expressed an unqualified opinion on those statements and financial
highlights.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the custodians
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the 1997 financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of each of the respective portfolios of Penn Series Funds, Inc. as of
December 31, 1997, and the results of their operations, the changes in their
net assets and their financial highlights for the year or period then ended in
conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

February 2, 1998
B-69
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS

OF PENN SERIES FUNDS, INC.

We have audited the statements of changes in net assets of Penn Series Funds,
Inc. (comprising respectively, the Money Market Fund, Quality Bond Fund, High
Yield Bond Fund, Growth Equity Fund, Value Equity Fund, Flexibly Managed Fund,
International Equity Fund, and Small Capitalization Fund) for the year ended
December 31, 1996, and the financial highlights for the years or periods ended
December 31, 1996, December 31, 1995, December 31, 1994 and December 31, 1993.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by corresponding with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the changes in net assets for
the year ended December 31, 1996 of Penn Series Funds, Inc. and the financial
highlights for the years or periods ended December 31, 1996, December 31, 1995,
December 31, 1994 and December 31, 1993 in conformity with generally accepted
accounting principles.

/s/ Coopers & Lybrand L.L.P.

Coopers & Lybrand L.L.P.

2400 Eleven Penn Center

Philadelphia, Pennsylvania

February 11, 1997

B-70
<PAGE>

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements included in Part B:

Reports of Independent Auditors
Schedules of Investments - December 31, 1997
Statement of Assets and Liabilities - December 31, 1997
December 31, 1997 and 1996
Notes to Financial Statements

(b) Exhibits (numbers correspond to numbers in list of exhibits set
forth in Item 24(b) of Form N-1A)

1. Articles of Incorporation -Previously filed on April 26, 1983 as
Exhibit 1 to Post-Effective Amendment No. 24 to this
Registration Statement, and incorporated by reference to Post-
Effective Amendment No. 44.

2. By-Laws - Previously filed on August 27, 1992 as Exhibit 2 to
Post-Effective Amendment No. 37 to this Registration Statement,
and incorporated by reference to Post-Effective Amendment No.
44.

3. None.

4. None (outstanding shares of common stock are recorded on the
books and records of the Registrant - Certificates of stock are
not issued).

5. (a) Investment Advisory Agreement between the Registrant
and Independence Capital Management, Inc. with respect to
the Growth Equity, Quality Bond and Money Market Funds-
Previously filed on August 27, 1992 as Exhibit 5(b) to Post-
Effective Amendment No. 37 to this Registration Statement,
and incorporated by reference to Exhibit 5(b) of Post-
Effective Amendment No. 44 filed via EDGAR on February 14,
1997.

(b) Investment Advisory Agreement between the Registrant and
Independence Capital Management, Inc. with respect to the
Emerging Growth Fund - Incorporated by reference to Exhibit
5(e) of Post-Effective Amendment No. 45 filed via EDGAR on
November 21, 1997.

C-1
<PAGE>

(c) Sub-Advisory Agreement between Independence Capital
Management, Inc. and RS Investment Management, Inc. with
respect to the Emerging Growth Fund - Filed herewith.

(d) Form of Investment Advisory Agreement between the Registrant
and Independence Capital Management, Inc. with respect to
the Value Equity, Small Capitalization, Flexibly Managed,
International Equity and High Yield Bond Funds - Filed
herewith.

(e) Form of Sub-Advisory Agreement between Independence Capital
Management, Inc. and OpCap Advisors with respect to the
Value Equity and Small Capitalization Funds - Filed
herewith.

(f) Form of Sub-Advisory Agreement between Independence Capital
Management, Inc. and T.Rowe Price Associates, Inc. with
respect to the Flexibly Managed and High Yield Bond Funds -
Filed herewith.

(g) Form of Sub-Advisory Agreement between Independence Capital
Management, Inc. and Vontobel USA Inc. with respect to the
International Equity Fund - Filed herewith.

6. None. Common stock of the Registrant is sold only to The Penn
Mutual Life Insurance Company and its affiliated insurance
companies for their general or separate accounts.

7. None.

8 . (a) Amended and Restated Custodian Agreement between the
Registrant and Provident National Bank - Previously filed
on April 26, 1993 as Exhibit 8(a) to Post-Effective
Amendment No. 38 to this Registration Statement, and
incorporated by reference to Exhibit 8(a) of Post-Effective
Amendment No. 44 filed via EDGAR on February 14, 1997.

(b) Form of Foreign Custody Manager Agreement between the
Registrant and PNC Bank - Filed herewith.

9. (a) Administrative and Corporate Services Agreement between
the Registrant and The Penn Mutual Life Insurance Company
-- Incorporated by reference to

C-2
<PAGE>

Exhibit 9(a) of Post-Effective
Amendment No. 45 filed via EDGAR on November 21, 1997.

(b) Accounting Services Agreement between the Registrant and
Provident Financial Processing Corporation -Previously filed
on March 10, 1990 as Exhibit 9(b) to Post-Effective
Amendment No. 33 to this Registration Statement, and
incorporated by reference to Exhibit 9(b) of Post-Effective
Amendment No. 44 filed via EDGAR on February 14, 1997.

(c) Agreement between the Registrant and Provident Financial
Processing Corporation on fees for services under Accounting
Services Agreement - Previously filed on February 24, 1995
as Exhibit 9(c) to Post-Effective Amendment No. 43 to this
Registration Statement, and incorporated by reference to
Exhibit 9(c) of Post-Effective Amendment No. 44 filed via
EDGAR on February 14, 1997.

10. Opinion and Consent of Morgan, Lewis & Bockius LLP-Incorporated
by reference to Exhibit (10) of Post-Effective Amendment No. 43
filed via EDGAR on April 29, 1996.

11. (a)(1) Consent of Ernst & Young L.L.P. - Filed herewith.

(a)(2) Consent of Coopers & Lybrand L.L.P. - Filed herewith.

(b) Powers of Attorney of Directors - Incorporated by
reference to Exhibit 11(b) of Post-Effective Amendment
No. 44 filed via EDGAR on February 14, 1997.

12. None.

13. None.

14. None.

15. None.

16. None.

17. Financial Data Schedules. Filed herewith.

C-3
<PAGE>

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

The Penn Mutual Life Insurance Company ("Penn Mutual") is the owner of
100% of the outstanding common stock of the Registrant. For further
information on the ownership of the outstanding common stock of the
Registrant, see "Voting Rights" in the Prospectus and "Ownership of
Shares" in the Statement of Additional Information, which are
incorporated hereunder by reference.

Penn Mutual is the record and beneficial owner of 100% of the
outstanding common stock of The Penn Insurance and Annuity Company, a
Delaware corporation.

Penn Mutual is the record and beneficial owner of 100% of the
outstanding common stock of Independence Capital Management., Inc., a
Pennsylvania corporation, and registered investment adviser.

Penn Mutual is the record and beneficiary owner of 100% of the
outstanding common stock of The Penn Janney Fund, Inc. Penn Janney
Fund, Inc. is a Pennsylvania corporation and invests in new business.

Penn Mutual is the record and beneficial owner of 100% of the
outstanding common stock of The Pennsylvania Trust Company, a
Pennsylvania corporation.

Penn Mutual is the record and beneficial owner of 100% of the
outstanding common stock of Independence Square Properties, Inc., a
holding corporation incorporated in Delaware.

Independence Square Properties, Inc. is the record and beneficial owner
of 100% of the outstanding common stock of the following corporations:
Penn Glenside Corp., Penn Wayne Corp., St. James Realty Corp.,
Investors' Mortgage Corp. and Christie Street Properties, Inc., all
Pennsylvania corporations; and Indepro Corp., Economic Resources
Associates, Inc. and WPI Investment Company, both Delaware corporations.

Indepro Corp. is the record and beneficial owner of 100% of the
outstanding common stock of Indepro Property Fund I Corp., Indepro
Property Fund II Corp., Commons One Corp. and West Hazleton, Inc., all
Delaware corporations.

Independence Square Properties, Inc. is the record and beneficial owner
of 100% of the outstanding common stock of Janney Montgomery Scott Inc.,
a Delaware corporation, and Hornor, Townsend & Kent, Inc., a
Pennsylvania corporation.

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<PAGE>

Janney Montgomery Scott Inc. is the record and beneficial owner of 100%
of the outstanding common stock of the following corporations: Addison
Capital Management, Inc., a Pennsylvania corporation; JMS Resources,
Inc., a Pennsylvania corporation; and JMS Investor Services, Inc., a
Delaware corporation.

Penn Mutual and Janney Montgomery Scott Inc. each is the record and
beneficial owner of a subscription agreement for 50% of the common
stock of Penn Janney Advisory, Inc., a Pennsylvania corporation.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

The Penn Mutual Life Insurance Company and its wholly owned subsidiary,
The Penn Insurance and Annuity Company, and their separate accounts, are
the sole record holders of the outstanding shares of the Registrant.

ITEM 27. INDEMNIFICATION

Article VII, Section (3) of the Articles of Incorporation of the
Registrant provides generally that directors and officers of the
Registrant shall be indemnified by the Registrant to the full extent
permitted by Maryland law and by the Investment Company Act of 1940, now
or hereinafter in force.

Article VI, Section (2) of the By-laws of the Registrant provides: Any
person who was or is a party or is threatened to be made a defendant or
respondent in any threatened, pending or completed action, suit or
proceeding, whether civi, criminal, administrative or investigative, by
reason of the fact that such person is or was a director or officer of
the Corporation, or is or was serving while a director or officer of the
Corporation at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership,
joint venture, trust, enterprise or employee benefit plan, shall be
indemnified by the Corporation against judgments, penalties, fines,
settlements and reasonable expenses (including attorney's fees) actually
incurred by such person in connection with such action, suit or
proceeding to the full extent permissible under the General Laws of the
State of Maryland now or hereafter in force, except that such indemnity
shall not protect any such person against any liability to the
Corporation or any stockholder thereof to which such person would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office.

C-5
<PAGE>

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS

T. ROWE PRICE ASSOCIATES, INC.

See Form ADV Parts I and II Uniform Application for Investment Adviser
Registration of T. Rowe Price dated November 14, 1997 (801-856), for
information on the business, profession, vocation, or employment of a
substantial nature in which T. Rowe Price and each director or officer
of T. Rowe Price, is or has been, at any time during the past two fiscal
years, engaged for his own account or in the capacity of director,
officer, employee, partner or trustee, which is incorporated herein by
reference.

INDEPENDENCE CAPITAL MANAGEMENT, INC.

See Form ADV Uniform Application for Investment Adviser Registration of
Independence Capital Management dated September 17, 1997 (801-35477),
for information on the business, profession, vocation or employment of a
substantial nature in which Independence Capital and each director or
officer of Independence Capital, is or has been, at any time during the
past two fiscal years, engaged for his own account or in the capacity of
director, officer, employee, partner or trustee, which is incorporated
herein by reference.

OPCAP ADVISORS

See Form ADV Registration Statement of OpCap Advisors filed under the
Investment Advisers Act of 1940, as amended, on January 29, 1998
Schedules D and F (File No. 801-27180), for information on the business,
profession, vocation or employment of a substantial nature in which each
partner of OpCap Advisors, is or has been, at any time during the past
two fiscal years, engaged for his own account or in the capacity of
director, officer, employee, partner or trustee, which is incorporated
herein by reference.

VONTOBEL USA INC.

See Form ADV Registration Statement of Vontobel USA Inc. filed under the
Investment Advisers Act of 1940, as amended, on October 31, 1997
Schedules D and F (File No. 801-21953), for information on the business,
profession, vocation or employment of a substantial nature in which
Vontobel USA Inc. and each director or officer of Vontobel USA Inc., is
or has been, at any time during the past two fiscal years, engaged for
his own account or in the capacity of director, officer, employee,
partner or trustee, which is incorporated herein by reference.

C-6
<PAGE>

RS INVESTMENT MANAGEMENT, INC.

See Form ADV Uniform Application for Investment Adviser Registration of
RS Investment Management, Inc. dated March 27, 1997 (801-29888), for
information on the business, profession, vocation, or employment of a
substantial nature in which RS Investment Management, Inc. and each
director or officer of RS Investment Management, Inc. is or has been, at
any time during the past two fiscal years, engaged for his own account
or in the capacity of director, officer, employee, partner or trustee,
which is incorporated herein by reference.

ITEM 29. PRINCIPAL UNDERWRITERS

Not Applicable.

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

Penn Series Funds, Inc.
600 Dresher Road
Horsham, PA 19044

PFPC Inc.
Bellevue Corporate Center
103 Bellevue Parkway
Wilmington, DE 19809

T. Rowe Price Associates, Inc.
100 E. Pratt Street
Baltimore, MD 21202

Independence Capital Management, Inc.
600 Dresher Road
Horsham, PA 19044

OpCap Advisors
Oppenheimer Capital
One World Financial Center
New York, NY 10281

Vontobel USA Inc.
450 Park Avenue
New York, NY 10022

C-7
<PAGE>

RS Investment Management, Inc.
555 California Street
San Francisco, CA 94104

ITEM 31. MANAGEMENT SERVICES

Not applicable.

ITEM 32. UNDERTAKINGS

The Registrant undertakes to furnish each person to whom a prospectus is
delivered a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.

C-8
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant certifies that it has
duly caused this Post-Effective Amendment to Registrant's Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Horsham, Commonwealth of Pennsylvania on the 26th day of February, 1998.

PENN SERIES FUNDS, INC.

By: /s/ James B. McElwain
-------------------------------
James B. McElwain, President

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to this Registration Statement of the Registrant has been signed below
by the following persons in the capacities indicated on the 26th day of
February, 1998.

SIGNATURE TITLE

/s/ James B. McElwain President (Principal Executive
- ------------------------------------- Officer)
James B. McElwain

/s/ Steven M. Herzberg Treasurer (Principal
- -------------------------------------- Financial Officer)
Steven M. Herzberg

/s/ Ann M. Strootman Controller (Principal
- --------------------------------------- Accounting Officer)
Ann M. Strootman

* Eugene Bay Director

* James S. Greene Director

* L. Stockton Illoway Director

* William H. Loesche, Jr. Director

* M. Donald Wright Director

* By: /s/ L. Stockton Illoway
--------------------------------------------
L. Stockton Illoway, Attorney-In-Fact

C-9
<PAGE>

EXHIBIT INDEX

<TABLE>
<S> <C> <C>
1 Articles of Incorporation -Previously filed on April 26, 1983 as
Exhibit 1 to Post-Effective Amendment No. 24 to this
Registration Statement, and incorporated by reference to Post-
Effective Amendment No. 44.

2 By-Laws - Previously filed on August 27, 1992 as Exhibit 2 to
Post-Effective Amendment No. 37 to this Registration
Statement, and incorporated by reference to Post-Effective
Amendment No. 44.

3 None.

4 None (outstanding shares of common stock are recorded on the
books and records of the Registrant - Certificates of stock are
not issued).

5(a) Investment Advisory Agreement between the Registrant and
Independence Capital Management, Inc. with respect to the
Growth Equity, Quality Bond and Money Market Funds-
Previously filed on August 27, 1992 as Exhibit 5(b) to Post-
Effective Amendment No. 37 to this Registration Statement, and
incorporated by reference to Exhibit 5(b) of Post-Effective
Amendment No. 44 filed via EDGAR on February 14, 1997.

5(b) Investment Advisory Agreement between the Registrant and
Independence Capital Management, Inc. with respect to the
Emerging Growth Fund - Incorporated by reference to Exhibit
5(e) of Post-Effective Amendment No. 45 filed via EDGAR on
November 21, 1997.

Ex-99.B 5(c) Sub-Advisory Agreement between Independence Capital
Management, Inc. and RS Investment Management, Inc. with
respect to the Emerging Growth Fund - Filed herewith.

Ex-99.B 5(d) Form of Investment Advisory Agreement between the Registrant
and Independence Capital Management, Inc. with respect to the
Value Equity, Small Capitalization, Flexibly Managed,
International Equity and High Yield Bond Funds - Filed
herewith.

Ex-99.B 5(e) Form of Sub-Advisory Agreement between Independence Capital
Management, Inc. and OpCap Advisors with respect to the
Value Equity and Small Capitalization Funds - Filed herewith.

</TABLE>

C-10
<PAGE>

<TABLE>

<S> <C> <C>
Ex-99.B 5(f) Form of Sub-Advisory Agreement between Independence Capital
Management, Inc. and T.Rowe Price Associates, Inc. with
respect to the Flexibly Managed and High Yield Bond Funds -
Filed herewith.

Ex-99.B 5(g) Form of Sub-Advisory Agreement between Independence Capital
Management, Inc. and Vontobel USA Inc. with respect to the
International Equity Fund - Filed herewith.

6 None. Common stock of the Registrant is sold only to The Penn
Mutual Life Insurance Company and its affiliated insurance
companies for their general or separate accounts.

