PENN SERIES FUNDS INC, 497, 1999-05-06

PENN SERIES FUNDS INC
497, 1999-05-06

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PROSPECTUS -- MAY 1, 1999
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PENN SERIES FUNDS, INC.
600 DRESHER ROAD, HORSHAM, PA 19044 O TELEPHONE (215) 956-8000
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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

MONEY MARKET FUND

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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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[ This page Intentionally Left Blank ]

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Penn Series Funds, Inc. ("Penn Series") is a mutual fund that provides
investment funds for variable annuity and variable life insurance contracts
issued by The Penn Mutual Life Insurance Company ("Penn Mutual") and its
subsidiary, The Penn Insurance and Annuity Company ("PIA"). Penn Series offers
nine different portfolios or "Funds" advised by Independence Capital Management,
Inc. ("ICMI") and, in the case of certain Funds, sub-advised by T. Rowe Price
Associates, Inc., OpCap Advisors, Vontobel USA Inc. and RS Investment
Management, Inc.

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PROSPECTUS CONTENTS

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FUND INVESTMENT SUMMARIES
Growth Equity Fund 4
Value Equity Fund 6
Small Capitalization Fund 8
Emerging Growth Fund 10
Flexibly Managed Fund 12
International Equity Fund 14
Quality Bond Fund 16
High Yield Bond Fund 18
Money Market Fund 20

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ADDITIONAL INFORMATION 22

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MANAGEMENT
Investment Adviser 22
Sub-Advisers 23
Expenses and Limitations 25

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ACCOUNT POLICIES 26

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FINANCIAL HIGHLIGHTS 27

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INVESTMENT SUMMARY: GROWTH EQUITY FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

INVESTMENT OBJECTIVE: The investment objective of the Growth
Equity Fund is to achieve long-term growth
of capital and increase of future income.

INVESTMENT STRATEGY: The Fund invests primarily in common stocks
of well established companies that the
Adviser believes have long-term growth
potential. In selecting the Fund's
investments, the Adviser seeks companies
that are expected to demonstrate long-term
earnings growth that is greater than the
projected growth rate of the economy as a
whole. The Adviser emphasizes those
companies that it believes are capable of
generating consistently strong earnings and
sales gains in an increasingly global
economy. The Adviser believes that, over the
long term, the earnings of well-established
companies will not be as adversely affected
by unfavorable economic conditions as the
earnings of more cyclical companies.
Secondarily, the Adviser also considers the
dividend-paying potential of
well-established companies.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for investors who are willing to accept the
risks and uncertainties of investing in
common stocks in the hope of earning
above-average long-term growth of capital
and income. The Fund's value will change
primarily with changes in the prices of the
common stocks held by the Fund. The prices
of common stocks will increase and decrease
based on market conditions, specific
industry conditions, and the conditions of
the individual companies who issued the
common stocks. In general, common stocks are
more volatile than those of other
investments, such as fixed income
securities. However, over the long-term,
common stocks have shown greater potential
for capital appreciation. By investing in
the common stocks of larger,
well-established companies, the Adviser
seeks to avoid some of the volatility
associated with investment in smaller, less
well-established companies. In addition, the
Adviser's "growth" strategy may underperform
other investment strategies (e.g., a "value"
strategy) or the market as a whole. As with
investing in other securities whose prices
increase and decrease in market value, you
may lose money by investing in the Fund.

4
<PAGE>

PERFORMANCE INFORMATION: The bar chart and table below show the
performance of the Fund both year-by-year
and as an average over different periods of
time. They include only those periods in
which ICMI managed the Fund's investments.
The bar chart and table demonstrate the
variability of performance over time and
provide an indication of the risks and
volatility of an investment in the Fund.
Past performance does not necessarily
indicate how the Fund will perform in the
future. This performance information does
not include the impact of any charges
deducted under your insurance contract. If
it did, returns would be lower.

FOR YEARS ENDED DECEMBER 31,

-10% 0% 10% 20% 30% 40% 50%

1993 12.43%
1994 -8.12%
1995 26.45%
1996 19.76%
1997 26.74%
1998 41.67%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
26.14% -7.61%
(12/31/98) (9/30/98)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
--------------------------------------------------------------------------------
GROWTH EQUITY FUND S & P 500 (1)
--------------------------------------------------------------------------------
<S> <C> <C>
1 Year............................. 41.67% 28.57%
--------------------------------------------------------------------------------
5 Year ............................ 20.10% 24.06%
--------------------------------------------------------------------------------
Since November 1, 1992 (2) ........ 19.47% 21.88%
--------------------------------------------------------------------------------
</TABLE>

(1) The S & P 500 is an unmanaged index that
is a widely recognized benchmark of
general market performance. The index is
a passive measure of equity market
returns. It does not factor in the costs
of buying, selling and holding
securities -- costs which are reflected
in the Fund's results.

(2) Date ICMI began managing the Fund's
investments.

5
<PAGE>

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INVESTMENT SUMMARY: VALUE EQUITY FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

SUB-ADVISER: OpCap Advisors

INVESTMENT OBJECTIVE: The investment objective of the Value Equity
Fund is to maximize total return (capital
appreciation and income).

INVESTMENT STRATEGY: The Fund invests primarily in common stocks
of companies that the Sub-Adviser believes
are under-valued. The Sub-Adviser uses a
disciplined "value" approach in selecting
investments for the Fund. The Sub-Adviser
seeks to identify companies that appear
undervalued by various measures, such as
price/earnings, and may be temporarily out
of favor, but have good prospects for
capital appreciation. The Sub-Adviser also
looks for companies that have the potential
for sustainable high return on invested
capital, maintain a competitive advantage in
the market, and generate a high level of
cash throughout the economic cycle. To
identify such companies, the Sub-Adviser
performs in-depth primary research of
individual companies and industries. The
Sub-Adviser then purchases the stocks of
these companies when they appear
under-priced compared to prices of other
stocks available in the marketplace.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for investors who are willing to accept the
risks and uncertainties of investing in
common stocks in the hope of earning
above-average total return. The Fund's value
will change primarily with changes in the
prices of the common stocks held by the
Fund. The prices of common stocks will
increase and decrease based on market
conditions, specific industry conditions,
and the conditions of the individual
companies who issued the common stocks. In
general, common stocks are more volatile
than those of other investments, such as
fixed income securities. However, over the
long-term, common stocks have shown greater
potential for capital appreciation. A risk
of the Fund is that the Sub-Advisor's
judgments about the attractiveness, relative
value or potential appreciation of a
particular security may prove to be
incorrect. In addition, the Sub-Adviser's
"value" strategy may underperform other
investment strategies (e.g., a "growth"
strategy) or the market as a whole. For
example, it may take the market considerable
time to recognize the value of the Fund's
investments. As with investing in other
securities whose prices increase and
decrease in market value, you may lose money
by investing in the Fund.

6
<PAGE>

PERFORMANCE INFORMATION: The bar chart and table below show the
performance of the Fund both year-by-year
and as an average over different periods of
time. They include only those periods in
which OpCap Advisors managed the Fund's
investments. The bar chart and table
demonstrate the variability of performance
over time and provide an indication of the
risks and volatility of an investment in the
Fund. Past performance does not necessarily
indicate how the Fund will perform in the
future. This performance information does
not include the impact of any charges
deducted under your insurance contract. If
it did, returns would be lower.

FOR YEARS ENDED DECEMBER 31,

0% 5% 10% 15% 20% 25% 30% 35% 40%

1993 7.08%
1994 2.92%
1995 37.48%
1996 25.19%
1997 24.98%
1998 9.59%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
14.35% -14.69%
(12/31/98) (9/30/98)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
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VALUE EQUITY FUND S & P 500 (1)
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<S> <C> <C>
1 Year........................... 9.59% 28.57%
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5 Year .......................... 19.40% 24.06%
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Since November 1, 1992 (2) ...... 17.49% 20.63%
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</TABLE>

7
<PAGE>

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INVESTMENT SUMMARY: SMALL CAPITALIZATION FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

SUB-ADVISER: OpCap Advisors

INVESTMENT OBJECTIVE: The investment objective of the Small
Capitalization Fund is to seek capital
appreciation.

INVESTMENT STRATEGY: The Fund invests primarily in common stocks
of companies with market capitalizations
under $1 billion. In selecting the Fund's
investments, the Sub-Adviser attempts to
identify small capitalization companies
which are under-priced. Smaller
capitalization companies may often be
under-priced because 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. Institutional
investors may be less interested because
they may be required to buy a large
percentage of a company's outstanding equity
securities in order to make the investment
meaningful in their larger portfolios. In
addition, stock analysts may not regularly
research small cap companies thereby
resulting in greater discrepancies in
valuation. The Sub-Adviser seeks companies
that have a significant record of earnings
and revenue growth, have high cash flow
returns on assets and are in very good
financial condition. The Sub-Adviser
attempts to purchase companies at attractive
multiples relative to the market and to
where they have traded in the past. The
Sub-Adviser may also purchase securities in
initial public offerings, or shortly after
such offerings have been completed, when the
Sub-Adviser believes that such securities
have greater-than-average market
appreciation potential.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for investors who are willing to accept the
risks and uncertainties of investing in
small-cap stocks in the hope of earning
above-average capital appreciation. The
Fund's value will change primarily with
changes in prices of the common stocks held
by the Fund. The prices of common stocks
will increase and decrease based on market
conditions, specific industry conditions,
and the conditions of individual companies
that issued the common stocks. In addition
to the general risks of common stocks, an
investment in small-cap stocks entails
special risks. The prices of small-cap
stocks tend to be more volatile than
investments in larger, more established
companies. Smaller-capitalization stocks may
have limited product lines, markets or
financial resources and may depend upon a
limited management group. As a result,
smaller capitalization companies often have
higher failure rates than larger
capitalization companies. In addition, the
Sub-Adviser's "value" strategy may
underperform other investment strategies
(e.g., a "growth" strategy) or the market as
a whole. As with investing in other
securities whose prices increase and
decrease in market value, you may lose money
by investing in the Fund.

8
<PAGE>

PERFORMANCE INFORMATION: The bar chart and table below show the
performance of the Fund both year-by-year
and as an average over different periods of
time. They demonstrate the variability of
performance over time and provide an
indication of the risks and volatility of an
investment in the Fund. Past performance
does not necessarily indicate how the Fund
will perform in the future. This performance
information does not include the impact of
any charges deducted under your insurance
contract. If it did, returns would be lower.

FOR YEARS ENDED DECEMBER 31,

-10% -5% 0% 5% 10% 15% 20% 25%

1996 19.76%
1997 23.02%
1998 -9.16%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
16.16% -18.06%
(6/30/97) (9/30/98)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
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SMALL CAPITALIZATION FUND RUSSELL 2000 (1)
------------------------------------------------------------------------------
<S> <C> <C>
1 Year.......................... -9.16% -2.57%
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Since March 1, 1995 (2) ........ 11.32% 15.43%
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</TABLE>
(1) The Russell 2000 Index is an unmanaged
index that is a widely recognized
benchmark of general market performance.
The index is a passive measure of equity
market returns. It does not factor in
the costs of buying, selling and holding
securities -- costs which are reflected
in the Fund's results.
(2) Date of inception.

9
<PAGE>

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INVESTMENT SUMMARY: EMERGING GROWTH FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

SUB-ADVISER: RS Investment Management, Inc.

INVESTMENT OBJECTIVE: The investment objective of the Emerging
Growth Fund is capital appreciation.

INVESTMENT STRATEGY: The Fund will invest primarily in common
stocks of emerging growth companies. In
selecting the Fund's investments, the
Sub-Adviser seeks companies that have the
potential, based on superior products or
services, operating characteristics, and
financial capabilities, for growth more
rapid than the overall economy. The
Sub-Adviser considers a company's rate of
earnings growth and the quality of
management, the return on equity, and the
financial condition of the company. In
addition to these factors, the Sub-Adviser
focuses on companies that enjoy a
competitive advantage in the marketplace.
The Sub-Adviser emphasizes companies in
those sectors of the economy that are
experiencing rapid growth.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for investors who are willing to accept the
risks and uncertainties of investing in
emerging growth companies in the hope of
earning above-average capital appreciation.
The Fund's value will change with changes in
the prices of the investments held by the
Fund. The prices of common stocks held by
the Fund will increase and decrease based on
market conditions, specific industry
conditions, and the conditions of the
individual companies who issued common
stocks. In addition to the general risks of
stocks, an investment in emerging growth
stocks entails special risks. The prices of
smaller capitalization stocks tend to be
more volatile than investments in larger,
more established companies.
Smaller-capitalization stocks may have
limited product lines, markets or financial
resources and may depend upon a limited
management group. As a result, smaller
capitalization companies often have higher
failure rates than larger capitalization
companies. In addition, the Sub-Adviser's
growth-oriented strategy may underperform
other investment strategies (e.g., a "value"
strategy) or the market as a whole. As with
investing in other securities whose prices
increase and decrease in market value, you
may lose money by investing in the Fund.

10
<PAGE>

PERFORMANCE INFORMATION: The bar chart and table show the performance
of the Fund for the past calendar year and
as an average over different periods of
time. They demonstrate the variability of
performance over time and provide an
indication of the risks and volatility of an
investment in the Fund. Past performance
does not necessarily indicate how the Fund
will perform in the future. This performance
information does not include the impact of
any charges deducted under your insurance
contract. If it did, returns would be lower.

FOR YEAR ENDED DECEMBER 31,

0% 5% 10% 15% 20% 25% 30% 35% 40%

1998 35.7%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
38.00% -22.42%
(12/31/98) (9/30/98)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
--------------------------------------------------------------------------------
EMERGING GROWTH FUND RUSSELL 2000 (1)
--------------------------------------------------------------------------------
<S> <C> <C>
1 Year.......................... 35.70% -2.57%
--------------------------------------------------------------------------------
Since May 1, 1997 (2) .......... 46.37% 14.50%
--------------------------------------------------------------------------------
</TABLE>

(1) The Russell 2000 Index is an unmanaged
index that is a widely recognized
benchmark of general market performance.
The index is a passive measure of equity
market returns. It does not factor in
the costs of buying, selling and holding
securities -- costs which are reflected
in the Fund's results.
(2) Date of inception.

11
<PAGE>
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INVESTMENT SUMMARY: FLEXIBLY MANAGED FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

SUB-ADVISER: T. Rowe Price Associates, Inc.

INVESTMENT OBJECTIVE: The investment objective of the Flexibly
Managed Fund is to maximize total return
(capital appreciation and income).

INVESTMENT STRATEGY: The Sub-Adviser invests primarily in common
stocks of established companies that it
believes have above average potential for
capital growth. Common stocks typically
compose at least half of total assets. The
Fund may also invest in other securities,
including convertibles, warrants, preferred
stocks, corporate and government debt,
foreign securities, futures, and options, in
keeping with the Fund's objective. The
Fund's investments in common stocks
generally fall into one of two categories.
The larger category comprises long-term core
holdings that the Sub-Adviser considers to
be underpriced in terms of company assets,
earnings, or other factors at the time they
are purchased. The smaller category
comprises opportunistic investments whose
prices the Sub-Adviser expects to rise in
the short-term, but not necessarily over the
long-term. Since the Sub-Adviser attempts to
prevent losses as well as achieve gains, it
typically uses a "value approach" in
selecting investments. Its in-house research
team seeks to identify companies that seem
undervalued by various measures, such as
price/book value, and may be temporarily out
of favor but have good prospects for capital
appreciation. The Sub-Adviser may establish
relatively large positions in companies it
finds particularly attractive.

The Fund's approach differs from that of
many other stock funds. The Sub-Adviser
works as hard to reduce risk as to maximize
gains and may realize gains rather than lose
them in market declines. In addition, the
Sub-Adviser searches for the best
risk/reward values among all types of
securities. The portion of the Fund invested
in a particular type of security, such as
common stocks, results largely from
case-by-case investment decisions, and the
size of the Fund's cash reserve may reflect
the manager's ability to find companies that
meet valuation criteria rather than his
market outlook. The Fund may sell securities
for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into
more promising opportunities.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for investors who are seeking a relatively
conservative approach to invest for capital
growth in the equity market and are willing
to accept price declines. The Fund's value
will change primarily with changes in the
prices of the common stocks held by the
Fund. The prices of common stocks will
increase and decrease based on market
conditions, specific industry conditions,
and the conditions of the individual
companies who issued the common stocks. In
general, common stocks are more volatile
than fixed income securities. However, over
the long-term, common stocks have shown
greater potential for capital appreciation.
A particular risk of the Sub-Adviser's value
or "contrarian" approach is that some
holdings may not recover and provide the
capital growth anticipated. A sizable cash
or fixed income position may hinder the Fund
from participating fully in a strong,
rapidly rising bull market. In addition,
significant exposure to bonds increases the
risk that the Fund's share value could be
hurt by rising interest rates or credit
downgrades or defaults. To the extent that
the Fund invests in foreign securities,

12
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it is also subject to the risk that some
holdings may lose value because of declining
foreign currencies or adverse political or
economic events overseas. To the extent the
Fund uses futures and options, it is exposed
to additional volatility and potential
losses. As with investing in other
securities whose prices increase and
decrease in market value, you may lose money
by investing in the Fund.

FOR YEARS ENDED DECEMBER 31,

-5% 0% 5% 10% 15% 20% 25%

1989 21.19%
1990 -0.82%
1991 21.63%
1992 9.61%
1993 15.79%
1994 4.14%
1995 22.28%
1996 16.37%
1997 15.65%
1998 6.09%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
12.44% -9.28%
(3/31/91) (9/30/90)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
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FLEXIBLY MANAGED FUND S & P 500 (1)
------------------------------------------------------------------------------
<S> <C> <C>
1 Year........................... 6.09% 28.57%
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5 Year .......................... 12.70% 24.06%
------------------------------------------------------------------------------
10 Year ......................... 12.93% 18.10%
------------------------------------------------------------------------------
</TABLE>
(1) The S & P 500 is an unmanaged index that
is a widely recognized benchmark of
general market performance. The index is
a passive measure of equity market
returns. It does not factor in the costs
of buying, selling and holding
securities -- costs which are reflected
in the Fund's results.

13
<PAGE>

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INVESTMENT SUMMARY: INTERNATIONAL EQUITY FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

SUB-ADVISER: Vontobel USA Inc.

INVESTMENT OBJECTIVE: The investment objective of the
International Equity Fund is to achieve
capital appreciation.

INVESTMENT STRATEGY: The Fund invests primarily in common stocks
of companies operating in the countries in
Europe and the Pacific Basin that are
generally considered to have developed
markets. These include the eleven euro-zone
countries (France, Germany, Italy, Spain,
Portugal, Finland, Ireland, Belgium, the
Netherlands, Luxembourg and Austria), the
United Kingdom, Switzerland, Norway, Japan,
Hong Kong, Australia, and Singapore. Using a
bottom-up investment approach, the
Sub-Adviser invests in large- and
medium-capitalization companies that have a
long record of successful operations in
their core business. Typically such
companies occupy a leading position in their
industry, have consistently generated free
cash flow, and have achieved earnings growth
through increasing market share and unit
sales volumes. The Sub-Adviser's goal is to
construct a portfolio of the best companies
in the developed markets of Europe and the
Pacific Basin without making any country
bets. With approximately 80-100 issuers, the
Fund also seeks to be well diversified in
terms of industry exposure.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for investors who are willing to accept the
risks and uncertainties of international
investing in the hope of realizing capital
appreciation while diversifying their
investment portfolio. The Fund's value will
change primarily with changes in the prices
of the common stocks held by the Fund. The
prices of common stocks held by the Fund
will increase and decrease based on market
conditions, specific industry conditions,
and the conditions of the individual
companies who issued the common stocks. In
addition to the general risks of common
stocks, foreign investing involves the risk
that news and events unique to a country or
region will affect those markets and their
issuers. These same events will not
necessarily have an effect on the U.S.
economy or similar issuers located in the
United States. In addition, the Portfolio's
investments in foreign countries generally
will be denominated in foreign currencies.
As a result, changes in the value of a
country's currency compared to the U.S.
dollar may affect the value of the
Portfolio's investments. These changes may
happen separately from and in response to
events that do not otherwise affect the
value of the security in the issuing
company's home country. The Sub-Adviser may
invest in certain instruments, such as
forward currency exchange contracts and may
use certain techniques such as hedging, to
manage these risks. However, the Sub-Adviser
cannot guarantee that it will succeed in
doing so. In certain markets, it may not be
possible to hedge currency risk. As with
investing in other securities whose prices
increase and decrease in market value, you
may lose money by investing in the Fund.

14
<PAGE>

PERFORMANCE INFORMATION: The bar chart and table show the performance
of the Fund both year-by-year and as an
average over different periods of time. They
demonstrate the variability of performance
over time and provide an indication of the
risks and volatility of an investment in the
Fund. Past performance does not necessarily
indicate how the Fund will perform in the
future. This performance information does
not include the impact of any charges
deducted under your insurance contract. If
it did, returns would be lower.

FOR YEARS ENDED DECEMBER 31,

-10% 0% 10% 20% 30% 40%

1993 38.14%
1994 -6.31%
1995 13.8 %
1996 16.87%
1997 10.41%
1998 18.85%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
18.63% -14.90%
(12/31/98) (9/30/98)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
--------------------------------------------------------------------------------

INTERNATIONAL MSCI EAFE
EQUITY FUND INDEX (1)
--------------------------------------------------------------------------------
<S> <C> <C>
1 Year............................. 18.85% 20.00%
--------------------------------------------------------------------------------
5 Year ............................ 10.33% 9.19%
--------------------------------------------------------------------------------
Since November 2, 1992 (2) ........ 14.49% 12.67%
--------------------------------------------------------------------------------
</TABLE>

(1) The Morgan Stanley Capital International
EAFE Index is an unmanaged index that is
a widely recognized benchmark of
international equity performance. The
index is a passive measure of equity
market returns. It does not factor in
the costs of buying, selling and holding
securities -- costs which are reflected
in the Fund's results.
(2) Date of Inception.

<PAGE>
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INVESTMENT SUMMARY: QUALITY BOND FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

INVESTMENT OBJECTIVE: The Quality Bond Fund seeks the highest
income over the long term that is consistent
with the preservation of principal.

INVESTMENT STRATEGY: The Fund invests primarily in marketable
investment-grade debt securities. The
portfolio manager heads up a team of
analysts that uses an active bond management
approach. They seek the best "value" by
employing the following strategies: sector
and security rotation, yield curve analysis
to determine which maturities to concentrate
in, and arbitrage to take advantage of
inefficient pricing of new corporate bond
issues.

Duration: The average duration of a fixed
income portfolio measures its exposure to
the risk of changing interest rates.
Duration is set for the portfolio generally
at between 3.5 and 5.5 years, depending on
the interest rate outlook.

Quality: The Fund will invest primarily in
investment grade debt securities and no more
than 10% of the net assets in "junk bonds."

Sectors: The fund will invest primarily in
the following sectors: Corporate Bonds, U.S.
Government Bonds, U.S. Government Agency
Securities, Commercial Paper, Collateralized
Mortgage Obligations, and Asset Backed
Securities.

Turnover: Because the portfolio management
team looks for inefficiencies in the market
and will sell when they feel a security is
fully priced, turnover can be relatively
high. The Fund's annual portfolio turnover
rates for 1998, 1997 and 1996 were 477%,
317.3% and 107.6% respectively.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for investors who are seeking investment
income and preservation of principal. The
Fund's value will change, however, primarily
with the changes in the prices of the fixed
income securities (e.g., bonds) held by the
Fund. The value of the fixed income
securities will vary inversely with changes
in interest rates. A decrease in interest
rates will generally result in an increase
in value of the Fund. Conversely, during
periods of rising interest rates, the value
of the Fund will generally decline. Longer
term fixed income securities tend to
experience larger changes in value than
shorter-term securities because they are
more sensitive to interest rate changes. A
portfolio with a lower average duration
generally will experience less price
volatility in response to changes in
interest rates as compared with a portfolio
with a higher duration. Mortgage-backed
securities are sensitive to changes in
interest rates, but may respond to these
changes differently from other fixed-income
securities due to the pre-payment of the
underlying loans. As with investing in other
securities whose prices increase and
decrease in market value, loss of money is a
risk of investing in the Fund.

16
<PAGE>

PERFORMANCE INFORMATION: The bar chart and table below show the
performance of the Fund both year-by-year
and as an average over different periods of
time. They only include those periods in
which ICMI managed the Fund's investments.
They demonstrate the variability of
performance over time and provide an
indication of the risks and volatility of an
investment in the Fund. Past performance
does not necessarily indicate how the Fund
will perform in the future. This performance
information does not include the impact of
any charges deducted under your insurance
contract. If it did, returns would be lower.

FOR YEARS ENDED DECEMBER 31,

-10% -5% 0% 5% 10% 15% 20% 25%

1993 11.67%
1994 -5.29%
1995 20.14%
1996 4.14%
1997 8.03%
1998 10.17%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
6.31% -4.71%
(3/31/95) (3/31/94)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)

-------------------------------------------------------------------------------
LEHMAN BROTHERS
QUALITY BOND FUND AGGREGATE BOND INDEX (1)
-------------------------------------------------------------------------------
<S> <C> <C>
1 Year.......................... 10.17% 8.67%
-------------------------------------------------------------------------------
5 Year ......................... 7.12% 7.27%
-------------------------------------------------------------------------------
Since November 1, 1992 (2) ..... 7.97% 7.74%
-------------------------------------------------------------------------------
</TABLE>

(1) The Lehman Brothers Aggregate Bond Index
is an unmanaged index that is a widely
recognized benchmark of general bond
performance. The index is a passive
measure of equity market returns. It
does not factor in the costs of buying,
selling and holding securities -- costs
which are reflected in the Fund's
results.
(2) Date ICMI began managing the Fund's
investments.

<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT SUMMARY: HIGH YIELD BOND FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

SUB-ADVISER: T. Rowe Price Associates, Inc.

INVESTMENT OBJECTIVE: The investment objective of the High Yield
Bond Fund is to realize high current
income.

INVESTMENT STRATEGY: The Fund will normally invest at least 65%
of its total assets in a widely diversified
portfolio of high-yield corporate bonds,
often called "junk" bonds, income-producing
convertible securities and preferred stocks.
High-yield bonds are rated below
investment-grade (BB and lower) and
generally provide high income in an effort
to compensate investors for their higher
risk of default, that is failure to make
required interest or principal payments.
High-yield bond issuers include small or
relatively new companies lacking the history
or capital to merit investment-grade status,
former blue chip companies downgraded
because of financial problems, companies
electing to borrow heavily to finance or
avoid a takeover or buyout, and firms with
heavy debt loads. The Fund may also invest
in common stocks, warrants, private
placements, bank loans, hybrid instruments,
foreign securities, futures and options,
various types of bonds such as asset-backed,
pay-in-kind, and zero coupon, and other
securities. The Fund's dollar weighted
average maturity generally is expected to be
in the eight to ten year range. In selecting
investments for the Fund, the Sub-Adviser
relies extensively on its research analysts.
When their outlook for the economy is
positive, they may purchase slightly
lower-rated bonds in an effort to secure
additional income and appreciation
potential. When they are less positive, they
may gravitate toward higher-rated junk
bonds.