7 None.

8(a) Amended and Restated Custodian Agreement between the
Registrant and Provident National Bank - Previously filed on
April 26, 1993 as Exhibit 8(a) to Post-Effective Amendment No.
38 to this Registration Statement, and incorporated by reference
to Exhibit 8(a) of Post-Effective Amendment No. 44 filed via
EDGAR on February 14, 1997.

Ex-99.B 8(b) Form of Foreign Custody Manager Agreement between the
Registrant and PNC Bank - Filed herewith.

9(a) Administrative and Corporate Services Agreement between the
Registrant and The Penn Mutual Life Insurance Company --
Incorporated by reference to Exhibit 9(a) of Post-Effective
Amendment No. 45 filed via EDGAR on November 21, 1997.

9(b) Accounting Services Agreement between the Registrant and
Provident Financial Processing Corporation - Previously filed
on March 10, 1990 as Exhibit 9(b) to Post-Effective Amendment
No. 33 to this Registration Statement, and incorporated by
reference to Exhibit 9(b) of Post-Effective Amendment No. 44
filed via EDGAR on February 14, 1997.

9(c) Agreement between the Registrant and Provident Financial
Processing Corporation on fees for services under Accounting
Services Agreement - Previously filed on February 24, 1995 as
Exhibit 9(c) to Post-Effective Amendment No. 43 to this
Registration Statement, and incorporated by reference to
Exhibit 9(c) of Post-Effective Amendment No. 44 filed via
EDGAR on February 14, 1997.

</TABLE>

C-11
<PAGE>

<TABLE>

<S> <C> <C>
10 Opinion and Consent of Morgan, Lewis & Bockius LLP-
Incorporated by reference to Exhibit (10) of Post-Effective
Amendment No. 43 filed via EDGAR on April 29, 1996.

Ex-99.B 11(a)(1) Consent of Ernst & Young L.L.P. - Filed herewith.

Ex-99.B 11(a)(2) Consent of Coopers & Lybrand L.L.P. - Filed herewith.

11(b) Powers of Attorney of Directors - Incorporated by reference to
Exhibit 11(b) of Post-Effective Amendment No. 44 filed via
EDGAR on February 14, 1997.

12 None.

13 None.

14 None.

15 None.

16 None.

Ex-99.B 27 Financial Data Schedules
</TABLE>

C-12

<PAGE>

EXHIBIT 5(C)

INVESTMENT SUB-ADVISORY AGREEMENT

BETWEEN

INDEPENDENCE CAPITAL MANAGEMENT, INC.

AND

RS INVESTMENT MANAGEMENT, INC.

RELATING TO

PENN SERIES EMERGING GROWTH FUND

INVESTMENT SUB-ADVISORY AGREEMENT, made as of October 1, 1997 by and
between INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Adviser"), a corporation
organized and existing under the laws of the State of Pennsylvania, and RS
INVESTMENT MANAGEMENT, INC. ("Sub-Adviser"), a corporation organized and
existing under the laws of the State of California.

WITNESSETH:

WHEREAS, Penn Series Funds, Inc. ("Penn Series") is an open-end management
investment company registered as such under the Investment Company Act of 1940,
as amended (the "Act"), and is authorized to issue shares in separate series
with each series representing interests in a separate fund of securities and
other assets; and

WHEREAS, Adviser is engaged principally in the business of rendering
investment advisory services and is registered as an investment adviser under
the federal Investment Advisers Act of 1940, as amended; and

WHEREAS, Sub-Adviser is engaged principally in the business of rendering
investment advisory services and is registered as an investment adviser under
the federal Investment Advisers Act of 1940, as amended; and

WHEREAS, Adviser renders investment advisory services to Penn Series
pursuant to an investment advisory agreement entered into by Penn Series and
Adviser;

WHEREAS, Adviser desires Sub-Adviser to render investment sub-advisory
services to Penn Series in the manner and on the terms and conditions
hereinafter set forth;
<PAGE>

NOW, THEREFORE, in consideration of the premises and the mutual promises
hereinafter set forth, the parties hereto agree as follows:

1. INVESTMENT SUB-ADVISORY SERVICES. Sub-Adviser shall serve as
investment sub-adviser and shall supervise and direct the cash, securities and
other assets of the Emerging Growth Fund of Penn Series ("the Fund"), and to
exercise all rights incidental to ownership in accordance with the investment
objectives, program and restrictions applicable to the Fund as provided in Penn
Series' Prospectus and Statement of Additional Information, as amended from time
to time, and such other limitations as may be imposed by law or as Penn Series
may impose with notice in writing to Sub-Adviser. To enable Sub-Adviser to fully
exercise its discretion, Adviser hereby appoints Sub-Adviser as agent and
attorney-in-fact for the Fund with full power and authority to buy, sell and
otherwise deal in securities and contracts for the Fund. No investment will be
made by Sub-Adviser for the Fund if that investment is in violation of the
objectives investment restrictions or limitations of the Fund set out in the
prospectus and the SAI previously delivered to the Sub-Advisor or to be
delivered. Sub-Adviser shall not take custody of any assets of Penn Series, but
shall issue settlement: instructions to the custodian designated by Penn Series
(the "Custodian"). Sub-Adviser shall, in its discretion, obtain and evaluate
such information relating to the economy, industries, businesses, securities
markets and securities as it may deem necessary or useful in the discharge of
its obligations hereunder and shall formulate and implement a continuing program
for the management of the assets and resources of the Fund in a manner
consistent with the investment objectives of the Fund. In furtherance of this
duty, Sub-Adviser, as agent and attorney-in-fact with respect to Adviser and
Penn Series, is authorized, in its discretion and without prior consultation
with Penn Series, to:

(i) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and

(ii) place orders and negotiate the commissions (if any) for the execution
of transactions in securities with or through such brokers, dealers,
underwriters or issuers as Sub-Adviser may select, in conformance
with the provisions of Paragraph 4 herein; and

(iii) to take such other actions Sub-Adviser deems to be appropriate;

provided, however, that Sub-Adviser shall make no investment for the Fund that
is in violation of the objectives, program, restrictions or limitations of the
Fund.

2. ACCOUNTING AND RELATED SERVICES. Sub-Adviser agrees to cooperate
with the Accounting Services Agent appointed by Penn Series pursuant to the
Accounting Services Agreement entered into by Penn Series and the Accounting
Services Agent. As requested from time to time, Sub-Adviser shall provide Penn
Series and its Accounting Services Agent with such information as may be
reasonably necessary to properly account for financial transactions with respect
to the Fund.

-2-
<PAGE>

3. FEE.

A. PAYMENT OF FEE. For the services Sub-Adviser renders to Penn
Series under this Agreement, Adviser will pay Sub-Adviser a fee based
on the average daily net assets of the Fund.

B. FEE RATE. The fee shall be paid at the following rates:

(i) Seventy basis points (0.70%) of the first $25,000,000 of average
daily net assets of the Fund;

(ii) Sixty-five basis points (0.65%) of the next $25,000,000 of
average daily net assets of the Fund; and

(iii) Sixty basis points (0.60%) of average daily net assets of
the Fund in excess of $50,000,000.

C. METHOD OF COMPUTATION. The fee shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid
monthly to Sub-Adviser as of the first business day of the next
succeeding calendar month. The daily fee will be computed by
multiplying the fraction of one over the number of calendar days in
the year by the annual rate applicable to the Fund as set forth above,
and multiplying this product by the net assets of the Fund. The Fund's
net assets, for purposes of the calculations described above, will be
determined in accordance with Penn Series' Prospectus and Statement of
Additional Information as of the close of business on the most recent
previous business day on which Penn Series was open for business.

D. EXPENSE LIMITATION. The expense limitation of the Fund, as a
percentage of the Funds average daily net assets, is 1.15%. To the
extent that the Fund's total expenses for a fiscal year (excluding
interest, taxes, brokerage, other expenses which are capitalized in
accordance with generally accepted accounting principles, and
extraordinary expenses, but including investment advisory and
administrative and corporate service fees before any adjustment
pursuant to this provision) exceed the expense limitation for the
Fund, one-half of such excess amount shall be a liability of Sub-
Adviser to Adviser. The liability (if any) of Sub-Adviser to pay
Adviser one-half of such excess amount shall be determined on a daily
basis. If, at the end of each month, there is any liability of Sub-
Adviser to pay Adviser such excess amount, the fee shall be reduced by
such liability. If, at the end of each month, there is no liability of
Sub-Adviser to pay Adviser such excess amount and if payments of the
fee at the end of prior months during the fiscal year have been
reduced in excess of that required in this subsection, such excess
reduction shall be recaptured by Sub-Adviser and shall be payable by
Adviser to Sub-Adviser along

-3-
<PAGE>

with the fee payable to Sub-Adviser for that month. If, at the end of
the fiscal year, there is any remaining liability of Sub-Adviser to
pay Adviser such excess amount (which has not been paid through
reduction of the fee), Sub-Adviser shall remit to Adviser an amount
sufficient to pay such remaining liability.

4. BROKERAGE. In executing portfolio transactions and selecting brokers
or dealers for the Fund, Sub-Adviser will use its best efforts to seek the best
price and the most favorable execution of its orders. In assessing the best
price and the most favorable execution for any transaction, Sub-Adviser shall
consider the breadth of the market in the security, the price of the security,
the skill, financial condition and execution capability of the broker or dealer,
and the reasonableness of the commission, if any. Where best price and most
favorable execution will not be compromised, Sub-Adviser may take into account
the research and related services that the broker has provided to Penn Series or
the Sub-Adviser. It is understood that the Sub-Adviser will not be deemed to
have acted unlawfully or to have breached a fiduciary duty to the Fund or be in
breach of any obligation owing to the Fund under this Agreement, or otherwise,
by reason of its having directed a securities transaction on behalf of the Fund
to a broker-dealer in compliance with the provisions of Section 28(e) of the
Securities Exchange Act of 1934 or as described from time to time in the Penn
Series' Prospectus and Statement of Additional Information. In addition, Sub-
Adviser is authorized to take into account the sale of variable contracts which
are invested in Penn Series shares in allocating to brokers or dealers purchase
and sale orders for portfolio securities, provided that Sub-Adviser believes
that the quality of the transaction and commission are comparable to what they
would be with other qualified firms. Sub-Adviser shall advise Penn Series'
Board of Directors, when requested, as to all payments of commissions and as to
its brokerage policies and practices and shall follow such instructions with
respect thereto as may be given by Penn Series' board.

5. USE OF THE SERVICES OF OTHERS. Sub-Adviser may (at its cost except
as contemplated by Section 4 of this Agreement) employ, retain or otherwise
avail itself of the services or facilities of other persons or organizations for
the purpose of providing Penn Series, Adviser or itself, as appropriate, with
such statistical and other factual information, such advice regarding economic
factors and trends, such advice as to occasional transactions in specific
securities or such other information, advice or assistance as Sub-Adviser may
deem necessary, appropriate or convenient for the discharge of its obligations
hereunder or otherwise helpful to Penn Series and Adviser, or in the discharge
of Sub-Adviser's overall responsibilities with respect to the other accounts
which it serves as investment adviser.

6. PERSONNEL, OFFICE SPACE, AND FACILITIES. Sub-Adviser at its own
expense shall furnish or provide and pay the cost of such office space, office
equipment, office personnel, and office services as it, or any affiliated
corporation of Sub-Adviser, requires in the performance of services under this
Agreement.

7. OWNERSHIP OF SOFTWARE AND RELATED MATERIAL. All computer programs,
magnetic tapes, written procedures and similar items developed and used by Sub-
Adviser or any affiliate in

-4-
<PAGE>

performance of this Agreement are the property of Sub-Adviser and will not
become the property of Penn Series or Adviser.

8. REPORTS TO PENN SERIES AND COOPERATION WITH ACCOUNTANTS. Sub-Adviser,
and any affiliated corporation of Sub-Adviser performing services for Adviser
and Penn Series described in this Agreement, shall furnish to or place at the
disposal of Penn Series and Adviser, such information, reports, evaluations,
analyses and opinions as Penn Series Adviser may, at any time or from time to
time, reasonably request or as Sub-Adviser may deem helpful, to reasonably
ensure compliance with applicable laws and regulations or for any other purpose.
Sub-Adviser and its affiliates shall cooperate with Penn Series' independent
public accountants and take all reasonable action in the performance of services
and obligations under this Agreement to assure that the information needed by
such accountants is made available to them.

9. REPORTS TO SUB-ADVISER. Penn Series and/or Adviser shall furnish or
otherwise make available to Sub-Adviser such prospectuses, statements of
additional information, financial statements, proxy statements, reports, and
other information relating to the business and affairs of Penn Series at or
prior to the time such documents are made available to the public.

10. OWNERSHIP OF RECORDS. All records required to be maintained and kept
current by Penn Series pursuant to the provisions of rules or regulations of the
Securities and Exchange Commission under Section 31(a) of the Act and that are
maintained and kept current by Sub-Adviser or any affiliated corporation of Sub-
Adviser on behalf of Penn Series are the property of Penn Series. Such records
will be preserved by Sub-Adviser itself or through an affiliated corporation for
the periods prescribed in Rule 3la-2 under the Act, where applicable, or in such
other applicable rules that may be adopted time under the Act. Such records may
be inspected by representatives of Penn Series and Adviser at reasonable times,
and upon reasonable notice to Sub-Adviser and, in the event of termination of
this Agreement, will be promptly delivered to Adviser and Penn Series upon
request.

11. SERVICES TO OTHER CLIENTS. Subject to compliance with the 1940 Act,
nothing herein contained shall be deemed to prohibit Sub-Adviser or any of its
affiliated persons from acting, and being separately compensated for acting, in
one or more capacities on behalf of the Fund. Nothing herein contained shall
limit the freedom of Sub-Adviser or any affiliated person of Sub-Adviser to
render investment supervisory and other services to other investment companies,
to act as investment Sub-Adviser or investment counselor to other persons, firms
or corporations, or to engage in other business activities. It is understood
that Sub-Adviser may give advice and take action for its other clients which may
differ from advice given, or the timing or nature of action taken, for the Fund.
Sub-Adviser is not obligated to initiate transactions for the Fund in any
security which Sub-Adviser, its principals, affiliates or employees may purchase
or sell for its or their own accounts or for other clients.

12. CONFIDENTIAL RELATIONSHIP. Information furnished by Penn Series or by
one party to another, including Penn Series' or a party's respective agents and
employees, is confidential and

-5-
<PAGE>

shall not be disclosed to third parties unless required by law. Sub-Adviser, on
behalf of itself and its affiliates and representatives, agrees to keep
confidential all records and other information relating to Adviser or Penn
Series (as the case may be), except after prior notification to and approval in
writing by Adviser or Penn Series (as the case may be), which approval shall not
be unreasonably withheld, and may not be withheld, where Sub-Adviser or any
affiliate may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, when so requested by Adviser and Penn Series.

13. PROXIES. Subject to such oversight by Penn Series as the Board of
Directors of Penn Series shall deem appropriate, Sub-Adviser shall vote proxies
solicited by or with respect to the issuers of securities held in the Fund.

14. INSTRUCTIONS, OPINION OF COUNSEL AND SIGNATURES. At any time
Sub-Adviser may apply to an officer of Penn Series for instructions, and may
consult legal counsel for Penn Series, in respect of any matter arising in
connection with this Agreement, and Sub-Adviser shall not be liable for any
action taken or omitted by it or by any affiliate in good faith in accordance
with such instructions or with the advice or opinion of Penn Series' legal
counsel. Sub-Adviser and its affiliates shall be protected in acting upon any
instruction, advice, or opinion provided by Penn Series or its legal counsel and
upon any other paper or document delivered by Penn Series or its legal counsel
believed by Sub-Adviser to be genuine and to have been signed by the proper
person or persons and shall not be held to have notice of any change of
authority of any officer or agent of Penn Series, until receipt of written
notice thereof from Penn Series. Sub-Adviser shall inform Adviser of all
applications to Penn Series for instructions and all consultations with legal
counsel for Penn Series at the time of such application or consultation.

15. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS. Except as such
responsibility may be placed upon Sub-Adviser or any affiliate by the terms of
this Agreement, and except for the accuracy of information furnished to Penn
Series by Sub-Adviser or any affiliate, Sub-Adviser does not assume
responsibility for the preparation, contents and distribution of the
prospectuses for Penn Series, for complying with any applicable requirements of
the Act, the Securities Exchange Act of 1934, the Securities Act of 1933, or any
other laws, rules and regulations of governmental authorities having
jurisdiction over Penn Series.

16. LIMITATION OF LIABILITY. Neither Sub-Adviser nor any of its
affiliates, their respective officers, directors, employees or agents, or any
person performing executive, administrative, trading, or other functions for
Penn Series (at the direction or request of Sub-Adviser), or Sub-Adviser or its
affiliates in connection with the discharge of obligations undertaken or
reasonably assumed with respect to this Agreement, shall be liable for any error
of judgment or mistake of law or for any loss suffered by Penn Series in
connection with the matters to which this Agreement relates, except for such
error, mistake or loss resulting from willful misfeasance, bad faith, negligence
or willful misconduct in the performance of its, his or her duties on behalf of
Penn Series or constituting or resulting from a failure to comply with any term
of this Agreement; nor shall such persons be liable for any loss or damage
resulting from the imposition

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<PAGE>

by any government of exchange control restrictions which might affect the
liquidity of the Fund's assets maintained with custodians or securities
depositories in foreign countries, or from any political acts of any foreign
governments to which such assets might be exposed, or for any tax of any kind,
including, without limitation, any statutory, governmental, state, provincial,
regional, local or municipal imposition, duty, contribution or levy imposed by
any government or governmental agency upon or with respect to such assets or
income earned with respect thereto (collectively, "Taxes"). Similarly, the Sub-
Adviser shall have no responsibility for and shall incur no liability to the
Fund, any shareholder of the Fund, or the Adviser relating to (i) the duty of
the Fund to register with any government or agency; (ii) the selection of
investment objectives and policies of the Fund; and (iii) the administration of
any plans or trusts investing in the Fund. Sub-Adviser shall not be responsible
for any loss incurred by reason of any act or omission of the Custodian or of
any broker, dealer, underwriter or issuer selected by Sub-Adviser with
reasonable care.

17. OBLIGATIONS OF ADVISER AND SUB-ADVISER. It is expressly agreed that
the obligations of Adviser and Sub-Adviser hereunder shall not be binding upon
any of their directors, shareholders, nominees, officers, agents or employees,
personally. The execution and delivery of this Agreement have been authorized in
accordance with the governing documents of each party and in accordance with
applicable law, and shall be signed by an authorized officer of each party,
acting as such, and shall be binding on each party.

18. INDEMNIFICATION BY ADVISER. Adviser will indemnify and hold Sub-
Adviser harmless from all loss, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by Sub-Adviser resulting from: (i) any
action or omission of Sub-Adviser or any affiliated corporation, with respect to
any service described in this Agreement, upon instructions reasonably believed
by Sub-Adviser or any affiliated corporation to have been executed by an
individual who has been identified in writing by Penn Series as a duly
authorized officer of Penn Series or Adviser; (ii) any action of Sub-Adviser or
any affiliated corporation, with respect to any service described in this
Agreement upon information provided by Penn Series or Adviser in form and under
policies agreed to by Sub-Adviser and Penn Series or Adviser; or (iii) any
action or omission of Adviser or any affiliated corporation, constituting
negligence or willful misconduct of Adviser or its affiliates, agents or
contractors, or constituting a failure by Adviser or any affiliate to comply
with any term of this Agreement. Nothwithstanding the forgoing, Sub-Adviser
shall not be entitled to such indemnification in respect of actions or omissions
constituting negligence or willful misconduct of Sub-Adviser or its affiliates,
agents or contractors, or constituting a failure by Sub-Adviser or any affiliate
to comply with any term of this Agreement. Prior to the confession of any claim
against Adviser which may be subject to this indemnification, Sub-Adviser shall
give Adviser reasonable opportunity to defend against said claim in its own name
or in the name of Sub-Adviser.

19. INDEMNIFICATION BY SUB-ADVISER. Sub-Adviser will indemnify and hold
harmless Penn Series and Adviser from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by Penn Series and
Adviser resulting from any claim, demand, action or

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<PAGE>

suit arising out of Sub-Adviser's or any affiliate's failure to comply with any
term of this Agreement or which arise out of the willful misfeasance, bad faith,
negligence or misconduct of Sub-Adviser, its affiliates, their agents or
contractors. Neither Penn Series nor Adviser shall be entitled to such
indemnification in respect of actions or omissions constituting negligence or
willful misconduct of Penn Series or Adviser, or their agents or contractors or
constituting a failure by Adviser to comply with any term of this Agreement;
provided, that such negligence or misconduct is not attributable to Sub-Adviser
or any person that is an affiliate of Sub-Adviser or an affiliate of an
affiliate of Sub-Adviser. Prior to confessing any claim against it which may be
subject to this indemnification, Adviser shall give Sub-Adviser reasonable
opportunity to defend against said claim in its own name or in the name of
Adviser. For purposes of this Section 19 and of Section 18 hereof, no broker or
dealer shall be deemed to be acting as agent or contractor of Sub-Adviser or any
affiliate of Sub-Adviser, in effecting or executing any portfolio transaction
for the Fund.

20. FURTHER ASSURANCES. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.

21. TERM OF AGREEMENT. The term of this Agreement shall begin on the date
first above written, and unless sooner terminated as hereinafter provided, this
Agreement shall remain in effect until two years from date of execution.
Thereafter, this Agreement shall continue in effect from year to year with
respect to the Fund, subject to the termination provisions and all other terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the board of directors of Penn Series,
or by a vote of a majority of the outstanding voting securities of the series of
shares of Penn Series representing interests in the Fund and (b) in either event
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of Penn Series who are not parties
to this Agreement or interested persons of any such party. Sub-Adviser shall
furnish to Penn Series, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement with respect to
the Fund or any extension, renewal or amendment hereof.

22. AMENDMENT AND ASSIGNMENT OF AGREEMENT. This Agreement may not be
amended or assigned without the written consent of the parties hereto, and
without the affirmative vote of a majority of the outstanding voting securities
of the series of shares of Penn Series representing interests in the Fund, and,
without affecting any claim for damages or other right that any party hereto may
have as a result thereof, this Agreement shall automatically and immediately
terminate in the event of its assignment.

23. TERMINATION OF AGREEMENT. This Agreement may be terminated by
Adviser, Penn Series or by Sub-Adviser, without payment of any penalty, upon 60
days' prior notice in writing from Penn Series to Sub-Adviser, or upon 90 days'
prior notice in writing from Sub-Adviser to Penn Series; provided, that in the
case of termination by Adviser or Penn Series, such action shall have been
authorized by resolution of a majority of its directors who are not interested
persons of

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<PAGE>

any party to this Agreement, or by vote of a majority of the outstanding voting
securities of the series of shares of Penn Series representing interests in the
Fund.

24. MISCELLANEOUS.

A. CAPTIONS. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of
the provisions hereof or otherwise affect their construction or
effect.

B. INTERPRETATION. Nothing herein contained shall be deemed to
require Penn Series to take any action contrary to its Articles of
Incorporation or By-Laws, or any applicable statutory or regulatory
requirement to which it is subject or by which it is bound, or to
relieve or deprive the board of directors of Penn Series of its
responsibility for and control of the conduct of the affairs of Penn
Series.

C. DEFINITIONS. Any question of interpretation of any terms or
provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Act shall be reference to such
term or provision of the Act and to interpretations thereof, if any,
by the United States courts or, in the absence of any controlling
decision of any such court, by rules, regulations or orders of the
Securities and Exchange Commission validly issued pursuant to the Act.
Specifically, the terms "vote of a majority of the outstanding voting
securities," "interested person," "assignment," and "affiliated
person," as used herein, shall have the meanings assigned to them by
Section 2(a) of the Act. In addition, where the effect of a
requirement of the Act reflected in any provision of this Agreement is
relaxed by a rule, regulation or order of the Securities and Exchange
Commission, whether of special or of general application, such
provision shall be deemed to incorporate the effect of such rule,
regulation or order.

D. NOTICE. Notice under the Agreement shall be in writing, addressed
and delivered or sent by registered or certified mail, postage
prepaid, to the addressed party at such address as such party may
designate for the receipt of such notices, Until further notice, it is
agreed that for this purpose the address of Adviser is Independence
Capital Management, Inc., 600 Dresser Road, Horsham, PA 19044,
Attention: President, and that of Sub-Adviser is RS Investment
Management, Inc., 555 California Street, San Francisco, CA 94104,
Attention: General Counsel.

E. STATE LAW. The Agreement shall be construed and enforced in
accordance with and governed by the laws of Pennsylvania except where
such state laws have been preempted by Federal law.

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<PAGE>

F. COUNTERPARTS. This Agreement may be entered into in counterparts,
each of which when so executed and delivered shall be deemed to be an
original, and together shall constitute one document.

G. ENTIRE AGREEMENT; SEVERABILITY. This Agreement is the entire
agreement of the parties and supersedes all prior or contemporaneous
written or oral negotiations, correspondence, agreements and
understandings regarding the subject matter hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the
validity or enforceability of any and all other provisions hereof.

H. NO THIRD PARTY BENEFICIARIES. Neither party intends for this
Agreement to benefit any third-party not expressly named in this
Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first above written.

Attest: INDEPENDENCE CAPITAL
MANAGEMENT, INC.

/s/ Laura M. Ritzko By: /s/ Peter M. Sherman
- ---------------------------- ----------------------------------
Assistant Secretary Peter M. Sherman
President

Attest: RS INVESTMENT MANAGEMENT, INC.

___________________________ By: /s/ George R. Hecht
----------------------------------
Secretary
George R. Hecht
----------------------------------
(Print Name)

President
----------------------------------
(Title)

-10-

<PAGE>
Exhibit 5(d)

INVESTMENT ADVISORY AGREEMENT

Between

PENN SERIES FUNDS, INC.

and

INDEPENDENCE CAPITAL MANAGEMENT, INC.

Relating to

VALUE EQUITY FUND
SMALL CAPITALIZATION FUND
FLEXIBLY MANAGED FUND
INTERNATIONAL EQUITY FUND
HIGH YIELD BOND FUND

INVESTMENT ADVISORY AGREEMENT, made as of May 1, 1998 by and between PENN
SERIES FUNDS, INC. ("Penn Series"), a corporation organized and existing under
the laws of the State of Maryland, and INDEPENDENCE CAPITAL MANAGEMENT, INC.
("Adviser"), a corporation organized and existing under the laws of the State of
Pennsylvania.

WITNESSETH:

WHEREAS, Penn Series is an open-end management investment company
registered as such under the Investment Company Act of 1940, as amended (the
"Act") and is authorized to issue shares in separate series with each series
representing interests in a separate fund of securities and other assets; and

WHEREAS, Adviser is engaged principally in the business of rendering
investment advisory services and is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended; and

WHEREAS, Penn Series desires Adviser to render investment advisory services
to Penn Series in the manner and on the terms and conditions hereinafter set
forth, and Adviser desires to render such services under such terms and
conditions:

NOW, THEREFORE, in consideration of the premises and the mutual promises
hereinafter set forth, the parties hereto agree as follows:
<PAGE>

1. Investment Advisory Services. Adviser shall serve as investment
adviser and shall supervise and direct the investments of the Value Equity,
Small Capitalization, Flexibly Managed, International Equity and the High
Yield Bond Funds of Penn Series (individually a "Fund" and collectively the
"Funds"), in accordance with the investment objectives, program and restrictions
applicable to the Fund as provided in Penn Series' Prospectus and Statement of
Additional Information, as amended from time to time, and such other limitations
as may be imposed by law or as Penn Series may impose with notice in writing to
Adviser. No investment will be made by Adviser for a Fund if that investment
would be in violation of the objectives, program, restrictions or limitations of
the Fund. Adviser shall not take custody of any assets of Penn Series, but
shall issue settlement instructions to the custodian designated by Penn Series
(the "Custodian"). Adviser shall obtain and evaluate such information relating
to the economy, industries, businesses, securities markets and securities as it
may deem necessary or useful in the discharge of its obligations hereunder and
shall formulate and implement a continuing program for the management of the
assets and resources of each Fund in a manner consistent with the investment
objectives of the Fund. In furtherance of this duty, Adviser, as agent and
attorney-in-fact with respect to Penn Series, is authorized, in its discretion
and without prior consultation with Penn Series, to:

(i) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and

(ii) place orders and negotiate the commissions (if any) for the execution
of transactions in securities with or through such brokers, dealers,
underwriters or issuers as Adviser may select, in conformance with
the provisions of Paragraph 4 herein;

provided, however, that Adviser shall make no investment for a Fund that is in
violation of the objectives, program, restrictions or limitations of the Fund.

2. Accounting and Related Services. Adviser agrees to cooperate with the
Accounting Services Agent appointed by Penn Series pursuant to the Accounting
Services Agreement entered into by Penn Series and the Accounting Services
Agreement. As requested from time to time, Adviser shall provide Penn Series
and its Accounting Services Agent with such information as may be reasonably
necessary to properly account for financial transactions with respect to each
Fund.

3. Fees.

A. Payment of Fees. For the services rendered to Penn Series under
this Agreement, Penn Series will pay Adviser a fees based on
average daily net assets of each Fund.

B. Fee Rates. The fees shall be paid at the following rates:

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<PAGE>

Value Equity Fund .50%
Small Capitalization Fund .50%
Flexibly Managed Fund .50%
International Equity Fund .75%
High Yield Bond Fund .50%

C. Method of computation. Each fee shall be accrued for each
calendar day and the sum of the daily fee accruals shall be paid
monthly to Adviser as of the first business day of the next succeeding
calendar month. The daily fee will be computed by multiplying the
fraction of one over the number of calendar days in the year by the
annual rate applicable to the Fund as set forth above, and multiplying
this product by the net assets of the Fund. The Fund's net assets,
for purposes of the calculations described above, will be determined
in accordance with Penn Series' Prospectus and Statement of Additional
Information as of the close of business on the most recent previous
business day on which Penn Series was open for business.

D. Expense Limitation. The expense limitations of the Funds are as
follows:

Value Equity Fund 1.00%
Small Capitalization Fund 1.00%
Flexibly Managed Fund 1.00%
International Equity Fund 1.50%
High Yield Bond Fund 0.90%

With respect to each of the Value Equity, Small Capitalization
and International Equity Funds, the extent that a Fund's total
expenses for a fiscal year (excluding interest, taxes, brokerage,
other expenses which are capitalized in accordance with generally
accepted accounting principles, and extraordinary expenses, but
including investment advisory and accounting, administrative and
corporate services fees before any adjustment pursuant to this
provision) exceed the expense limitation for the Fund in an amount up
to and including .10% of the average daily net assets of the Fund,
such excess amount shall be a liability of Adviser to Penn Series.
The liability (if any) of Adviser to pay Penn Series such excess
amount shall be determined on a daily basis. If, at the end of each
month, there is any liability of Adviser to pay Penn Series such
excess amount, the advisory fee shall be reduced by such liability.
If, at the end of each month, there is no liability of Adviser to pay
Penn Series such excess amount and if payments of the advisory fee at
the end of prior months during the fiscal year have been reduced in
excess of that required to maintain expenses within the expense
limitation, such excess reduction shall be recaptured by Adviser and
shall be payable by Penn Series to Adviser along with the advisory fee
payable to Adviser for that month.

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<PAGE>

With respect to each of the Flexibly Managed Fund and the High
Yield Bond Funds, to the extent that a Fund's total expenses for a
fiscal year (excluding interest, taxes, brokerage, other expenses
which are capitalized in accordance with generally accepted accounting
principles, and extraordinary expenses, but including investment
advisory and accounting administrative and corporate service fees
before any adjustment pursuant to this provision) exceed the expense
limitation for the Fund, one-half of such excess amount shall be a
liability of Adviser to Penn Series. The liability (if any) of Adviser
to pay Penn Series one-half of such excess amount shall be determined
on a daily basis. If, at the end of each month, there is any liability
of Adviser to pay Penn Series such excess amount, the advisory fee
shall be reduced by such liability. If, at the end of each month,
there is no liability of Adviser to pay Penn Series such excess amount
and if payments of the advisory fee at the end of prior months during
the fiscal year have been reduced in excess of that required to
maintain expenses within the expense limitation, such excess reduction
shall be recaptured by Adviser and shall be payable by Penn Series to
Adviser along with the advisory fee payable to Adviser for that month.
If, at the end of the fiscal year, there is any remaining liability of
Adviser to pay Penn Series such excess amount (which has not been paid
through reduction of the advisory fee), Adviser shall remit to Penn
Series an amount sufficient to pay such remaining liability.

4. Brokerage. In executing portfolio transactions and selecting brokers
or dealers for a Fund, Adviser will use its best efforts to seek the best price
and the most favorable execution of its orders. In assessing the best price and
the most favorable execution for any transaction, Adviser shall consider the
breadth of the market in the security, the price of the security, the skill,
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any. Where best price and most favorable
execution will not be compromised, Adviser may take into account the research
and related services that the broker has provided to Penn Series or the Adviser.
It is understood that the Adviser will not be deemed to have acted unlawfully or
to have breached a fiduciary duty to a Fund or be in breach of any obligation
owing to a Fund under this Agreement, or otherwise, by reason of its having
directed a securities transaction on behalf of the Fund to a broker-dealer in
compliance with the provisions of Section 28(e) of the Securities Exchange Act
of 1934 or as described from time to time in the Penn Series' Prospectus and
Statement of Additional Information. In addition, Adviser is authorized to take
into account the sale of variable contracts which are invested in Penn Series
shares in allocating to brokers or dealers purchase and sale orders for
portfolio securities, provided that Adviser believes that the quality of the
transaction and commission are comparable to what they would be with other
qualified firms. Adviser shall regularly advise Penn Series' Board of Directors
as to all payments of commissions and as to its brokerage policies and practices
and shall follow such reasonable instructions with respect thereto as may
be, given by Penn Series' board.