RISKS OF INVESTING: An investment in the Fund may be appropriate
for long-term, risk oriented investors who
are willing to accept the greater risks and
uncertainties of investing in high yield
fixed income securities in the hope of
earning high current income. Loss of money
is a risk of investing in the Fund. The
Fund's value will change primarily with
changes in the prices of the fixed income
securities held by the Fund. The value of
fixed income securities will vary inversely
with changes in interest rates. A decrease
in interest rates will generally result in
an increase in value of the Fund.
Conversely, during periods of rising
interest rates, the value of the Fund will
generally decline. Longer term fixed income
securities tend to suffer greater declines
than shorter-term securities because they
are more sensitive to interest rate changes.
Investing in lower quality fixed income
securities involves additional risks,
including credit risk. High yield bonds may
be considered speculative. The value of
lower quality fixed income securities is
affected by the creditworthiness of the
companies that issue the securities, general
economic and specific industry conditions.
Companies issuing high-yield bonds are not
as strong financially as those with higher
credit ratings, so the bonds are usually
considered speculative investments. These
companies are more vulnerable to financial
setbacks and recession than more
creditworthy companies which may impair
their ability to make interest and principal
payments. The share price of the Fund is
expected to be more volatile than the share
price of a fund investing in higher quality
securities, which react primarily to the
general level of interest rates. In
addition, the trading market for lower
quality bonds may be less active and less
liquid, that is, the Sub-Adviser may not be
able to sell bonds at desired prices and
large purchases or sales of certain
high-yield bond issues can cause substantial
price swings. As a result, the price at
which lower quality bonds can be sold may be
adversely affected and

18
<PAGE>
valuing such lower quality bonds can be a
difficult task. Shareholders may also be
exposed to foreign investing risk, including
greater volatility, less liquidity, and the
possibility that foreign currencies will
decline against the dollar, lower than the
value of securities denominated in these
currencies. As with investing in other
securities whose prices increase and
decrease in market value, you may lose money
by investing in the Fund.

FOR YEARS ENDED DECEMBER 31,

-10% 0% 10% 20% 30% 40%

1989 -0.6%
1990 9.04%
1991 37.01%
1992 15.8%
1993 19.81%
1994 7.33%
1995 16.41%
1996 13.87%
1997 15.78%
1998 4.79%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
14.09% -6.86%
(3/31/91) (9/30/90)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)

------------------------------------------------------------------------------
HIGH YIELD FIRST BOSTON
BOND FUND HIGH YIELD INDEX (1)
------------------------------------------------------------------------------
<S> <C> <C>
1 Year............................. 4.79% 10.74%
------------------------------------------------------------------------------
5 Year ............................ 8.29% 10.27%
------------------------------------------------------------------------------
10 Year ........................... 9.85% 11.81%
------------------------------------------------------------------------------
</TABLE>

(1) The First Boston Index is a widely
recognized benchmark of high yield bond
performance. The index is a passive
measure of equity market returns. It
does not factor in the costs of buying,
selling and holding securities -- costs
which are reflected in the Fund's
results.

19
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT SUMMARY: MONEY MARKET FUND

INVESTMENT ADVISER: Independence Capital Management, Inc.

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.

INVESTMENT STRATEGY: The Fund will invest in a diversified
portfolio of high quality money market
instruments, which are rated within the two
highest credit categories assigned by
recognized rating organizations or, if not
rated, are of comparable investment quality
as determined by the Adviser. Investments
include commercial paper, U.S. Treasury
securities, bank certificates of deposit and
repurchase agreements. The Adviser looks for
money market instruments that present
minimal credit risks. Important factors in
selecting investments include a company's
profitability, ability to generate funds and
capital adequacy, and liquidity of the
investment. The Fund will invest only in
securities that mature in 397 days or less.
Penn Series policy is to maintain a stable
price of $1.00 per share of the Fund.

RISKS OF INVESTING: The Fund may be appropriate for investors
who want to minimize the risk of loss of
principal and maintain liquidity of their
investment, and at the same time receive a
return on their investment. The Fund follows
strict rules about credit risk, maturity and
diversification of its investments. However,
although the Fund seeks to preserve the
value of your investment in shares of the
Fund at $1.00 per share, there is no
guarantee and it is still possible to lose
money. An investment in the Fund is not
insured or guaranteed by the Federal Deposit
Insurance Corporation or any other
government agency.

20
<PAGE>

FOR YEARS ENDED DECEMBER 31,

0% 1% 2% 3% 4% 5% 6%

1993 2.53%
1994 3.71%
1995 5.51%
1996 5.00%
1997 5.15%
1998 5.00%

<TABLE>
<CAPTION>
BEST QUARTER WORST QUARTER
1.39% 0.61%
(6/30/95) (3/31/93)

AVERAGE ANNUAL TOTAL RETURN (FOR PERIODS ENDED DECEMBER 31, 1998)
------------------------------------------------------------------------------
MONEY MARKET FUND
------------------------------------------------------------------------------
<S> <C>
1 Year ..................................... 5.00%
------------------------------------------------------------------------------
5 Year ..................................... 4.87%
------------------------------------------------------------------------------
Since November 1, 1992 (1) ................. 4.43%
------------------------------------------------------------------------------
</TABLE>
(1) Date ICMI began managing the Fund's
investments.

The current yield of the Money Market
Fund for the seven-day period ended December
31, 1998 was 4.68%.

21
<PAGE>

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

TEMPORARY INVESTING: When a Fund's Adviser or Sub-Adviser believes that
changes in economic, financial or political conditions warrant, each Fund may
invest without limit in money market instruments and other short-term fixed
income securities. If they incorrectly predict the effects of these changes,
such defensive investments may adversely affect Fund performance.

PORTFOLIO TURNOVER: Consistent with their investment objectives, the Funds
may sell securities without regard to the effect on portfolio turnover. A high
rate of portfolio turnover (e.g. greater than 100%) may result in increased
transaction costs.

YEAR 2000: The services provided by the Adviser and the Sub-Advisers, as
well as services provided by others, depend on the smooth functioning of
computer systems. Many computer systems in use today may not recognize the Year
2000, but revert to 1900 or some other date, due to the manner in which dates
were encoded and calculated earlier in this century. If not corrected, computer
applications could fail or create erroneous results by or at the Year 2000.
Failure of computer systems could affect pricing, account services, and the
handling of investment transactions, among other things. The Penn Mutual Life
Insurance Company ("Penn Mutual"), Penn Series' administrative and corporate
services agent, began addressing the Year 2000 problem actively in 1996. The
effort involves careful examination of computers, computer programs and related
equipment, making the necessary changes and ensuring that all systems process
dates correctly. Penn Mutual believes that it has designed and implemented an
efficient process for identifying what needs to be changed. Penn Mutual is
working to correct and test systems that its research shows will be affected by
dates in the Year 2000 and beyond, and expect its computer systems to be Year
2000 compliant.

Penn Mutual, on behalf of Penn Series, is contacting Penn Series' service
providers to obtain assurances that such service providers have taken
appropriate measures to address the Year 2000 problem. Where practicable, Penn
Mutual will assess and attempt to mitigate risks that outside service providers
are not Year 2000 ready. Penn Mutual and Penn Series cannot, however, give
assurance that the failure of outside service providers to complete adequate
preparations in a timely manner, and any resulting systems interruptions or
other consequences, would not have an adverse affect, directly or indirectly, on
the Funds, including, without limitation, its operation or the valuation of its
assets.

The costs to Penn Mutual of addressing the Year 2000 problem are
significant but not material to its financial condition or results of
operations. Penn Mutual will continue to incur costs in addressing the Year
2000, but does not anticipate that the costs will be material going forward.
Year 2000 costs will not affect the Funds.

The Year 2000 Information and Readiness Disclosure Act passed by Congress
in 1998 encourages business and other organizations to provide information about
the readiness of their computer systems. The Act also provides certain
protections to these organizations against potential liability for what they say
about their readiness. The above statements are designated as readiness
disclosure under the protections of the Act.

- --------------------------------------------------------------------------------
MANAGEMENT

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 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 $10 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, 1998, ICMI serves as investment adviser
for over $549 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.

22
<PAGE>
- --------------------------------------------------------------------------------
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.

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 Executive Vice President, ICMI, prior to becoming President. Mr.
Sherman is Executive 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 management services to the VALUE
EQUITY, SMALL CAPITALIZATION, EMERGING GROWTH, FLEXIBLY MANAGED, INTERNATIONAL
EQUITY and HIGH YIELD BOND FUNDS through Sub-Advisers who are specially selected
and qualified to manage the Funds. 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, including
placing purchase and sale orders on behalf of the Funds. 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%; International Equity Fund - 0.75%; and High Yield Bond Fund - 0.50%.

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.

- --------------------------------------------------------------------------------
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, 1998, Price Associates and its
affiliates, managed more than $147 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 a Vice President
and an 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.

23
<PAGE>

OPCAP ADVISERS. OpCap Advisers (`'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 $63
billion in assets under management on December 31, 1998. 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, 1998, OpCap managed
assets of U.S. investment companies with an aggregate value of more than $16
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 Advisers, 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.

Timothy McCormack and Mark F. Degenhart are responsible for the day-to-day
investment management of the Small Capitalization Fund. Timothy McCormack has
been a portfolio manager of the Fund since March 1996. 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. Mark F. Degenhart became a
portfolio manager of the Fund on May 1, 1999. He joined Oppenheimer Capital in
January 1999 as a Vice President with responsibilities including research,
analysis and investment management. He acts as a portfolio manager for several
small capitalization funds. Prior to joining Oppenheimer Capital, he was
Director of Research and Associate Portfolio Manager at Palisade Capital
Management. From 1990 to 1993, he was a Generalist for Cazenove & Co. and
previously, a Special Situations Analyst at Argus Research Corp. for over three
years. He has a B.S. degree in marketing from the University of Scranton.

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, 1998, 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 $40 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. ("RSIM") is sub-adviser to the
EMERGING GROWTH FUND pursuant to an investment sub-advisory agreement entered
into by ICMI and RSIM on April 26, 1999. As sub-adviser, RSIM provides
investment management services to the Fund. RSIM is located at 555 California
Street, San Francisco, CA 94104. As of December 31, 1998, RSIM managed more than
$3.8 billion for individual and institutional clients.

ICMI pays RSIM, 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.

24
<PAGE>

James Callinan, Portfolio Manager of RSIM, is responsible for managing the
Emerging Growth Fund. Mr. Callinan has more than ten years of investment
research and management experience. From 1986 until June 1996, Mr. Callinan was
employed by Putnam 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.

- --------------------------------------------------------------------------------
EXPENSES AND LIMITATIONS

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:

--------------------------------------------------
FUND EXPENSE LIMITATION
--------------------------------------------------
Growth Equity 1.00%
--------------------------------------------------
Value Equity 1.00%
--------------------------------------------------
Small Capitalization 1.00%
--------------------------------------------------
Emerging Growth 1.15%
--------------------------------------------------
Flexibly Managed 1.00%
--------------------------------------------------
International Equity 1.50%
--------------------------------------------------
Quality Bond 0.90%
--------------------------------------------------
High Yield Bond 0.90%
--------------------------------------------------
Money Market 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, 1998, the annualized ratios of operating
expenses (after waivers) to the average net assets for each of the Funds were:
Growth Equity Fund: 0.76%; Value Equity Fund: 0.76%; Small Capitalization Fund:
0.82%; Emerging Growth Fund: 1.15%; Flexibly Managed Fund: 0.76%; International
Equity Fund: 1.08%; Quality Bond Fund: 0.77%; High Yield Bond Fund: 0.82%; Money
Market Fund: 0.72%.

25
<PAGE>

- --------------------------------------------------------------------------------
ACCOUNT POLICIES

PURCHASING AND SELLING FUND SHARES

Shares are offered on each day that the New York Stock Exchange ("NYSE")
is open for business (a "Business Day").

The Funds offer their shares only to Penn Mutual and PIA for separate
accounts they establish to fund variable life insurance and variable annuity
contracts. Penn Mutual or PIA purchases or redeems shares of the Funds based on,
among other things, the amount of net contract premiums or purchase payments
allocated to a separate account investment division, transfers to or from a
separate account investment division, contract loans and repayments, contract
withdrawals and surrenders, and benefit payments. The contract prospectus
describes how contract owners may allocate, transfer and withdraw amounts to,
and from, separate accounts.

The price per share will be the net asset value per share (NAV) next
determined after receipt of the purchase order. NAV for one share is the value
of that share's portion of all of the assets in the Portfolio. The Fund
determines the net asset value for the Funds (except got the Money Market Fund)
as of the close of business of the NYSE (normally 4:00 p.m. Eastern Time) on
each day that the NYSE is open for business. The NAV of the Money Market Fund is
calculated at Noon (Eastern Time) on each day that the NYSE is open.

HOW THE FUNDS CALCULATE NAV

In calculating NAV, the Funds (except for the Money Market Portfolio)
generally value their portfolio securities at their market price. If market
prices are unavailable or the Funds think that they are unreliable, the Funds
may determine fair value prices using methods approved by the Board of
Directors. Some Funds hold portfolio securities that are listed on foreign
exchanges. These securities may trade on weekends or other days when the Funds
do not calculate NAV. As a result, the value of these Funds' investments may
change on days when you cannot purchase or sell Fund shares. The Money Market
Portfolio values its assets by the amortized cost method, which approximates
market value.

- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS

The Funds distribute their investment income annually as dividends and
make distributions of capital gains, if any, at least annually except for
distributions from the Money Market Portfolio which will be made monthly.

TAXES

PLEASE CONSULT YOUR TAX ADVISER REGARDING YOUR SPECIFIC QUESTIONS ABOUT
FEDERAL, STATE AND LOCAL INCOME TAXES. Below we have summarized some important
tax issues that affect the Funds and their shareholders. This summary is based
on current tax laws, which may change.

The Funds expect that they will not have to pay income taxes if they
distribute all of their income and gains. Net income and realized capital gains
that the Funds distribute are not currently taxable to owners of variable
annuity or variable life insurance contracts when left to accumulate in the
contracts.

For information on federal income taxation of a life insurance company
with respect to its receipt of distributions from the Funds and federal income
taxation of owners of variable annuity or variable life insurance contracts,
refer to the contract prospectus.

26
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

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

<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................................... 0.0489 0.0503 0.0489 0.0538 0.0365
------- ------- ------- ------- -------
Total from investment operations.................. 0.0489 0.0503 0.0489 0.0538 0.0365
------- ------- ------- ------- -------

LESS DIVIDENDS:
Dividends from net investment income.................... (0.0489) (0.0503) (0.0489) (0.0538) (0.0365)
------- ------- ------- ------- -------
Total dividends......................................... (0.0489) (0.0503) (0.0489) (0.0538) (0.0365)
------- ------- ------- ------- -------
Net asset value, end of year............................ $1.00 $1.00 $1.00 $1.00 $1.00
======= ======= ======= ======= =======

Total return..................................... 5.00% 5.15% 5.00% 5.51% 3.71%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................. $53,626 $37,476 $34,501 $24,726 $16,531
======= ======= ======= ======= =======

Ratio of expenses to average net assets................. 0.72% 0.70% 0.73%(a) 0.69%(a) 0.73%(a)
======= ======= ======= ======= =======

Ratio of net investment income to average net assets.... 4.88% 5.04% 4.88%(a) 5.37%(a) 3.74%(a)
======= ======= ======= ======= =======
</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%, and .79%, and the ratios of net investment income to average net
assets would have been 4.87%, 5.32%, and 3.68% for the years ended December
31, 1996, 1995, and 1994, respectively.

27
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
THE QUALITY BOND 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,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...................... $10.20 $10.00 $10.24 $9.04 $10.19
------- ------- ------- ------- -------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.51 0.60 0.66 0.61 0.61
Net realized and unrealized gain on
investment transactions.............................. 0.53 0.20 (0.24) 1.21 (1.15)
------- ------- ------- ------- -------
Total from investment operations.................. 1.04 0.80 0.42 1.82 (0.54)
------- ------- ------- ------- -------

LESS DISTRIBUTIONS:
Dividend from net investment income..................... (0.51) (0.60) (0.66) (0.61) (0.61)
Distribution from net realized gain..................... (0.33) 0.00 0.00 0.00 0.00
Distribution in excess of net investment income......... 0.00 0.00 0.00 (0.01) 0.00
------- ------- ------- ------- -------
Total distributions............................... (0.84) (0.60) (0.66) (0.62) (0.61)
------- ------- ------- ------- -------
Net asset value, end of year............................ $10.40 $10.20 $10.00 $10.24 $9.04
======= ======= ======= ======= =======

Total return...................................... 10.17% 8.03% 4.14% 20.14% (5.29)%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................. $53,505 $40,077 $37,611 $38,048 $31,338
======= ======= ======= ======= =======

Ratio of expenses to average net assets................. 0.77% 0.75% 0.77%(a) 0.73%(a) 0.78%(a)
======= ======= ======= ======= =======

Ratio of net investment income to average net assets.... 5.26% 5.87% 6.03%(a) 6.20%(a) 6.14%(a)
======= ======= ======= ======= =======

Portfolio turnover rate................................. 477.2% 317.3% 107.6% 449.2% 380.9%
======= ======= ======= ======= =======
</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 .78%,
.78%, and .83%, and the ratio of net investment income to average net
assets would have been 6.02%, 6.15%, and 6.09% for the years ended December
31, 1996, 1995, and 1994, respectively.

28
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
THE VALUE EQUITY PORTFOLIO

YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...................... $22.55 $19.32 $16.28 $12.67 $12.68
-------- -------- -------- -------- -------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.31 0.29 0.22 0.25 0.20
Net realized and unrealized gain on
investment transactions.............................. 1.85 4.53 3.88 4.50 0.17
-------- -------- -------- -------- -------
Total from investment operations.................. 2.16 4.82 4.10 4.75 0.37
-------- -------- -------- -------- -------

LESS DISTRIBUTIONS:
Dividend from net investment income..................... (0.31) (0.29) (0.22) (0.25) (0.20)
Distribution from net realized gains.................... (2.01) (1.30) (0.84) (0.89) (0.18)
-------- -------- -------- -------- -------
Total distributions............................... (2.32) (1.59) (1.06) (1.14) (0.38)
-------- -------- -------- -------- -------
Net asset value, end of year............................ $22.39 $22.55 $19.32 $16.28 $12.67
======== ======== ======== ======== =======

Total return...................................... 9.59% 24.98% 25.19% 37.48% 2.92%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................. $335,479 $302,960 $200,674 $127,260 $79,021
======== ======== ======== ======== =======

Ratio of expenses to average net assets................. 0.76% 0.76% 0.78% 0.80% 0.82%
======== ======== ======== ======== =======

Ratio of net investment income to average net assets.... 1.27% 1.43% 1.38% 1.71% 1.59%
======== ======== ======== ======== =======

Portfolio turnover rate................................. 24.0% 18.7% 25.0% 34.3% 30.6%
======== ======== ======== ======== =======
</TABLE>

29
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
THE GROWTH EQUITY 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,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...................... $24.37 $21.46 $20.00 $18.30 $20.49
-------- -------- -------- ------- -------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.02 0.10 0.11 0.09 0.13
Net realized and unrealized gain (loss)
on investment transactions........................... 10.12 5.64 3.85 4.75 (1.80)
-------- -------- -------- ------- -------
Total from investment operations.................. 10.14 5.74 3.96 4.84 (1.67)
-------- -------- -------- ------- -------

LESS DISTRIBUTIONS:
Dividend from net investment income..................... (0.02) (0.10) (0.11) (0.09) (0.13)
Distribution from net realized gains.................... (3.61) (2.73) (2.39) (3.05) (0.39)
-------- -------- -------- ------- -------
Total distributions............................... (3.63) (2.83) (2.50) (3.14) (0.52)
-------- -------- -------- ------- -------
Net asset value, end of year............................ $30.88 $24.37 $21.46 $20.00 $18.30
======== ======== ======== ======= =======

Total return...................................... 41.67% 26.74% 19.76% 26.45% (8.12)%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................. $195,692 $136,058 $106,039 $95,593 $80,078
======== ======== ======== ======= =======

Ratio of expenses to average net assets................. 0.76% 0.77% 0.80%(a) 0.77%(a) 0.79%(a)
======== ======== ======== ======= =======

Ratio of net investment income to average net assets... 0.08% 0.39% 0.48%(a) 0.43%(a) 0.70%(a)
======== ======== ======== ======= =======

Portfolio turnover rate................................. 161.3% 169.1% 177.1% 169.8% 156.2%
======== ======== ======== ======= =======
</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%, and .84%, and the ratio of net investment income to average net
assets would have been .47%, .38%, and .65% for the years ended December
31, 1996, 1995, and 1994, respectively.

30
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
THE HIGH YIELD BOND 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,
-------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...................... $9.52 $8.91 $8.44 $7.94 $9.55
------- ------- ------- ------- -------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.79 0.80 0.70 0.80 0.90
Net realized and unrealized gain (loss)
on investment transactions........................... (0.33) 0.61 0.47 0.50 (1.60)
------- ------- ------- ------- -------
Total from investment operations.................. 0.46 1.41 1.17 1.30 (0.70)
======= ======= ======= ======= =======

LESS DISTRIBUTIONS:
Dividend from net investment income..................... (0.79) (0.80) (0.70) (0.80) (0.90)
Distribution in excess of net investment income......... 0.00 0.00 0.00 0.00 (0.01)
------- ------- ------- ------- -------
Total distributions............................... (0.79) (0.80) (0.70) (0.80) (0.91)
------- ------- ------- ------- -------
Net asset value, end of year............................ $9.19 $9.52 $8.91 $8.44 $7.94
======= ======= ======= ======= =======

Total return...................................... 4.79% 15.78% 13.87% 16.41% 7.33%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................. $69,003 $59,138 $44,042 $36,442 $32,081
======= ======= ======= ======= =======

Ratio of expenses to average net assets................. 0.82% 0.81% 0.84% 0.87% 0.86%
======= ======= ======= ======= =======

Ratio of net investment income to average net assets.... 8.30% 8.96% 8.14% 9.20% 9.18%
======= ======= ======= ======= =======

Portfolio turnover rate................................. 82.7% 111.3% 118.5% 84.3% 90.7%
======= ======= ======= ======= =======
</TABLE>

31
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

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

1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...................... $19.83 $18.74 $17.40 $15.19 $15.70
-------- -------- -------- -------- --------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.60 0.61 0.65 0.53 0.43
Net realized and unrealized gain
on investment transactions........................... 0.61 2.33 2.19 2.86 0.22
-------- -------- -------- -------- --------
Total from investment operations.................. 1.21 2.94 2.84 3.39 0.65
-------- -------- -------- -------- --------

LESS DISTRIBUTIONS:
Dividend from net investment income..................... (0.60) (0.61) (0.65) (0.53) (0.43)
Distribution in excess of net investment income......... (0.00) 0.00 0.00 (0.01) (0.02)
Distribution from net realized gains.................... (2.13) (1.24) (0.85) (0.64) (0.71)
-------- -------- -------- -------- --------
Total distributions............................... (2.73) (1.85) (1.50) (1.18) (1.16)
-------- -------- -------- -------- --------
Net asset value, end of year............................ $18.31 $19.83 $18.74 $17.40 $15.19
======== ======== ======== ======== ========

Total return...................................... 6.09% 15.65% 16.37% 22.28% 4.14%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................. $545,486 $516,139 $398,544 $266,556 $169,847
======== ======== ======== ======== ========

Ratio of expenses to average net assets................. 0.76% 0.76% 0.77% 0.79% 0.82%
======== ======== ======== ======== ========

Ratio of net investment income to average net assets.... 2.78% 3.10% 3.90% 3.45% 3.14%
======== ======== ======== ======== ========

Portfolio turnover rate................................. 48.0% 37.1% 32.9% 37.2% 37.3%
======== ======== ======== ======== ========
</TABLE>

32
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

- --------------------------------------------------------------------------------
THE INTERNATIONAL EQUITY PORTFOLIO

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,
-------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year...................... $16.13 $15.61 $14.47 $13.01 $13.94
-------- -------- -------- ------- -------

INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income................................... 0.10 0.58 0.63 0.13 0.09
Net realized and unrealized gain (loss) on investments
and foreign currency related transactions............ 2.93 1.04 1.81 1.67 (0.97)
-------- -------- -------- ------- -------
Total from investment operations.................. 3.03 1.62 2.44 1.80 (0.88)
======== ======== ======== ======= =======

LESS DISTRIBUTIONS:
Dividend from net investment income..................... (0.10) (0.53) (0.56) (0.12) (0.02)
Distribution in excess of net investment income......... (0.08) 0.00 (0.74) (0.22) 0.00
Distribution from net realized gains.................... (0.61) (0.57) 0.00 0.00 0.00
Distribution from capital............................... 0.00 0.00 0.00 0.00 (0.03)
-------- -------- -------- ------- -------
Total distributions............................... (0.79) (1.10) (1.30) (0.34) (0.05)
-------- -------- -------- ------- -------
Net asset value, end of year............................ $18.37 $16.13 $15.61 $14.47 $13.01
======== ======== ======== ======= =======

Total return...................................... 18.85% 10.41% 16.87% 13.80% 6.31%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands).................. $153,822 $129,638 $104,418 $69,531 $59,393
======== ======== ======== ======= =======

Ratio of expenses to average net assets................. 1.08% 1.13% 1.17% 1.23% 1.22%
======== ======== ======== ======= =======

Ratio of net investment income to average net assets.... 0.45% 0.62% 0.66% 0.91% 0.82%
======== ======== ======== ======= =======

Portfolio turnover rate................................. 43.5% 35.7% 54.8% 62.5% 15.6%
======== ======== ======== ======= =======
</TABLE>

33
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

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

The following table includes selected data for a share outstanding
throughout each period or 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,
----------------------------------------------------
1998 1997 1996 1995*
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period or year.................. $14.43 $12.53 $10.96 $10.00
------- ------- ------- ------

INCOME FROM INVESTMENT OPERATIONS:
Net investment income......................................... 0.08 0.07 0.07 0.09
Net realized and unrealized gain (loss)
on investment transactions................................. (1.41) 2.81 2.09 1.19
------- ------- ------- ------
Total from investment operations........................ (1.33) 2.88 2.16 1.28
------- ------- ------- ------

LESS DISTRIBUTIONS:
Dividend from net investment income........................... (0.08) (0.07) (0.07) (0.09)
Distribution from net realized gains.......................... (0.21) (0.91) (0.52) (0.23)
------- ------- ------- ------
Total distributions..................................... (0.29) (0.98) (0.59) (0.32)
------- ------- ------- ------
Net asset value, end of period or year........................ $12.81 $14.43 $12.53 $10.96
======= ======= ======= ======

Total return............................................ (9.16)% 23.02% 19.76% 12.76%(b)

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period or year (in thousands).............. $43,635 $38,726 $16,134 $4,828
======= ======= ======= ======

Ratio of expenses to average net assets....................... 0.82% 0.85% 0.99%(a) 1.00%(a)
======= ======= ======= ======

Ratio of net investment income to average net assets.......... 0.65% 0.66% 0.85%(a) 1.53%(a)
======= ======= ======= ======

Portfolio turnover rate....................................... 61.9% 71.1% 39.2% 64.3%
======= ======= ======= ======
</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 1.06%
and 1.29%, and the ratios of net investment loss 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.

(b) Not annualized.

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

34
<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.

FINANCIAL HIGHLIGHTS

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

The following table includes selected data for a share outstanding
throughout each period or 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 PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997*
------- -------
<S> <C> <C>
Net asset value, beginning of period or year................................. $12.85 $10.00
------- -------

INCOME FROM INVESTMENT OPERATIONS:
Net investment loss.......................................................... (0.06) 0.00
Net realized and unrealized gain (loss) on investment transactions........... (4.65) 3.92
------- -------
Total from investment operations....................................... 4.59 3.92
------- -------

LESS DISTRIBUTIONS:
Distribution from net realized gains......................................... (0.01) (1.07)
------- -------
Total distributions.................................................... 0.00 (1.07)
------- -------
Net asset value, end of period or year....................................... $17.43 $12.85
======= =======

Total return........................................................... 35.70% 39.22%(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period or year (in thousands)............................. $38,664 $17,942
======= =======
Ratio of expenses to average net assets...................................... 1.15%(b) 1.15%(a)(b)
======= =======
Ratio of net investment income to average net assets........................ (0.66)%(b) (0.73)%(a)(b)
======= =======
Portfolio turnover rate...................................................... 240.9% 392.3%
======= =======
</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 1.21%
and 1.41%, and the ratios of net investment loss to average net assets
would have been (0.73)% and (0.99)%, respectively, for the periods ended
December 31, 1998 and December 31, 1997.

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

- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
In addition to this Prospectus, Penn Series has a Statement of Additional
Information ("SAI"), dated May 1, 1999, which contains additional, more detailed
information about the Funds. The SAI is incorporated by reference into this
Prospectus and, therefore, legally forms a part of this Prospectus.

- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS

Penn Series publishes annual and semi-annual reports containing additional
information about each Fund's investments. In Penn Series' shareholder reports,
you will find a discussion of the market conditions and the investment
strategies that significantly affected each Fund's performance during that
period.

You may obtain the SAI and shareholder reports without charge by
contacting the Fund at 1-800-523-0650.

Information about the Fund, including the SAI, and the annual and
semi-annual reports, may be obtained from the Securities and Exchange Commission
in any of the following ways: (1) In person: you may review and copy documents
in the Commission's Public Reference Room in Washington, D.C. (for information
call 1-800-SEC-0330); (2) On-line: you may retrieve information from the
Commission's web site at "http://www.sec.gov"; or (3) By mail; you may request
documents, upon payment of a duplicating fee, by writing to Securities Exchange
Commission, Public Reference Section, Washington, D.C. 20549-6009. To aid you in
obtaining this information, Penn Series' Investment Company Act registration
number is 811-03459.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

PENN SERIES FUNDS, INC.
600 Dresher Road
Horsham, Pennsylvania 19044

Penn Series Funds, Inc. ("Penn Series") is a no-load mutual fund with nine
separate investment portfolios (the "Funds").
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
MONEY MARKET FUND

This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Penn Series prospectus dated May 1, 1999. A copy of the
prospectus is available, without charge, by writing to The Penn Mutual Life
Insurance Company, Customer Service Group -- H3F, Philadelphia, PA, 19172. Or,
you may call, toll free, 1-800-548-1119.

The date of this Statement of Additional Information is May 1, 1999.

<PAGE>

TABLE OF CONTENTS

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES .................................................... 2
- --------------------------------------------------------------------------------
INVESTMENT POLICIES ...................................................... 3
- --------------------------------------------------------------------------------
SECURITIES AND INVESTMENT TECHNIQUES ..................................... 8
Investments in Debt Securities .......................................... 8
Investments in Foreign Equity Securities ................................ 10
Investments in Smaller Companies ........................................ 11
Foreign Currency Transactions ........................................... 11
Repurchase Agreements ................................................... 12
Lending of Portfolio Securities ......................................... 13
Illiquid Securities ..................................................... 13
Warrants ................................................................ 13
When-Issued Securities .................................................. 14
The Quality Bond Fund's Policy Regarding Industry Concentration ......... 14
Options ................................................................. 14
Futures Contracts ....................................................... 15
Investment Companies .................................................... 16
Loan Participations and Assignments ..................................... 16
Trade Claims ............................................................ 17
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS .................................................. 18
Growth Equity Fund ...................................................... 18
Value Equity Fund ....................................................... 19
Small Capitalization Fund ............................................... 20
Emerging Growth Fund .................................................... 21
Flexibly Managed Fund ................................................... 21
International Equity Fund ............................................... 22
Quality Bond Fund ....................................................... 23
High Yield Bond Fund .................................................... 24
Money Market Fund ....................................................... 25
- --------------------------------------------------------------------------------
GENERAL INFORMATION ...................................................... 27
Investment Advisory Services ............................................ 27
Administrative and Corporate Services ................................... 28
Accounting Services ..................................................... 29
Limitation on Fund Expenses ............................................. 29
Portfolio Transactions .................................................. 29
Directors and Officers .................................................. 31
Custodial Services ...................................................... 32
Independent Auditors .................................................... 33
Legal Matters ........................................................... 33
Net Asset Value of Shares ............................................... 33
Ownership of Shares ..................................................... 33
Tax Status .............................................................. 34
Voting Rights ........................................................... 35
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION .................................................. 35
Total Return ............................................................ 35
- --------------------------------------------------------------------------------
RATINGS OF COMMERCIAL PAPER .............................................. 36
- --------------------------------------------------------------------------------
RATINGS OF CORPORATE DEBT SECURITIES ..................................... 37
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS OF PENN SERIES ...................................... 39
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS ........................................... 75
- --------------------------------------------------------------------------------

1
<PAGE>

- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
- --------------------------------------------------------------------------------
The investment objectives of the Funds are as follows. There can be no
assurance that these objectives will be achieved.
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND long-term growth of capital and increase of
future income;
- --------------------------------------------------------------------------------
VALUE EQUITY FUND maximize total return (capital appreciation
and income);
- --------------------------------------------------------------------------------
SMALL CAPITALIZATION FUND capital appreciation;
- --------------------------------------------------------------------------------
EMERGING GROWTH FUND capital appreciation;
- --------------------------------------------------------------------------------
FLEXIBLY MANAGED FUND maximize total return (capital appreciation
and income);
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND capital appreciation;
- --------------------------------------------------------------------------------
QUALITY BOND FUND the highest income over the long term
consistent with the preservation of
principal;
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND high current income;
- --------------------------------------------------------------------------------
MONEY MARKET FUND preserve shareholder capital, maintain
liquidity and achieve the highest
possible level of current income consistent
therewith.
- --------------------------------------------------------------------------------

2
<PAGE>

INVESTMENT POLICIES
- --------------------------------------------------------------------------------

Information in this Statement of Additional Information supplements the
discussion in the Penn Series Prospectus regarding investment policies and
restrictions of the Funds. Unless otherwise specified, the investment policies
and restrictions are not fundamental policies and may be changed by the Board
of Directors without shareholder approval. Fundamental policies and
restrictions 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.
- --------------------------------------------------------------------------------

GROWTH EQUITY FUND

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.
- --------------------------------------------------------------------------------

VALUE EQUITY FUND

The Fund will invest primarily in common stock, and may invest in other
equity securities, including 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.
- --------------------------------------------------------------------------------

SMALL CAPITALIZATION FUND

The Fund will invest primarily in common stocks, and may also 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 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. 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,
sometimes referred to 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.
- --------------------------------------------------------------------------------

3
<PAGE>
EMERGING GROWTH FUND

The Fund will invest primarily in common stocks, and may also 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 (sometimes 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.
- --------------------------------------------------------------------------------

FLEXIBLY MANAGED FUND

In addition to investing in common stocks, the Fund may invest in the
following securities:

o Equity-related securities, such as convertible securities (i.e., bonds
or preferred stock convertible into or exchangeable for common stock),
preferred stock, warrants, futures, and options.

o 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 sometimes
referred to 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. The Fund's convertible bond
holdings will not be subject to these debt limits, but rather, will be
treated as equity-related securities. 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.

o 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.
- --------------------------------------------------------------------------------

INTERNATIONAL EQUITY FUND

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 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 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.

The 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

4
<PAGE>

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 Ratings Group 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 Fund may invest in securities which may be considered to be
"thinly-traded" if they are deemed to offer the potential for appreciation, but
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.

ADDITIONAL 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

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. 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 the investment adviser. 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 sometimes referred to 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.
- --------------------------------------------------------------------------------

HIGH YIELD BOND FUND

The Fund will invest at least 80% of the value of its total assets in a
widely diversified portfolio of high-yield corporate bonds, often called "junk"
bonds, income-producing convertible securities and preferred stocks. The Fund
seeks to invest its assets in securities 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 referred to 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

5
<PAGE>

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.

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. The Fund's dollar weighted average maturity is expected to be in
the 8 to 12 year range.

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 10% 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. 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. There are also special risks associated with investments in foreign
securities whether denominated in U.S. dollars or foreign currencies. These
risks include potentially adverse political and economic developments overseas,
greater volatility, less liquidity and the possibility that foreign currencies
will decline against the dollar, lower the value of securities denominated in
those currencies. Currency risk affects the Fund to the extent that it holds
nondollar foreign bonds.

ADDITIONAL 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

6
<PAGE>

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.

During 1998 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:

STANDARD AND POOR'S RATINGS PERCENTAGE OF TOTAL NET INVESTMENTS**
AAA 0.3%
AA 0.0%
A 0.0%
BBB 0.3%
BB 14.1%
B 64.3%
CCC 3.8%
CC 0.3%
C 0.1%
D 4.1%
Unrated*

* 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: 0.7%; B: 3%; CCC: 0.3%; CC: 0.0%; C: 0.0%; D:
0.0%; UNRATED: 4.1%.
** UNAUDITED.
- --------------------------------------------------------------------------------
MONEY MARKET FUND

INVESTMENT PROGRAM. 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 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.

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).

7
<PAGE>

- --------------------------------------------------------------------------------
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 between 8 and 12 years. This Fund will generally invest in long-term
corporate obligations which are rated BBB or lower by Standard & Poor's Ratings
Group ("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. The Flexibly Managed Fund may invest up to 15% of its
assets in medium to lower quality corporate debt.

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.

<PAGE>

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.

8
<PAGE>

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 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 Ratings Group or, if
they have not been so rated, will be the equivalent of investment grade (Baa or
BBB) as determined by the adviser or sub-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.

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<PAGE>

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 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 and Flexibly
Managed Funds 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.

CONVERTIBLE SECURITIES. The Flexibly Managed Fund may invest in debt
securities or preferred equity securities convertible into or exchangeable for
equity securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree.
In recent years, convertible securities have developed which combine higher or
lower current income with options and other features.

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.

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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 - 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

10
<PAGE>

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).

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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

As a means of reducing the risks associated with investing in securities
denominated in foreign currencies, a Fund, other than the Money Market Fund,
may purchase or sell foreign currency on a forward basis ("forward contracts"),
enter into foreign currency futures and options on futures contracts ("forex
futures") and foreign currency options ("forex options"). These investment
techniques are designed primarily to hedge against anticipated future changes
in currency prices that otherwise might adversely affect the value of the
Fund's investments.

Forward contracts involve 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.

Forex futures are standardized contracts for the future delivery of a
specified amount of a foreign currency at a future date at a price set at the
time of the contract. Forex futures traded in the United States are traded on
regulated futures exchanges. A Fund will incur brokerage fees when it purchases
or sells forex futures and it will be required to maintain margin deposits.
Parties to a forex future must make initial margin deposits to secure
performance of the contract, which generally range from 2% to 5% of the
contract price. There also are requirements to make "variation" margin deposits
as the value of the futures contract fluctuates. Forex futures and forex
options will be used only to hedge against anticipated future changes in
exchange rates that might otherwise adversely affect the value of the Fund's
securities or adversely affect the prices of the securities the Fund intends to
purchase at a later date.

<PAGE>

The Funds may enter into forward foreign 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 or sub-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

<PAGE>

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 or sub-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.

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, Flexibly Managed 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.

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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

12
<PAGE>

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.

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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.

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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 valued has 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 or sub-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 or sub-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 or sub-adviser will continue to monitor the liquidity
of any Rule 144A security which has been determined to be liquid. 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
compliance with applicable limitations on investments in illiquid securities.

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<PAGE>

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,

13
<PAGE>

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.

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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 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

14
<PAGE>

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. 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.

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.

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.

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, currency
futures or stock index futures contracts, as applicable). 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. 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 or sub-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 or sub-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 or sub-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

15
<PAGE>

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.

- --------------------------------------------------------------------------------
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. The High Yield and Flexibly Managed Funds may invest cash reserves in
shares of the T. Rowe Price Reserve Investment Fund, an internally-managed
money market fund. 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.

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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.

<PAGE>

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.

16
<PAGE>

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.

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.

<PAGE>

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,

17
<PAGE>

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.

- --------------------------------------------------------------------------------
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.

<PAGE>

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
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

18
<PAGE>

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.

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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.

<PAGE>

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 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

19
<PAGE>

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.

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 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

20
<PAGE>

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 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.

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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

21
<PAGE>

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 (i) to the extent permitted by the
Investment Company Act of 1940 and any rules adopted thereunder or (ii)
securities of the Reserve Investment Fund, an internally-managed money market
fund of T. Rowe Price; (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 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.

<PAGE>

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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.

22
<PAGE>

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.

<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

23
<PAGE>

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.

- --------------------------------------------------------------------------------
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.

<PAGE>

24
<PAGE>

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 (i) in compliance with the Investment Company Act of 1940 or
(ii) securities of the Reserve Investment Fund, an internally-managed money
market fund of T. Rowe Price; (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.

- --------------------------------------------------------------------------------
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.

25
<PAGE>

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 restrictions set forth above 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.

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 POLICIES -- MONEY MARKET FUND" above for certain of the
restrictions contained in the Rule.

26
<PAGE>

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

INVESTMENT ADVISORY SERVICES

INDEPENDENCE CAPITAL MANAGEMENT, INC. Independence Capital Management,
Inc. ("ICMI") serves as investment adviser to all of the Funds and performs
day-to-day investment management services for the GROWTH EQUITY, QUALITY BOND
AND MONEY MARKET FUNDS. 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.

OPCAP ADVISORS. OpCap Advisors ("OpCap") serves as sub-adviser to the
SMALL CAPITALIZATION FUND VALUE EQUITY AND SMALL CAPITALIZATION FUNDS AND
PERFORMS DAY-TO-DAY INVESTMENT MANAGEMENT SERVICES FOR THE FUNDS. 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 Advisors, the investment adviser to the Fund (the "Manager"), is a
majority owned subsidiary of Oppenheimer Capital, a registered investment
adviser whose employees perform all investment advisory and management services
provided to the Fund by the Advisor. Oppenheimer Capital, is an indirect
wholly-owned subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors"), a registered
investment adviser. The general partners of PIMCO Advisors are PIMCO Partners
G.P. and PIMCO Advisors Holdings L.P. PIMCO Partners, G.P. is a general
partnership between PIMCO Holding LLC, a Delaware limited liability company and
an indirect wholly-owned subsidiary of Pacific Life Insurance Company, and
PIMCO Partners LLC, a California limited liability company controlled by the
current Managing Directors and two former Managing Directors of Pacific
Investment Management. PIMCO Partners, G.P. is the sole general partner of
PIMCO Advisors Holdings L.P., a wholly-owned subsidiary of PIMCO Advisors.

T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price Associates, Inc. ("Price
Associates") serves as sub-adviser the FLEXIBLY MANAGED and HIGH YIELD BOND
FUNDS and performs day-to-day investment management services for the Funds. 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") serves as sub-adviser to
the INTERNATIONAL EQUITY FUND and performs the day-to-day investment management
services for the Fund. 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.") ("RSIM") serves as
sub-adviser to the EMERGING GROWTH FUND and performs day- to-day investment
management services for the Fund. See "INVESTMENT SUB-ADVISERS" in the
prospectus for information regarding the the sub-advisory services provided to
the Fund and the method of computing the sub-advisory fees payable by ICMI to
RSIM.

On February 26, 1999, Robertson Stephens Investment Management Co. LLC
("RSIM Co. LLC") purchased Robertson Stephens Investment Management Co. Inc.
from BankAmerica Corporation. RSIM Co. LLC, a Delaware limited liability
company, owns all of the outstanding common stock of Robertson Stephens
Investment Management Co., Inc. Through its ownership of Robertson Stephens
Investment Management Co. Inc., RSIM Co. LLC indirectly owns RSIM. RS Regulated
I, LLC, a subsidiary of Robertson Stephens Investment Management Co. Inc., owns
all of the common stock of RSIM.

RSIM Co. LLC is principally owned by four individuals. G. Randall Hecht
owns approximately 29%, Paul H. Stephens owns approximately 22%, Andrew P.
Pilara, Jr., owns approximately 15% and James Callinan owns approximately 20%,
respectively, of the membership interest in RSIM Co. LLC. The remainder of the
membership interest is owned by other employees of RSIM Co. LLC or its
affiliates. Each of Messrs. Callinan, Hecht, Pilara, and Stephens, and Messrs.
David Evans and James Foster, is a member of the Board of Managers of RSIM Co.
LLC.

27
<PAGE>

In the years 1998, 1997 and 1996, the Funds paid advisory fees to each
Fund's investment adviser as set forth in the following table.

FUND 1998 1997 1996
- -------------------------------------------------------------------------
Growth Equity Fund $ 753,060 $ 600,772 $ 494,636
- -------------------------------------------------------------------------
Value Equity Fund 1,651,501(1) 1,279,429 800,404
- -------------------------------------------------------------------------
Small Capitalization Fund 210,456(2) 137,566 51,982
- -------------------------------------------------------------------------
Emerging Growth Fund3 208,963(4) 50,608(5) N/A
- -------------------------------------------------------------------------
Flexibly Managed Fund 2,719,881(6) 2,310,427 1,645,769
- -------------------------------------------------------------------------
International Equity Fund 1,071,377(7) 912,368 646,040
- -------------------------------------------------------------------------
Quality Bond Fund 206,065 164,758 175,993
- -------------------------------------------------------------------------
High Yield Bond Fund 326,267(8) 254,474 196,230
- -------------------------------------------------------------------------
Money Market Fund 181,722 148,226 119,842
- -------------------------------------------------------------------------

- -----------
1 For the period from January 1, 1998 to April 30, 1998, the Value Equity Fund
paid $534,722 to OpCap. For the period from May 1, 1998 to December 31,
1998, the Value Equity Fund paid $1,116,779 to ICMI. For the period from May
1, 1998 to December 31, 1998, ICMI paid subadvisory fees of $759,501 to
OpCap.
2 For the period from January 1, 1998 to April 30, 1998, the Small
Capitalization Fund paid $69,824 to OpCap. For the period from May 1, 1998
to December 31, 1998, the Small Capitalization Fund paid $140,632 to ICMI.
For the period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory
fees of $95,631 to OpCap.
3 The Emerging Growth Fund commenced operations on May 1, 1997.
4 For the period from January 1, 1998 to December 31, 1998, the Emerging Growth
Fund paid $208,963 to ICMI. For the period from May 1, 1998 to December 31,
1998, ICMI paid subadvisory fees of $175,491 to R.S. Investment Management.
5 For the eight months ended December 31, 1997, ICMI paid sub-advisory fees to
RSIM in the amount of $45,346.
6 For the period from January 1, 1998 to April 30, 1998, the Flexibly Managed
Fund paid $887,116 to Price Associates. For the period from May 1, 1998 to
December 31, 1998, the Flexibly Managed Fund paid $1,832,765 to ICMI. For
the period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory fees
of $1,615,775 to Price Associates.
7 For the period from January 1, 1998 to April 30, 1998, the International
Equity Fund paid $342,141 to Vontobel. For the period from May 1, 1998 to
December 31, 1998, the International Equity Fund paid $729,236 to ICMI. For
the period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory fees
of $486,157 to Vontobel.
8 For the period from January 1, 1998 to April 30, 1998, the High Yield Bond
Fund paid $102,744 to Price Associates. For the period from May 1, 1998 to
December 31, 1998, the High Yield Bond Fund paid $223,523 to ICMI. For the
period from May 1, 1998 to December 31, 1998, ICMI paid subadvisory fees of
$197,064 to Price Associates.

In 1998, the advisory fee paid by the Emerging Growth Fund is after a
voluntary fee waiver of $8,604. 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.

<PAGE>

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

Penn Mutual provides administrative and corporate services to Penn Series
and receives a fee from Penn Series for those services equal to the annual rate
of 0.15% of each Fund's average daily net assets. The administrative and
corporate services include: (a) 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) preparation of certain filings, reports and proxy statements
required by the federal securities laws; (c) 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 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.

28
<PAGE>

For fiscal years 1998, 1997, and 1996 the administrative fees paid to Penn
Mutual by each of the Funds then in existence were as follows:

FUND 1998 1997 1996
- ---------------------------------------------------------------------
Growth Equity Fund $234,353 $186,580 $149,014
- ---------------------------------------------------------------------
Value Equity Fund 495,450 383,864 240,121
- ---------------------------------------------------------------------
Small Capitalization Fund 63,137 41,270 15,135
- ---------------------------------------------------------------------
Emerging Growth Fund* 39,416 1,483 N/A
- ---------------------------------------------------------------------
Flexibly Managed Fund 815,964 693,190 493,731
- ---------------------------------------------------------------------
International Equity Fund 214,275 182,487 129,460
- ---------------------------------------------------------------------
Quality Bond Fund 68,688 56,299 58,663
- ---------------------------------------------------------------------
High Yield Bond Fund 97,880 76,344 58,869
- ---------------------------------------------------------------------
Money Market Fund 68,174 56,455 45,111
- ---------------------------------------------------------------------

* THE EMERGING GROWTH FUND COMMENCED OPERATIONS ON MAY 1, 1997.

In 1998, the administration fees paid by the Emerging Growth Fund is after
a voluntary fee waiver of $8,603. In 1997, the administration fees paid by the
Emerging Growth Fund is after a voluntary fee waiver of $9,862.

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

PFPC Inc. ("PFPC") serves as the accounting services agent to Penn Series.
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.

<PAGE>

For fiscal years 1998, 1997, and 1996, the accounting fees paid by each of
the Funds then in existence were as follows:

FUND 1998 1997 1996
- ---------------------------------------------------------------------
Growth Equity Fund $103,118 $ 87,177 $ 74,103
- ---------------------------------------------------------------------
Value Equity Fund 183,900 152,928 105,040
- ---------------------------------------------------------------------
Emerging Growth Fund* 26,161 6,127 N/A
- ---------------------------------------------------------------------
Flexibly Managed Fund 248,193 223,627 182,975
- ---------------------------------------------------------------------
International Equity Fund 110,710 97,981 73,307
- ---------------------------------------------------------------------
Quality Bond Fund 34,344 28,211 29,335
- ---------------------------------------------------------------------
High Yield Bond Fund 48,940 38,169 29,453
- ---------------------------------------------------------------------
Small Capitalization Fund 31,608 27,518 27,268
- ---------------------------------------------------------------------
Money Market Fund 34,073 28,227 22,555
- ---------------------------------------------------------------------

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

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

See "EXPENSES AND LIMITATIONS" 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

29
<PAGE>

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, sub-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 allocate 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 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.

30
<PAGE>

For fiscal years 1998, 1997, and 1996, the total brokerage commissions
paid by the Growth Equity Fund, including the discounts received by securities
dealers in connection with underwritings, were $731,672 , $595,881 and
$641,514, respectively. During 1998, the adviser directed transactions of
$671,796,308 (with related commissions of $658,505) to brokers who provided
research services.

For fiscal years 1998, 1997, and 1996, the total brokerage commissions
paid by the Value Equity Fund, including discounts received by securities
dealers in connection with underwritings, were $195,772, $111,699 and $119,775,
respectively. During 1998, the adviser directed transactions of $24,300,574
(with related commissions of $31,446) to brokers who provided research
services.

For fiscal years 1998, 1997, and 1996, the total brokerage commissions
paid by the Flexibly Managed Fund, including the discounts received by
securities dealers in connection with underwritings, were $1,259,520, $368,415
and $323,511, respectively. During 1998, the adviser directed transactions of
$18,279,768 (with related commissions of $25,451) to brokers who provided
research services.

For fiscal years 1998, 1997, and 1996, the total brokerage commissions
paid by the International Equity Fund, including the discounts received by the
securities dealers in connection with underwritings, were $305,099, $248,517
and $282,591, respectively. During 1998, the adviser allocated transactions of
$56,873,016 (with related commissions of $121,013) to brokers who provided
research services.

For fiscal years 1998, 1997 and 1996, the total brokerage commissions paid
by the Small Capitalization Fund, including the discounts received by the
Securities division in connection with underwritings, were $107,030, $82,820,
and $28,271, respectively. During 1998, the adviser directed transactions of
$5,515,799 (with related commissions of $15,805) to brokers who provided
research services.

For fiscal year 1998 and 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 were $112,916 and $32,800. During
1998, the adviser directed transactions of $6,313,210 (with related commissions
of $10,746) to brokers who provide research services.

For fiscal years 1998, 1997, and 1996, the Quality Bond Fund engaged in
portfolio transactions involving broker-dealers totaling $1,548,170,055,
$1,504,902,144 and $838,148,194, respectively. For fiscal years 1998, 1997, and
1996, the High Yield Bond Fund engaged in portfolio transactions involving
broker-dealers totaling $737,865, $362,910,185 and $263,291,031, respectively,
and the Money Market Fund engaged in portfolio transactions involving
broker-dealers totaling $479,932,894, $337,784,744 and $329,947,899,
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.
- --------------------------------------------------------------------------------
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.

<PAGE>

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.