5. Use of the Services of Others. Adviser may (at its cost except as
contemplated in Section 4 of this Agreement) employ, retain or otherwise avail
itself of a sub-adviser or sub-

-4-
<PAGE>

advisors to assist it in performing its duties and meeting its responsibilities
under this Agreement, and may delegate to such sub-adviser sub-advisers duties
assumed by the Adviser under this Agreement. In addition, Adviser may (at its
cost, except as contemplated in Section 4 of this Agreement) employ, retain or
otherwise avail itself of the services or facilities of other persons or
organizations for the purpose of providing itself or Penn Series, as
appropriate, with such statistical and other factual information, such advice
regarding economic factors and trends, such advice as to occasional transactions
in specific securities or such other information, advice or assistance as
Adviser may deem necessary, appropriate or convenient for the discharge of its
obligations hereunder or otherwise helpful to Penn Series, or in the discharge
of Adviser's overall responsibilities with respect to the other accounts which
it serves as investment adviser.

6. Personnel, Office Space, and Facilities. Adviser at its own expense
shall furnish or provide and pay the cost of such office space, office
equipment, office personnel, and office services as it, or any affiliated
corporation of Adviser, requires in the performance of services under this
Agreement.

7. Ownership of Software and Related Material. All computer programs,
magnetic tapes, written procedures and similar items developed and used by
Adviser or any affiliate in performance of this Agreement are the property of
Adviser and will not become the property of Penn Series.

8. Certain Personnel. Adviser agrees to permit individuals who are
officers or employees of Adviser to serve (if duly elected or appointed) as
officers, directors, members of any committee of directors, members of any
advisory board, or members of any other committee of Penn Series, without
remuneration or other cost to Penn Series. Adviser shall pay all salaries,
expenses, and fees of officers and/or directors of Penn Series who are
affiliated with Adviser.

9. Reports to Penn Series and Cooperation with Accountants. Adviser, and
any affiliated corporation of Adviser performing services for Penn Series
described in this Agreement, shall furnish to or place at the disposal of Penn
Series, such information, reports, evaluations, analyses and opinions as Penn
Series may, at any time or from time to time, reasonably request or as Adviser
may deem helpful, to reasonably ensure compliance with applicable laws and
regulations or for any other purpose. Adviser and its affiliates shall
cooperate with Penn Series' independent public accountants and take all
reasonable action in the performance of services and obligations under this
Agreement to assure that the information needed by such accountants is made
available to them for the expression of their opinion without any qualification
as to the scope of their examination, including, but not limited to, their
opinion included in Penn Series' annual report under the Act and annual
amendment to Penn Series' registration statement under the Act.

10. Reports to Adviser. Penn Series shall furnish or otherwise make
available to Adviser such prospectuses, financial statements, proxy statements,
reports, and other information relating to the business and affairs of Penn
Series, as Adviser may, at any time or from time to time, reasonably require in
order to discharge its obligations under this Agreement.

-5-
<PAGE>

11. Ownership of Records. All records required to be maintained and kept
current by Penn Series pursuant to the provisions of rules or regulations of the
Securities and Exchange Commission under Section 31(a) of the Act and that are
maintained and kept current by Adviser or any affiliated corporation of Adviser
on behalf of Penn Series are the property of Penn Series. Such records will be
preserved by Adviser itself or through or sub-adviser or an affiliated
corporation for the periods prescribed in Rule 3la-2 under the Act, where
applicable, or in such other applicable rules that may be adopted time under the
Act. Such records may be inspected by representatives of Penn Series at
reasonable times, and, in the event of termination of this Agreement, will be
promptly delivered to Penn Series.

12. Services to Other Clients. Nothing herein contained shall limit the
freedom of Adviser or any affiliated person of Adviser to render investment
supervisory and other services to other investment companies, to act as
investment adviser or investment counselor to other persons, firms or
corporations, or to engage in other business activities. It is understood that
Adviser may give advice and take action for its other clients which may differ
from advice given, or the timing or nature of action taken, for a Fund. Adviser
is not obligated to initiate transactions for a Fund in any security which
Adviser, its principals, affiliates or employees may purchase or sell for its or
their own accounts or for other clients.

13. Confidential Relationship. Information furnished by one party to
another, including a party's respective agents and employees, is confidential
and shall not be disclosed to third parties unless required by law. Adviser, on
behalf of itself and its affiliates and representatives, agrees to keep
confidential all records and other information relating to Penn Series, except
after prior notification to and approval in writing by Penn Series, which
approval shall not be unreasonably withheld, and may not be withheld where
Adviser or any affiliate may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by Penn Series.

14. Proxies. Subject to such direction and oversight by Penn Series as
the Board of Directors of Penn Series shall deem appropriate, Adviser shall vote
proxies solicited by or with respect to the issuers of securities held in the
Funds.

15. Instructions, Opinion of Counsel and Signatures. At any time Adviser
may apply to an officer of Penn Series for instructions, and may consult legal
counsel for Penn Series, in respect of any matter arising in connection with
this Agreement, and Adviser shall not be liable for any action taken or omitted
by it or an affiliate in good faith in accordance with such instructions or with
the advice or opinion of Penn Series' legal counsel. Adviser and its affiliates
shall be protected in acting upon any instruction, advice, or opinion provided
by Penn Series or its legal counsel and upon any other paper or document
delivered by Penn Series or its legal counsel believed by Adviser to be genuine
and to have been signed by the proper person or persons and shall not be held to
have notice of any change of authority of any officer or agent of Penn Series,
until receipt of written notice thereof from Penn Series.

-6-
<PAGE>

16. Compliance with Governmental Rules and Regulations. Except as such
responsibility may be placed upon Adviser or any affiliate expressly by, or by
fair implication of, the terms of this Agreement, and except for the accuracy of
information furnished to Penn Series by Adviser or any affiliate, Penn Series
assumes full responsibility for the preparation, contents and distribution of
the prospectuses for Penn Series, for complying with all applicable requirements
of the Act, the Securities Exchange Act of 1934, the Securities Act of 1933, and
any other laws, rules and regulations of governmental authorities having
jurisdiction over Penn Series.

17. Limitation of Liability. Neither Adviser nor any of its affiliates,
their officers, directors, employees or agents, or any person performing
executive, administrative, trading, or other functions for Penn Series (at the
direction or request of Adviser), or Adviser or its affiliates in connection
with the discharge of obligations undertaken or reasonably assumed with respect
to this Agreement, shall be liable for any error of judgment or mistake of law
or for any loss suffered by Penn Series in connection with the matters to which
this Agreement relates, except for such error, mistake or loss resulting from
willful misfeasance, bad faith, negligence or misconduct in the performance of
its, his or her duties on behalf of Penn Series or constituting or resulting
from a failure to comply with any term of this Agreement. Adviser shall not be
responsible for any loss incurred by reason of any act or omission of the
Custodian Transfer Agent, Accounting Services Agent, or other third party with
which Company has a contractual arrangement, or of any broker, dealer,
underwriter or issuer selected by Adviser with reasonable care.

18. Obligations of Penn Series and Adviser. It is expressly agreed that
the obligations of Penn. Series and Adviser hereunder shall not be binding upon
any of their directors, shareholders, nominees, officers, agents or employees,
personally. The execution and delivery of this Agreement have been authorized
by the Board of Directors of Penn Series and signed by an authorized officer of
Penn Series, acting as such, and shall bind Penn Series.

19. Indemnification by Penn Series. Penn Series will indemnify and hold
Adviser harmless from all loss, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by Adviser resulting from: (i) any action
or omitting to act by Adviser or any affiliated corporation, with respect to any
service described in this Agreement, upon instructions reasonably believed by
Adviser or any affiliated corporation to have been executed by an individual who
has been identified in writing by Penn Series as a duly authorized officer of
Penn Series; or (ii) any action by Adviser or any affiliated corporation, with
respect to any service described in this Agreement, upon information provided by
Penn Series in form and under policies agreed to by Adviser and Penn Series.
Adviser shall not be entitled to such indemnification in respect of actions or
omissions constituting negligence or willful misconduct of Adviser or its
affiliates, agents or contractors, or constituting a failure by Adviser or any
affiliate to comply with any term of this Agreement. Prior to the confession of
any claim against Adviser which may be subject to this indemnification, Adviser
shall give Penn Series reasonable opportunity to defend against said claim in
its own name or in the name of Adviser.

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<PAGE>

20. Indemnification by Adviser. Adviser will indemnify and hold harmless
Penn Series from all loss, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by Penn Series resulting from any claim,
demand, action or suit arising out of Adviser's or any affiliate's failure to
comply with any term of this Agreement or which arise out of the willful
misfeasance, bad faith, negligence or misconduct of Adviser, its affiliates,
their agents or contractors. Penn Series shall not be entitled to such
indemnification in respect of actions or omissions constituting negligence or
willful misconduct of Penn Series or its agents or contractors or constituting a
failure by Penn Series to comply with any term of this Agreement; provided, that
such negligence or misconduct is not attributable to Adviser or any person that
is an affiliate of Adviser or an affiliate of an affiliate of Adviser. Prior to
confessing any claim against it which may be subject to this indemnification,
Penn Series shall give Adviser reasonable opportunity to defend against said
claim in its own name or in the name of Penn Series. For purposes of this
Section 20 and of Section 19 hereof, no broker or dealer shall be deemed to be
acting as agent or contractor of Adviser or any affiliate of Adviser, in
effecting or executing any portfolio transaction for a Fund.

21. Further Assurances. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.

22. Dual Interests. It is understood that some person or persons may
be, or from time to time become, directors, officers, or shareholders of both
Penn Series and Adviser (including its affiliates), and that the existence of
any such dual interest shall not affect the validity hereof or of any
transactions hereunder except as otherwise provided by a specific provision of
applicable law.

23. Term of Agreement. The term of this Agreement shall begin on the date
first above written, and unless sooner terminated as hereinafter provided, this
Agreement shall remain in effect until two years from date of execution.
Thereafter, this Agreement shall continue in effect from year to year with
respect to the Fund, subject to the termination provisions and all other terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the board of directors of Penn Series,
or by a vote of a majority of the outstanding voting securities of the series of
shares of Penn Series representing interests in the Fund and (b) in either event
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of Penn Series who are not parties
to this Agreement or interested persons of any such party. Adviser shall
furnish to Penn Series, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement with respect to
the Fund or any extension, renewal or amendment hereof.

24. Amendment and Assignment of Agreement. This Agreement may not be
amended or assigned without the affirmative vote of a majority of the
outstanding voting securities of the series of shares of Penn Series
representing interests in the affected Fund, and, without affecting any claim
for damages or other right that Penn Series may have as a result thereof, this
Agreement shall automatically and immediately terminate in the event of its
assignment.

-8-
<PAGE>

25. Termination of Agreement. This Agreement may be terminated by Penn
Series or by Adviser with respect to any Fund, without the payment of any
penalty, upon 60 days' prior notice in writing from Penn Series to Adviser, or
upon 90 days' prior notice in writing from Adviser to Penn Series; provided,
that in the case of termination by Penn Series, such action shall have been
authorized by resolution of a majority of its directors who are not interested
persons of any party to this Agreement, or by vote of a majority of the
outstanding voting securities of the series of shares of Penn Series
representing interests in the Fund.

26. Miscellaneous.

A. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of
the provisions hereof or otherwise affect their construction or
effect.

B. Interpretation. Nothing herein contained shall be deemed to
require Penn Series to take any action contrary to its Articles of
Incorporation or By-Laws, or any applicable statutory or regulatory
requirement to which it is subject or by which it is bound, or to
relieve or deprive the board of directors of Penn Series of its
responsibility for and control of the conduct of the affairs of Penn
Series.

C. Definitions. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Act shall be be resolved by
reference to such term or provision of the Act and to interpretations
thereof, if any, by the United States courts or, in the absence of any
controlling decision of any such court, by rules, regulations or
orders of the Securities and Exchange Commission validly issued
pursuant to the Act. Specifically, the terms "vote of a majority of
the outstanding voting securities," "interested person," "assignment,"
and "affiliated person," as used herein, shall have the meanings
assigned to them by Section 2(a) of the Act. In addition, where the
effect of a requirement of the Act reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the Securities
and Exchange Commission, whether of special or of general application,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.

D. Notice. Notice under the Agreement shall be in writing, addressed
and delivered or sent by registered or certified mail, postage
prepaid, to the addressed party at such address as such party may
designate for the receipt of such notices, Until further notice, it is
agreed that for this purpose the address of Penn Series is Penn Series
Funds, Inc., 600 Dresser Road, Horsham, PA 19044, Attention:
President, and that of Adviser is Independence Capital Management,
Inc., 600 Dresser Road, Horsham, PA 19044, Attention: President.

-9-
<PAGE>

E. State Law. The Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Maryland
except where such state laws have been preempted by Federal

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective officers thereunto duly authorized as of the day
and year first above written.

PENN SERIES FUNDS, INC.

By:
---------------------------

INDEPENDENCE CAPITAL
MANAGEMENT, INC.

By:
---------------------------

-10-

<PAGE>
Exhibit 5(e)

INVESTMENT SUB-ADVISORY AGREEMENT

Between

INDEPENDENCE CAPITAL MANAGEMENT, INC.

and

OPCAP ADVISORS

Relating to

VALUE EQUITY FUND
SMALL CAPITALIZATION FUND

INVESTMENT SUB-ADVISORY AGREEMENT, made as of May 1, 1998 by and between
INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Adviser"), a corporation organized and
existing under the laws of the State of Pennsylvania, and OPCAP ADVISORS ("Sub-
Adviser"), a partnership organized and existing under the laws of the State of
Delaware.

WITNESSETH:

WHEREAS, Adviser and Sub-Adviser are engaged principally in the business of
rendering investment advisory services and each is registered as an investment
advisers under the federal Investment Advisers Act of 1940, as amended; and

WHEREAS, Adviser is authorized to render investment advisory services to
Penn Series and to enter into a sub-advisory agreement with a sub-adviser for
the rendering of investment advisory services by the Sub-Adviser to Adviser;

WHEREAS, Adviser desires Sub-Adviser to render investment sub-advisory
services to Penn Series in the manner and on the terms and conditions
hereinafter set forth; and Sub-Adviser desires to render such services, in such
manner and under such terms;

NOW, THEREFORE, in consideration of the premises and the mutual promises
hereinafter set forth, the parties hereto agree as follows:
<PAGE>

1. Investment Sub-Advisory Services. Sub-Adviser shall serve as
investment sub-adviser and shall supervise and direct the investments of the
Value Equity and Small Capitalization Funds (each a "Fund" and together the
"Funds"), and to exercise all rights incidental to ownership in accordance with
the investment objectives, program and restrictions applicable to the Funds as
provided in Penn Series' Prospectus and Statement of Additional Information
("SAI"), as amended from time to time, and such other limitations as may be
imposed by law or as Penn Series or Adviser may impose with notice in writing to
Sub-Adviser. To enable Sub-Adviser to fully exercise its discretion, Adviser
hereby appoints Sub-Adviser as agent and attorney-in-fact for the Funds with
full power and authority to buy, sell and otherwise deal in securities and
contracts for the Funds. No investment will be made by Sub-Adviser for a Fund
if that investment would violate the investment objectives or investment
restrictions or limitations of a Fund set out in the Prospectus and the SAI
delivered to the Sub-Adviser and as may be amended and delivered to Sub-Adviser
in the future. Sub-Adviser shall not take custody of any assets of Penn Series,
but shall issue settlement instructions to the custodian designated by Penn
Series (the "Custodian"). Sub-Adviser shall, in its discretion, obtain and
evaluate such information relating to the economy, industries, businesses,
securities markets and securities as it may deem necessary or useful in the
discharge of its obligations hereunder and shall formulate and implement a
continuing program for the management of the assets and resources of the Funds
in a manner consistent with the investment objectives of the Funds. In
furtherance of this duty, Sub-Adviser, as agent and attorney-in-fact with
respect to Adviser and Penn Series, is authorized, in its discretion and without
prior consultation with Adviser or Penn Series, to:

(i) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and

(ii) place orders and negotiate the commissions (if any) for the
execution of transactions in securities with or through such brokers,
dealers, underwriters or issuers as Sub-Adviser may select, in conformance
with the provisions of Paragraph 4 herein; and

(iii) take such other actions Sub-Adviser deems to be appropriate;

provided, however, that Sub-Adviser shall make no investment for the Funds that
would violate the objectives, investment program, or restrictions or limitations
of the Funds.

2. Accounting and Related Services. Sub-Adviser agrees to cooperate with
the Accounting Services Agent appointed by Penn Series pursuant to the
Accounting Services Agreement entered into by Penn Series and the Accounting
Services Agent. As requested from time to time, Sub-Adviser shall provide Penn
Series and its Accounting Services Agent with such information as may be
reasonably necessary to properly account for financial transactions with respect
to the Fund.

-2-
<PAGE>

3. Fees.

A. Payment of Fees. For the services Sub-Adviser renders to Penn
Series under this Agreement, Adviser will pay Sub-Adviser fees based
on the average daily net assets of each Fund.