31
<PAGE>

<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATION
NAME AND ADDRESS PENN SERIES DURING PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Eugene Bay Director Senior Pastor, Bryn Mawr Presbyterian Church, Bryn Mawr, PA.
121 Fishers Road
Bryn Mawr, PA 19010
- ------------------------------------------------------------------------------------------------------------------------------------
James S. Greene Director Retired; Vice President and Director, International Raw Materials, Inc., Philadelphia, PA
P.O. Box 3761 (commodities trading), prior to September 1990.
Vero Beach, FL 32964-3761
- ------------------------------------------------------------------------------------------------------------------------------------
Robert E. Chappell* Director Chairman of the Board and Chief Executive Officer (since December 1996), President and
600 Dresher Road Chief Executive Officer (April 1995 - December 1996), President and Chief Operating
Horsham, PA 19044 Officer, prior thereto The Penn Mutual Life Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Larry L. Mast* Director Executive Vice President, The Penn Mutual Life Insurance Company May 1997 to present.
The Penn Mutual Life Formerly Senior Vice President, Lafayette Life Insurance Company September 1994 to May
Insurance Company 1997; prior thereto Vice President, Security Benefit Insurance Company May 1993 to
600 Dresher Road September 1994; Vice President, Home Life Insurance Company July 1990 to May 1993;
Horsham, PA 19044 Agency Manager, The Equitable Life Insurance Company August 1978 to July 1990.
- ------------------------------------------------------------------------------------------------------------------------------------
Daniel J. Toran* Director President and Chief Operating Officer, (January 1997 to present), Executive Vice President,
The Penn Mutual Life Sales and Marketing (May 1996 to January 1997), The Penn Mutual Life Insurance Company;
Insurance Company Executive Vice President, The New England Mutual Life Insurance Company, (prior thereto).
600 Dresher Road
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
William H. Loesche, Jr. Director Retired; Adviser (since April 1988); Director (prior thereto), Keystone Insurance Company
100 Gray's Lane and Keystone Automobile Club,
Philadelphia, PA.
Apt. 101
Haverford, PA 19041
- ------------------------------------------------------------------------------------------------------------------------------------
M. Donald Wright Director President, M. Donald Wright Professional Corporation, Bryn Mawr, PA (financial planning and
100 Chetwynd Drive consulting); Director, Graduate School of Financial Services, The American College,
Rosemont, PA 19010 since April 1991.
- ------------------------------------------------------------------------------------------------------------------------------------
James B. McElwain President Assistant Vice President, Investment Marketing and Operations (since August 1995); Assistant
600 Dresher Road Vice President, Retirement and Investment Sales Operation, The Penn Mutual Life
Horsham, PA 19044 Insurance Company, prior thereto.
- ------------------------------------------------------------------------------------------------------------------------------------
Richard F. Plush Vice President Vice President and Senior Actuary, The Penn Mutual Life Insurance Company (1973 to present).
600 Dresher Road
Horsham, PA 19044
- ------------------------------------------------------------------------------------------------------------------------------------
C. Ronald Rubley Secretary Attorney, Morgan, Lewis & Bockius LLP, Philadelphia, PA (since January 1996); Associate
1701 Market Street General Counsel, The Penn Mutual Life Insurance Company, (prior thereto).
Philadelphia, PA 19103
- ------------------------------------------------------------------------------------------------------------------------------------
Steven M. Herzberg Treasurer Assistant Vice President and Treasurer, The Penn Mutual Life Insurance Company (December
600 Dresher Road 1997 to present); Director of Financial Planning and Treasurer (November 1995 to December
Horsham, PA 19044 1997): Director, Cost and Budget (November 1991 to November 1995); Director, Benefits
Administration, (prior thereto).
- ------------------------------------------------------------------------------------------------------------------------------------
Ann M. Strootman Controller Vice President and Controller (since January 1996), Assistant Vice President, Financial and
600 Dresher Road Management Accounting (since 1994), Director of Financial Accounting (prior thereto), Penn
The Horsham, PA 19044 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 1998, Penn Series paid directors' fees in the
aggregate amount of $28,144 to directors who are not "interested persons" of
Penn Series.

The Board of Directors has an Executive Committee currently consisting of
Messrs. Chappell, Toran and Greene. 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.

32
<PAGE>

- --------------------------------------------------------------------------------
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 "Account Policies" 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 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.

33
<PAGE>

On January 31, 1999, the outstanding shares of Penn Series were owned as
follows:*

<TABLE>
<CAPTION>
GROWTH VALUE EMERGING FLEXIBLY
EQUITY EQUITY GROWTH MANAGED
FUND FUND FUND FUND
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in Separate
Accounts Pursuant to
Variable Annuity Contracts 85% 76% 68% 74%
- ----------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by PIA and
Held in a Separate Account
Pursuant to Variable Annuity
Contracts 7% 13% 17% 16%
- ----------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in a Separate
Account Pursuant to Variable
Life Insurance Contracts 8% 11% 15% 10%
- ----------------------------------------------------------------------------

<CAPTION>
QUALITY SMALL MONEY
INTERNATIONAL BOND HIGH YIELD CAPITALIZATION MARKET
EQUITY FUND FUND BOND FUND FUND FUND
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in Separate
Accounts Pursuant to
Variable Annuity Contracts 74% 69% 71% 55% 54%
- -----------------------------------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by PIA and
Held in a Separate Account
Pursuant to Variable Annuity
Contracts 11% 19% 17% 25% 23%
- -----------------------------------------------------------------------------------------------------
Percentage of Outstanding
Shares Owned by Penn
Mutual and Held in a Separate
Account Pursuant to Variable
Life Insurance Contracts 15% 12% 12% 20% 23%
- -----------------------------------------------------------------------------------------------------
</TABLE>

* UNAUDITED.

- --------------------------------------------------------------------------------
TAX STATUS

The following is only a summary of certain federal tax considerations
generally affecting the Funds and their shareholders that are not described in
the Funds' prospectus. No attempt is made to present a detailed explanation of
the tax treatment of Funds or their shareholders and the discussion here and in
the Funds' prospectus 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 general 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.

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).

34
<PAGE>

If for any taxable year, a Fund does not qualify as a regulated investment
company under Subchapter 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.

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

Penn Series is an open end management investment company. Each Fund is
"diversified" as defined in the 1940 Act. 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.

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

- --------------------------------------------------------------------------------
The Company may from time to time quote various performance figures to
illustrate the Funds' past performance.

Performance quotations by investment companies are subject to rules
adopted by the Commission, which require the use of standardized performance
quotations. In the case of total return, non-standardized performance
quotations may be furnished by the Fund but must be accompanied by certain
standardized performance information computed as required by the Commission.
Current yield and average annual compounded total return quotations used by the
Fund are based on the standardized methods of computing performance mandated by
the Commission. An explanation of those and other methods used by the Company
to compute or express performance follows.

- --------------------------------------------------------------------------------
TOTAL RETURN

From time to time each Fund, except the Money Market Fund, may advertise
total return. Total return figures are based on historical earnings and are not
intended to indicate future performance. The average annual total return is
determined by finding the average annual compounded rates of return over 1-,
5-, and 10-year periods (or over the life of the Fund) that

35
<PAGE>

would equate an initial hypothetical $1,000 investment to its ending redeemable
value. The calculation assumes that all dividends and distributions are
reinvested when paid. The quotation assumes the amount was completely redeemed
at the end of each 1-, 5-, and 10-year period (or over the life of the Fund)
and the deduction of all applicable Company expenses on an annual basis.

The average annual compounded rates of return (unless otherwise noted) for
the Funds for the periods ended December 31, 1998 are as follows:

<TABLE>
<CAPTION>
INCEPTION ONE AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL
NAME OF FUND DATE YEAR FIVE YEARS TEN YEARS SINCE INCEPTION
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Growth Equity 11/1/92(1) 41.67% 20.10% N/A 19.47%
Value Equity 11/1/92(2) 9.59% 19.40% N/A 17.49%
Small Capitalization 3/1/95 --9.16% N/A N/A 11.32%
Emerging Growth 5/1/97 35.70% N/A N/A 46.37%
Flexibly Managed 3/1/87 6.09% 12.70% 12.93% 12.84%
International Equity 11/2/92 18.85% 10.33% N/A 14.49%
Quality Bond 11/1/92(3) 10.17% 7.12% N/A 7.97%
High Yield Bond 3/1/87 4.79% 8.29% 9.85% 9.03%
- -----------------------------------------------------------------------------------------------------------
</TABLE>

(1) Date ICMI began managing the Fund's investments.

(2) Date OpCap Advisors began managing the Fund's investments.

(3) Date ICMI began managing the Fund's investments.

These figures were calculated according to the following formula:
P(1 +T)n=ERV

where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the
beginning of the l-, 5-, or 10-year periods at the end of the l-,
5- , or 10-year periods (or fractional portion thereof).

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

MOODY'S INVESTOR SERVICES, INC. COMMERCIAL PAPER RATINGS:

PRIME-1
Issues rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:

- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
- Board margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.

- --------------------------------------------------------------------------------
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.

- --------------------------------------------------------------------------------
PRIME-3 Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.

36
<PAGE>

- --------------------------------------------------------------------------------
STANDARD & POOR'S RATING GROUP COMMERCIAL PAPER RATINGS:

A-1 This is the highest category and indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation.

- --------------------------------------------------------------------------------
A-2 Capacity for timely payment on issues with this designation is satisfactory
and the obligation is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in
higher rating categories.

- --------------------------------------------------------------------------------
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.

- --------------------------------------------------------------------------------
B Issues rated B are regarded as having significant speculative
characteristics for timely payment.

- --------------------------------------------------------------------------------
C This rating is assigned to short-term debt obligations that is currently
vulnerable to nonpayment.

- --------------------------------------------------------------------------------
D Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.

- --------------------------------------------------------------------------------
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.

- --------------------------------------------------------------------------------
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 which are 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." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.

- --------------------------------------------------------------------------------
AA Bonds which are 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. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long- term risk appear somewhat larger
than Aaa securities.

- --------------------------------------------------------------------------------
A Bonds which are rated A possess many favorable investment attributes and are
generally considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.

- --------------------------------------------------------------------------------
BAA Bonds which are rated Baa are considered medium-grade obligations i.e.,
they are neither highly protected nor poorly

37
<PAGE>

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 which are 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 characterizes bonds in this class.

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

- --------------------------------------------------------------------------------
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

- --------------------------------------------------------------------------------
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates a rating in the
lower end of the generic rating category.

- --------------------------------------------------------------------------------
STANDARD & POOR'S RATINGS GROUP

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, and in the majority of
instances they differ from AAA issues only to a small degree.

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

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

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

The C rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this
obligation are being continued.

Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the filing
of a bankruptcy petition of the taking of a similar action if payments on a
obligation are jeopardized.

38
<PAGE>

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

- --------------------------------------------------------------------------------
The following pages include audited financial statements and financial
highlights as of December 31, 1998 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.

<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE MONEY MARKET FUND
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- -----------

COMMERCIAL PAPER (41.4%)
Carolina Power and Light
5.13% ............................. 02/03/99 A-1 1,700 $ 1,692,006
5.45% ............................. 01/28/99 A-1 750 746,934
Caterpillar Inc.
5.05% ............................. 01/08/99 A-1 1,000 999,018
Dekalb County For
Emory University
5.25% ............................. 01/21/99 A-1 1,500 1,500,000
Ford Motor Credit Corp.
5.01% ............................. 01/28/99 A-1 2,300 2,291,358
5.05% ............................. 02/05/99 A-1 700 696,563
General Electric
Capital Corp.
5.16% ............................. 03/09/99 A-1 2,000 1,980,793
General Electric Capital
Mortgage Services
5.01% ............................. 02/19/99 A-1 250 248,295
General Motors
Acceptance Corp.
5.16% ............................. 01/14/99 A-2 2,500 2,495,342
GTE Corp.
5.20% ............................. 02/22/99 A-2 1,000 992,489
5.30% ............................. 02/09/99 A-2 1,500 1,491,388
Merrill Lynch
5.47% ............................. 01/22/99 A-1 1,000 996,809
Monsanto Co.
5.47% ............................. 01/11/99 A-1 1,500 1,497,721
5.10% ............................. 02/01/99 A-1 300 298,683
New York, New York
5.40% ............................. 01/14/99 A-1 1,600 1,600,000
Walt Disney Co.
5.05% ............................. 01/15/99 A-1 2,500 2,495,090
5.10% ............................. 02/16/99 A-1 103 102,329
-----------
TOTAL COMMERCIAL PAPER
(Cost $22,124,818) .............................................. 22,124,818
-----------

CORPORATE BONDS (24.0%)
Associates Corporation
North America
7.25% ............................. 09/01/99 AA- 150 151,533
6.68% ............................. 09/17/99 AA- 1,650 1,661,120
Caterpillar Financial
Service Corp.
6.77% ............................. 02/02/99 A+ 1,000 1,001,308
Chase Manhattan Corp.
7.58% ............................. 07/23/99 A 2,000 2,020,849
Coca-Cola Enterprises
7.00% ............................. 11/15/99 A+ 1,000 1,016,379
Florida Power and Light
5.50% ............................. 07/01/99 AA- 250 249,805
General Motors
Acceptance Corp.
7.75% ............................. 01/15/99 A-2 325 325,228
GTE Northwest Inc.
6.125% ............................ 02/15/99 A-1 375 375,114
Mobil Corp.
7.25% ............................. 03/15/99 AA 115 115,351
Norwest Financial Inc.
6.68% ............................. 09/15/99 A+ 1,000 1,007,240

<PAGE>
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ----------
Sears Roebuck Co.
8.00% ............................. 02/16/99 A- 2,500 $ 2,507,990
Southern California Edison
7.50% ............................. 04/15/99 A- 500 502,382
Texas Instruments Inc.
6.75% ............................. 07/15/99 A 1,550 1,558,224
Wachovia Bank
North America
6.00% ............................. 03/15/99 AA+ 350 350,169
-----------
TOTAL CORPORATE BONDS
(Cost $12,842,692) .............................................. 12,842,692
-----------

VARIABLE RATE DEMAND NOTES (21.6%)+
Alabama State
Development Authority
6.00% ............................. 01/07/99 A-1 500 500,000
Barton Healthcare
5.70% ............................. 01/06/99 A-1 430 430,000
Baylis Group Partnership
6.00% ............................. 01/06/99 A-1 700 700,000
Berks County Industrial
Development Authority
6.05% ............................. 01/07/99 A-1 535 535,000
Bloomfield, New Mexico
5.70% ............................. 01/07/99 A-1 600 600,000
Columbia County Georgia
Development Authority
5.70% ............................. 01/07/99 A-1 1,390 1,390,000
Community Health
Systems, Inc.
6.05% ............................. 01/07/99 A-1 1,065 1,065,000
Community Health
Systems, Inc.
6.05% ............................. 01/07/99 A-1 365 365,000
Durham Risk
Management Co.
5.17% ............................. 01/07/99 A-1 500 500,000
Fairview Hospital and
Healthcare Services
5.65% ............................. 01/07/99 AAA 500 500,000
GMG Warehouse
American National
5.70% ............................. 01/06/99 A-1 875 875,000
Health Insurance Plan of
Greater NY
5.65% ............................. 01/07/99 A-1 500 500,000
Illinois Development
Finance Authority
5.70% ............................. 01/07/99 A-1 600 600,000
Liliha Partners LP
6.05% ............................. 01/06/99 A-1 1,155 1,155,000
Montgomery County PA
Industrial Development
Authority
6.05% ............................. 01/07/99 A-1 775 775,000
Saint Francis Health
6.05% ............................. 01/07/99 A-2 490 490,000
Silver City New Mexico
5.70% ............................. 01/07/99 A-1 600 600,000
-----------
TOTAL VARIABLE RATE DEMAND NOTES
(Cost $11,580,000) .............................................. 11,580,000
-----------

40
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE MONEY MARKET FUND
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- -----------

MEDIUM TERM NOTES (5.4%)
Associates Corporation
North America
6.125% ............................ 11/12/99 AA- 1,000 $ 1,009,113
Bank One Wisconsin
5.74% ............................. 05/11/99 AA 350 349,938
Caterpillar Financial
Service Corp.
6.78% ............................. 08/05/99 A+ 250 251,600
NYNEX Capital Funding
7.60% ............................. 07/19/99 A 1,000 1,012,377
Xerox Corp.
7.01% ............................. 04/30/99 A 250 250,980
-----------
TOTAL MEDIUM TERM NOTES
(Cost $2,874,008)................................................ 2,874,008
-----------

NUMBER
OF SHARES
---------
SHORT-TERM INVESTMENTS (7.6%)
Janus Money Market
Fund ............................................. 2,666,715 2,666,715
Temporary Investment
Fund Class B ..................................... 1,416,465 1,416,465
TOTAL SHORT-TERM INVESTMENTS
(Cost $4,083,180) .............................................. 4,083,180
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $53,504,698)(a) .......................................... $53,504,698
===========
- ----------
(a) Cost for Federal income tax purposes.
+ The rate shown is the rate as of December 31, 1998, and the maturity 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, 1998. Ratings are unaudited.

MATURITY AMOUNT PERCENTAGE OF PORTFOLIO
SCHEDULE PAR (CUM)
-------- ------ ----
1- 7 days $11,580,000 23.4% 23.4%
8- 14 days 6,600,000 13.4% 36.8%
15- 30 days 8,375,000 17.0% 53.8%
31- 60 days 9,428,000 19.1% 72.9%
61- 90 days 2,465,000 5.0% 77.9%
91-120 days 750,000 1.5% 79.4%
121-150 days 350,000 0.7% 80.1%
Over 150 days 9,850,000 19.9% 100.0%
----------- -----
$49,398,000 100.0%
=========== =====

Average Weighted Maturity -- 69 days

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE MONEY MARKET FUND
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- -----------

CORPORATE BONDS (10.5%)
CANADIAN GOV'T AGENCY (2.2%)
Hydro-Quebec 8.05% .................. 07/07/06 A+ 1,150 $ 1,398,687
FINANCIAL (1.7%)
Associates Corp. N.A.
7.75% ............................. 02/15/05 AA- 500 555,625
General Electric Capital
Corp. 8.125% ...................... 02/01/99 AAA 500 501,028
-----------
1,056,653
-----------
GENERAL OBLIGATION BONDS (1.6%)
General Electric Capital
Corp. 6.66% ....................... 05/01/00 AAA 1,000 1,017,500
-----------
INDUSTRIAL (1.7%)
IBM Corp. 6.22% ..................... 08/01/27 A+ 1,000 1,061,250
-----------
RETAIL (0.3%)
Penney (J.C.) Inc.
Note 9.45% ........................ 07/15/02 A+ 175 185,500
-----------
SERVICES-EQUIPMENT RENTING & LEASING (0.2%)
Service Corporation
International 7.00% ............... 06/01/15 BBB+ 100 103,875
-----------
TRANSPORTATION (1.1%)
CSX Corp. 7.05% ..................... 05/01/02 BBB 660 685,575
-----------
UTILITY (1.7%)
Calenergy Co. Inc.
8.48% ............................. 09/15/28 BB+ 975 1,084,688
-----------
TOTAL CORPORATE BONDS
(Cost $6,099,819) 6,593,728
-----------

U.S. TREASURY OBLIGATIONS (34.9%)
Treasury Bonds (3.2%)
7.50% ............................... 11/15/16 NR 700 869,831
6.125% .............................. 11/15/27 NR 1,025 1,145,938
-----------
2,015,769
-----------
Treasury Notes (31.7%)
6.25% ............................... 08/31/02 NR 3,750 3,946,545
5.75% ............................... 04/30/03 NR 6,625 6,896,268
5.75% ............................... 08/15/03 NR 1,900 1,984,987
6.50% ............................... 05/15/05 NR 5,625 6,166,091
5.625% .............................. 05/15/08 NR 900 961,005
-----------
19,954,896
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $21,961,438) 21,970,665
-----------

<PAGE>

PAR
MATURITY RATING (000) VALUE
-------- ------ ----- -----------

AGENCY OBLIGATIONS (40.5%)
FEDERAL NATIONAL MORTGAGE ASSOCIATION BONDS
4.50% ............................... 01/04/99 NR 6,400 $ 6,397,600
5.625% .............................. 03/15/01 NR 3,100 3,150,555
6.00% ............................... 11/30/28 NR 5,000 4,935,950
6.45% ............................... 12/01/03 NR 1,207 1,241,677
6.50% ............................... 12/01/26 NR 1,500 1,510,320
6.67% ............................... 12/01/04 NR 1,759 1,831,648
6.825% .............................. 09/01/07 NR 2,702 2,819,497
7.00% ............................... 01/01/29 NR 2,000 2,041,260
7.50% ............................... 12/01/26 NR 1,500 1,540,320
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $25,218,011) ............................................. 25,468,827
-----------
COMMERCIAL ASSET BACKED SECURITIES (6.5%)
Comed Transitional
Funding Trust
5.44% ............................. 03/25/07 AAA 2,000 1,997,500
Morgan Stanley 6.95% ................ 12/10/07 AA 464 494,689
Railcar Leasing, LLC
7.125% ............................ 01/15/13 AAA 1,000 1,098,750
Sasco 96- CFl Class B
6.303% ............................ 02/25/28 AA 500 508,642
-----------
TOTAL COMMERCIAL ASSET BACKED SECURITIES
(Cost $4,013,482) 4,099,581
-----------

SHARES
------
SHORT-TERM INVESTMENTS (7.6%)
Janus Money Market Fund ........................... 2,644,429 2,644,429
Temporary Investment Fund Class B ................. 2,161,869 2,161,869
TOTAL SHORT-TERM INVESTMENTS
(Cost $4,806,298) .............................................. 4,806,298
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $62,099,048) (a) ......................................... $62,939,099
===========

- ----------
(a) At December 31, 1998, the cost for Federal income tax purposes was
$62,136,407. Net unrealized appreciation was $802,692. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $982,439 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $179,747.

The Standard & Poor's corporation ratings are the most recent ratings available
at December 31, 1998. Ratings are unaudited.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE HIGH YIELD BOND FUND
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ----------
CORPORATE BONDS (87.9%)

ADVERTISING (0.2%)
American Business
Information
Inc. 9.50% ......................... 06/15/08 B 175 $ 140,000
----------
AEROSPACE & DEFENSE (2.3%)
Communication & Power
Industries 12.00% .................. 08/01/05 B 750 778,125
Dyncorp, Inc.
9.50% .............................. 03/01/07 B 425 420,750
L-3 Communications
Corp. 10.375% ...................... 05/01/07 B 325 357,500
----------
1,556,375
----------
AUTOMOBILES & RELATED (1.4%)
Advance Stores Co.
10.25% ............................. 04/15/08 B- 300 304,500
Federal Mogul, Inc.
7.75% .............................. 07/01/06 BB+ 400 405,912
Trident Automotive
10.00% ............................. 12/15/05 B- 250 252,500
----------
962,912
----------
BROADCASTING (3.8%)
CBS Radio, Inc.
11.375% ............................ 01/15/09 NR 263 307,827
Chancellor Media
Corporation 9.375% ................. 10/01/04 B 500 518,750
Citadel Broadcasting
CO. 9.25% .......................... 11/15/08 B- 150 156,000
Jacor Communications
CO. 8.00% .......................... 02/15/10 B 375 393,750
Lin Holdings, Corp.
9.319%++ ........................... 03/01/08 B- 150 105,375
Muzak Limited Partners
10.00% ............................. 10/01/03 B+ 500 520,000
Radio Unica Corp.
14.99%++ ........................... 08/01/06 NR 250 135,000
Sinclair Broadcast Group
8.75% .............................. 12/15/07 B 250 253,125
TV Azteca SA DE CV
10.50% ............................. 02/15/07 B+ 200 163,000
----------
2,552,827
----------
BUILDING PRODUCTS (2.7%)
American Builders
and Contractors
10.625% ............................ 05/15/07 B 500 465,000
Associated Materials, Inc.
9.25% .............................. 03/01/08 B 600 612,000
Building Materials Corp.
7.75% .............................. 07/15/05 BB 250 246,250
ISG Resources, Inc.
10.00% ............................. 04/15/08 B- 500 495,000
----------
1,818,250
----------
CABLE OPERATORS (3.5%)
Adelphia
Communications
Corp. 9.875% ....................... 03/01/07 B+ 250 276,875
CSC Holdings, Inc.
7.625% ............................. 07/15/18 BB+ 425 433,041

<PAGE>

PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ----------
Falcon Holding Group
9.246%++ ........................... 04/15/10 B 200 $ 136,000
Frontiervision L.P.
11.00% ............................. 10/15/06 B 400 444,000
Frontiervision Holdings
L.P. 9.9%++ ........................ 09/15/07 B 400 335,000
Fundy Cable Ltd.
11.00% ............................. 11/15/05 BB 300 318,000
Marcus Cable Co.
11.162%++ .......................... 12/15/05 B 450 432,000
----------
2,374,916
----------
CHEMICALS (1.3%)
International Specialty
Products, Inc.
9.75% .............................. 02/15/02 BB- 500 531,250
Sovereign Specialty
Chemicals 9.50% .................... 08/01/07 B- 350 355,250
----------
886,500
----------
CONGLOMERATES (0.6%)
ICF Kaiser International,
Inc. 13.00% ........................ 12/31/03 NR 400 396,000
----------
CONSUMER PRODUCTS (1.6%)
Purina Mills, Inc.
9.00% .............................. 03/15/10 B 600 597,000
Revlon Consumer
Products 8.125% .................... 02/01/06 B 150 142,500
8.625% ............................. 02/01/08 B- 350 322,000
----------
1,061,500
----------
CONTAINER (3.8%)
Anchor Advanced
Products 11.75% .................... 04/01/04 BB- 600 654,000
BWAY Corp.
10.25% ............................. 04/15/07 B 500 525,000
Plastic Containers, Inc.
10.00% ............................. 12/15/06 B+ 1,000 1,050,000
U.S. Can Corp.
10.125% ............................ 10/15/06 B 350 368,375
----------
2,597,375
----------
DIVERSIFIED CHEMICALS (0.7%)
Koppers Industry, Inc.
9.875% ............................. 12/01/07 B- 500 490,000
----------
ELECTRIC UTILITIES (0.8%)
Niagara Mohawk
Power Corp.
7.281%++ ........................... 07/01/10 BB+ 400 309,052
7.75% .............................. 10/01/08 BB+ 200 217,620
----------
526,672
----------
ELECTRONIC COMPONENTS (0.5%)
Fairchild Semiconductor
10.125% ............................ 03/15/07 B 125 123,750
Viasystems, Inc.
9.75% .............................. 06/01/07 B- 250 232,500
----------
356,250
----------
ENERGY SERVICES (4.3%)
Amerigas Partners LP
10.125% ............................ 04/15/07 BB+ 400 408,000
Canadian Forest Oil
Ltd. 8.75% ......................... 09/15/07 B 150 137,250

43
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ----------
Energy Corporation of
America 9.50% ...................... 05/15/07 B 600 $ 555,000
Flores & Rucks
9.75% .............................. 10/01/06 BB- 275 280,500
Kelley Oil & Gas
Corporation
10.375% ............................ 10/15/06 B- 150 111,000
Lomak Petroleum
8.75% .............................. 01/15/07 B 300 276,000
Plains Resources, Inc.
10.25% ............................. 03/15/06 B- 550 555,500
Pride Petroleum Services
9.375% ............................. 05/01/07 BB 425 395,250
Rutherford-Moran Oil
10.75% ............................. 10/01/04 CC 175 199,500
----------
2,918,000
----------
ENTERTAINMENT & LEISURE (3.5%)
Bally Total Fitness
Holdings 9.875% .................... 10/15/07 B- 400 392,000
IMAX Corp.
7.875% ............................. 12/01/05 BB- 250 250,625
Loews Cineplex
Entertainment
8.875% ............................. 08/01/08 B 75 77,438
Park Place Entertainment
7.875% ............................. 12/15/05 BB+ 400 400,500
Premier Parks, Inc.
9.68%++ ............................ 04/01/08 B- 125 84,687
Six Flags Theme Parks
12.25% ............................. 06/15/05 B- 600 666,000
Speedway Motorsports,
Inc. 8.50% ......................... 08/15/07 B+ 500 527,500
----------
2,398,750
----------
FINANCIAL SERVICES (0.2%)
Ocwen Capital Trust I
10.875% ............................ 08/01/27 B- 150 120,000
----------
FOOD PROCESSING (1.9%)
B&G Foods, Inc.
9.625% ............................. 08/01/07 B- 600 585,000
Mrs. Fields Original
10.125% ............................ 12/01/04 B+ 250 241,250
Shoppers Food Warehouse
9.75% .............................. 06/15/04 B+ 400 431,000
----------
1,257,250
----------
FOOD/TOBACCO (3.5%)
Archibald Candy Corp.
10.25% ............................. 07/01/04 B 100 101,500
Del Monte Foods Co.
11.131%++ .......................... 12/15/07 B- 75 51,375
Eagle Family Foods
8.75% .............................. 01/15/08 B- 250 235,625
International Home
Foods, Inc. Senior
Subordinated Notes
10.375% ............................ 11/01/06 B- 600 649,500
Keebler Corporation
10.75% ............................. 07/01/06 BB+ 600 678,000
Smithfield Foods, Inc.
7.625% ............................. 02/15/08 BB+ 125 125,625
Southern Foods, Inc.
9.875% ............................. 09/01/07 B 500 522,500
----------
2,364,125
----------