B. Fee Rates. The fee rates, based on the average daily net assets of
each Fund, shall be as follows:

0.40% with respect to the first $50,000,000 of the combined total
average daily net assets of the two Funds;

0.35% with respect to the next $200,000,000 of the combined total
average daily net assets of the two Funds;

0.30% with respect to the combined total average daily net assets
of the two Funds in excess of $250,000,000.

C. Method of computation. The fee shall be accrued for each calendar
day and the sum of the daily fee accruals shall be paid monthly to
Sub-Adviser as of the first business day of the next succeeding
calendar month. The daily fee will be computed by multiplying the
fraction of one over the number of calendar days in the year by the
annual rate applicable to the Fund as set forth above, and multiplying
this product by the net assets of the Fund. A Fund's net assets, for
purposes of the calculations described above, will be determined in
accordance with Penn Series' Prospectus and Statement of Additional
Information as of the close of business on the most recent previous
business day on which Penn Series was open for business. If this
Agreement is terminated before the end of the month, the fee for the
period from the beginning of such month to the date of termination
shall be prorated based upon services provided through the date of
termination.

D. Expense Limitation. The expense limitation of each Fund, as a
percentage of the Fund's average daily net assets, is 1.00%. To the
extent that a Fund's total expenses for a fiscal year (excluding
interest, taxes, brokerage, other expenses which are capitalized in
accordance with generally accepted accounting principles, and
extraordinary expenses, but including investment advisory and
accounting, administrative and corporate services fees before any
adjustment pursuant to this provision) exceed the expense limitation
for the Fund in an amount up to and including .10% of the average
daily net assets of the Fund, such excess amount shall be a liability
of Sub-Adviser to Adviser. The liability (if any) of Sub-Adviser to
pay Adviser such excess amount shall be determined on a daily basis.
If, at the end of each month, there is any liability of Sub-Adviser to
pay Adviser such excess amount, the advisory fee shall be reduced by
such liability. If, at the end of each

-3-
<PAGE>

month, there is no liability of Sub-Adviser to pay Adviser such excess
amount and if payments of the advisory fee at the end of prior months
during the fiscal year have been reduced in excess of that required to
maintain expenses within the expense limitation, such excess reduction
shall be recaptured by Sub-Adviser and shall be payable by Adviser to
Sub-Adviser along with the advisory fee payable to Sub-Adviser for
that month.

4. Brokerage. In executing portfolio transactions and selecting brokers
or dealers for the Funds, Sub-Adviser will use its best efforts to seek the best
price and the most favorable execution of its orders. In assessing the best
price and the most favorable execution for any transaction, Sub-Adviser shall
consider the breadth of the market in the security, the price of the security,
the skill, financial condition and execution capability of the broker or dealer,
and the reasonableness of the commission, if any. Where best price and most
favorable execution will not be compromised, Sub-Adviser may take into account
the research and related services that the broker has provided to the Funds or
the Sub-Adviser. It is understood that the Sub-Adviser will not be deemed to
have acted unlawfully or to have breached a fiduciary duty to the Funds or be in
breach of any obligation owing to the Funds under this Agreement, or otherwise,
by reason of its having directed a securities transaction on behalf of the Funds
to a broker-dealer in compliance with the provisions of Section 28(e) of the
Securities Exchange Act of 1934, as amended, or as described from time to time
in the Penn Series' Prospectus and Statement of Additional Information. In
addition, Sub-Adviser is authorized to take into account the sale of variable
contracts which are invested in Penn Series shares in allocating to brokers or
dealers purchase and sale orders for portfolio securities, provided that Sub-
Adviser believes that the quality of the transaction and commission are
comparable to what they would be with other qualified firms. Sub-Adviser shall
advise Penn Series' Board of Directors, when requested, as to all payments of
commissions and as to its brokerage policies and practices and shall follow such
instructions with respect thereto as may be given by Penn Series' board.

5. Use of the Services of Others. Sub-Adviser may (at its cost except
as contemplated by Section 4 of this Agreement) employ, retain or otherwise
avail itself of the services or facilities of other persons or organizations for
the purpose of providing Penn Series, Adviser or itself, as appropriate, with
such statistical and other factual information, such advice regarding economic
factors and trends, such advice as to occasional transactions in specific
securities or such other information, advice or assistance as Sub-Adviser may
deem necessary, appropriate or convenient for the discharge of its obligations
hereunder or otherwise helpful to Penn Series and Adviser, or in the discharge
of Sub-Adviser's overall responsibilities with respect to the other accounts
which it serves as investment adviser.

6. Personnel, Office Space, and Facilities. Sub-Adviser at its own
expense shall furnish or provide and pay the cost of such office space, office
equipment, office personnel, and office services as it, or any affiliated
corporation of Sub-Adviser, requires in the performance of services under this
Agreement.

-4-
<PAGE>

7. Ownership of Software and Related Material. All computer programs,
magnetic tapes, written procedures and similar items developed and used by Sub-
Adviser or any affiliate in performance of this Agreement are the property of
Sub-Adviser and will not become the property of Penn Series or Adviser.

8. Reports to Penn Series and Cooperation with Accountants. Sub-Adviser,
and any affiliated corporation of Sub-Adviser performing services for Adviser
and Penn Series described in this Agreement, shall furnish to or place at the
disposal of Penn Series and Adviser, such information, reports, evaluations,
analyses and opinions as Penn Series and Adviser may, at any time or from time
to time, reasonably request or as Sub-Adviser may deem helpful, to reasonably
ensure compliance with applicable laws and regulations or for any other purpose.
Sub-Adviser and its affiliates shall cooperate with Penn Series' independent
public accountants and take all reasonable action in the performance of services
and obligations under this Agreement to assure that the information needed by
such accountants is made available to them for the expression of their opinion
without any qualification as to the scope of their examination, including, but
not limited to, their opinion included in Penn Series' annual report under the
Act and annual amendment to Penn Series' registration statement under the Act.

10. Ownership of Records. All records required to be maintained and
kept current by Penn Series pursuant to the provisions of rules or regulations
of the Securities and Exchange Commission under Section 31(a) of the Act and
that are maintained and kept current by Sub-Adviser or any affiliated
corporation of Sub-Adviser on behalf of Penn Series are the property of Penn
Series. Such records will be preserved by Sub-Adviser itself or through an
affiliated corporation for the periods prescribed in Rule 3la-2 under the Act,
where applicable, or in such other applicable rules that may be adopted time
under the Act. Such records may be inspected by representatives of Penn Series
and Adviser at reasonable times and, in the event of termination of this
Agreement, will be promptly delivered to Adviser and Penn Series upon request.

11. Services to Other Clients. Nothing herein contained shall limit
the freedom of Sub-Adviser or any affiliated person of Sub-Adviser to render
investment supervisory and other services to other investment companies, to act
as investment adviser or investment counselor to other persons, firms or
corporations or to engage in other business activities; but so long as this
Agreement or any extension, renewal or amendment hereof shall remain in effect
as to the Funds, or until Sub-Adviser shall otherwise consent, Sub-Adviser shall
be the only investment sub-adviser to the Fund. It is understood that Sub-
Adviser may give advice and take action for its other clients which may differ
from advice given, or the timing or nature of action taken, for a Fund. Sub-
Adviser is not obligated to initiate transactions for a Fund in any security
which Sub-

-5-
<PAGE>

Adviser , its principals, affiliates or employees may purchase or sell for its
or their own accounts or other clients.

12. Confidential Relationship. Information furnished by Penn Series or by
one party to another, including Penn Series' or a party's respective agents and
employees, is confidential and shall not be disclosed to third parties unless
required by law. Sub-Adviser, on behalf of itself and its affiliates and
representatives, agrees to keep confidential all records and other information
relating to Adviser or Penn Series (as the case may be), except after prior
notification to and approval in writing by Adviser or Penn Series (as the case
may be), which approval shall not be unreasonably withheld, and may not be
withheld, where Sub-Adviser or any affiliate may be exposed to civil or criminal
contempt proceedings for failure to comply, when requested to divulge such
information by duly constituted authorities, when so requested by Adviser and
Penn Series.

13. Proxies. Subject to such oversight by Penn Series as the Board of
Directors of Penn Series shall deem appropriate, Sub-Adviser shall vote proxies
solicited by or with respect to the issuers of securities held in a Fund.

14. Instructions, Opinion of Counsel and Signatures. At any time
Sub-Adviser may apply to an officer of Penn Series for instructions, and may
consult legal counsel for Penn Series, in respect of any matter arising in
connection with this Agreement, and Sub-Adviser shall not be liable for any
action taken or omitted by it or by any affiliate in good faith in accordance
with such instructions or with the advice or opinion of Penn Series' legal
counsel. Sub-Adviser and its affiliates shall be protected in acting upon any
instruction, advice, or opinion provided by Penn Series or its legal counsel and
upon any other paper or document delivered by Penn Series or its legal counsel
believed by Sub-Adviser to be genuine and to have been signed by the proper
person or persons and shall not be held to have notice of any change of
authority of any officer or agent of Penn Series, until receipt of written
notice thereof from Penn Series. Sub-Adviser shall inform Adviser of all
applications to Penn Series for instructions and all consultations with legal
counsel for Penn Series at the time of such application or consultation.

15. Compliance with Governmental Rules and Regulations. Except as such
responsibility may be placed upon Sub-Adviser or any affiliate by the terms of
this Agreement, and except for the accuracy of information furnished to Penn
Series by Sub-Adviser or any affiliate, Sub-Adviser does not assume
responsibility for the preparation, contents and distribution of the
prospectuses for Penn Series, for complying with any applicable requirements of
the Act, the Securities Exchange Act of 1934, the Securities Act of 1933, or any
other laws, rules and regulations of governmental authorities having
jurisdiction over Penn Series.

-6-
<PAGE>

judgment or mistake of law or for any loss suffered by Penn Series in connection
with the matters to which this Agreement relates, except for such error, mistake
or loss resulting from willful misfeasance, bad faith, negligence or willful
misconduct in the performance of its, his or her duties on behalf of Penn Series
or constituting or resulting from a failure to comply with any term of this
Agreement. Sub-Adviser shall not be responsible for any loss incurred by reason
of any act or omission of the Custodian or of any broker, dealer, underwriter or
issuer selected by Sub-Adviser with reasonable care.

17. Obligations of Adviser and Sub-Adviser. It is expressly agreed
that the obligations of Adviser and Sub-Adviser hereunder shall not be binding
upon any of their directors, shareholders, nominees, officers, agents or
employees, personally. The execution and delivery of this Agreement have been
authorized in accordance with the governing documents of each party and in
accordance with applicable law, and shall be signed by an authorized officer of
each party, acting as such, and shall be binding on each party.

18. Indemnification by Adviser. Adviser will indemnify and hold Sub-
Adviser harmless from all loss, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by Sub-Adviser resulting from: (i) any
action or omission of Sub-Adviser or any affiliated corporation, with respect to
any service described in this Agreement, upon instructions reasonably believed
by Sub-Adviser or any affiliated corporation to have been executed by an
individual who has been identified in writing by Penn Series as a duly
authorized officer of Penn Series or Adviser; (ii) any action of Sub-Adviser or
any affiliated corporation, with respect to any service described in this
Agreement upon information provided by Penn Series or Adviser in form and under
policies agreed to by Sub-Adviser and Penn Series or Adviser. Sub-Adviser shall
not be entitled to such indemnification in respect of actions or omissions
constituting negligence or willful misconduct of Sub-Adviser or its affiliates,
agents or contractors, or constituting a failure by Sub-Adviser or any affiliate
to comply with any term of this Agreement. Prior to the confession of any claim
against Adviser which may be subject to this indemnification, Sub-Adviser shall
give Adviser reasonable opportunity to defend against said claim in its own name
or in the name of Sub-Adviser.

19. Indemnification by Sub-Adviser. Sub-Adviser will indemnify and
hold harmless Penn Series and Adviser from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by Penn Series and
Adviser and resulting from any claim, demand, action or suit arising out of Sub-
Adviser's or any affiliate's failure to comply with any term of this Agreement
or which arise out of the willful misfeasance, bad faith, negligence or
misconduct of Sub-Adviser, its affiliates, their agents or contractors. Neither
Penn Series nor Adviser shall be entitled to such indemnification in respect of
actions or omissions constituting negligence or willful misconduct of Penn
Series or Adviser, or their agents or contractors or constituting a failure by
Adviser to comply with any term of this Agreement; provided, that such
negligence or misconduct is not attributable to Sub-Adviser or any person that
is an affiliate of Sub-Adviser or an affiliate of an affiliate of Sub-Adviser.
Prior to confessing any claim against it which may be subject to this
indemnification, Adviser shall give Sub-Adviser reasonable opportunity to defend

-7-
<PAGE>

against said claim in its own name or in the name of Adviser. For purposes of
this Section 19 and of Section 18 hereof, no broker or dealer shall be deemed to
be acting as agent or contractor of Sub-Adviser or any affiliate of Sub-Adviser,
in effecting or executing any portfolio transaction for the Fund.

20. Further Assurances. Each party agrees to perform such further
acts and execute such further documents as are necessary to effectuate the
purposes hereof.

21. Term of Agreement. The term of this Agreement shall begin on the
date first above written, and unless sooner terminated as hereinafter provided,
this Agreement shall remain in effect until two years from date of execution.
Thereafter, this Agreement shall continue in effect from year to year with
respect to each Fund, subject to the termination provisions and all other terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the Board of Directors of Penn Series,
or by a vote of a majority of the outstanding voting securities of the series of
shares of Penn Series representing interests in the Fund and (b) in either event
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of Penn Series who are not parties
to this Agreement or interested persons of any such party. Sub-Adviser shall
furnish to Penn Series, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement with respect to
each Fund or any extension, renewal or amendment hereof.

22. Amendment and Assignment of Agreement. This Agreement may not be
amended or assigned without the written consent of the parties hereto, and
without the affirmative vote of a majority of the outstanding voting securities
of the series of shares of Penn Series representing interests in the affected
Fund, and, without affecting any claim for damages or other right that any party
hereto may have as a result thereof, this Agreement shall automatically and
immediately terminate in the event of its assignment.

23. Termination of Agreement. This Agreement may be terminated by
Adviser, Penn Series or by Sub-Adviser, with respect to a Fund, without payment
of any penalty, upon 60 days' prior notice in writing from Adviser to Sub-
Adviser, or upon 90 days' prior notice in writing from Sub-Adviser to Adviser;
provided, that in the case of termination by Adviser or Penn Series, such action
shall have been authorized by resolution of a majority of its directors who are
not interested persons of any party to this Agreement, or by vote of a majority
of the outstanding voting securities of the series of shares of Penn Series
representing interests in the affected Fund.

24. Miscellaneous.

-8-
<PAGE>

C. Definitions. Any question of interpretation of any terms or
provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Act shall be resolved by
reference to such term or provision of the Act and to interpretations
thereof, if any, by the United States courts or, in the absence of any
controlling decision of any such court, by rules, regulations or
orders of the Securities and Exchange Commission validly issued
pursuant to the Act. Specifically, the terms "vote of a majority of
the outstanding voting securities," "interested person," "assignment,"
and "affiliated person," as used herein, shall have the meanings
assigned to them by Section 2(a) of the Act. In addition, where the
effect of a requirement of the Act reflected in any provision of this
Agreement is relaxed by a rule, regulation or order of the Securities
and Exchange Commission, whether of special or of general application,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order.

D. Notice. Notice under the Agreement shall be in writing,
addressed and delivered or sent by registered or certified mail,
postage prepaid, to the addressed party at such address as such party
may designate for the receipt of such notices, Until further notice,
it is agreed that for this purpose the address of Adviser is
Independence Capital Management, Inc., 600 Dresser Road, Horsham, PA
19044, Attention: President, and that of Sub-Adviser is OpCap
Advisors, 1 World Financial Center, New York, New York 10281,
Attention: President.

E. State Law. The Agreement shall be construed and enforced in
accordance with and governed by the laws of Maryland except where such
state laws have been preempted by Federal law.

F. Counterparts. This Agreement may be entered into in
counterparts, each of which when so executed and delivered shall be
deemed to be an original, and together shall constitute one document.

G. Entire Agreement; Severability. This Agreement is the
entire agreement of the parties and supersedes all prior or
contemporaneous written or oral negotiations, correspondence,
agreements and understandings regarding the subject matter hereof. The
invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any and all other provisions
hereof.

-9-
<PAGE>

H. No Third Party Beneficiaries. Neither party intends for
this Agreement to benefit any third-party not expressly named in this
Agreement.

I. Changes in Sub-Adviser Organization. The Sub-Adviser agrees
to notify the Adviser within a reasonable period of time regarding a
material change in the members of Sub-Adviser.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first above written.

Attest: INDEPENDENCE CAPITAL
MANAGEMENT, INC.

By:
- --------------------------- ---------------------------
Secretary

Attest: OPCAP ADVISORS

By:
- --------------------------- ---------------------------
Secretary

-10-

<PAGE>
Exhibit 5(f)

INVESTMENT SUB-ADVISORY AGREEMENT

Between

INDEPENDENCE CAPITAL MANAGEMENT, INC.

and

T. ROWE PRICE ASSOCIATES, INC.

Relating to

FLEXIBLY MANAGED FUND
HIGH YIELD BOND FUND

INVESTMENT SUB-ADVISORY AGREEMENT, made as of May 1, 1998 by and between
INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Adviser"), a corporation organized and
existing under the laws of the State of Pennsylvania, and T. ROWE PRICE
ASSOCIATES, INC. ("Sub-Adviser"), a corporation organized and existing under the
laws of the State of Maryland.

WITNESSETH:

WHEREAS, Adviser and Sub-Advisor are engaged principally in the business of
rendering investment advisory services and are registered as an investment
advisers under the federal Investment Advisers Act of 1940, as amended; and

WHEREAS, Adviser renders investment advisory services to Penn Series
pursuant to an investment advisory agreement entered into by Penn Series and
Adviser;

NOW, THEREFORE, in consideration of the premises and the mutual promises
hereinafter set forth, the parties hereto agree as follows:
<PAGE>

1. Investment Sub-Advisory Services. Sub-Adviser shall serve as
investment sub-adviser and shall supervise and direct the cash, securities and
other assets of the Flexibly Managed and High Yield Bond Funds (each a "Fund"
and together the "Funds"), and to exercise all rights incidental to ownership in
accordance with the investment objectives, program and restrictions applicable
to the Funds as provided in Penn Series' Prospectus and Statement of Additional
Information, as amended from time to time, and such other limitations as may be
imposed by law or as Penn Series may impose with notice in writing to Sub-
Adviser. To enable Sub-Adviser to fully exercise its discretion, Adviser hereby
appoints Sub-Adviser as agent and attorney-in-fact for the Funds with full power
and authority to buy, sell and otherwise deal in securities and contracts for
the Funds. No investment will be made by Sub-Adviser for Funds if that
investment would violate the objectives investment restrictions or limitations
of a Fund set out in the prospectus and the SAI previously delivered to the Sub-
Adviser or to be delivered. Sub-Adviser shall not take custody of any assets of
Penn Series, but shall issue settlement instructions to the custodian designated
by Penn Series (the "Custodian"). Sub-Adviser shall, in its discretion, obtain
and evaluate such information relating to the economy, industries, businesses,
securities markets and securities as it may deem necessary or useful in the
discharge of its obligations hereunder and shall formulate and implement a
continuing program for the management of the assets and resources of the Funds
in a manner consistent with the investment objectives of the Funds. In
furtherance of this duty, Sub-Adviser, as agent and attorney-in-fact with
respect to Adviser and Penn Series, is authorized, in its discretion and without
prior consultation with Penn Series, to:

(i) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and

(ii) place orders and negotiate the commissions (if any) for the
execution of transactions in securities with or through such
brokers, dealers, underwriters or issuers as Sub-Adviser may select,
in conformance with the provisions of Paragraph 4 herein; and

(iii) take such other actions Sub-Adviser deems to be appropriate;

provided, however, that Sub-Adviser shall make no investment for the Funds that
would violate the objectives, program, restrictions or limitations of the Funds.

2. Accounting and Related Services. Sub-Adviser agrees to cooperate
with the Accounting Services Agent appointed by Penn Series pursuant to the
Accounting Services Agreement entered into by Penn Series and the Accounting
Services Agent. As requested from time to time, Sub-Adviser shall provide Penn
Series and its Accounting Services Agent with such information as may be
reasonably necessary to properly account for financial transactions with respect
to the Fund.

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<PAGE>

3. Fees.

A. Payment of Fees. For the services Sub-Adviser renders to Penn Series
under this Agreement, Adviser will pay Sub-Adviser fees based on the
average daily net assets of each Fund.

B. Fee Rates. The fee rates, based on the average daily net assets of
each Fund, shall be as follows:

0.50% with respect to the first $250,000,000 of the combined total
average daily net assets of the two Funds;

0.40% with respect to the next $500,000,000 of combined total average
daily net assets of the two Funds;

Provided, the fee rate shall be 0.40% with respect to all average
--------
daily net assets of the two Funds at such time the combined total
average daily net assets of the two Funds exceed $750,000,000.

C. Method of computation. The fee shall be accrued for each calendar day
and the sum of the daily fee accruals shall be paid monthly to Sub-Adviser
as of the first business day of the next succeeding calendar month. The
daily fee will be computed by multiplying the fraction of one over the
number of calendar days in the year by the annual rate applicable to the
Fund as set forth above, and multiplying this product by the net assets of
the Fund. A Fund's net assets, for purposes of the calculations described
above, will be determined in accordance with Penn Series' Prospectus and
Statement of Additional Information as of the close of business on the most
recent previous business day on which Penn Series was open for business. If
this Agreement is terminated before the end of the month, the fee for the
period from the beginning of such month to the date of termination shall be
prorated based upon services provided through the date of termination.

D. Expense Limitation. The expense limitation of each Fund, as a
percentage of the Fund's average daily net assets, is 1.00%. To the extent
that a Fund's total expenses for a fiscal year (excluding interest, taxes,
brokerage, other expenses which are capitalized in accordance with
generally accepted accounting principles, and extraordinary expenses, but
including investment advisory and accounting, administrative and corporate
service fees before any adjustment pursuant to this provision) exceed the
expense limitation for the Fund, one-half of such excess amount shall be a
liability of Sub-Adviser to Adviser. The liability (if any) of Sub-Adviser
to pay Adviser one-half of such excess amount shall be determined on a
daily basis. If, at the end of each month, there is any liability of Sub-
Adviser to pay Adviser such excess amount, the fee shall be reduced by such
liability. If, at the end

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<PAGE>

of each month, there is no liability of Sub-Adviser to pay Adviser
such excess amount and if payments of the fee at the end of prior
months during the fiscal year have been reduced in excess of that
required in this subsection, such excess reduction shall be recaptured
by Sub-Adviser and shall be payable by Adviser to Sub-Adviser along
with the fee payable to Sub-Adviser for that month. If, at the end of
the fiscal year, there is any remaining liability of Sub-Adviser to
pay Adviser such excess amount (which has not been paid through
reduction of the fee), Sub-Adviser shall remit to Adviser an amount
sufficient to pay such remaining liability.

4. Brokerage. In executing portfolio transactions and selecting brokers
or dealers for the Funds, Sub-Adviser will use its best efforts to seek the best
price and the most favorable execution of its orders. In assessing the best
price and the most favorable execution for any transaction, Sub-Adviser shall
consider the breadth of the market in the security, the price of the security,
the skill, financial condition and execution capability of the broker or dealer,
and the reasonableness of the commission, if any. Where best price and most
favorable execution will not be compromised, Sub-Adviser may take into account
the research and related services that the broker has provided to the Funds or
the Sub-Adviser. It is understood that the Sub-Adviser will not be deemed to
have acted unlawfully or to have breached a fiduciary duty to the Funds or be in
breach of any obligation owing to the Funds under this Agreement, or otherwise,
by reason of its having directed a securities transaction on behalf of the Funds
to a broker-dealer in compliance with the provisions of Section 28(e) of the
Securities Exchange Act of 1934, as amended, or as described from time to time
in the Penn Series' Prospectus and Statement of Additional Information. In
addition, Sub-Adviser is authorized to take into account the sale of variable
contracts which are invested in Penn Series shares in allocating to brokers or
dealers purchase and sale orders for portfolio securities, provided that Sub-
Adviser believes that the quality of the transaction and commission are
comparable to what they would be with other qualified firms. Sub-Adviser shall
advise Penn Series' Board of Directors, when requested, as to all payments of
commissions and as to its brokerage policies and practices and shall follow such
reasonable instructions with respect thereto as may be given by Penn Series'
Board.

5. Use of the Services of Others. Sub-Adviser may (at its cost except as
contemplated by Section 4 of this Agreement) employ, retain or otherwise avail
itself of the services or facilities of other persons or organizations for the
purpose of providing Penn Series, Adviser or itself, as appropriate, with such
statistical and other factual information, such advice regarding economic
factors and trends, such advice as to occasional transactions in specific
securities or such other information, advice or assistance as Sub-Adviser may
deem necessary, appropriate or convenient for the discharge of its obligations
hereunder or otherwise helpful to Penn Series and Adviser, or in the discharge
of Sub-Adviser's overall responsibilities with respect to the other accounts
which it serves as investment adviser.

6. Personnel, Office Space, and Facilities. Sub-Adviser at its own
expense shall furnish or provide and pay the cost of such office space, office
equipment, office personnel, and

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<PAGE>

office services as it, or any affiliated corporation of Sub-Adviser, requires in
the performance of services under this Agreement.

9. Reports to Sub-Adviser. Penn Series and/or Adviser shall furnish or
otherwise make available to Sub-Adviser such prospectuses, statements of
additional information, financial statements, proxy statements, reports,
articles of incorporation, by-laws and other information relating to the
business and affairs of Penn Series as Sub-Adviser may, at any time or from time
to time, reasonably require in order to discharge its obligations under this
Agreement. Any printed matter, or other material prepared for distribution to
the stockholders of Penn Series or the public, which refers in any way to Sub-
Adviser or any affiliated corporation of Adviser other than merely to identify
Sub-Adviser as the Sub-Adviser, shall be furnished to Sub-Adviser at least 14
days prior to use thereof. Penn Series and Adviser shall not use such material
if Sub-Adviser shall object thereto in writing within 7 days after its receipt
by Sub-Adviser. In the event of termination of this Agreement, Penn Series and
Adviser shall, on written request of Sub-Adviser, forthwith delete any reference
to Sub-Adviser or any affiliated corporation of Sub-Adviser from any materials
prepared on behalf of Penn Series.

10. Ownership of Records. All records required to be maintained and kept
current by Penn Series pursuant to the provisions of rules or regulations of the
Securities and Exchange Commission under Section 31(a) of the Act and that are
maintained and kept current by Sub-Adviser or any affiliated corporation of Sub-
Adviser on behalf of Penn Series are the property of Penn Series. Such records
will be preserved by Sub-Adviser itself or through an affiliated corporation for
the periods prescribed in Rule 3la-2 under the Act, where applicable, or in such
other applicable rules that may be adopted time under the Act. Such records may
be inspected by

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<PAGE>

representatives of Penn Series and Adviser at reasonable times and, in the event
of termination of this Agreement, will be promptly delivered to Adviser and Penn
Series upon request.

11. Services to Other Clients. Nothing herein contained shall limit the
freedom of Sub-Adviser or any affiliated person of Sub-Adviser to render
investment supervisory and other services to other investment companies, to act
as investment advisor or investment counselor to other persons, firms or
corporations or to engage in other business activities; but so long as this
Agreement or any extension, renewal or amendment hereof shall remain in effect
as to the Funds, or until Sub-Adviser shall otherwise consent, Sub-Adviser shall
be the only investment Sub-Adviser to the Fund. It is understood that Sub-
Adviser may give advice and taken action for its other clients which may differ
from advice given, or the timing or nature of action taken, for a Fund. Sub-
Adviser is not obligated to initiate transactions for a Fund in any security
which Sub-Adviser , its principals, affiliates or employees may purchase or sell
for its or their own accounts or other clients.

13. Proxies. Subject to such oversight as the Board of Directors of Penn
Series shall deem appropriate, Sub-Adviser shall vote proxies solicited by or
with respect to the issuers of securities held in a Fund.

14. Instructions, Opinion of Counsel and Signatures. At any time Sub-
Adviser may apply to an officer of Penn Series for instructions, and may consult
legal counsel for Penn Series, in respect of any matter arising in connection
with this Agreement, and Sub-Adviser shall not be liable for any action taken or
omitted by it or by any affiliate in good faith in accordance with such
instructions or with the advice or opinion of Penn Series' legal counsel. Sub-
Adviser and its affiliates shall be protected in acting upon any instruction,
advice, or opinion provided by Penn Series or its legal counsel and upon any
other paper or document delivered by Penn Series or its legal counsel believed
by Sub-Adviser to be genuine and to have been signed by the proper person or
persons and shall not be held to have notice of any change of authority of any
officer or agent of Penn Series, until receipt of written notice thereof from
Penn Series.

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<PAGE>

affiliate, Sub-Adviser does not assume responsibility for the preparation,
contents and distribution of the prospectuses for Penn Series, for complying
with any applicable requirements of the Act, the Securities Exchange Act of
1934, the Securities Act of 1933, or any other laws, rules and regulations of
governmental authorities having jurisdiction over Penn Series.

16. Limitation of Liability. Neither Sub-Adviser nor any of its
affiliates, their respective officers, directors, employees or agents, or any
person performing executive, administrative, trading, or other functions for
Penn Series (at the direction or request of Sub-Adviser), or Sub-Adviser or its
affiliates in connection with the discharge of obligations undertaken or
reasonably assumed with respect to this Agreement, shall be liable for any error
of judgment or mistake of law or for any loss suffered by Penn Series in
connection with the matters to which this Agreement relates, except for such
error, mistake or loss resulting from willful misfeasance, bad faith, negligence
or willful misconduct in the performance of its, his or her duties on behalf of
Penn Series or constituting or resulting from a failure to comply with any term
of this Agreement. Sub-Adviser shall not be responsible for any loss incurred by
reason of any act or omission of the Custodian or of any broker, dealer,
underwriter or issuer selected by Sub-Adviser with reasonable care.

17. Obligations of Adviser and Sub-Adviser. It is expressly agreed that
the obligations of Adviser and Sub-Adviser hereunder shall not be binding upon
any of their directors, shareholders, nominees, officers, agents or employees,
personally. The execution and delivery of this Agreement have been authorized in
accordance with the governing documents of each party and in accordance with
applicable law, and shall be signed by an authorized officer of each party,
acting as such, and shall be binding on each party.

19. Indemnification by Sub-Adviser. Sub-Adviser will indemnify and hold
harmless Penn Series and Adviser from all loss, cost, damage and expense,
including reasonable expenses

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<PAGE>

for legal counsel, incurred by Penn Series and Adviser and resulting from any
claim, demand, action or suit arising out of Sub-Adviser's or any affiliate's
failure to comply with any term of this Agreement or which arise out of the
willful misfeasance, bad faith, negligence or misconduct of Sub-Adviser, its
affiliates, their agents or contractors. Neither Penn Series nor Adviser shall
be entitled to such indemnification in respect of actions or omissions
constituting negligence or willful misconduct of Penn Series or Adviser, or
their agents or contractors or constituting a failure by Adviser to comply with
any term of this Agreement; provided, that such negligence or misconduct is not
attributable to Sub-Adviser or any person that is an affiliate of Sub-Adviser or
an affiliate of an affiliate of Sub-Adviser. Prior to confessing any claim
against it which may be subject to this indemnification, Adviser shall give Sub-
Adviser reasonable opportunity to defend against said claim in its own name or
in the name of Adviser. For purposes of this Section 19 and of Section 18
hereof, no broker or dealer shall be deemed to be acting as agent or contractor
of Sub-Adviser or any affiliate of Sub-Adviser, in effecting or executing any
portfolio transaction for the Fund.

20. Further Assurances. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.

21. Term of Agreement. The term of this Agreement shall begin on the date
first above written, and unless sooner terminated as hereinafter provided, this
Agreement shall remain in effect until two years from date of execution.
Thereafter, this Agreement shall continue in effect from year to year with
respect to each Fund, subject to the termination provisions and all other terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the Board of Directors of Penn Series,
or by a vote of a majority of the outstanding voting securities of the series of
shares of Penn Series representing interests in the Fund and (b) in either event
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of Penn Series who are not parties
to this Agreement or interested persons of any such party. Sub-Adviser shall
furnish to Penn Series, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement with respect to
each Fund or any extension, renewal or amendment hereof.

23. Termination of Agreement. This Agreement may be terminated by Adviser,
Penn Series or by Sub-Adviser, with respect to a Fund, without payment of any
penalty, upon 60 days' prior notice in writing from Penn Series to Sub-Adviser,
or upon 90 days' prior notice in writing from Sub-Adviser to Penn Series;
provided, that in the case of termination by Adviser or Penn Series, such action
shall have been authorized by resolution of a majority of its directors who are

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<PAGE>

not interested persons of any party to this Agreement, or by vote of a majority
of the outstanding voting securities of the series of shares of Penn Series
representing interests in the affected Fund.

24. Miscellaneous.

D. Notice. Notice under the Agreement shall be in writing, addressed
and delivered or sent by registered or certified mail, postage
prepaid, to the addressed party at such address as such party may
designate for the receipt of such notices, Until further notice, it is
agreed that for this purpose the address of Adviser is Independence
Capital Management, Inc., 600 Dresser Road, Horsham, PA 19044,
Attention: President, and that of Sub-Adviser is T. Rowe Price
Associates, Inc., 100 East Pratt Street, Baltimore, Maryland 21202,
Attention: General Counsel.

E. State Law. The Agreement shall be construed and enforced in
accordance with and governed by the laws of Maryland except where such
state laws have been preempted by Federal law.