<PAGE>

PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ---------
HEALTHCARE (3.4%)
Genesis Healthcare
9.25% .............................. 10/01/06 B- 100 $94,000
Genesis Health Ventures,
Inc. 9.75% ........................ 06/15/05 B- 100 97,000
Hudson Respiratory Care
9.125% ............................. 04/15/08 B- 100 81,000
Integrated Health
Services, Inc.
9.25% .............................. 01/15/08 B- 300 279,000
Kinetic Concepts, Inc.
9.625% ............................. 11/01/07 B- 250 237,500
Mariner Post-Acute
Network 9.50% ...................... 11/01/07 B- 250 192,500
Owens & Minor, Inc.
10.875% ............................ 06/01/06 B+ 500 537,500
Quest Diagnostic, Inc.
10.75% ............................. 12/15/06 B+ 250 277,500
Tenet Healthcare Corp.
8.125% ............................. 12/01/08 BB- 500 516,250
----------
2,312,250
----------
HOTELS & GAMING (7.4%)
Argosy Gaming
12.00% ............................. 06/01/01 NR 150 147,563
Casino America, Inc.
12.50% ............................. 08/01/03 B+ 250 275,625
Courtyards By Marriott
10.75% ............................. 02/01/08 B- 600 618,000
Grand Casinos, Inc.
10.125% ............................ 12/01/03 BB 500 545,135
9.00% .............................. 10/15/04 B+ 300 336,000
Host Marriott Travel
Plaza 9.50% ........................ 05/15/05 BB- 600 624,000
HMH Properties
7.875% ............................. 08/01/08 BB 600 582,000
ITT Corp.
7.375% ............................. 11/15/15 BB 300 253,740
Players International,
Inc. 10.875% ...................... 04/15/05 BB- 300 321,000
Red Roof Inns
9.625% ............................. 12/15/03 B 500 508,750
Rio Hotel & Casino,
Inc. 10.625% ...................... 07/15/05 B+ 350 381,500
9.50% .............................. 04/15/07 B+ 50 55,562
Venetian Casino LV
Sands 12.25% ....................... 11/15/04 B- 400 374,000
----------
5,022,875
----------
MANUFACTURING (3.3%)
Grove Worldwide
L.L.C. 9.25% ....................... 05/01/08 B 500 455,000
Goss Graphic Systems,
Inc. 12.00% ....................... 10/15/06 CCC+ 25 13,750
Hawk Corp.
10.25% ............................. 12/01/03 B+ 500 525,000
HCC Industries, Inc.
10.75% ............................. 05/15/07 B- 500 480,000
International Wire
Group 11.75% ....................... 06/01/05 B- 500 526,250
Paragon Corp.
Holdings 9.625% .................... 04/01/08 B+ 250 207,500
----------
2,207,500
----------

44
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ----------
MEDIA AND COMMUNICATIONS (1.4%)
Mediacom L.L.C.
8.50% .............................. 04/15/08 B+ 175 $ 178,938
Northland Cable
Television 10.25% .................. 11/15/07 B- 500 526,250
Transwestern Holdings
11.431%++ .......................... 11/15/08 B- 250 165,625
Transwestern Publishing
9.625% ............................. 11/15/07 B- 100 104,500
----------
975,313
----------
MINING (0.3%)
P&L Coal Holdings
Corp. 8.875% ....................... 05/15/08 B+ 200 203,500
----------
METALS & STEELS (0.3%)
Republic Engineered
Steel 9.875% ....................... 12/15/01 CCC+ 200 202,000
----------
MISCELLANEOUS CONSUMER PRODUCTS (4.9%)
American Safety Razor
Co. 9.875% ......................... 08/01/05 BB- 500 500,000
Chattem, Inc.
12.75% ............................. 06/15/04 B- 500 562,500
Doane Products Co.
9.75% .............................. 05/15/07 B- 1,266 1,303,980
Hedstrom Holdings, Inc.
17.274%++ .......................... 06/01/09 B- 50 22,437
Herff Jones, Inc.
11.00% ............................. 08/15/05 B 500 542,500
Holmes Products Corp.
9.875% ............................. 11/15/07 B- 400 376,000
----------
3,307,417
----------
PAPER & PAPER PRODUCTS (1.4%)
Repap New Brunswick
9.00% .............................. 06/01/04 B- 200 182,000
10.625% ............................ 04/15/05 CCC+ 650 442,000
Riverwood International
10.25% ............................. 04/01/06 B- 150 147,000
10.625% ............................ 08/01/07 B- 200 198,000
----------
969,000
----------
PRINTING AND PUBLISHING (2.3%)
American Lawyer
Media Holdings
12.246%++ .......................... 12/15/08 CCC+ 175 109,375
Hollinger International
Publishing 9.25% ................... 03/15/07 BB- 400 422,000
Liberty Group Publishing
9.375% ............................. 02/01/08 CCC+ 250 240,625
Mail-Well Corp.
8.75% .............................. 12/15/08 B+ 500 500,000
Sun Media Corp.
9.50% .............................. 02/15/07 B- 275 305,250
----------
1,577,250
----------
RETAIL (2.4%)
Eye Care Centers of
America 9.125% .................... 05/01/08 B- 350 325,500
MTS, Inc.
9.375% ............................. 05/01/05 B 100 97,500
Pantry, Inc.
10.25% ............................. 10/15/07 B- 500 522,500
Safelite Glass Corp.
9.875% ............................. 12/15/06 B 300 276,750
9.875% ............................. 12/15/06 B- 100 92,250
Specialty Retailers, Inc.
8.50% .............................. 07/15/05 BB- 325 $ 279,500
----------
1,594,000
----------
<PAGE>

PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ----------
SAVINGS & LOAN ASSOCIATIONS (0.8%)
First Federal Financial
Corp. 11.75% ....................... 10/01/04 B+ 500 515,625
----------
SERVICE (5.1%)
Alliance Imaging
9.625% ............................. 12/15/05 B- 450 445,500
AP Holdings, Inc.
13.283%++ .......................... 03/15/08 B- 200 108,000
APCOA, Inc.
9.249% ............................. 03/15/08 B- 600 552,000
Coinmach Corp.
11.75% ............................. 11/15/05 B+ 307 338,468
Intertek Finance PLC
10.25% ............................. 11/01/06 B 500 465,000
Iron Mountain, Inc.
8.75% .............................. 09/30/09 B- 500 515,000
MSX International, Inc.
11.375% ............................ 01/15/08 B- 400 381,000
Protection One Alarm
7.375% ............................. 08/15/05 BBB- 250 251,760
13.625% ............................ 06/30/05 BB+ 260 295,100
8.125% ............................. 01/15/09 BB+ 150 149,600
----------
3,501,428
----------
SPECIALTY CHEMICALS (0.9%)
Furon Co.
8.125% ............................. 03/01/08 B+ 325 321,750
Octel Developments
PLC. 10.00% ........................ 05/01/06 B+ 250 260,000
----------
581,750
----------
SUPERMARKETS (0.8%)
Jitney-Jungle Stores
10.375% ............................ 09/15/07 B- 325 329,875
12.00% ............................. 03/01/06 B+ 200 223,000
----------
552,875
----------
TELECOMMUNICATIONS (13.8%)
Centennial Cellular
10.75% ............................. 12/15/08 CCC+ 200 201,000
Clearnet
Communications
12.358%++ .......................... 12/15/05 NR 200 172,000
Colt Telecom Group
PLC 9.579%++ ....................... 12/15/06 B 750 622,500
Comcast Cellular
Holdings 9.50% ..................... 05/01/07 BB+ 200 213,500
E. Spire
Communications
13.75% ............................. 07/15/07 NR 100 98,000
14.157%++ .......................... 07/01/08 NR 200 82,000
ICG Holdings, Inc.
13.106%++ .......................... 09/15/05 NR 500 408,355
Intercel, Inc.
13.056%++ .......................... 02/01/06 B 250 184,807
Intermedia
Communication, Inc.
8.50% .............................. 01/15/08 B 100 95,500
11.021%++ .......................... 07/15/07 B 275 189,750

45
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND
PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ----------
Mastec, Inc.
7.75% .............................. 02/01/08 BB- 200 $ 193,000
Metrocall, Inc.
9.75% .............................. 11/01/07 CCC+ 500 480,000
Metromedia Fiber
Network 10.00% ..................... 11/15/08 B 200 205,500
Metronet
Communications,
Corp. 11.146%++ .................... 11/01/07 B 300 195,000
12.00% ............................. 08/15/07 B 150 163,125
10.661%++ .......................... 06/15/08 B 150 91,875
Microcell
Telecommunications,
Inc. 12.445%++ ..................... 06/01/06 NR 500 370,000
Nextel Communications,
Inc. 11.477%++ ..................... 10/31/07 CCC+ 450 274,500
10.31%++ ........................... 08/15/04 CCC+ 500 485,000
Nextlink
Communications, Inc.
12.50% ............................. 04/15/06 B 500 535,000
Pegasus Communications
9.625% ............................. 10/15/05 B- 200 200,000
Pegasus Communications,
Inc. 9.75% ......................... 12/01/06 B- 100 100,250
Price Communications
9.125% ............................. 12/15/06 B 600 606,000
PSINet, Inc.
10.00% ............................. 02/15/05 B- 150 148,500
11.50% ............................. 11/01/08 B- 450 465,750
Qwest Communications
Intl., Inc. 7.50% .................. 11/01/08 BB+ 125 130,625
8.120%++ ........................... 10/15/07 BB+ 600 468,000
RSL Communications
PLC 12.00% ......................... 11/01/08 B- 300 310,500
Satelites Mexicanos SA
10.125% ............................ 11/01/04 B- 250 207,500
Sitel Corporation
9.25% .............................. 03/15/06 B+ 200 180,000
Teligent, Inc.
11.50% ............................. 12/01/07 CCC 50 46,000
14.769%++ .......................... 03/01/08 CCC 450 220,500
United International
Holdings
13.167%++ .......................... 02/15/08 B 525 283,500
Verio, Inc.
10.375% ............................ 04/01/05 B- 150 147,000
11.25% ............................. 12/01/08 B- 300 303,000
Viatel, Inc.
11.25% ............................. 04/15/08 NR 100 100,000
13.165%++ .......................... 04/15/08 NR 200 113,000
21st Century Telecom
Group 17.351%++ .................... 02/15/08 NR 150 63,000
----------
9,353,537
----------
TEXTILES & APPAREL (1.2%)
Delta Mills, Inc.
9.625% ............................. 09/01/07 B+ 400 387,000
Dyersburg Corp.
9.75% .............................. 09/01/07 B+ 300 268,500
Glenoit Corp.
11.00% ............................. 04/15/07 B- 150 139,500

<PAGE>

PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ---------
+@# Plaid Clothing Corp.
11.00% ............................. 08/01/03 D 375 $ 0
-----------
795,000
TRANSPORTATION (1.6%)
Greyhound Lines, Inc.
11.50% ............................. 04/15/07 B- 500 567,500
Travelcenters of
America 10.25% ..................... 04/01/07 B 500 497,500
-----------
1,065,000
-----------
TOTAL CORPORATE BONDS
(Cost $60,146,842) $59,514,022
-----------

COMMERCIAL PAPER (5.5%)
Ciesco L.P.
5.20% .............................. 01/13/99 A-1+ 1,340 1,337,677
General Electric Capital
5.09% .............................. 03/10/99 A-1+ 1,135 1,123,927
@Sysco Corp.
5.10% .............................. 01/04/99 A-1+ 1,243 1,242,472
-----------
TOTAL COMMERCIAL PAPER
(Cost $3,704,237) 3,704,076
-----------

NUMBER
OF SHARES
---------
COMMON STOCK (0.9%)
@+#Capital Gaming Intl., Inc ........................... 34 0
+ Dr. Pepper Bottling Holdings, Inc.,
Class A ........................................... 14,800 444,000
+ Gaylord Containers Corp., Class A .................... 7,500 45,937
+ Hedstrom Holdings .................................... 6,065 6,065
+ Isle of Capri Casinos ................................ 3,600 14,288
+ Nextel Communications Inc. ........................... 232 5,481
+ Protection One, Inc. ................................. 8,400 71,925
-----------

TOTAL COMMON STOCK
(Cost $242,187) ....................................... 587,696
-----------

PREFERRED STOCK (5.2%)
@Anvil Holdings, Inc. .................................. 4,545 45,450
Bank United Capital Trust ............................. 250 250,000
Capstar Broadcasting Partners ......................... 3,588 430,572
Citadel Broadcasting Co. .............................. 1,819 207,368
Clarke USA, Inc. ...................................... 2,792 223,344
Concentric Network Corp. .............................. 2 1,710
CSC Holdings, Inc. Series H ........................... 1,783 205,477
CSC Holdings, Inc. Series M ........................... 9,125 1,021,991
Cumulus Media, Inc. ................................... 160 172,352
E. Spire Communication, Inc. .......................... 1,682 82,404
+Global Crossing Holdings, Ltd. ........................ 1,500 147,375
Intermedia Communications, Inc. ....................... 6,167 66,293
+International Utility Structures ...................... 150 132,000
Nextel Communications, Inc. ........................... 1,063 109,804
Pegasus Communications Corp. .......................... 109 104,640
Rural Cellular Corp. .................................. 310 285,200
Viatel, Inc. .......................................... 154 5,390
-----------

TOTAL PREFERRED STOCK
(Cost $3,650,612) ..................................... 3,491,370
-----------

46
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE HIGH YIELD BOND FUND

NUMBER
OF SHARES VALUE
--------- --------
WARRANTS (0.5%)
+Allegiance Telecom, Inc. ............................. 250 $ 438
+Colt Telecom ......................................... 700 299,005
@+Globalstar, Inc. ..................................... 350 21,000
@+ICF Kaiser International Inc. ........................ 1,575 1
+Intermedia Communication ............................. 50 2,137
+Metronet Communications .............................. 150 6,324
@+Microcell Telecom .................................... 800 10,272
@+President Casinos, Inc. .............................. 4,415 221
+UIH Australia Exp. ................................... 175 583
+Wireless One, Inc. ................................... 450 5
@+Wright Medical Technology, Inc. ...................... 2,676 2
---------
TOTAL WARRANTS
(Cost $44,111) ............................................... 339,988
TOTAL INVESTMENTS (100.0%) -----------
(Cost $67,787,989)(a) ........................................ $67,637,152
===========
- -------------
@ Restricted Security
+ Non-Income Producing
++ Effective Yield
# Securities in default

(a) At December 31, 1998, the cost for Federal income tax purposes was
$67,822,003. Net unrealized depreciation was $184,851. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $2,079,571 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $2,264,422.

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, 1998. Ratings are unaudited.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE GROWTH EQUITY FUND

NUMBER
OF SHARES VALUE
--------- -----------
COMMON STOCK (95.6 %)

COMPUTER SOFTWARE & SERVICES (11.0%)
America Online, Inc. ............. 20,000 $ 2,895,000
+ Cisco Systems, Inc. .............. 90,000 8,355,937
+ Microsoft Corp. .................. 70,000 9,697,188
-----------
20,948,125
-----------
COMPUTER SYSTEMS (7.6%)
Compaq Computer Corp. ............ 70,000 2,935,625
+ Compuware Corp. .................. 75,000 5,857,031
+ Dell Computer Corp. .............. 80,000 5,857,500
-----------
14,650,156
-----------
DIVERSIFIED OPERATIONS (3.5%)
General Electric Co. ............. 65,000 6,634,063
-----------
ELECTRONICS-SEMICONDUCTORS (6.2%)
Intel Corp. ...................... 50,000 5,926,563
Texas Instruments, Inc. .......... 70,000 5,989,375
-----------
11,915,938
-----------
FINANCIAL SERVICES (13.5%)
Chase Manhattan Corp. ............ 60,000 4,083,750
Federal National Mortgage
Association .................... 90,000 6,660,000
First Union Corp. ................ 125,000 7,601,562
MBNA Corp. ....................... 300,000 7,481,250
-----------
25,826,562
-----------
INSURANCE (2.0%)
American International Group, Inc. 40,000 3,865,000
-----------
MEDICAL SUPPLIES (2.3%)
Guidant Corp. .................... 40,000 4,410,000
-----------
PHARMACEUTICALS (15.0%)
Eli Lilly and Co. ................ 60,000 5,332,500
Johnson & Johnson ................ 30,000 2,516,250
Merck & Co., Inc. ................ 50,000 7,384,375
Pfizer, Inc. ..................... 40,000 5,017,500
Schering-Plough Corp. ............ 85,000 4,696,250
Warner-Lambert Co. ............... 50,000 3,759,375
-----------
28,706,250
-----------
RETAIL STORES (19.5%)
CVS Corporation .................. 140,000 7,700,000
+ Safeway, Inc. .................... 150,000 9,140,625
+ Staples, Inc. .................... 175,000 7,650,781
Wal Mart Stores, Inc. ............ 90,000 7,329,375
The Home Depot, Inc. ............. 90,000 5,506,875
-----------
37,327,656
-----------
TELECOMMUNICATIONS (15.0%)
Lucent Technologies, Inc. ........ 60,000 6,600,000
+ MCI WorldCom, Inc. ............... 100,000 7,178,125
SBC Communications, Inc. ......... 120,000 6,435,000
Time Warner, Inc. ................ 135,000 8,378,438
-----------
28,591,563
-----------
TOTAL COMMON STOCK
(Cost $113,072,390) .............. 182,875,313
-----------

<PAGE>
- --------------------------------------------------------------------------------

NUMBER
OF SHARES VALUE
--------- -----------
SHORT TERM INVESTMENTS (4.4%)

Temporary Investment Fund - Temp
Cash ............................ 4,211,143 $ 4,211,143
Temporary Investment Fund, Inc. .. 4,211,142 4,211,142
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $8,422,285) ......................... 8,422,285
------------
TOTAL INVESTMENTS (100.0%)
(Cost $121,494,675) (a) ................... $191,297,598
============
- ------------------
+ Non-Income Producing

(a) At December 31, 1998, the cost for Federal income tax purposes was
$121,546,835. Net appreciation was $69,750,763 this consisted of aggregate
gross unrealized appreciation for all securities in which there was an
excess of market value over tax cost of $69,966,415 and aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over market value of $215,652.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE VALUE EQUITY FUND

NUMBER
OF SHARES VALUE
--------- -----------
COMMON STOCK (90.7%)

ADVERTISING (1.7%)
Omnicom Group, Inc. .............. 100,000 $ 5,800,000
------------
AEROSPACE & DEFENSE (4.8%)
Allied-Signal, Inc. .............. 160,000 7,090,000
Lockheed Martin Corp. ............ 104,000 8,814,000
------------
15,904,000
------------
AIRLINES (2.3%)
+ AMR Corp. ........................ 129,000 7,659,375
------------
AUTOMOTIVE PARTS-EQUIPMENT (1.8%)
Lucas Varity PLC ................. 178,520 5,980,420
------------
BUILDING PRODUCTS (0.6%)
Armstrong World Industries, Inc. . 32,000 1,930,000
------------
COMMUNICATIONS (0.2%)
+ Sprint PCS ....................... 36,125 835,391
------------
CHEMICALS (1.7%)
Dupont (E.I.) de Nemours & Co. ... 80,000 4,245,000
Hercules, Inc. ................... 50,000 1,368,750
------------
5,613,750
------------
CONSUMER NON-DURABLE (3.7%)
Philip Morris Companies .......... 230,000 12,305,000
------------
COSMETICS-TOILETRY (1.1%)
International Flavors &
Fragrances, Inc. ............... 80,000 3,535,000
------------
DIVERSIFIED OPERATIONS (6.8%)
Canadian Pacific, Ltd. ........... 150,000 2,831,250
Minnesota Mining &
Manufacturing Co. .............. 115,000 8,179,375
Textron, Inc. .................... 155,000 11,770,313
------------
22,780,938
------------
ENTERTAINMENT & LEISURE (2.0%)
Carnival Corp. - Class A ......... 140,000 6,720,000
------------
ELECTRONIC COMPONENTS (0.7%)
+ Conexant Systems, Inc. ........... 2,000 33,438
Motorola, Inc. ................... 40,000 2,442,500
------------
2,475,938
------------
ELECTRONIC SYSTEMS (2.7%)
Rockwell International Corp. ..... 224,000 9,005,500
------------
ELECTRONICS (2.2%)
+ Arrow Electronics, Inc. .......... 96,000 2,562,000
Avnet, Inc. ...................... 81,000 4,900,500
------------
7,462,500
------------

<PAGE>
- --------------------------------------------------------------------------------

NUMBER
OF SHARES VALUE
--------- -----------
FINANCIAL SERVICES (14.9%)
Bank Boston Corp. ................ 127,000 $4,945,063
Citigroup Inc. ................... 137,500 6,806,250
Conseco Inc. ..................... 311,610 9,523,581
Countrywide Credit Industries, Inc. 190,000 9,535,625
Freddie Mac ...................... 169,000 10,889,938
Wells Fargo & CO ................. 203,330 8,120,492
------------
49,820,949
------------
HEALTHCARE (2.2%)
+ Tenet Healthcare Corp. ........... 282,500 7,415,625
------------
INSURANCE (20.7%)
Ace Limited ...................... 505,000 17,390,938
AFLAC, Inc. ...................... 164,750 7,249,000
American International Group, Inc. 45,375 4,384,359
Everest Reinsurance Holdings, Inc. 250,000 9,734,375
EXEL Limited ..................... 283,196 21,239,700
Berkshire Hathaway Class B ....... 3,885 9,129,750
------------
69,128,122
------------
MACHINERY (DIVERSIFIED) (4.7%)
Caterpillar, Inc. ................ 137,000 6,302,000
Dover Corp. ...................... 256,000 9,376,000
------------
15,678,000
------------
MEDICAL SUPPLIES (2.2%)
Becton, Dickinson & Co. .......... 168,000 7,171,500
------------
OFFICE SUPPLIES (2.2%)
+ Avery Dennison Corp. ............. 160,000 7,210,000
------------
PAPER & PAPER PRODUCTS (1.2%)
Champion International Corp. ..... 100,000 4,050,000
------------
PHOTOGRAPHIC EQUIPMENT (0.6%)
Polaroid Corp. ................... 115,000 2,149,062
------------

RESTAURANTS (3.1%)
McDonald's Corporation ........... 136,000 10,421,000
------------
RETAIL (2.5%)
The May Department Stores Co. .... 138,000 8,331,750
------------
TELECOMMUNICATIONS (1.8%)
Sprint Corp. ..................... 72,250 6,078,031
------------
TOYS (0.6%)
Mattel, Inc. ..................... 89,531 2,042,426
------------
TRAVEL SERVICES (1.7%)
+ The Sabre Group Holdings, Inc. ... 125,000 5,562,500
------------
TOTAL COMMON STOCK
(Cost $216,288,658) ....................... 303,066,778
------------

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE VALUE EQUITY FUND

PAR
MATURITY (000) VALUE
-------- ------ ------------
COMMERCIAL PAPER (8.7%)

American Express Credit Corp.
5.05% .................... 01/06/99 10,687 $ 10,679,504
Ford Motor Credit Corp.
5.01% .................... 01/20/99 9,005 8,981,189
General Motors Acceptance
Corp. 5.32% .............. 01/13/99 9,501 9,484,152
------------
TOTAL COMMERCIAL PAPER
(Cost $29,144,845) ............................. 29,144,845
------------

NUMBER
OF SHARES
---------
SHORT TERM INVESTMENTS (0.6%)

Temporary Cash Investment
Fund, Inc. ............... 978,115 978,115
Temporary Investment Fund,
Inc. ...................... 980,841 980,841
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $1,958,956) .............................. 1,958,956
------------
TOTAL INVESTMENTS (100.0%)
(Cost $247,392,459) (a) ........................ $334,170,576
============
- ------------------
+ Non-Income Producing

(a) At December 31, 1998, the cost for Federal income tax purposes was
$247,423,512. At December 31, 1998, net unrealized appreciation was
$86,747,067. This consisted of aggregate gross unrealized appreciation for
all securities in which there was an excess of market value over tax cost of
$99,737,759 and aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over market value of $12,990,692.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE FLEXIBLY MANAGED FUND

NUMBER
OF SHARES VALUE
--------- -----------
COMMON STOCK (50.9%)
AUTOMOTIVE PARTS-EQUIPMENT (0.1%)
Exide Corp. ..................................... 35,000 $ 568,750
-----------
BANKS (0.2%)
Bank Fuer International Zahlungs ................ 150 955,602
-----------
CHEMICALS (3.2%)
English China Clays PLC ......................... 112,000 308,404
Great Lakes Chemical Corp. ...................... 190,000 7,600,000
+ Imperial Chemical Industries PLC (ADR) 107,000 .. 3,738,313
+ Octel Corp. ..................................... 410,000 5,688,750
-----------
17,335,467
-----------
CONSTRUCTION (0.5%)
Johns Manville Corp. ............................ 153,000 2,514,938
-----------
CONSUMER NON-DURABLE (0.5%)
+ Nine West Group Inc. ............................ 7,500 116,719
+ Reebok International, Ltd. ...................... 173,500 2,580,812
-----------
2,697,531
-----------
ELECTRIC UTILITIES (7.2%)
First Energy Corp. .............................. 390,500 12,715,656
Kansas City Power & Light Co. ................... 226,000 6,695,250
+ Nevada Power Co. ................................ 29,000 754,000
+ Niagara Mohawk Power Corp. ...................... 873,000 14,077,125
Unicom Corp. .................................... 118,500 4,569,656
-----------
38,811,687
-----------
EXPLORATION & PRODUCTION (1.3%)
+ Mitchell Energy & Development Corp.,
Class A ....................................... 10,000 114,375
Mitchell Energy & Development Corp.,
Class B ....................................... 434,000 5,045,250
+ Oryx Energy Co. ................................. 140,600 1,889,312
-----------
7,048,937
-----------
FINANCIAL SERVICES (0.9%)
Fund American Enterprises
Holdings, Inc. ................................ 35,000 4,902,188
-----------
FOOD PROCESSING (0.6%)
McCormick & Co., Inc. ........................... 94,000 3,175,438
-----------
FOREST PRODUCTS (0.8%)
Georgia-Pacific Corp. (Timber Group) ............ 40,000 952,500
Weyerhaeuser Co. ................................ 64,000 3,252,000
-----------
4,204,500
-----------
HOLDINGS COMPANY DIVERSIFIED (5.5%)
BTR PLC ......................................... 124,313 256,472
Hanson PLC (ADR) ................................ 74,125 2,890,875
Loews Corp. ..................................... 244,500 24,022,125
Lonrho Africa PLC ............................... 305,000 281,641
Lonrho PLC ...................................... 428,000 2,278,755
-----------
29,729,868
-----------
HOTELS & GAMING (0.6%)
+ Circus Circus Enterprises,Inc ................... 274,000 3,133,875
-----------
INSURANCE (2.1%)
Aetna Inc. ...................................... 29,000 2,280,125
+ Leucadia National Corp. ......................... 172,000 5,418,000
Unitrin, Inc. ................................... 49,500 3,533,062
-----------
11,231,187
-----------