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<PAGE>

F. Counterparts. This Agreement may be entered into in counterparts,
each of which when so executed and delivered shall be deemed to be an
original, and together shall constitute one document.

G. Entire Agreement; Severability. This Agreement is the entire
agreement of the parties and supersedes all prior or contemporaneous
written or oral negotiations, correspondence, agreements and
understandings regarding the subject matter hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the
validity or enforceability of any and all other provisions hereof.

H. No Third Party Beneficiaries. Neither party intends for this
Agreement to benefit any third-party not expressly named in this
Agreement.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first above written.

Attest: INDEPENDENCE CAPITAL
MANAGEMENT, INC.

By:
- ----------------------------- ------------------------------
Secretary

Attest: T. ROWE PRICE ASSOCIATES, INC.

By:
- ----------------------------- ------------------------------
Secretary

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<PAGE>

Exhibit 5(g)

INVESTMENT SUB-ADVISORY AGREEMENT

Between

INDEPENDENCE CAPITAL MANAGEMENT, INC.

and

VONTOBEL USA INC.

Relating to

INTERNATIONAL EQUITY FUND

INVESTMENT SUB-ADVISORY AGREEMENT, made as of May 1, 1998 by and between
INDEPENDENCE CAPITAL MANAGEMENT, INC. ("Adviser"), a corporation organized and
existing under the laws of the State of Pennsylvania, and VONTOBEL USA INC.
("Sub-Adviser"), a corporation organized and existing under the laws of the
State of New York.

WITNESSETH:

WHEREAS, Adviser and Sub-Adviser are engaged principally in the business of
rendering investment advisory services and are registered as investment advisers
under the Investment Advisers Act of 1940, as amended; and

WHEREAS, Adviser is authorized to render investment advisory services to
Penn Series and to enter into a sub-advisory agreement with Sub-Adviser for the
rendering of investment advisory services by Sub-Adviser to Penn Series;

NOW, THEREFORE, in consideration of the premises and the mutual promises
hereinafter set forth, the parties hereto agree as follows:
<PAGE>

1. Investment Sub-Advisory Services. Sub-Adviser shall serve as
investment sub-adviser and shall supervise and direct the cash, securities and
other assets of the International Equity Fund (the "Fund"), and to exercise all
rights incidental to ownership in accordance with the investment objectives,
program and restrictions applicable to the Fund as provided in Penn Series'
Prospectus and Statement of Additional Information ("SAI"), as amended from time
to time, and such other limitations as may be imposed by law or as Penn Series
or Adviser may impose with notice in writing to Sub-Adviser. To enable Sub-
Adviser to fully exercise its discretion, Adviser hereby appoints Sub-Adviser as
agent and attorney-in-fact for the Fund with full power and authority to buy,
sell and otherwise deal in securities and contracts for the Fund. No investment
will be made by Sub-Adviser for the Fund if that investment would violate the
investment objectives, investment program, or investment restrictions or
limitations of the Fund set out in the Prospectus and the SAI previously
delivered to the Sub-Adviser or to be delivered. Sub-Adviser shall not take
custody of any assets of Penn Series, but shall issue settlement instructions to
the custodian designated by Penn Series (the "Custodian"). Sub-Adviser shall,
in its discretion, obtain and evaluate such information relating to the economy,
industries, businesses, securities markets and securities as it may deem
necessary or useful in the discharge of its obligations hereunder and shall
formulate and implement a continuing program for the management of the assets
and resources of the Fund in a manner consistent with the investment objectives
of the Fund. In furtherance of this duty, Sub-Adviser, as agent and attorney-
in-fact with respect to Adviser and Penn Series, is authorized, in its
discretion and without prior consultation with Adviser or Penn Series, to:

(i) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and

(ii) place orders and negotiate the commissions (if any) for the
execution of transactions in securities with or through such
brokers, dealers, underwriters or issuers as Sub-Adviser may
select, in conformance with the provisions of Paragraph 4 herein;
and

(iii) take such other actions Sub-Adviser deems to be appropriate;

provided, however, that Sub-Adviser shall make no investment for the Fund that
would violate the investment objectives, investment program, or investment
restrictions or limitations of the Fund.

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<PAGE>

3. Fees.

A. Payment of Fee. For the services Sub-Adviser renders to Penn
Series under this Agreement, Adviser will pay Sub-Adviser a fee based
on the average daily net assets of the Fund.

B. Fee Rate. The fee shall be paid at the rate of 0.50%

D. Expense Limitation. The expense limitation of the Fund, as a
percentage of average daily net assets, is 1.50%. To the extent that
a Fund's total expenses for a fiscal year (excluding interest, taxes,
brokerage, other expenses which are capitalized in accordance with
generally accepted accounting principles, and extraordinary expenses,
but including investment advisory and accounting, administrative and
corporate services fees before any adjustment pursuant to this
provision) exceed the expense limitation for the Fund in an amount up
to and including .10% of the average daily net assets of the Fund,
such excess amount shall be a liability of Sub-Adviser to Adviser.
The liability (if any) of Sub-Adviser to pay Adviser such excess
amount shall be determined on a daily basis. If, at the end of each
month, there is any liability of Sub-Adviser to pay Adviser such
excess amount, the advisory fee shall be reduced by such liability.
If, at the end of each month, there is no liability of Sub-Adviser to
pay Adviser such excess amount and if payments of the advisory fee at
the end of prior months during the fiscal year have been reduced in
excess of that required to maintain expenses within the expense
limitation, such excess reduction shall be recaptured by Sub-Adviser
and shall be payable by Adviser to Sub-Adviser along with the advisory
fee payable to Sub-Adviser for that month. In no circumstance shall
the liability of Sub-Adviser under this Section 3D exceed the total
amount of the sub-advisory fees payable to it hereunder in any given
fiscal year.

4. Brokerage. In executing portfolio transactions and selecting brokers
or dealers for the Fund, Sub-Adviser will use its best efforts to seek the best
price and the most favorable

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<PAGE>

execution of its orders. In assessing the best price and the most favorable
execution for any transaction, Sub-Adviser shall consider the breadth of the
market in the security, the price of the security, the skill, financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any. Where best price and most favorable
execution will not be compromised, Sub-Adviser may take into account the
research and related services that the broker has provided to Penn Series or the
Sub-Adviser. It is understood that the Sub-Adviser will not be deemed to have
acted unlawfully or to have breached a fiduciary duty to the Fund or be in
breach of any obligation owing to the Fund under this Agreement, or otherwise,
by reason of its having directed a securities transaction on behalf of the Fund
to a broker-dealer in compliance with the provisions of Section 28(e) of the
Securities Exchange Act of 1934, as amended, or as described from time to time
in the Penn Series' Prospectus and Statement of Additional Information. In
addition, Sub-Adviser is authorized to take into account the sale of variable
contracts which are invested in Penn Series shares in allocating to brokers or
dealers purchase and sale orders for portfolio securities, provided that Sub-
Adviser believes that the quality of the transaction and commission are
comparable to what they would be with other qualified firms. Sub-Adviser shall
advise Penn Series' Board of Directors, when requested, as to all payments of
commissions and as to its brokerage policies and practices and shall follow such
instructions with respect thereto as may be given by Penn Series' board.

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<PAGE>

any time or from time to time, reasonably request or as Sub-Adviser may deem
helpful, to reasonably ensure compliance with applicable laws and regulations or
for any other purpose. Sub-Adviser and its affiliates shall cooperate with Penn
Series' independent public accountants and take all reasonable action in the
performance of services and obligations under this Agreement to assure that the
information needed by such accountants is made available to them for the
expression of their opinion without any qualification as to the scope of their
examination, including, but not limited to, their opinion included in Penn
Series' annual report under the Act and annual amendment to Penn Series'
registration statement under the Act.

11. Services to Other Clients. Nothing herein contained shall limit
the freedom of Sub-Adviser or any affiliated person of Sub-Adviser to render
investment supervisory and other services to other investment companies, to act
as investment advisor or investment counselor to other persons, firms or
corporations or to engage in other business activities; but so long as this
Agreement or any extension, renewal or amendment hereof shall remain in effect
as to Fund, or until Sub-Adviser shall otherwise consent, Sub-Adviser shall be
the only investment sub-adviser to the Fund. It is understood that Sub-Adviser
may give advice and take action for its other clients which may differ from
advice given, or the timing or nature of action taken, for a Fund. Sub-Adviser
is not obligated to initiate transactions for the Fund in any security which
Sub-Adviser, its principals, affiliates or employees may purchase or sell for
its or their own accounts or other clients.

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<PAGE>

unreasonably withheld, and may not be withheld, where Sub-Adviser or any
affiliate may be exposed to civil or criminal contempt proceedings for failure
to comply, when requested to divulge such information by duly constituted
authorities, when so requested by Adviser and Penn Series.

14. Instructions, Opinion of Counsel and Signatures. At any time Sub-
Adviser may apply to an officer of Penn Series for instructions, and may consult
legal counsel for Penn Series, in respect of any matter arising in connection
with this Agreement, and Sub-Adviser shall not be liable for any action taken or
omitted by it or by any affiliate in good faith in accordance with such
instructions or with the advice or opinion of Penn Series' legal counsel. Sub-
Adviser and its affiliates shall be protected in acting upon any instruction,
advice, or opinion provided by Penn Series or its legal counsel and upon any
other paper or document delivered by Penn Series or its legal counsel believed
by Sub-Adviser to be genuine and to have been signed by the proper person or
persons and shall not be held to have notice of any change of authority of any
officer or agent of Penn Series, until receipt of written notice thereof from
Penn Series. Sub-Adviser shall inform Adviser of all applications to Penn Series
for instructions and all consultations with legal counsel for Penn Series at the
time of such application or consultation.

16. Limitation of Liability. Neither Sub-Adviser nor any of its
affiliates, their respective officers, directors, employees or agents, or any
person performing executive, administrative, trading, or other functions for
Penn Series (at the direction or request of Sub-Adviser), or Sub-Adviser or its
affiliates in connection with the discharge of obligations undertaken or
reasonably assumed with respect to this Agreement, shall be liable for any error
of judgment or mistake of law or for any loss suffered by Penn Series in
connection with the matters to which this Agreement relates, except for such
error, mistake or loss resulting from willful misfeasance, bad faith, negligence
or willful misconduct in the performance of its, his or her duties on behalf of
Penn Series or constituting or resulting from a failure to comply with any term
of this Agreement. Sub-Adviser shall not be responsible for any loss incurred
by reason of any act or omission of the Custodian, Transfer Agent, Accounting
Services Agent, or other third party with which the Fund has a contractual
arrangement, or of any broker, dealer, underwriter or issuer selected by Sub-
Adviser with reasonable care.

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<PAGE>

17. Obligations of Adviser and Sub-Adviser. It is expressly agreed that
the obligations of Adviser and Sub-Adviser hereunder shall not be binding upon
any of their directors, shareholders, nominees, officers, agents or employees,
personally. The execution and delivery of this Agreement have been authorized
in accordance with the governing documents of each party and in accordance with
applicable law, and shall be signed by an authorized officer of each party,
acting as such, and shall be binding on each party.

19. Indemnification by Sub-Adviser. Sub-Adviser will indemnify and hold
harmless Penn Series and Adviser from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by Penn Series and
Adviser and resulting from any claim, demand, action or suit arising out of Sub-
Adviser's or any affiliate's failure to comply with any term of this Agreement
or which arise out of the willful misfeasance, bad faith, negligence or
misconduct of Sub-Adviser, its affiliates, their agents or contractors. Neither
Penn Series nor Adviser shall be entitled to such indemnification in respect of
actions or omissions constituting negligence or willful misconduct of Penn
Series or Adviser, or their agents or contractors or constituting a failure by
Adviser to comply with any term of this Agreement; provided, that such
negligence or misconduct is not attributable to Sub-Adviser or any person that
is an affiliate of Sub-Adviser or an affiliate of an affiliate of Sub-Adviser.
Prior to confessing any claim against it which may be subject to this
indemnification, Adviser shall give Sub-Adviser reasonable opportunity to defend
against said claim in its own name or in the name of Adviser. For purposes of
this Section 19 and of Section 18 hereof, no broker or dealer or any third party
with which the Fund has a contractual arrangement and with which Sub-Adviser is
obligated to cooperate under the terms of this Agreement, shall be deemed to be
acting as agent or contractor of Sub-Adviser or any affiliate of Sub-Adviser, in
effecting or executing any portfolio transaction for the Fund.

20. Further Assurances. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.

-7-
<PAGE>

21. Term of Agreement. The term of this Agreement shall begin on the date
first above written, and unless sooner terminated as hereinafter provided, this
Agreement shall remain in effect until two years from date of execution.
Thereafter, this Agreement shall continue in effect from year to year with
respect to the Fund, subject to the termination provisions and all other terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the Board of Directors of Penn Series,
or by a vote of a majority of the outstanding voting securities of the series of
shares of Penn Series representing interests in the Fund and (b) in either event
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of Penn Series who are not parties
to this Agreement or interested persons of any such party. Sub-Adviser shall
furnish to Penn Series, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement with respect to
the Fund or any extension, renewal or amendment hereof.

22. Amendment and Assignment of Agreement. This Agreement may not be
amended or assigned without the written consent of the parties hereto, and
without the affirmative vote of a majority of the outstanding voting securities
of the series of shares of Penn Series representing interests in the Fund and,
without affecting any claim for damages or other right that any party hereto may
have as a result thereof, this Agreement shall automatically and immediately
terminate in the event of its assignment.

23. Termination of Agreement. This Agreement may be terminated by
Adviser, Penn Series or by Sub-Adviser, without payment of any penalty, upon 60
days' prior notice in writing from Adviser to Sub-Adviser, or upon 90 days'
prior notice in writing from Sub-Adviser to Adviser; provided, that in the case
of termination by Adviser or Penn Series, such action shall have been authorized
by resolution of a majority of its directors who are not interested persons of
any party to this Agreement, or by vote of a majority of the outstanding voting
securities of the series of shares of Penn Series representing interests in the
Fund.

24. Miscellaneous.

-8-
<PAGE>

Act and to interpretations thereof, if any, by the United States
courts or, in the absence of any controlling decision of any such
court, by rules, regulations or orders of the Securities and Exchange
Commission validly issued pursuant to the Act. Specifically, the terms
"vote of a majority of the outstanding voting securities," "interested
person," "assignment," and "affiliated person," as used herein, shall
have the meanings assigned to them by Section 2(a) of the Act. In
addition, where the effect of a requirement of the Act reflected in
any provision of this Agreement is relaxed by a rule, regulation or
order of the Securities and Exchange Commission, whether of special or
of general application, such provision shall be deemed to incorporate
the effect of such rule, regulation or order.

D. Notice. Notice under the Agreement shall be in writing, addressed
and delivered or sent by registered or certified mail, postage
prepaid, to the addressed party at such address as such party may
designate for the receipt of such notices, Until further notice, it is
agreed that for this purpose the address of Adviser is Independence
Capital Management, Inc., 600 Dresser Road, Horsham, PA 19044,
Attention: President, and that of Sub-Adviser is Vontobel USA Inc.,
450 Park Avenue, New York, New York 10022, Attention: Chief Executive
Officer.

E. State Law. The Agreement shall be construed and enforced in
accordance with and governed by the laws of Pennsylvania except where
such state laws have been preempted by Federal law.

F. Counterparts. This Agreement may be entered into in counterparts,
each of which when so executed and delivered shall be deemed to be an
original, and together shall constitute one document.

G. Entire Agreement; Severability. This Agreement is the entire
agreement of the parties and supersedes all prior or contemporaneous
written or oral negotiations, correspondence, agreements and
understandings regarding the subject matter hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the
validity or enforceability of any and all other provisions hereof.

H. No Third Party Beneficiaries. Neither party intends for this
Agreement to benefit any third-party not expressly named in this
Agreement.

-9-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first above written.

Attest: INDEPENDENCE CAPITAL
MANAGEMENT, INC.

By:
- ---------------------------- -----------------------------
Secretary

Attest: VONTOBEL USA INC.

By:
- --------------------------- ----------------------------
Secretary

-10-

<PAGE>

Exhibit 8(b)

Penn Series Funds, Inc.
600 Dresher Road
Horsham, PA 19044

Re: Foreign Custody Manager Delegation Amendment
--------------------------------------------

Dear Sirs:

Reference is made to the Amended and Restated Custodian Agreement dated as of
October 28, 1992 (the "Agreement") by and between PNC Bank, N.A. ("PNC Bank")
and Penn Series Funds, Inc. (the "Fund"). Unless otherwise defined herein,
terms defined in the Agreement are used herein with their defined meanings.