<PAGE>
NUMBER
OF SHARES VALUE
--------- ------------
MEDIA AND COMMUNICATIONS (2.4%)
+ Chris-Craft Industries, Inc. ................ 206,000 $ 9,926,625
Meredith Corp. .............................. 80,000 3,030,00
-----------
12,956,625
-----------
MEDICAL (0.8%)
Smith and Nephew PLC ........................ 1,530,000 4,722,144
-----------
MINING (2.2%)
Homestake Mining Co. ........................ 461,500 4,240,031
Newmont Mining Corp. ........................ 418,000 7,550,125
-----------
11,790,156
-----------
MISCELLANEOUS CONSUMER DURABLES (1.0%)
Corning, Inc. ............................... 115,000 5,175,000
-----------
MISCELLANEOUS CONSUMER PRODUCTS (1.8%)
Cross (A.T.) Co., Class A ................... 38,000 204,250
Philip Morris Co., Inc. ..................... 182,000 9,737,000
-----------
9,941,250
-----------
OIL & GAS (8.3%)
Amerada Hess Corp. .......................... 443,000 22,039,250
Atlantic Richfield Co. ...................... 58,500 3,817,125
Kerr-McGee Corp. ............................ 34,100 1,304,325
Murphy Oil Corp. ............................ 196,000 8,085,000
Texaco, Inc. ................................ 144,500 7,640,437
Unocal Corp. ................................ 75,000 2,189,063
-----------
45,075,200
-----------
PAPER & FOREST PRODUCTS (2.3%)
Domtar, Inc. (ADR) .......................... 652,000 3,830,500
MacMillian Bloedel, Ltd. (ADR) .............. 858,000 8,472,750
-----------
12,303,250
-----------
PHARMACEUTICALS (0.2%)
Schering-Plough Corp. ....................... 21,000 1,160,250
-----------
PHOTOGRAPHIC EQUIPMENT (0.4%)
Polaroid Corp. .............................. 113,000 2,111,688
-----------
PUBLISHING (5.3%)
New York Times Co., Class A ................. 287,000 9,955,313
Reader's Digest Assoc., Inc., Class A ....... 65,000 1,637,188
Reader's Digest Assoc., Inc., Class B ....... 52,000 1,254,500
The Washington Post Co., Class B ............ 27,800 16,066,662
-----------
28,913,663
-----------
RAILROADS (0.5%)
+ Canadian Pacific, Ltd. (ADR) ................ 160,000 3,020,000
-----------
RETAIL (0.5%)
+ Hills Stores Co. ............................ 93,000 133,687
+ J.C. Penney Co., Inc. ....................... 54,000 2,531,250
-----------
2,664,937
-----------
SPECIALTY MERCHANDISERS (1.2%)
+ Petrie Stores Corp. ......................... 1,372,500 3,045,234
+ Toys 'R' Us, Inc. ........................... 193,000 3,256,875
-----------
6,302,109
-----------
TRANSPORTATION SERVICES (0.5%)
Overseas Shipholding Group, Inc. ............ 182,000 2,923,375
-----------
TOTAL COMMON STOCK
(Cost $242,890,127) ......................................... 275,369,615
-----------

51
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE FLEXIBLY MANAGED FUND

NUMBER
OF SHARES VALUE
--------- ------------
PREFERRED STOCK (6.4%)
Cleveland Electric Illum. Series
L 7.00% ..................................... 29,550 $ 2,980,856
Cleveland Electric Illum. Series
R 8.80% ..................................... 350 372,750
Cleveland Electric Illum. Series
S 9.00% ..................................... 2,100 2,236,500
Entergy Gulf States Utilities Inc. Series
B 7.20% ..................................... 14,414 724,304
Kemper Corp. Series E 144A 5.75% .............. 100,000 5,287,500
Niagara Mohawk Power Corp. Series
A 6.50% ..................................... 16,000 408,500
Niagara Mohawk Power Corp. Series
B 7.50% ..................................... 6,800 172,975
Niagara Mohawk Power Corp. Series
C 7.20% ..................................... 5,500 139,734
Reckson Assoc. Realty Corp. Series
A 7.625% .................................... 21,000 443,625
Rouse Co. Series B $3 ......................... 278,500 12,079,938
Sealed Air Corp. Series A $2 .................. 40,300 2,090,563
Union Pacific Cap Trust 6.25% ................. 93,000 4,324,500
Union Pacific Cap Trust 6.25% 144A ............ 66,000 3,069,000
Unocal Corp. 6.25% ............................ 7,300 356,787
-----------
TOTAL PREFERRED STOCK
(Cost $33,451,743) ........................................... 34,687,532
-----------

NUMBER OF
CONTRACTS
---------
PUT OPTIONS (0.1%)
+ Clear Channel Communications
$55, 1/16/99 ...................................... 126 35,831
+ Clear Channel Communications
$60, 1/16/99 ...................................... 30 19,125
+ IBM $130, 1/16/99 ................................... 125 391
+ MCI WorldCom $55, 1/16/99 ........................... 130 812
+ Pharmacia & Upjohn, Inc. ............................
$50, 1/16/99 ...................................... 120 3,000
+ Reebok International, Ltd. ..........................
$35, 1/16/99 ...................................... 130 263,250
+ Schering-Plough Corp. ...............................
$52.50, 2/20/99 ................................... 260 42,250
+ Time Warner, Inc. $50, 3/20/99 ...................... 360 24,750
---------

TOTAL OPTIONS
(Cost $937,970) ................................................. 389,409
---------

PAR
MATURITY RATING (000)
-------- ------ -----
U.S. TREASURY OBLIGATIONS (5.9%)
U.S. Treasury Notes
5.50% ............... 02/28/99 NR 10,000 10,010,900
6.75% ............... 05/31/99 NR 2,000 2,016,240
5.875%............... 02/15/00 NR 12,900 13,067,313
6.125%............... 07/31/00 NR 1,250 1,277,538
6.25% ............... 04/30/01 NR 2,500 2,587,900
6.25% ............... 10/31/01 NR 2,500 2,604,675
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $31,343,445)........................................... 31,564,566
-----------

<PAGE>

PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ---------
AGENCY OBLIGATIONS (7.9%)
FNMA-Global Bond
6.375% ...................... 01/16/02 AAA 3,200 $ 3,321,437
California State
5.25% ....................... 10/01/11 A+ 2,925 3,133,348
Tennessee Valley
Authority
5.88%....................... 04/01/36 AAA 17,000 17,844,883
5.98%....................... 04/01/36 AAA 4,600 4,830,621
6.235%...................... 07/15/45 AAA 9,950 10,440,366
------------
TOTAL AGENCY OBLIGATIONS
(Cost $38,610,204) ........................................ 39,570,655
------------
MEDIUM TERM NOTES (0.3%)
FNMA Medium Term
Note 5.37%
(Cost $1,576,000) ........... 02/07/01 AAA 1,600 1,615,020
------------
CORPORATE BONDS (0.7%)
BellSouth Telecommunications
Debentures 5.85%
(Cost $3,776,250) ........... 11/15/45 AAA 3,800 3,848,222
------------
CONVERTIBLE BONDS (14.9%)
Centor, Inc. 4.75% ............ 02/15/05 NR 1,165 1,233,444
Chiron Corp.1.90% ............. 11/17/00 BB+ 7,775 7,940,219
Clear Channel 2.625% .......... 04/01/03 BBB- 1,050 1,124,813
Exide Corp. 144A 2.90% ........ 12/15/05 B 1,363 805,874
France Telecom Euro
Bond 2.00% ................. 01/01/04 AA+ 5,870 5,865,891
George Weston, Ltd.
3.00% ...................... 06/30/23 NR 1,500 899,449
Hilton Hotels Corp.
5.00% ...................... 05/15/06 BBB- 4,400 3,987,500
Homestake Mining Co.
5.50% ...................... 06/23/00 B+ 7,190 6,794,550
Homestake Mining Co.
Euro Bond 5.50% ............. 06/23/00 NR 1,890 1,786,050
Inco, Ltd. 7.75% .............. 03/15/16 BBB- 1,950 1,755,000
Inco, Ltd. 5.75% .............. 07/01/04 BBB- 10,100 8,711,250
Loews Corp. 3.125% ............ 09/15/07 A+ 7,975 6,380,000
Lonhro 6.00% .................. 02/27/04 NR 4,260 6,077,816
Mckesson Corp.
4.50% ....................... 03/01/04 BBB+ 1,500 1,357,500
National Semiconductor
Corp. 6.50% ................. 10/01/02 NR 4,015 3,513,125
Nedlloyd Group
4.25%........................ 03/15/01 NR 497 287,341
Nine West Group Inc.
5.50%........................ 07/15/03 B+ 3,050 2,405,687
Ogden Corp. 5.75% ............. 10/20/02 BBB 250 239,063
Oryx Energy Co.
7.50%........................ 05/15/14 BB- 425 418,625
Peninsular & Oriental
7.25% ....................... 05/19/03 NR 580 1,066,336
Pep Boys 4.00% ................ 09/01/99 BB+ 2,650 2,610,250
Phycor, Inc. 4.50% ............ 02/15/03 B+ 3,500 2,117,500
Potomac Electric Power
Co. 5.00% ................... 09/01/02 A 4,050 3,908,250

52
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE FLEXIBLY MANAGED FUND

PAR
MATURITY RATING (000) VALUE
-------- ------ ----- ---------
Rouse Co. Euro Bond
5.75% .................. 07/23/02 BBB- 4,380 $ 4,588,400
Teck Corp.
3.75% .................. 07/15/06 BBB- 5,200 3,393,000
Thomas Nelson
5.75% .................. 11/30/99 NR 1,050 1,060,50
-----------
TOTAL CONVERTIBLE BONDS
(Cost $80,676,906) .................................... 80,327,433
-----------
ZERO COUPON BONDS (6.2%)
Marriott International
3.9978%++ .............. 03/25/11 BBB 5,330 3,513,483
Motorola, Inc.
2.2453%++ .............. 09/27/13 A+ 2,600 1,937,000
News American Holdings
Lyons 5.3533%++ ........ 03/11/13 BBB- 2,515 1,450,627
Pep Boys 4.6148%++ ....... 09/20/11 BB+ 2,680 1,393,600
Roche Holdings, Inc.
144A 6.3750%++ ......... 05/06/12 NR 6,395 3,421,325
Times Mirror Co.
4.4492%++............... 04/15/17 A 27,150 12,387,187
U.S. Cellular
5.8820%++............... 06/15/15 BBB- 22,600 9,352,332
-----------
TOTAL ZERO COUPON BONDS
(Cost $31,413,869) .................................... 33,455,554
-----------
COMMERCIAL PAPER (6.4%)
Aluminum Company of
America 5.25% .......... 02/04/99 A-1 3,265 3,248,811
Ciesco L.P.
5.20% .................. 01/13/99 A-1+ 1,420 1,417,539
5.17% .................. 01/13/99 A-1+ 11,245 11,225,621
Duke Energy 5.15% ........ 01/14/99 A-1 14,500 14,473,034
Equilon Enterprises
5.00%................... 01/04/99 A-1+ 3,613 3,611,494
Falcon Asset Sec .........
6.75% .................. 01/05/99 A-1+ 500 499,625
Federal Home Loan Bank
4.50% .................. 01/04/99 AAA 3,387 3,385,730
-----------
TOTAL COMMERCIAL PAPER
(Cost $37,861,854) .................................... 37,861,854
-----------

<PAGE>
NUMBER
OF SHARES VALUE
--------- ----------
SHORT TERM INVESTMENTS (0.3%)
Temporary Investment Fund, Inc.
(Cost $1,745,433) ..................... 1,745,433 $1,745,433
TOTAL INVESTMENTS (100.0%)
(Cost $504,283,801) (a) ...................................... $540,435,293
============
- ---------
+ Non-Income Producing

++ Effective Yield.

(a) At December 31, 1998, the cost for Federal income tax purposes was
$504,473,403. Net unrealized appreciation was $35,961,890. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $66,274,133 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $30,312,243.

ADR--American Depository Receipt

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, 1998. Ratings are unaudited.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE INTERNATIONAL EQUITY FUND

NUMBER
OF SHARES VALUE
--------- -----------
COMMON STOCK (93.7%)
BELGIUM (1.1%)
Barco N.V. .............................. 6,000 $ 1,694,192
-----------
DENMARK (0.6%)
Bang & Olufsen Holding-B ................ 14,000 853,504
-----------
FINLAND (0.8%)
+ Nokia Corp. (ADR) ....................... 9,000 1,083,938
+ Pohjola Insurance ....................... 4,000 219,621
-----------
1,303,559
-----------
FRANCE (11.9%)
AXA-AUP ................................. 25,500 3,697,638
Compagnie Generale D'Industrie
Et de Participations .................. 30,000 1,654,136
Dassault Systemes SA .................... 39,000 1,834,103
L'OREAL ................................. 3,300 2,386,682
LVMH (Louis Vuitton
Moet Hennessy) ........................ 9,300 1,841,354
Scor SA ................................. 40,000 2,645,901
Societe BIC SA .......................... 14,566 808,353
Societe Generale Paris .................. 12,000 1,944,146
Total SA-B .............................. 14,185 1,437,292
-----------
18,249,605
-----------
GERMANY (4.9%)
Allianz AG .............................. 4,508 1,678,105
AXA Colonia Konzern AG .................. 7,500 851,072
Bayerische Motoren Werke
(BMW) AG .............................. 1,000 785,328
+ Bayerische Motoren Werke (BMW)
AG-NEW ................................ 600 460,390
Mannesmann AG ........................... 18,500 2,140,965
Muenchener Rueckversicherungs
Gesellschaft AG ....................... 3,204 1,567,810
-----------
7,483,670
-----------
GREECE (0.5%)
+ Alpha Credit Bank ....................... 8,000 834,733
HONG KONG (1.0%)
Dah Sing Financial Group ................ 172,100 422,085
Sun Hung Kai Properties Limited ......... 150,000 1,093,969
-----------
1,516,054
-----------
IRELAND (5.6%)
Allied Irish Banks PLC .................. 193,290 3,441,098
+ Bank of Ireland ......................... 65,000 1,448,916
CRH PLC ................................. 49,021 834,376
+ Elan Corp. PLC (ADR) .................... 25,000 1,739,063
Greencore Group PLC ..................... 112,027 506,985
Viridian Group PLC ...................... 56,000 678,768
-----------
8,649,206
-----------
JAPAN (17.7%)
The Bank of Tokyo-Mitsubishi,
Limited ............................... 85,000 881,675
Bridgestone Corp. ....................... 105,000 2,387,705
Credit Saison Co. Limited ............... 80,000 1,975,237
Fuji Photo Film Co. Limited ............. 69,000 2,569,226
Hoya Corp ............................... 33,000 1,609,091
Ito-Yokado Co. Limited .................. 30,000 2,101,127
Murata Manufacturing Co. Limited ........ 25,000 1,039,482
Nintendo Co. Limited .................... 22,000 2,135,702
NTT Data Corp. .......................... 260,000 1,293,124

<PAGE>

NUMBER
OF SHARES VALUE
--------- -----------
Rohm Co. Limited ........................ 34,000 $ 3,101,689
Sony Corp. .............................. 22,000 1,605,190
Takeda Chemical Industries .............. 103,000 3,972,194
Tokyo Broadcasting System, Inc. ......... 30,000 335,914
Tokyo Electron Limited .................. 40,000 1,521,322
Yasuda Fire & Marine Insurance
Co. Limited ........................... 145,000 699,312
-----------
27,227,990
-----------
MALAYSIA (0.1%)
Malayan Banking Berhad .................. 160,000 226,893
-----------
NETHERLANDS (10.7%)
AEGON N.V. (ADR) ........................ 27,000 3,300,750
AEGON N.V. .............................. 32,840 4,035,362
+ ASM Lithography Holding ................. 47,000 1,437,573
+ Getronics N.V. .......................... 19,000 941,579
+ Heineken N.V. ........................... 26,000 1,565,568
ING Groep N.V. .......................... 33,000 2,013,444
Philips Electronics N.V. ................ 21,500 1,443,541
+ Vedior N.V. ............................. 39,189 772,656
Vendex N.V. (Non Food) .................. 39,933 970,324
-----------
16,480,797
-----------
PORTUGAL (0.6%)
+ Telecel-Comunicacaoes Pessoais SA ....... 4,200 858,566
-----------
SINGAPORE (1.4%)
+ Jardine Strategic Holdings Ltd. ......... 575,000 833,750
+ Singapore Press Holdings ................ 125,000 1,363,669
-----------
2,197,419
-----------
SPAIN (0.9%)
Banco Popular Espanol SA ................ 18,000 1,359,296
-----------
SWEDEN (5.9%)
ABB AB B Shares ......................... 145,000 1,538,454
ASSA Abloy AB-B ......................... 62,700 2,397,990
Astra AB-B .............................. 70,000 1,424,951
Hennes & Mauritz AB-B ................... 28,000 2,286,831
+ Investment AB Bure ...................... 60,000 851,270
Om Gruppen AB ........................... 47,100 592,706
-----------
9,092,202
-----------
SWITZERLAND (11.8%)
Credit Suisse Group ..................... 23,000 3,600,344
Nestle SA ............................... 1,250 2,721,190
Novartis Limited ........................ 550 1,081,195
+ Pharma Vision 2000 AG ................... 1,000 706,235
Roche Holding AG ........................ 70 1,267,765
Roche Holding AG -Genusshein ............ 370 4,514,955
Swiss Reinsurance ....................... 900 2,346,521
+ Zurich Allied AG ........................ 2,650 1,962,206
-----------
18,200,411
-----------
UNITED KINGDOM (18.2%)
Barclays PLC ............................ 1 22
British Petroleum Co. PLC (ADR) ......... 13,467 1,206,980
Capita Group PLC ........................ 100,000 924,247
CGU PLC ................................. 94,941 1,486,440
Compass Group PLC ....................... 328,000 3,757,350
Dixons Group PLC ........................ 128,000 1,800,642
Hays PLC ................................ 150,000 1,316,490
HSBC Holdings PLC ....................... 71,000 1,925,528
Lloyds TSB Group PLC .................... 140,000 1,991,581
Misys PLC ............................... 257,640 1,894,695
Provident Financial PLC ................. 81,334 1,174,615

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE INTERNATIONAL EQUITY FUND

NUMBER
OF SHARES VALUE
--------- -----------

Rentokil Initial PLC .................... 570,000 $ 4,296,125
+ Schroders PLC ........................... 43,000 784,836
Siebe PLC ............................... 296,360 1,168,616
Vodafone Group PLC ...................... 88,000 1,429,014
WPP Group PLC ........................... 200,000 1,217,077
Zeneca Group PLC ........................ 36,500 1,589,280
------------
27,963,538
------------
TOTAL COMMON STOCK
(Cost $106,126,061) ................................... 144,191,635
------------
PREFERRED STOCK (2.3%)
Germany
SAP AG Prf ............................ 7,350 3,528,168
------------
TOTAL PREFERRED STOCK
(Cost $1,874,933) ..................................... 3,528,168
------------
WARRANTS (0.3%)
+ Credit Suisse ........................... 280,000 452,573
+ Muenchener Reuckversicherungs ........... 104 4,870
------------
TOTAL WARRANTS
(Cost $1,409,378) ..................................... 457,443
------------
SHORT TERM INVESTMENTS (3.7%)
Temporary Cash Investment
Fund, Inc. ............................ 2,890,887 2,890,887
Temporary Investment Fund, Inc. ......... 2,890,887 2,890,887
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $5,781,774) ..................................... 5,781,774
------------ ------------
TOTAL INVESTMENTS (100.0%)
(Cost $115,192,146) (a) ............................... $153,959,020
============

+ Non-Income Producing

(a) At December 31, 1998, the cost for Federal income tax purposes was
$115,192,146. Net unrealized appreciation was $38,766,874. This consisted
of aggregate gross unrealized appreciation for all securities in which
there was an excess of market value over tax cost of $43,273,642 and
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over market value of $4,506,768.

ADR--American Depository Receipt.

<PAGE>

% OF
MARKET VALUE
VALUE (000'S)
----- -------
COMMON AND PREFERRED STOCK SECTOR
DIVERSIFICATION
Financial Services ...................... 18.5% $ 27,269
Insurance ............................... 16.6% 24,491
Pharmaceuticals ......................... 10.6% 15,590
Electronics ............................. 10.1% 14,939
Diversified Operations .................. 3.7% 5,538
Computer Software ....................... 3.6% 5,362
Retail Diversified ...................... 3.6% 5,358
Telecommunication Equipment ............. 3.2% 4,665
Diversified Commercial Services ......... 2.9% 4,296
Metal Processors & Fabricators .......... 2.7% 4,052
Catering Services ....................... 2.6% 3,757
Diversified Food Products ............... 2.2% 3,228
Human Resources ......................... 2.0% 3,013
Computer Services ....................... 1.9% 2,836
Oil ..................................... 1.8% 2,644
Photographic Equipment .................. 1.7% 2,569
Automotive Parts & Equipment ............ 1.6% 2,388
Cosmetics ............................... 1.6% 2,387
Electrical Services ..................... 1.5% 2,217
Machinery - General Industry ............ 1.4% 2,141
Optical Equipment ....................... 1.1% 1,609
Beverages ............................... 1.1% 1,566
Publishing .............................. 1.0% 1,364
Automobile Manufacturing ................ 0.8% 1,246
Advertising ............................. 0.8% 1,217
Building Materials ...................... 0.6% 834
Office Supplies & Forms ................. 0.6% 808
Media Communications .................... 0.2% 336
----- -------
100.0% 147,720
===== =======

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE SMALL CAPITALIZATION FUND

NUMBER
OF SHARES VALUE
--------- -----------
COMMON STOCK (90.0%)
AGRICULTURAL PRODUCTS (1.1%)
+ Agribrands International, Inc. .......... 15,600 $ 468,000
-----------
AUDIO & VIDEO EQUIPMENT (2.1%)
Harman International Industries, Inc. ... 23,300 888,312
-----------
AUTO-PARTS/EQUIPMENT (2.5%)
Borg-Warner Automotive, Inc. ............ 19,100 1,066,019
-----------
CHEMICALS (5.0%)
+ Lawter International, Inc. .............. 5,200 60,450
+ McWhorter Technologies, Inc. ............ 16,000 366,000
Schulman, A. Inc. ....................... 47,800 1,079,981
+ TETRA Technologies, Inc. ................ 62,400 682,500
-----------
2,188,931
-----------
CHEMICALS-DIVERSIFIED (1.2%)
M.A. Hanna Co. .......................... 43,100 530,669
-----------
COMMERCIAL SERVICES (2.3%)
+ Volt Information Sciences, Inc. ......... 43,300 976,956
-----------
COMPUTERS (1.3%)
+ Artesyn Technologies, Inc. .............. 40,000 571,250
-----------
COMPUTER SERVICES & SOFTWARE (5.8%)
+ BANCTEC, Inc. ........................... 50,200 630,638
+ Wang Laboratories, Inc. ................. 67,500 1,868,906
-----------
2,499,544
-----------
COMPUTER SYSTEMS (0.7%)
+ Adaptec, Inc. ........................... 17,000 298,031
-----------
DIVERSIFIED OPERATIONS (6.2%)
+ GP Strategies Corp. ..................... 54,600 819,000
+ Lydall, Inc. ............................ 53,700 637,687
+ Triarc Companies, Inc. .................. 65,400 1,046,400
U.S. Industries, Inc. ................... 8,400 156,450
-----------
2,659,537
-----------
ELECTRONIC COMPONENTS (8.6%)
CTS Corp. ............................... 23,900 1,039,650
+ Exar Corp. .............................. 47,000 757,875
+ General Semiconductor, Inc. ............. 63,700 521,544
+ Oak Industries, Inc. .................... 4,200 147,000
+ Unitrode Corp. .......................... 42,600 745,500
Technitrol, Inc. ........................ 15,900 506,812
-----------
3,718,381
-----------
FINANCIAL SERVICES (2.3%)
Enhance Financial Services
Group, Inc. ........................... 33,400 1,002,000
-----------
HEALTHCARE (2.7%)
+ Corvel Corp. ............................ 18,100 641,419
+ Trigon Healthcare, Inc. ................. 13,900 518,644
-----------
1,160,063
-----------
INSURANCE (11.4%)
Chartwell Re Corp. ...................... 35,900 852,625
CNA Surety Corp. ........................ 47,600 749,700
E.W. Blanch Holdings, Inc. .............. 20,300 962,981
Horace Mann Educators Corp. ............. 7,900 225,150
RenaissanceRe Holdings Ltd. ............. 34,600 1,267,225
Terra Nova (Bermuda) Holdings Ltd. ...... 33,700 850,925
-----------
4,908,606
-----------

<PAGE>

NUMBER
OF SHARES VALUE
--------- -----------
INSURANCE (LIFE)(7.4%)
+ American Medical Security Group, Inc. ... 69,800 $ 999,013
Annuity and Life Re (Holdings), Ltd. .... 44,900 1,201,075
+ Delphi Financial Group, Inc. ............ 18,967 994,582
-----------
3,194,670
-----------
MACHINERY (1.4%)
+ Albany International Corp. .............. 31,306 592,854
-----------
MACHINE TOOLS (0.9%)
+ Baldwin Technology Company,Inc. ......... 72,500 407,813
-----------
MANUFACTURING (4.1%)
Flowserve Corp. ......................... 44,600 738,688
+ Paxar Corp. ............................. 116,650 1,042,559
-----------
1,781,247
-----------
MEDICAL-HOSP MGT+SVC (2.6%)
+ Magellan Health Services, Inc. .......... 66,200 554,425
United Wisconsin Services, Inc. ......... 64,300 558,606
-----------
1,113,031
-----------
MEDICAL SUPPLIES (1.1%)
DENTSPLY International, Inc. ............ 8,700 222,937
Vital Signs, Inc. ....................... 15,400 270,944
-----------
493,881
-----------
METALS (0.6%)
+ Precision Castparts Corp. ............... 5,700 252,225
-----------
OFFICE EQUIPMENT & SUPPLIES (2.9%)
+ Wallace Computer Services, Inc. ......... 47,200 1,244,900
-----------
OIL/GAS-EXPLORATION (0.5%)
KCS Energy, Inc. ........................ 72,200 221,113
-----------
OIL & GAS (4.7%)
+ Basin Exploration, Inc. ................. 30,900 391,078
Cabot Oil & Gas Corp. ................... 40,500 607,500
+ Nuevo Energy Co. ........................ 30,000 345,000
St. Mary Land & Exploration Co. ......... 37,200 695,175
-----------
2,038,753
-----------
PACKAGING & PAPER PRODUCTS (0.2%)
+ AEP Industries, Inc. .................... 3,800 82,413
-----------
PUBLISHING (3.1%)
Hollinger International, Inc. ........... 96,000 1,338,000
-----------
TEXTILES (3.3%)
Guilford Mills, Inc. .................... 59,100 986,231
+ WestPoint Stevens, Inc. ................. 14,500 457,203
-----------
1,443,434
-----------

TRANSPORTATION (1.8%)
Interpool, Inc. ......................... 45,700 765,475
-----------
TRANSPORTATION SERVICES (2.2%)
Air Express International Corp. ......... 43,600 961,925
-----------
TOTAL COMMON STOCK
(Cost $39,983,304) .................................... 38,868,033
===========

<PAGE>

- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE SMALL CAPITALIZATION FUND

PAR
MATURITY (000) VALUE
-------- ----- -----
AGENCY OBLIGATIONS (7.3%)
Federal Home Loan Bank
5.00% ................................. 01/22/99 1,000 $ 997,083
Federal Home Loan Mortgage
Corporation 5.11% ..................... 01/04/99 2,185 2,184,070
-----------
TOTAL AGENCY OBLIGATIONS
(Cost $3,181,153) .......................................... 3,181,153
-----------
NUMBER
OF SHARES
---------
SHORT TERM INVESTMENTS (2.7%)
Temporary Investment Fund, Inc.
(Cost $1,160,677) ..................... 1,160,677 1,160,677
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $44,325,134) (a) ..................................... $43,209,863
===========

+ Non-Income Producing

(a) At December 31, 1998, the cost for federal income tax purposes was
$44,325,134. Net unrealized depreciation was $1,115,271. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $4,810,700 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $5,925,971.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
THE EMERGING GROWTH FUND

NUMBER
OF SHARES VALUE
--------- ----------
COMMON STOCK (94.6%)
ADVERTISING (2.7%)
+ Lamar Advertising Co. ....................... 9,700 $ 363,750
+ TMP Worldwide, Inc. ......................... 15,800 672,487
---------
1,036,237
---------
AIRLINES (1.1%)
+ Atlantic Coast Airlines, Inc. ............... 800 20,200
SkyWest, Inc. ............................... 13,000 424,937
---------
445,137
---------
BROADCASTING (2.0%)
+ CD Radio, Inc. .............................. 3,600 123,525
+ Emmis Broadcasting Corp. .................... 7,400 320,975
+ Infinity Broadcasting Corp. ................. 1,100 30,112
+ Jacor Communications, Inc. .................. 4,800 310,500
---------
785,112
---------
BUILDING PRODUCTS (0.5%)
+ Comfort Systems USA, Inc. ................... 10,000 178,750
BUSINESS SERVICES (4.5%)
+ NCO Group, Inc. ............................. 15,100 679,972
+ Professional Detailing, Inc. ................ 8,200 233,700
+ Ritchie Bros. Auctioneers, Inc. ............. 12,000 323,250
USweb Corp. ................................. 20,000 526,250
---------
1,763,172
---------
CABLE OPERATORS (0.8%)
+ Univision Communications, Inc. .............. 8,800 318,450
---------

COMPUTER SERVICES & SOFTWARE (35.2%)
+ Abovenet Communications, Inc. ............... 1,100 23,031
+ Brightstar Information
Technology Group, Inc. ..................... 4,700 36,719
+ CMGI, Inc. .................................. 5,500 585,922
+ Cognizant Technology Solutions Corp. ........ 19,300 582,016
+ Concord Communications, Inc. ................ 1,300 74,425
+ Concur Technologies, Inc. ................... 400 12,088
+ Earthlink Network, Inc. ..................... 5,600 318,675
+ Ecsoft Group, PLC (ADR) ..................... 24,700 867,587
+ Electronic Processing, Inc. ................. 8,500 82,875
+ Imrglobal Corp. ............................. 4,300 126,716
+ Inso Corp. .................................. 13,200 330,825
+ International Network Services .............. 3,300 219,450
+ ISS Group, Inc. ............................. 8,400 464,625
+ Keane, Inc. ................................. 3,200 127,800
+ Lycos, Inc. ................................. 11,200 621,950
+ Macromedia, Inc. ............................ 28,300 952,472
+ Mapics, Inc. ................................ 7,700 128,494
+ Mastech Corp. ............................... 10,500 298,594
+ Maxtor Corp. ................................ 10,000 140,625
+ Micromuse, Inc. ............................. 13,400 260,462
+ Mindspring Enterprises, Inc. ................ 2,000 122,188
+ Network Appliance, Inc. ..................... 14,800 662,300
+ Network Solutions, Inc. ..................... 8,600 1,121,762
+ New Era of Networks, Inc. ................... 10,200 447,525
+ Pervasive Software, Inc. .................... 21,700 408,231
+ PSINet, Inc. ................................ 20,000 420,000
+ Quantum Corp. ............................... 10,000 212,187
+ Sapient Corp. ............................... 5,000 279,688
+ Seagate Technology, Inc. .................... 10,000 302,500
+ Timberline Software Corp. ................... 3,600 49,387

<PAGE>
NUMBER
OF SHARES VALUE
--------- ----------
+ TSI International Software Ltd. ............. 26,000 $ 1,257,750
+ VeriSign, Inc ............................... 10,400 615,550
+ VISTA Information Solutions, Inc ............ 5,300 41,406
+ Visual Networks, Inc. ....................... 15,400 577,019
+ Wind River Systems, Inc. .................... 6,100 286,319
+ Xoom.Com, Inc. .............................. 1,700 55,569
+ 24/7 Media, Inc. ............................ 21,900 615,937
----------
13,730,669
----------
DRUGS AND COSMETICS (0.2%)
+ USANA, Inc. ................................. 7,800 78,487
----------
EDUCATION (2.2%)
+ Bright Horizons Family Solutions, Inc. ...... 3,360 91,140
+ Education Management Corp. .................. 20,200 475,331
+ ITT Educational Services, Inc. .............. 9,000 306,000
----------
872,471
----------
ENTERTAINMENT & LEISURE (2.9%)
+ Championship Auto Racing Teams, Inc. ........ 17,300 512,512
+ Steiner Leisure Ltd. ........................ 19,925 636,977
----------
1,149,489
----------
ELECTRONIC COMPONENTS (8.9%)
+ Applied Micro Circuits Corp. ................ 9,700 329,800
+ Artisan Components, Inc. .................... 11,500 60,734
+ Broadcom Corp. .............................. 5,300 639,313
+ Cree Research, Inc. ......................... 5,000 239,063
+ E-Tek Dynamics, Inc. ........................ 2,700 71,550
+ Gemstar International Group Ltd. ............ 15,300 875,447
+ InTEST Corp. ................................ 6,400 53,000
+ Macrovision Corp. ........................... 7,900 332,294
+ Power Intergrations, Inc. ................... 8,000 201,250
+ TranSwitch Corp. ............................ 17,400 677,513
----------
3,479,964
----------
ELECTRONICS (2.0%)
+ Jabil Circuit, Inc. ......................... 5,300 395,512
+ Sanmina Corp. ............................... 6,100 380,488
----------
776,000
----------
FINANCE (2.1%)
+ Knight/Trimark Group, Inc. .................. 34,300 822,128
----------
FINANCIAL SERVICES (2.8%)
+ Ameritrade Holding Corp. .................... 14,700 462,591
+ Financial Federal Corp. ..................... 20,800 514,800
+ International Telecommunications
Data Systems, Inc. ........................ 3,800 54,981
+ TeleBanc Financial Corp. .................... 1,300 44,444
----------
1,076,816
----------
HOME FURNISHINGS/HOUSEWARES (0.3%)
+ Select Comfort Corp. ........................ 4,300 114,756
----------
HOTELS (1.2%)
Four Seasons Hotels, Inc. ................... 15,800 462,150
----------
HUMAN RESOURCES (2.7%)
+ Data Processing Resources Corp. ............. 12,100 353,925
+ Labor Ready, Inc. ........................... 17,200 338,625
+ On Assignment, Inc. ......................... 4,400 150,287
+ Select Appointments Holdings, PLC
(ADR) ..................................... 5,300 113,288
+ Vincam Group, Inc. .......................... 6,700 117,459
----------
1,073,584
----------

58
<PAGE>

PENN SERIES FUNDS, INC.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (CONTINUED)
THE EMERGING GROWTH FUND

NUMBER
OF SHARES VALUE
--------- ----------
INSURANCE (0.8%)
+ ARM Financial Group, Inc. ..................... 13,200 $ 292,875
----------
MEDICAL INFORMATION SYSTEMS (0.7%)
+ Incyte Pharmaceuticals, Inc. .................. 7,500 279,844
----------
MEDICAL-HOSPITALS (0.6%)
+ Province Healthcare Co. ....................... 6,200 220,487
----------
MEDICAL SUPPLIES (1.9%)
+ Biomatrix, Inc. ............................... 700 40,775
+ Cytyc Corp. ................................... 13,400 345,888
+ Ocular Sciences, Inc. ......................... 11,900 322,788
+ Xomed Surgical Products, Inc. ................. 1,500 48,000
----------
757,451
----------
OFFICE EQUIPMENT (0.8%)
+ Knoll, Inc. ................................... 10,000 296,250
----------
PHARMACEUTICALS (0.1%)

+ Geltex Pharmaceuticals, Inc. .................. 2,300 52,038
----------
PRINTING & PUBLISHING (1.4%)
+ American Bank Note
Holographics, Inc. .......................... 1,500 26,250
+ Consolidated Graphics, Inc. ................... 7,500 506,719
----------
532,969
----------
REAL ESTATE (0.8%)
+ CB Commercial Real Estate
Services Group, Inc. ........................ 11,000 199,375
Intrawest Corp. ............................... 7,400 124,875
----------
324,250
----------
RECREATIONAL (0.5%)
+ Global Vacation Group, Inc. ................... 11,700 100,913
+ Resort Quest International, Inc. .............. 6,400 93,600
----------
194,513
----------
RESTAURANTS (0.2%)
+ PJ America, Inc. .............................. 3,800 68,638
----------
RETAIL (3.9%)
+ Abercrombie & Fitch Co. ....................... 7,800 551,850
+ bebe stores, Inc. ............................. 15,000 529,219
Beyond.Com Corp. .............................. 20,600 426,162
----------
1,507,231
----------
SPECIALTY RETAILER (2.1%)
+ DM Management Co. ............................. 27,200 526,150
+ Tropical Sportswear International Corp. ....... 8,700 308,306
----------
834,456
----------
TELECOMMUNICATIONS (8.0%)
+ Allegiance Telecom, Inc. ...................... 31,200 380,250
+ Carrier Access Corp. .......................... 500 17,141
+ COM21, Inc. ................................... 23,600 498,550
+ DSET Corp. .................................... 20,000 221,875
+ Echostar Communications Corp. ................. 13,100 635,759
+ Electric Lightwave, Inc. ...................... 48,900 398,841
+ ICG Communications, Inc. ...................... 14,600 314,812
+ Primus Telecommunications
Group, Inc. ................................. 21,100 346,172
+ RF Micro Devices, Inc. ........................ 6,900 317,184
----------
3,130,584
----------

<PAGE>

NUMBER
OF SHARES VALUE
--------- ----------
WASTE MANAGEMENT (0.7%)
+ US Liquids, Inc. ........................ 12,100 $ 272,250
-----------
TOTAL COMMON STOCK
(Cost $25,489,040) ........................................ 36,927,208
-----------
SHORT TERM INVESTMENTS (5.4%)
Temporary Investment Fund
- Temp Cash .......................... 1,060,277 1,060,277
Temporary Investment Fund
Class B ............................... 1,060,277 1,060,277
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $2,120,554) ......................................... 2,120,554
-----------
TOTAL INVESTMENTS (100.0%)
(Cost $27,609,594) (a) .................................... $39,047,762
-----------

- ----------
+ Non-income producing

(a) At December 31, 1998, the cost for Federal income tax purposes was
$27,935,119. Net unrealized appreciation was $11,112,643. This consisted of
aggregate gross unrealized appreciation for all securities in which there
was an excess of market value over tax cost of $12,126,724 and aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over market value of $1,014,081.

ADR - American Depository Receipt

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MONEY QUALITY HIGH YIELD GROWTH EQUITY
MARKET FUND BOND FUND BOND FUND FUND
----------- --------- ---------- ------------
ASSETS:
<S> <C> <C> <C> <C>
Investments at value (1) ........................................ $53,504,698 $62,939,099 $67,637,152 $191,297,598
Cash ............................................................ 500 500 980 --
Interest, dividends and reclaims receivable ..................... 390,187 555,763 1,188,421 97,191
Receivable for investment securities sold ....................... -- 6,674,677 -- 6,914,211
Receivable for capital stock sold ............................... -- 206,367 281,364 72,223
Net unrealized appreciation on forward foreign currency
contracts ..................................................... -- -- -- --
Other assets .................................................... 680 677 989 2,389
----------- ----------- ----------- ------------
Total Assets ................................................. 53,896,065 70,377,083 69,108,906 198,383,612
----------- ----------- ----------- ------------
LIABILITIES:
Payable for investment securities purchased ..................... -- 16,705,259 -- 2,262,093
Payable for capital stock redeemed .............................. -- 115,591 35,783 266,610
Dividends payable ............................................... 216,179 -- -- --
Payable to the investment advisor ............................... 18,732 20,135 29,310 74,931
Payable to The Penn Mutual Life Insurance Co .................... 21,643 19,458 25,297 63,005
Other liabilities ............................................... 13,089 11,534 15,282 25,084
----------- ----------- ----------- ------------
Total Liabilities. ........................................... 269,643 16,871,977 105,672 2,691,723
----------- ----------- ----------- ------------
NET ASSETS ......................................................... $53,626,422 $53,505,106 $69,003,234 $195,691,889
=========== =========== ========== ============
Shares of $.10 par value capital stock issued and outstanding ...... 53,629,171 5,142,854 7,509,507 6,337,061
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE ........... $1.00 $10.40 $9.19 $30.88
NET ASSETS CONSIST OF:
Capital paid in ................................................. $53,629,171 $52,702,414 $70,781,166 $125,941,128
Undistributed net investment loss ............................... -- -- -- --
Accumulated net realized gain (loss) on investment
transactions and foreign exchange ............................ (2,749) (37,359) (1,627,095) (52,162)
Net unrealized appreciation (depreciation) in value of
investments, futures contracts and foreign currency
related items ................................................. -- 840,051 (150,837) 69,802,923
----------- ----------- ----------- ------------
TOTAL NET ASSETS .......................................... $53,626,422 $53,505,106 $69,003,234 $195,691,889
=========== =========== =========== ============
(1) Investments at cost. ........................................... $53,504,698 $62,099,048 $67,787,989 $121,494,675
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
60
<PAGE>

[RESTUBED FROM TABLE ABOVE]

<TABLE>
<CAPTION>
FLEXIBLY
VALUE EQUITY MANAGED INTERNATIONAL
FUND FUND EQUITY FUND
------------ -------- -------------
ASSETS:
<S> <C> <C> <C>
Investments at value (1) ........................................... $334,170,576 $540,435,293 $153,959,020
Cash ............................................................... -- -- --
Interest, dividends and reclaims receivable ........................ 348,765 3,512,006 326,439
Receivable for investment securities sold .......................... 1,617,790 1,739,146 --
Receivable for capital stock sold .................................. 56,830 1,428,523 --
Net unrealized appreciation on forward foreign currency
contracts ........................................................ -- 250 --
Other assets ....................................................... 4,960 8,226 12,953
------------ ------------ ------------
Total Assets .................................................... 336,198,921 547,123,444 154,298,412
------------ ------------ ------------
LIABILITIES:
Payable for investment securities purchased ........................ -- 793,421 9,031
Payable for capital stock redeemed ................................. 416,826 336,488 281,470
Dividends payable .................................................. -- -- --
Payable to the investment advisor .................................. 140,103 230,603 93,868
Payable to The Penn Mutual Life Insurance Co ....................... 122,309 204,095 53,297
Other liabilities .................................................. 41,153 73,265 38,538
------------ ------------ ------------
Total Liabilities. .............................................. 720,391 1,637,872 476,204
------------ ------------ ------------
NET ASSETS ............................................................ $335,478,530 $545,485,572 $153,822,208
============ ============ ============
Shares of $.10 par value capital stock issued and outstanding ......... 14,980,843 29,790,433 8,371,341
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE .............. $22.39 $18.31 $18.37
NET ASSETS CONSIST OF:
Capital paid in .................................................... $248,731,465 $509,598,717 $116,420,636
Undistributed net investment loss .................................. -- -- (1,681,574)
Accumulated net realized gain (loss) on investment
transactions and foreign exchange ............................... (31,052) (264,986) 304,342
Net unrealized appreciation (depreciation) in value of
investments, futures contracts and foreign currency
related items .................................................... 86,778,117 36,151,841 38,778,804
------------ ------------ ------------
TOTAL NET ASSETS ............................................. $335,478,530 $545,485,572 $153,822,208
============ ============ ============
(1) Investments at cost. .............................................. $247,392,459 $504,283,801 $115,192,146
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

[RESTUBED TABLE FROM ABOVE]
<TABLE>
<CAPTION>
SMALL EMERGING
CAPITALIZATION GROWTH
FUND FUND
-------------- --------
<S> <C> <C>
ASSETS:
Investments at value (1) ........................................... $43,209,863 $39,047,762
Cash ............................................................... 191,286 44,651
Interest, dividends and reclaims receivable ........................ 22,931 10,494
Receivable for investment securities sold .......................... 75,472 --
Receivable for capital stock sold .................................. 275,192 13,681
Net unrealized appreciation on forward foreign currency
contracts ........................................................ -- --
Other assets ....................................................... 611 391
----------- -----------
Total Assets .................................................... 43,775,355 39,116,979
----------- -----------
LIABILITIES:
Payable for investment securities purchased ........................ 89,221 5,800
Payable for capital stock redeemed ................................. 8,632 406,924
Dividends payable .................................................. -- --
Payable to the investment advisor .................................. 17,870 21,821
Payable to The Penn Mutual Life Insurance Co ....................... 15,383 6,757
Other liabilities .................................................. 9,409 11,995
----------- -----------
Total Liabilities. .............................................. 140,515 453,297
----------- -----------
NET ASSETS ............................................................ $43,634,840 $38,663,682
=========== ===========
Shares of $.10 par value capital stock issued and outstanding ......... 3,407,397 2,218,181
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE .............. $12.81 $17.43
NET ASSETS CONSIST OF:
Capital paid in .................................................... $44,758,954 $29,697,547
Undistributed net investment loss .................................. -- (229,925)
Accumulated net realized gain (loss) on investment
transactions and foreign exchange ............................... (8,843) (2,242,108)
Net unrealized appreciation (depreciation) in value of
investments, futures contracts and foreign currency
related items .................................................... (1,115,271) 11,438,168
----------- -----------
TOTAL NET ASSETS ............................................. $43,634,840 $38,663,682
=========== ===========
(1) Investments at cost. .............................................. $44,325,134 $27,609,594
- --------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
61
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>

MONEY QUALITY HIGH YIELD GROWTH EQUITY
MARKET FUND BOND FUND BOND FUND FUND
----------- --------- ---------- ------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends ........................................................ $ -- $ -- $ 356,617 $ 1,045,730
Interest ......................................................... 2,543,263 2,759,686 5,589,19 270,930
Foreign tax withheld ............................................. -- -- -- --
---------- ---------- ---------- -----------
Total investment income ....................................... 2,543,263 2,759,686 5,945,736 1,316,660
---------- ---------- ---------- -----------
EXPENSES:
Investment advisory fees ......................................... 181,722 206,065 326,267 753,060
Administration fees .............................................. 68,174 68,688 97,880 234,353
Accounting fees .................................................. 34,073 34,344 48,940 103,118
Custodian fees and expenses ...................................... 18,792 21,939 27,349 31,014
Other expenses ................................................... 24,459 21,393 31,842 63,826
---------- ---------- ---------- -----------
Total expenses ................................................ 327,220 352,429 532,278 1,185,371
Less: Expense waivers ......................................... -- -- -- --
---------- ---------- ---------- -----------
Net expenses .................................................. 327,220 352,429 532,278 1,185,371
---------- ---------- ---------- -----------
NET INVESTMENT INCOME (LOSS) ........................................ 2,216,043 $2,407,257 $5,413,458 131,289
---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investment transactions .............. (992) 1,533,022 (34,795) 20,481,154
Net realized foreign exchange gain (loss) -- -- -- --
Change in net unrealized appreciation/depreciation of
investments, futures contracts and foreign currency
related items .................................................. -- 487,720 (2,434,085) 36,064,087
---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS .............. (992) 2,020,742 (2,468,880) 56,545,241
---------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..... $2,215,051 $4,427,999 $2,944,578 $56,676,530
========== ========== ========== ===========
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
62

<PAGE>

[RESTUBED TABLE FROM ABOVE]
<TABLE>
<CAPTION>

FLEXIBLY
VALUE EQUITY MANAGED INTERNATIONAL
FUND FUND EQUITY FUND
------------ -------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends ........................................................ $ 4,099,205 $ 6,988,321 $ 1,960,357
Interest ......................................................... 2,650,627 12,385,014 395,839
Foreign tax withheld ............................................. (50,492) (142,793) (171,001)
----------- ----------- -----------
Total investment income ....................................... 6,699,340 19,230,542 2,185,195
----------- ----------- -----------
EXPENSES:
Investment advisory fees ......................................... 1,651,501 2,719,881 1,071,377
Administration fees .............................................. 495,450 815,964 214,275
Accounting fees .................................................. 183,900 248,193 110,710
Custodian fees and expenses ...................................... 45,479 98,787 69,865
Other expenses ................................................... 136,117 239,953 71,524
----------- ----------- -----------
Total expenses ................................................ 2,512,447 4,122,778 1,537,751
Less: Expense waivers ......................................... -- -- --
----------- ----------- -----------
Net expenses .................................................. 2,512,447 4,122,778 1,537,751
----------- ----------- -----------
NET INVESTMENT INCOME (LOSS) ........................................ 4,186,893 15,107,764 647,444
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investment transactions .............. 27,331,911 55,261,526 5,177,853
Net realized foreign exchange gain (loss) ........................ -- (7,284) 114,386
Change in net unrealized appreciation/depreciation of
investments, futures contracts and foreign currency
related items ................................................. (3,543,595) (39,212,128) 18,456,661
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS .............. 23,788,316 16,042,114 23,748,900
----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..... $27,975,209 $31,149,878 $24,396,344
=========== =========== ===========
</TABLE>
[RESTUBED TABLE FOR ABOVE]
<TABLE>
<CAPTION>
SMALL EMERGING
CAPITALIZATION GROWTH
FUND FUND
-------------- --------
<S> <C> <C>
INVESTMENT INCOME:
Dividends ........................................................ $ 303,081 $ 12,143
Interest ......................................................... 315,503 115,098
Foreign tax withheld ............................................. -- (490)
----------- ----------
Total investment income ....................................... 618,584 126,751
----------- ----------
EXPENSES:
Investment advisory fees ......................................... 210,456 208,963
Administration fees .............................................. 63,137 39,416
Accounting fees .................................................. 31,608 26,161
Custodian fees and expenses ...................................... 18,160 28,264
Other expenses ................................................... 20,712 15,895
----------- ----------
Total expenses ................................................ 344,073 318,699
Less: Expense waivers ......................................... -- (17,207)
----------- ----------
Net expenses .................................................. 344,073 301,492
----------- ----------
NET INVESTMENT INCOME (LOSS) ........................................ 274,511 (174,741)
----------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investment transactions .............. 712,102 (2,191,288)
Net realized foreign exchange gain (loss) ........................ -- --
Change in net unrealized appreciation/depreciation of
investments, futures contracts and foreign currency
related items ................................................. (5,286,799) 10,934,484
----------- ----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS .............. (4,574,697) 8,743,196
----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..... ($4,300,186) $8,568,455
=========== ==========
</TABLE>
63
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

<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
12/31/98 12/31/97 12/31/98 12/31/97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ..................................... $ 2,216,043 $ 1,896,676 $ 2,407,257 $ 2,207,510
Net realized gain (loss) on investment transactions .............. (992) (225) 1,533,022 912,980
Net realized foreign exchange gain (loss) ........................ -- -- -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items .......... -- -- 487,720 (208,702)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ....................................................... 2,215,051 1,896,451 4,427,999 2,911,788
----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (2,216,043) (1,896,676) (2,407,257) (2,207,510)
Net realized capital gains ....................................... -- -- (1,568,759) (16,338)
In excess of net investment income ............................... -- -- (1,623) (16,277)
----------- ----------- ----------- -----------
TOTAL DISTRIBUTIONS ........................................... (2,216,043) (1,896,676) (3,977,639) (2,240,125)
----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share transactions ....... 16,151,030 2,975,990 12,977,718 1,794,024
TOTAL INCREASE IN NET ASSETS .................................. 16,150,038 2,975,765 13,428,078 2,465,687
Net Assets, beginning of period ..................................... 37,476,384 34,500,619 40,077,028 37,611,341
----------- ----------- ----------- -----------
NET ASSETS, END OF PERIOD ........................................... $53,626,422 $37,476,384 $53,505,106 $40,077,028
=========== =========== =========== ===========

HIGH YIELD BOND FUND GROWTH EQUITY FUND
-------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/98 12/31/97 12/31/98 12/31/97
----------- ----------- ------------ ------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ..................................... $ 5,413,458 $ 4,560,298 $ 131,289 $ 482,003
Net realized gain (loss) on investment transactions .............. (34,795) 2,964,765 20,481,154 13,834,988
Net realized foreign exchange gain (loss) ........................ -- -- -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items .......... (2,434,085) (118,203) 36,064,087 14,267,440
----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ....................................................... 2,944,578 7,406,860 56,676,530 28,584,431
----------- ----------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (5,413,458) (4,560,298) (131,289) (482,003)
Net realized capital gains ....................................... -- -- (20,497,332) (13,678,856)
In excess of net investment income ............................... (6,598) (10,576) -- --
----------- ----------- ------------ ------------
TOTAL DISTRIBUTIONS ........................................... (5,420,056) (4,570,874) (20,628,621) (14,160,859)
----------- ----------- ------------ ------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share transactions ....... 12,341,048 12,260,119 23,585,734 15,595,214
----------- ----------- ------------ ------------
TOTAL INCREASE IN NET ASSETS .................................. 9,865,570 15,096,105 59,633,643 30,018,786
Net Assets, beginning of period ..................................... 59,137,664 44,041,559 136,058,246 106,039,460
----------- ----------- ------------ ------------
NET ASSETS, END OF PERIOD ........................................... $69,003,234 $59,137,664 $195,691,889 $136,058,246
=========== =========== ============ ============

</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

64
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
VALUE EQUITY FUND FLEXIBLY MANAGED FUND
---------------------------- -----------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/98 12/31/97 12/31/98 12/31/97
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ..................................... $ 4,186,893 $ 3,663,616 $ 15,107,764 $ 14,346,115
Net realized gain (loss) on investment transactions .............. 27,331,911 16,381,602 55,261,526 29,490,467
Net realized foreign exchange gain (loss) ........................ -- -- (7,284) 80,506
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items .......... (3,543,595) 36,751,125 (39,212,128) 23,598,612
------------ ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ....................................................... 27,975,209 56,796,343 31,149,878 67,515,700
------------ ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (4,186,893) (3,663,616) (15,107,764) (14,346,115)
Net realized capital gains ....................................... (27,362,963) (16,381,602) (55,129,786) (29,491,615)
In excess of net investment income ............................... -- -- (363,128) (99,694)
------------ ------------- ------------- -------------
TOTAL DISTRIBUTIONS ........................................... (31,549,856) (20,045,218) (70,600,678) (43,937,424)
------------ ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share transactions ....... 36,092,709 65,535,450 68,797,648 94,016,309
------------ ------------- ------------- -------------
TOTAL INCREASE IN NET ASSETS .................................. 32,518,062 102,286,575 29,346,848 117,594,585
Net Assets, beginning of period ..................................... 302,960,468 200,673,893 516,138,724 398,544,139
------------ ------------- ------------- -------------
NET ASSETS, END OF PERIOD ........................................... $335,478,530 $ 302,960,468 $ 545,485,572 $ 516,138,724
============ ============= ============= =============

INTERNATIONAL EQUITY FUND SMALL CAPITALIZATION FUND
------------------------------ ----------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/98 12/31/97 12/31/98 12/31/97
------------ ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ..................................... $ 647,444 $ 754,837 $ 274,511 $ 181,451
Net realized gain (loss) on investment transactions .............. 5,177,853 4,305,835 712,102 2,278,532
Net realized foreign exchange gain (loss) ........................ 114,386 2,563,120 -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items .......... 18,456,661 3,833,566 (5,286,799) 2,875,385
------------ ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ....................................................... 24,396,344 11,457,358 (4,300,186) 5,335,368
------------ ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ (647,444) (754,837) (274,511) (181,451)
Net realized capital gains ....................................... (4,938,505) (4,305,835) (711,962) (2,286,865)
In excess of net investment income ............................... (769,506) (3,230,284) -- --
------------ ------------- ------------- -------------
TOTAL DISTRIBUTIONS ........................................... (6,355,455) (8,290,956) (986,473) (2,468,316)
------------ ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share transactions ....... 6,143,763 22,053,566 10,195,405 19,725,010
------------ ------------- ------------- -------------
TOTAL INCREASE IN NET ASSETS .................................. 24,184,652 25,219,968 4,908,746 22,592,062
Net Assets, beginning of period ..................................... 129,637,556 104,417,588 38,726,094 16,134,032
------------ ------------- ------------- -------------
NET ASSETS, END OF PERIOD ........................................... $153,822,208 $ 129,637,556 $ 43,634,840 $ 38,726,094
============ ============= ============= =============
</TABLE>

<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
EMERGING GROWTH FUND
-------------------------------
YEAR PERIOD
ENDED ENDED
12/31/98 12/31/97*
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income (loss) ..................................... $ (174,741) $ (56,325)
Net realized gain (loss) on investment transactions .............. (2,191,288) 1,331,710
Net realized foreign exchange gain (loss) ........................ -- --
Net change in unrealized appreciation/depreciation of investments,
futures contracts and foreign currency related items .......... 10,934,484 504,824
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ....................................................... 8,568,455 1,780,209
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................ -- --
Net realized capital gains ....................................... (8,966) (1,373,564)
In excess of net investment income ............................... -- --
-------------- --------------
TOTAL DISTRIBUTIONS ........................................... (8,966) (1,373,564)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Net increase in net assets from capital share transactions ....... 12,162,475 17,535,073
-------------- --------------
TOTAL INCREASE IN NET ASSETS .................................. 20,721,964 17,941,718
Net Assets, beginning of period ..................................... 17,941,718 --
-------------- --------------
NET ASSETS, END OF PERIOD ........................................... $ 38,663,682 $ 17,941,718
============== ==============
</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.