1. In addition to the duties of PNC Bank under the Agreement, with
respect to the Property in such jurisdictions as the Fund and PNC Bank shall
agree from time to time, the Fund hereby delegates to the PNC Bank, and PNC Bank
hereby accepts and assumes, the following duties of a "Foreign Custody Manager"
as permitted by and in accordance with Rule 17f-5 under the Investment Company
of 1940, as amended ("Rule 17f-5"):

a. selecting Eligible Foreign Custodians (as defined in Rule 17f-5)
and placing and maintaining Property with such Eligible Foreign
Custodians;

b. providing for written contracts with such Eligible Foreign
Custodians; and

c. monitoring the appropriateness of maintaining the Property with
each Eligible Foreign Custodian and the custody contracts with such
Eligible Foreign Custodian.

Notwithstanding anything to the contrary in this Amendment or the Agreement, PNC
Bank shall not be responsible for the duties described in a., b. and c. with
respect to any Compulsory Securities Depository. A "Compulsory Securities
Depository" shall mean a securities depository or clearing agency the use of
which is mandatory (i) by law or regulation; (ii) because securities cannot be
withdrawn from the depository or clearing agency; or (iii) because maintaining
securities outside the securities depository or clearing agency is not
consistent with prevailing local custodial practices. PNC Bank, or such entity
as it may designate for this purpose, shall inform the Fund in writing of the
name and location of each Compulsory Securities Depository and the factors used
to determine that the securities depository or clearing agency is a Compulsory
Securities Depository.

2. In acting as a Foreign Custody Manager, PNC Bank shall not supervise,
recommend or advise the Fund relative to the investment, purchase, sale,
retention or disposition of any Property in any particular country, including
with respect to prevailing country risks.
<PAGE>

3. (a) The Fund represents that it (i) has the authority and power to
delegate to PNC Bank the duties set forth herein and (ii) has taken all
requisite action (corporate or otherwise) to authorize the execution and
delivery of this Amendment.

(b) PNC Bank represents that it (i) is a U.S. Bank (as defined in Rule
17f-5) and (ii) has taken all requisite action (corporate or otherwise) to
authorize the execution and delivery of this Amendment.

4. PNC Bank's only responsibility with respect to the activities covered
by this Amendment shall be to exercise reasonable care, prudence and diligence
such as a person having responsibility for the safekeeping of fund assets would
exercise.

5. Except as expressly amended hereby, all terms and provisions of the
Agreement are and shall continue to be in full force and effect. The provision
of the services provided for in this Amendment shall be governed by the
applicable laws of the State of New York. This Amendment may be executed by one
or both of the parties hereto on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument.

If the foregoing corresponds to your understanding of our agreement, please
indicate your acceptance by the signature of your authorized representative
below

Yours truly,

PNC BANK, N.A.

By:______________________
Name:

Title:

Agreed and accepted:

PENN SERIES FUNDS, INC.

By:______________________
Name:

Title:

Dated as of November 21, 1997

<PAGE>

Exhibit 11(a)(1)

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Financial
Highlights" in the Prospectus and "Independent Auditors" and "Financial
Statements of Penn Series" in the Statement of Additional Information and to the
inclusion in this Post-Effective Amendment Number 46 to Registration Statement
Number 2-77284 (Form N-1A) of our report dated February 2, 1998, on the
financial statements and financial highlights of Penn Series Funds, Inc. for the
year or period ended December 31, 1997, included in the 1997 Annual Report to
Shareholders.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
February 25, 1998

<PAGE>
Exhibit 11(a)(2)

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this Post-Effective Amendment No. 46 to the
Registration Statement under the Securities Act of 1933 on Form N-1A (File No.
2-77284) of our report dated February 11, 1997 on our audit of the financial
statements and financial highlights of Penn Series Funds, Inc. We also consent
to the reference to our Firm under the caption "Financial Highlights" in the
Prospectus.

/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 25, 1998

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> GROWTH EQUITY FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 103,491,311
<INVESTMENTS-AT-VALUE> 137,230,147
<RECEIVABLES> 216,600
<ASSETS-OTHER> 1,254
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 137,448,001
<PAYABLE-FOR-SECURITIES> 1,119,150
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 270,605
<TOTAL-LIABILITIES> 1,389,755
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 102,355,392
<SHARES-COMMON-STOCK> 5,583,243
<SHARES-COMMON-PRIOR> 4,942,020
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (35,982)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 33,738,836
<NET-ASSETS> 136,058,246
<DIVIDEND-INCOME> 1,172,790
<INTEREST-INCOME> 266,042
<OTHER-INCOME> (2,071)
<EXPENSES-NET> 954,758
<NET-INVESTMENT-INCOME> 482,003
<REALIZED-GAINS-CURRENT> 13,834,988
<APPREC-INCREASE-CURRENT> 14,267,440
<NET-CHANGE-FROM-OPS> 28,584,431
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 482,003
<DISTRIBUTIONS-OF-GAINS> 13,678,856
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,907,900
<NUMBER-OF-SHARES-REDEEMED> 12,473,543
<SHARES-REINVESTED> 14,160,857
<NET-CHANGE-IN-ASSETS> 30,018,786
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 600,772
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 954,758
<AVERAGE-NET-ASSETS> 124,377,315
<PER-SHARE-NAV-BEGIN> 21.46
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 5.64
<PER-SHARE-DIVIDEND> 0.10
<PER-SHARE-DISTRIBUTIONS> 2.73
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 24.37
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> MONEY MARKET FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 37,333,851
<INVESTMENTS-AT-VALUE> 37,333,851
<RECEIVABLES> 353,126
<ASSETS-OTHER> 1,313
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 37,688,290
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 211,906
<TOTAL-LIABILITIES> 211,906
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,478,141
<SHARES-COMMON-STOCK> 37,478,141
<SHARES-COMMON-PRIOR> 34,502,151
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,757)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 37,476,384
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,161,404
<OTHER-INCOME> 0
<EXPENSES-NET> 264,728
<NET-INVESTMENT-INCOME> 1,896,676
<REALIZED-GAINS-CURRENT> (225)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,896,451
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,896,676
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 52,596,243
<NUMBER-OF-SHARES-REDEEMED> 51,478,157
<SHARES-REINVESTED> 1,857,904
<NET-CHANGE-IN-ASSETS> 2,975,765
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,532)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 148,226
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 246,728
<AVERAGE-NET-ASSETS> 37,674,853
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0.05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> FLEXIBLY MANAGED

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 440,167,542
<INVESTMENTS-AT-VALUE> 515,531,351
<RECEIVABLES> 3,505,131
<ASSETS-OTHER> 4,477
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 519,040,959
<PAYABLE-FOR-SECURITIES> 1,973,039
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 929,196
<TOTAL-LIABILITIES> 2,902,235
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 440,801,069
<SHARES-COMMON-STOCK> 26,029,570
<SHARES-COMMON-PRIOR> 21,265,896
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (26,314)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 75,363,969
<NET-ASSETS> 516,138,724
<DIVIDEND-INCOME> 7,090,647
<INTEREST-INCOME> 10,789,548
<OTHER-INCOME> (34,053)
<EXPENSES-NET> 3,500,027
<NET-INVESTMENT-INCOME> 14,346,115
<REALIZED-GAINS-CURRENT> 29,570,973
<APPREC-INCREASE-CURRENT> 23,598,612
<NET-CHANGE-FROM-OPS> 67,515,700
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14,346,115
<DISTRIBUTIONS-OF-GAINS> 29,491,615
<DISTRIBUTIONS-OTHER> 99,694
<NUMBER-OF-SHARES-SOLD> 80,965,783
<NUMBER-OF-SHARES-REDEEMED> 30,886,898
<SHARES-REINVESTED> 43,937,424
<NET-CHANGE-IN-ASSETS> 117,594,585
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,310,427
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,500,027
<AVERAGE-NET-ASSETS> 462,085,393
<PER-SHARE-NAV-BEGIN> 18.74
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 2.33
<PER-SHARE-DIVIDEND> 0.61
<PER-SHARE-DISTRIBUTIONS> 1.24
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.83
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> HIGH YIELD BOND FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 55,860,714
<INVESTMENTS-AT-VALUE> 58,143,961
<RECEIVABLES> 1,099,426
<ASSETS-OTHER> 632
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 59,244,019
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106,355
<TOTAL-LIABILITIES> 106,355
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58,440,118
<SHARES-COMMON-STOCK> 6,214,249
<SHARES-COMMON-PRIOR> 4,941,766
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,585,701)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,283,247
<NET-ASSETS> 59,137,664
<DIVIDEND-INCOME> 315,064
<INTEREST-INCOME> 4,656,080
<OTHER-INCOME> 0
<EXPENSES-NET> 410,846
<NET-INVESTMENT-INCOME> 4,560,298
<REALIZED-GAINS-CURRENT> 2,964,765
<APPREC-INCREASE-CURRENT> (118,203)
<NET-CHANGE-FROM-OPS> 7,406,860
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,560,298
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 10,576
<NUMBER-OF-SHARES-SOLD> 15,567,712
<NUMBER-OF-SHARES-REDEEMED> 7,878,467
<SHARES-REINVESTED> 4,570,874
<NET-CHANGE-IN-ASSETS> 12,260,119
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,539,890)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 254,474
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 410,846
<AVERAGE-NET-ASSETS> 50,895,138
<PER-SHARE-NAV-BEGIN> 8.91
<PER-SHARE-NII> 0.80
<PER-SHARE-GAIN-APPREC> 0.61
<PER-SHARE-DIVIDEND> 0.80
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.52
<EXPENSE-RATIO> 0.81
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> QUALITY BOND FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 44,349,525
<INVESTMENTS-AT-VALUE> 44,701,856
<RECEIVABLES> 318,125
<ASSETS-OTHER> 1,462
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 45,021,443
<PAYABLE-FOR-SECURITIES> 4,847,231
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 97,093
<TOTAL-LIABILITIES> 4,944,415
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 39,724,697
<SHARES-COMMON-STOCK> 3,929,034
<SHARES-COMMON-PRIOR> 3,760,294
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 352,331
<NET-ASSETS> 40,077,028
<DIVIDEND-INCOME> 28,350
<INTEREST-INCOME> 2,460,829
<OTHER-INCOME> 0
<EXPENSES-NET> 281,669
<NET-INVESTMENT-INCOME> 2,207,510
<REALIZED-GAINS-CURRENT> 912,980
<APPREC-INCREASE-CURRENT> (208,702)
<NET-CHANGE-FROM-OPS> 2,911,788
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,207,510
<DISTRIBUTIONS-OF-GAINS> 16,338
<DISTRIBUTIONS-OTHER> 16,277
<NUMBER-OF-SHARES-SOLD> 7,228,293
<NUMBER-OF-SHARES-REDEEMED> 7,674,394
<SHARES-REINVESTED> 2,240,125
<NET-CHANGE-IN-ASSETS> 2,465,687
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (880,365)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 164,758
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 281,669
<AVERAGE-NET-ASSETS> 37,532,105
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> 0.20
<PER-SHARE-DIVIDEND> 0.60
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.20
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> VALUE EQUITY FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 214,026,602
<INVESTMENTS-AT-VALUE> 304,348,314
<RECEIVABLES> 346,648
<ASSETS-OTHER> 2,728
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 304,697,690
<PAYABLE-FOR-SECURITIES> 971,198
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 766,024
<TOTAL-LIABILITIES> 1,737,222
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 212,638,756
<SHARES-COMMON-STOCK> 13,432,474
<SHARES-COMMON-PRIOR> 10,387,893
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 90,321,712
<NET-ASSETS> 302,960,468
<DIVIDEND-INCOME> 3,097,369
<INTEREST-INCOME> 2,524,642
<OTHER-INCOME> (6,146)
<EXPENSES-NET> 1,952,249
<NET-INVESTMENT-INCOME> 3,663,616
<REALIZED-GAINS-CURRENT> 16,381,602
<APPREC-INCREASE-CURRENT> 36,751,125
<NET-CHANGE-FROM-OPS> 56,796,343
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,663,616
<DISTRIBUTIONS-OF-GAINS> 16,381,602
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 61,202,630
<NUMBER-OF-SHARES-REDEEMED> 15,712,398
<SHARES-REINVESTED> 20,045,218
<NET-CHANGE-IN-ASSETS> 102,286,575
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,279,429
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,952,249
<AVERAGE-NET-ASSETS> 255,885,792
<PER-SHARE-NAV-BEGIN> 19.32
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> 4.53
<PER-SHARE-DIVIDEND> 0.29
<PER-SHARE-DISTRIBUTIONS> 1.30
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.55
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> INTERNATIONAL EQUITY

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 108,931,449
<INVESTMENTS-AT-VALUE> 129,437,984
<RECEIVABLES> 562,360
<ASSETS-OTHER> 931,758
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 130,932,102
<PAYABLE-FOR-SECURITIES> 930,708
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 363,838
<TOTAL-LIABILITIES> 1,294,546
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 110,276,873
<SHARES-COMMON-STOCK> 8,038,534
<SHARES-COMMON-PRIOR> 6,688,564
<ACCUMULATED-NII-CURRENT> (1,026,453)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (64,993)
<OVERDISTRIBUTION-GAINS> 20,322,143
<ACCUM-APPREC-OR-DEPREC> 129,637,556
<NET-ASSETS> 1,562,348
<DIVIDEND-INCOME> 564,878
<INTEREST-INCOME> 0
<OTHER-INCOME> 1,372,389
<EXPENSES-NET> 754,837
<NET-INVESTMENT-INCOME> 6,868,955
<REALIZED-GAINS-CURRENT> 3,833,566
<APPREC-INCREASE-CURRENT> 11,457,358
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 754,837
<DISTRIBUTIONS-OF-GAINS> 4,305,835
<DISTRIBUTIONS-OTHER> 3,230,284
<NUMBER-OF-SHARES-SOLD> 27,762,536
<NUMBER-OF-SHARES-REDEEMED> 13,999,926
<SHARES-REINVESTED> 8,290,956
<NET-CHANGE-IN-ASSETS> 25,219,968
<ACCUMULATED-NII-PRIOR> (359,289)
<ACCUMULATED-GAINS-PRIOR> 64,993
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 912,368
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,372,389
<AVERAGE-NET-ASSETS> 121,649,114
<PER-SHARE-NAV-BEGIN> 15.61
<PER-SHARE-NII> 0.58
<PER-SHARE-GAIN-APPREC> 1.04
<PER-SHARE-DIVIDEND> 0.53
<PER-SHARE-DISTRIBUTIONS> 0.57
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.13
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SMALL CAPITALIZATION FUND

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 35,493,665
<INVESTMENTS-AT-VALUE> 39,665,695
<RECEIVABLES> 682,069
<ASSETS-OTHER> 341
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,348,105
<PAYABLE-FOR-SECURITIES> 1,582,088
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 39,923
<TOTAL-LIABILITIES> 1,622,011
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 34,563,548
<SHARES-COMMON-STOCK> 2,683,387
<SHARES-COMMON-PRIOR> 1,287,316
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,484)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,172,030
<NET-ASSETS> 38,726,094
<DIVIDEND-INCOME> 189,866
<INTEREST-INCOME> 226,303
<OTHER-INCOME> 0
<EXPENSES-NET> 234,718
<NET-INVESTMENT-INCOME> 181,451
<REALIZED-GAINS-CURRENT> 2,278,532
<APPREC-INCREASE-CURRENT> 2,875,385
<NET-CHANGE-FROM-OPS> 5,335,368
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 181,451
<DISTRIBUTIONS-OF-GAINS> 2,286,865
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,734,987
<NUMBER-OF-SHARES-REDEEMED> 2,478,293
<SHARES-REINVESTED> 2,468,316
<NET-CHANGE-IN-ASSETS> 11,592,062
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,151)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 137,566
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 234,718
<AVERAGE-NET-ASSETS> 27,513,137
<PER-SHARE-NAV-BEGIN> 12.53
<PER-SHARE-NII> 0.07
<PER-SHARE-GAIN-APPREC> 2.81
<PER-SHARE-DIVIDEND> 0.07
<PER-SHARE-DISTRIBUTIONS> 0.91
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.43
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> EMERGING GROWTH FUND

<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 15,146,294
<INVESTMENTS-AT-VALUE> 15,651,118
<RECEIVABLES> 944,515
<ASSETS-OTHER> 2,523,779
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19,119,412
<PAYABLE-FOR-SECURITIES> 1,141,769
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 35,925
<TOTAL-LIABILITIES> 1,177,694
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 17,535,073
<SHARES-COMMON-STOCK> 1,395,974
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (56,325)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (41,854)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 504,824
<NET-ASSETS> 17,941,718
<DIVIDEND-INCOME> 15,587
<INTEREST-INCOME> 15,001
<OTHER-INCOME> 0
<EXPENSES-NET> 86,913
<NET-INVESTMENT-INCOME> (56,325)
<REALIZED-GAINS-CURRENT> 1,331,710
<APPREC-INCREASE-CURRENT> 504,824
<NET-CHANGE-FROM-OPS> 1,780,209
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 1,373,564
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,230,999
<NUMBER-OF-SHARES-REDEEMED> 2,069,490
<SHARES-REINVESTED> 1,373,564
<NET-CHANGE-IN-ASSETS> 17,941,718
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 60,470
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 106,637
<AVERAGE-NET-ASSETS> 11,259,445
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 3.92
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.07
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.85
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>