<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,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- --------- --------- ------------
<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 .............................................. 0.0489 0.0503 0.0489 0.0538 0.0365
--------- -------- --------- --------- ------------
Total from investment operations ................................ 0.0489 0.0503 0.0489 0.0538 0.0365
--------- -------- --------- --------- ------------
LESS DIVIDENDS:
Dividends from net investment income ............................... (0.0489) (0.0503) (0.0489) (0.0538) (0.0365)
--------- -------- --------- --------- ------------
Total dividends ................................................. (0.0489) (0.0503) (0.0489) (0.0538) (0.0365)
--------- -------- --------- --------- ------------
Net asset value, end of year ....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======== ========= ========= ============
Total return .................................................... 5.00% 5.15% 5.00% 5.51% 3.71%

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ............................. $ 53,626 $37,476 $ 34,501 $ 24,726 $ 16,531
--------- -------- --------- --------- ------------
Ratio of expenses to average net assets ............................ 0.72% 0.70% 0.73%(a) 0.69%(a) 0.73%(a)
--------- -------- --------- --------- ------------
Ratio of net investment income to average net assets ............... 4.88% 5.04% 4.88%(a) 5.37%(a) 3.74%(a)
--------- -------- --------- --------- ------------
</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%, AND .79%, AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET
ASSETS WOULD HAVE BEEN 4.87%, 5.32%, AND 3.68% FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994, RESPECTIVELY.

- --------------------------------------------------------------------------------
THE QUALITY BOND 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,
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...................................... $ 10.20 $ 10.00 $ 10.24 $ 9.04 $ 10.19
------- ------- -------- -------- --------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................................................... 0.51 0.60 0.66 0.61 0.61
Net realized and unrealized gain (loss) on investment transactions ...... 0.53 0.20 (0.24) 1.21 (1.15)
------- ------- -------- -------- --------
Total from investment operations ..................................... 1.04 0.80 0.42 1.82 (0.54)
------- ------- -------- -------- --------
LESS DISTRIBUTIONS:
Dividend from net investment income ..................................... (0.51) (0.60) (0.66) (0.61) (0.61)
Distribution from net investment income ................................. (0.33) 0.00 0.00 0.00 0.00
Distribution in excess of net investment income ......................... 0.00 0.00 0.00 (0.01) 0.00
------- ------- -------- -------- --------
Total distributions .................................................. (0.84) (0.60) (0.66) (0.62) (0.61)
------- ------- -------- -------- --------
Net asset value, end of year ............................................ $ 10.40 $ 10.20 $ 10.00 $ 10.24 $ 9.04
======= ======= ======== ======== ========
Total return ......................................................... 10.17% 8.03% 4.14% 20.14% (5.29%)

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) .................................. $53,505 $40,077 $ 37,611 $ 38,048 $ 31,338
------- ------- -------- -------- --------
Ratio of expenses to average net assets ................................. 0.77% 0.75% 0.77%(a) 0.73%(a) 0.78%(a)
------- ------- -------- -------- --------
Ratio of net investment income to average net assets .................... 5.26% 5.87% 6.03%(a) 6.20%(a) 6.14%(a)
------- ------- -------- -------- --------
Portfolio turnover rate ................................................. 477.2% 317.3% 107.6% 449.2% 380.9%
------- ------- -------- -------- --------

</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 .78%,
.78%, AND .83%, AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS
WOULD HAVE BEEN 6.02%, 6.15%, AND 6.09% FOR THE YEARS ENDED DECEMBER 31,
1996, 1995, AND 1994, RESPECTIVELY.

66
<PAGE>

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

THE HIGH YIELD BOND FUND

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....................................... $ 9.52 $ 8.91 $ 8.44 $ 7.94 $ 9.55
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................................................... 0.79 0.80 0.70 0.80 0.90
Net realized and unrealized gain (loss) on investment transactions ....... (0.33) 0.61 0.47 0.50 (1.60)
------- ------- ------- ------- -------
Total from investment operations ...................................... 0.46 1.41 1.17 1.30 (0.70)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment income ...................................... (0.79) (0.80) (0.70) (0.80) (0.90)
Distribution in excess of net investment income .......................... 0.00 0.00 0.00 0.00 (0.01)
------- ------- ------- ------- -------
Total distributions ................................................... (0.79) (0.80) (0.70) (0.80) (0.91)
------- ------- ------- ------- -------
Net asset value, end of year ............................................. $9.19 $ 9.52 $ 8.91 $ 8.44 $ 7.94
======= ======= ======= ======= =======
Total return .......................................................... 4.79% 15.78% 13.87% 16.41% 7.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ................................... $69,003 $59,138 $44,042 $36,442 $32,081
------- ------- ------- ------- -------
Ratio of expenses to average net assets .................................. 0.82% 0.81% 0.84% 0.87% 0.86%
------- ------- ------- ------- -------
Ratio of net investment income to average net assets ..................... 8.30% 8.96% 8.14% 9.20% 9.18%
------- ------- ------- ------- -------
Portfolio turnover rate .................................................. 82.7% 111.3% 118.5% 84.3% 90.7%
------- ------- ------- ------- -------
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 24.37 $ 21.46 $ 20.00 $ 18.30 $ 20.49
-------- -------- -------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income (loss) ........................................ 0.02 0.10 0.11 0.09 0.13
Net realized and unrealized gain (loss) on investment transactions .. 10.12 5.64 3.85 4.75 (1.80)
-------- -------- -------- ------- -------
Total from investment operations ................................. 10.14 5.74 3.96 4.84 (1.67)
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment income ................................. (0.02) (0.10) (0.11) (0.09) (0.13)
Distribution from net realized gains ................................ (3.61) (2.73) (2.39) (3.05) (0.39)
-------- -------- -------- ------- -------
Total distributions .............................................. (3.63) (2.83) (2.50) (3.14) (0.52)
-------- -------- -------- ------- -------
Net asset value, end of year ........................................ $ 30.88 $ 24.37 $ 21.46 $ 20.00 $18.30
======== ======== ======== ======= =======
Total return ..................................................... 41.67% 26.74% 19.76% 26.45% (8.12)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) .............................. $195,692 $136,058 $106,039 $95,593 $80,078
-------- -------- -------- ------- --------
Ratio of expenses to average net assets ............................. 0.76% 0.77% 0.80%(a) 0.77%(a) 0.79%(a)
-------- -------- -------- ------- --------
Ratio of net investment income to average net assets ................ 0.08% 0.39% 0.48%(a) 0.43%(a) 0.70%(a)
-------- -------- -------- ------- --------
Portfolio turnover rate ............................................. 161.3% 169.1% 177.1% 169.8% 156.2%
-------- -------- -------- ------- --------
</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%, AND .84%, AND THE RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS
WOULD HAVE BEEN .47%, .38%, AND .65% FOR THE YEARS ENDED DECEMBER 31, 1996,
1995, AND 1994, RESPECTIVELY.

67
<PAGE>

THE VALUE EQUITY FUND

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....................................... $ 22.55 $ 19.32 $ 16.28 $ 12.67 $ 12.68
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................................................... 0.31 0.29 0.22 0.25 0.20
Net realized and unrealized gain
on investment transactions ............................................ 1.85 4.53 3.88 4.50 0.17
------- ------- ------- ------- -------
Total from investment operations ...................................... 2.16 4.82 4.10 4.75 0.37
------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment income ...................................... (0.31) (0.29) (0.22) (0.25) (0.20)
Distribution from net realized gains ..................................... (2.01) (1.30) (0.84) (0.89) (0.18)
------- ------- ------- ------- -------
Total distributions ................................................... (2.32) (1.59) (1.06) (1.14) (0.38)
------- ------- ------- ------- -------
Net asset value, end of year ............................................. $ 22.39 $ 22.55 $ 19.32 $ 16.28 $ 12.67
======== ======== ======== ======== =======
Total return .......................................................... 9.59% 24.98% 25.19% 37.48% 2.92%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ................................... $335,479 $302,960 $200,674 $127,260 $79,021
------- ------- ------- ------- -------
Ratio of expenses to average net assets .................................. 0.76% 0.76% 0.78% 0.80% 0.82%
------- ------- ------- ------- -------
Ratio of net investment income to average net assets ..................... 1.27% 1.43% 1.38% 1.71% 1.59%
------- ------- ------- ------- -------
Portfolio turnover rate .................................................. 24.0% 18.7% 25.0% 34.3% 30.6%
------- ------- ------- ------- -------

</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ....................................... $ 19.83 $ 18.74 $ 17.40 $ 15.19 $ 15.70
------- ------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................................................... 0.60 0.61 0.65 0.53 0.43
Net realized and unrealized gain (loss) on investment transactions ....... 0.61 2.33 2.19 2.86 0.22
------- ------- ------- ------- --------
Total from investment operations ...................................... 1.21 2.94 2.84 3.39 0.65
------- ------- ------- ------- --------
LESS DISTRIBUTIONS:
Dividend from net investment income ...................................... (0.60) (0.61) (0.65) (0.53) (0.43)
Distribution in excess of net investment income .......................... (0.00) 0.00 0.00 (0.01) (0.02)

Distribution from net realized gains ..................................... (2.13) (1.24) (0.85) (0.64) (0.71)
------- ------- ------- ------- --------
Total distributions ................................................... (2.73) (1.85) (1.50) (1.18) (1.16)
------- ------- ------- ------- --------
Net asset value, end of year ............................................. $ 18.31 $ 19.83 $ 18.74 $ 17.40 $ 15.19
======== ======== ======== ======== ========
Total return .......................................................... 6.09% 15.65% 16.37% 22.28% 4.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ................................... $545,486 $516,139 $398,544 $266,556 $169,847
------- ------- ------- ------- --------
Ratio of expenses to average net assets .................................. 0.76% 0.76% 0.77% 0.79% 0.82%
------- ------- ------- ------- --------
Ratio of net investment income to average net assets ..................... 2.78% 3.10% 3.90% 3.45% 3.14%
------- ------- ------- ------- --------
Portfolio turnover rate .................................................. 48.0% 37.1% 32.9% 37.2% 37.3%
------- ------- ------- ------- --------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................... $ 16.13 $ 15.61 $ 14.47 $ 13.01 $ 13.94
-------- -------- -------- ------- -------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................................................. 0.10 0.58 0.63 0.13 0.09
Net realized and unrealized gain (loss) on investments
and foreign currency related transactions .......................... 2.93 1.04 1.81 1.67 (0.97)
-------- -------- -------- ------- -------
Total from investment operations ................................... 3.03 1.62 2.44 1.80 (0.88)
-------- -------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividend from net investment income ................................... (0.10) (0.53) (0.56) (0.12) (0.02)
Distribution in excess of net investment income ....................... (0.08) 0.00 (0.74) (0.22) 0.00
Distribution from net realized gains .................................. (0.61) (0.57) 0.00 0.00 0.00
Distribution from capital ............................................. 0.00 0.00 0.00 0.00 (0.03)
-------- -------- -------- ------- -------
Total distributions ................................................ (0.79) (1.10) (1.30) (0.34) (0.05)
-------- -------- -------- ------- -------
Net asset value, end of year .......................................... $ 18.37 $ 16.13 $ 15.61 $ 14.47 $ 13.01
======== ======== ======== ======= =======
Total return ....................................................... 18.85% 10.41% 16.87% 13.80% 6.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (in thousands) ................................ $153,822 $129,638 $104,418 $69,531 $59,393
-------- -------- -------- ------- -------
Ratio of expenses to average net assets ............................... 1.08% 1.13% 1.17% 1.23% 1.22%
-------- -------- -------- ------- -------
Ratio of net investment income to average net assets .................. 0.45% 0.62% 0.66% 0.91% 0.82%
-------- -------- -------- ------- -------
Portfolio turnover rate ............................................... 43.5% 35.7% 54.8% 62.5% 15.6%
-------- -------- -------- ------- -------
</TABLE>

<PAGE>

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

<TABLE>
<CAPTION>
<S> <C>
YEAR ENDED DECEMBER 31,
--------------------------------------------------

1998 1997 1996 1995*
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net asset value, beginning of period or year .......................... $ 14.43 $ 12.53 $ 10.96 $10.00
------- ------- ------- ------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income ................................................. 0.08 0.07 0.07 0.09
Net realized and unrealized gain (loss) on investment transactions .... (1.41) 2.81 2.09 1.19
------- ------- ------- ------
Total from investment operations ...................................... (1.33) 2.88 2.16 1.28
------- ------- ------- ------
LESS DISTRIBUTIONS:
Dividend from net investment income ................................... (0.08) (0.07) (0.07) (0.09)
Distribution from net realized gains .................................. (0.21) (0.91) (0.52) (0.23)
------- ------- ------- ------
Total distributions ................................................ (0.29) (0.98) (0.59) (0.32)
------- ------- ------- ------
Net asset value, end of period or year ................................ $12.81 $14.43 $12.53 $10.96
======= ======= ======= ======
Total return .......................................................... (9.16)% 23.02% 19.76% 12.76%(b)

RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period or year (in thousands) ...................... $43,635 $38,726 $16,134 $4,828
------- ------- ------- ------
Ratio of expenses to average net assets ............................... 0.82% 0.85% 0.99%(a) 1.00%(a)(c)
------- ------- ------- ------
Ratio of net investment income to average net assets .................. 0.65% 0.66% 0.85%(a) 1.53%(a)(c)
------- ------- ------- ------
Portfolio turnover rate ............................................... 61.9% 71.1% 39.2% 64.3%
------- ------- ------- ------
</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 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.
(B) NOT ANNUALIZED.
(C) ANNUALIZED.
* FOR THE PERIOD FROM MARCH 1, 1995 (COMMENCEMENT OF OPERATIONS) THROUGH
DECEMBER 31, 1995.

69
<PAGE>

<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1998 1997*
------- -------
<S> <C> <C>
Net asset value, beginning of period or year .......................... $ 12.85 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .......................................... (0.06) 0.00

Net realized and unrealized gain on investment transactions............ 4.65 3.92
------- -------
Total from investment operations ................................... 4.59 3.92
------- -------
LESS DISTRIBUTIONS:
Distribution from net realized gains .................................. (0.01) (1.07)
------- -------
Total distributions ................................................ (0.01) (1.07)
------- -------
Net asset value, end of period or year ................................ $ 17.43 $ 12.85
======= =======
Total return ....................................................... 35.70% 39.22%(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period or year (in thousands) ...................... $38,664 $17,942
------- -------
Ratio of expenses to average net assets ............................... 1.15%(b) 1.15%(a)(b)
------- -------
Ratio of net investment loss to average net assets .................... (0.66)%(b) (0.73)%(a)(b)
------- -------
Portfolio turnover rate ............................................... 240.9% 392.3%
------- -------
</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 1.21%
AND 1.41%, AND THE RATIOS OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS
WOULD HAVE BEEN (0.73)% AND (0.99)%, RESPECTIVELY, FOR THE PERIODS ENDED
DECEMBER 31, 1998 AND DECEMBER 31, 1997.
(C) NOT ANNUALIZED.
* FOR THE PERIOD FROM MAY 1, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
DECEMBER 31, 1997.

<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1998
- --------------------------------------------------------------------------------

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 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 are 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 the Quality Bond, High Yield Bond, Growth Equity, Value Equity,
Flexibly Managed, International Equity, Small Capitalization, and Emerging
Growth Funds 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.
<PAGE>

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.

Dividends from net investment income and distributions from net realized
gains are determined in accordance with federal income tax regulations which may
differ from net investment income and net realized capital gains recorded in
accordance with generally accepted accounting principles. To the extent these
differences are permanent, such amounts are reclassified within the capital
accounts based on their federal tax basis treatment; temporay differences do not
require such reclassification. Distributions from net realized gains for book
purposes may involve short-term capital gains, which are included as ordinary
income for tax purposes.

71
<PAGE>
- --------------------------------------------------------------------------------
PENN SERIES FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS - DECEMBER 31, 1998
- --------------------------------------------------------------------------------

2 - DERIVATIVE FINANCIAL INSTRUMENTS

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 transaction 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, 1998. There were no open futures contracts at
December 31, 1998.

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, 1998. Purchased put options
open and outstanding at December 31, 1998 are disclosed in the schedule of
investments.

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, 1998. At December 31, 1998 there was one open contract in the
Flexibly Managed Fund and none in the International Equity Fund. Open forward
foreign currency contracts held by the Flexibly Managed Fund at December 31,
1998 were as follows:
<TABLE>
<CAPTION>
UNREALIZED
FOREIGN
FOREIGN EXCHANGE
FORWARD FOREIGN EXPIRATION CURRENCY FORWARD CONTRACT CONTRACT GAIN/
CURRENCY CONTRACT DATE TO BE SOLD RATE AMOUNT VALUE LOSS
- ----------------- ---------- ---------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
British Pound Sterling ............... 01/05/99 19,761 .597569 $33,069 $32,819 $250
======= ======= ====
</TABLE>
<PAGE>

3 - INVESTMENT ADVISORY AND OTHER CORPORATE SERVICES

INVESTMENT ADVISORY SERVICES
Effective May 1, 1998 Independence Capital Management, Inc. ("ICMI") serves
as investment advisor to each of the Funds. ICMI is a wholly-owned subsidiary of
The Penn Mutual Life Insurance Company.

T. Rowe Price Associates, Inc. ("Price Associates") is sub-advisor 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-advisor, Price Associates provides investment management services to the
Funds.

OpCap Advisors ("OpCap") is sub-advisor to Value Equity and Small
Capitalization Funds pursuant to an investment sub-advisor agreement entered
into by ICMI and OpCap on May 1, 1998. As sub-advisor, OpCap provides investment
management services to the Funds. OpCap is a subsidiary of Oppenheimer Capital.

Vontobel USA Inc. ("Vontobel") is sub-advisor to the International Equity
Fund pursuant to an investment sub-advisor agreement entered into by ICMI and
Vontobel on May 1, 1998. As sub-advisor, Vontobel provides investment management
services to the Fund. Vontobel is a wholly owned subsidiary of Vontobel Holding
Ltd. an affiliate of Bank J. Vontobel & Co. Ltd.

RS Investment Management, Inc. (formerly Robertson Stephens Investment
Management, Inc. ) ("RS") is sub-advisor to the Emerging Growth Fund pursuant to
an investment sub-advisor agreement entered into by ICMI and RS on May 1, 1998.
As sub-advisor, RS provides investment management services to the Fund.

Each of the Funds pay ICMI, on a monthly basis, an 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% and Emerging Growth Fund: .80% for the first $25 million, 0.75% for
next $25 million and 0.70% thereafter.

For providing investment management services to the Funds, ICMI pays the
sub-advisors, on a monthly basis, a sub-advisory fee.

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 pay 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: 1.00%; 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, 1998. 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.

<PAGE>

4 - CAPITAL STOCK

At December 31, 1998, 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 Penn Series Funds, Inc. were as follows:
<TABLE>
<CAPTION>

THE YEAR ENDED DECEMBER 31, 1998:
----------------------------------------------------------------------
DIVIDEND
SHARES SOLD REINVESTMENT SHARES REACQUIRED
----------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund ................................. 84,556,622 $84,556,622 2,176,407 $2,176,407 70,581,999 $70,581,999
Quality Bond Fund ................................. 1,642,975 $17,780,630 382,465 $3,977,639 811,620 $8,780,551
High Yield Bond Fund .............................. 1,757,800 $17,292,747 589,778 $5,420,056 1,052,320 $10,371,757
Growth Equity Fund................................. 691,494 $19,801,255 669,396 $20,628,621 607,072 $16,844,142
Value Equity Fund ................................. 1,671,304 $40,295,090 1,409,105 $31,549,856 1,532,040 $35,752,237
Flexibly Managed Fund ............................. 2,831,936 $58,177,184 3,855,202 $70,600,678 2,926,275 $59,980,214
International Equity Fund ......................... 1,780,356 $31,336,651 345,781 $6,355,455 1,793,330 $31,548,343
Small Capitalization Fund ......................... 1,065,490 $14,767,847 76,921 $986,473 418,401 $5,558,915
Emerging Growth Fund .............................. 1,366,179 $20,129,936 638 $8,966 544,610 $7,976,427
</TABLE>

Transactions in capital stock of Penn Series Funds, Inc. were as follows:
<TABLE>
<CAPTION>

THE YEAR ENDED DECEMBER 31, 1997:
----------------------------------------------------------------------
DIVIDEND
SHARES SOLD REINVESTMENT SHARES REACQUIRED
----------------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Money Market Fund ................................. 52,596,243 $52,596,243 1,857,904 $1,857,904 51,478,157 $51,478,157
Quality Bond Fund ................................. 695,043 $7,228,270 219,620 $2,240,125 745,923 $7,674,394
High Yield Bond Fund .............................. 1,621,677 $15,567,712 480,137 $4,570,874 829,328 $7,878,467
Growth Equity Fund................................. 560,843 $13,907,900 581,078 $14,160,857 500,698 $12,473,543
Value Equity Fund ................................. 2,867,800 $61,202,630 888,923 $20,045,218 712,142 $15,712,398
Flexibly Managed Fund ............................. 4,061,684 $80,965,783 2,215,705 $43,937,424 1,513,715 $30,886,898
International Equity Fund ......................... 1,665,223 $27,762,536 514,008 $8,290,956 829,261 $13,999,926
Small Capitalization Fund ......................... 1,398,053 $19,734,987 171,055 $2,468,316 173,037 $2,478,293
Emerging Growth Fund*.............................. 1,427,602 $18,230,138 106,892 $1,373,564 138,520 $2,069,490
</TABLE>

* FOR THE PERIOD FROM MAY 1, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH DECEMBER
31, 1997.

5 - PURCHASES AND SALES OF INVESTMENTS

During the year ended December 31, 1998, the Funds made the following purchases
and sales of portfolio securities, excluding U.S. Government and Agency
obligations and short term securities:

PURCHASES SALES
----------- ---------
Quality Bond Fund ....................... $108,643,907 $119,461,219
High Yield Bond Fund ..................... $60,196,551 $48,652,828
Growth Equity Fund ....................... $241,534,849 $243,891,278
Value Equity Fund ........................ $95,882,522 $67,620,213
Flexibly Managed Fund .................... $260,791,434 $230,954,970
International Equity Fund ................ $65,046,636 $58,985,257
Small Capitalization Fund ................ $31,338,551 $22,535,904
Emerging Growth Fund ..................... $73,498,020 $59,063,803

6 - CAPITAL LOSS CARRYOVERS

Capital loss carryovers expire as follows:
MONEY HIGH YIELD EMERGING
MARKET BOND GROWTH
FUND FUND FUND
------ ---------- ----------
2000 .......... $ 61 $ 0 $ 0
2001 .......... 183 0 0
2003 .......... 416 1,052,436 0
2004 .......... 0 525,647 0
2005 .......... 225 0 0
2006 .......... 992 14,558 1,908,042
---- ---------- ----------
Total ...... $1,877 $1,592,641 $1,908,042

<PAGE>

- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS

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

We have audited the 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
Cap Fund, and Emerging Growth Fund) as of December 31, 1998, and the related
statements of operations for the year then ended and the statements of changes
in net assets and financial highlights for each of the two years in the period
then ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The financial highlights of Penn Series Funds,
Inc. for the years and periods through December 31, 1996 included herein were
audited by other auditors whose report dated February 11, 1997, expressed an
unqualified opinion on those 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 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, 1998, 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 presentation. We
believe our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
portfolios constituting Penn Series Funds, Inc. at December 31, 1998, the
results of their operations for the year then ended, the changes in their net
assets and their financial highlights for each of the two years in the period
then ended, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP
---------------------------

Philadelphia, Pennsylvania
January 29, 1999