DELAWARE GROUP PREMIUM FUND INC, N-30D, 1999-03-05

DELAWARE GROUP PREMIUM FUND INC
N-30D, 1999-03-05

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<PAGE>

DELAWARE GROUP
- ----------------------------------
PREMIUM FUND
==================================

SMALL CAP VALUE SERIES
- ----------------------------------

DELAWARE SERIES
- ----------------------------------

ANNUAL REPORT
- ----------------------------------
DECEMBER 31, 1998

DELAWARE
INVESTMENTS
- ---------------------
Philadelphia o London

<PAGE>

January 10, 1999

Dear Policy Holder:

Fiscal year 1998 was the best and worst of times for equity and fixed-income
investors. While the year began and ended with U.S. stocks posting tremendous
gains, the events in between left investors a bit uncertain about the outlook
going forward.

1998 Total Return
Standard & Poor's 500 Index +28.56%
Russell 2000 Index -2.55%
Lehman Brothers Government/Corporate Bond Index +8.69%
Morgan Stanley Europe, Australia, Far East (EAFE) Index +20.33%

Performance quoted above assumes reinvestment of dividends. It is not intended
to represent the performance of any Premium Fund Series. Complete performance
information can be found following each discussion section of this report. Past
performance does not guarantee future results. The indexes are unmanaged and
assume no management fees or expenses. A direct investment in an unmanaged index
is not possible.

During the first half of 1998, U.S. and European stock markets continued to
hit record levels fueled by a positive environment with low inflation, low
interest rates and low unemployment. Between January 1 and July 17, the Standard
& Poor's 500 Index rose +23.3% and the Morgan Stanley Europe, Australia, Far
East (EAFE) Index had posted a comparable gain of +21.3%.
However, as U.S. corporations began lowering their earnings expectations for
the second half of 1998 and investors learned of escalating financial problems
in Asia, Russia and Latin America, concern mounted that the U.S. economy would
weaken. Foreign investors responded by moving their money out of riskier
investments--stocks and non-government bonds--and into U.S. Treasuries for their
safety and liquidity.
Stock and non-government bond prices spiraled downward. Conversely, prices of
U.S. Treasury securities skyrocketed causing yields to decline. For the first
time since the 1960s, the yield on the benchmark 30-year U.S. Treasury fell
below 5% to 4.97% at the end of September.
To help ease the strain on the U.S. economy, the Federal Reserve responded by
lowering its target for short-term interest rates three times in the fall. By
the end of November, the federal funds rate (the interest rate charged between
banks for overnight loans) was reduced a total of 0.75 percentage points to
4.75%.
The impact of the Fed's rate cuts was tremendous. U.S. stocks soared to new
highs--the large-cap S&P 500 Index returned +21.28% in the fourth quarter after
reporting a near 10% drop in the third quarter. Small and mid-cap stocks also
rebounded, but still underperformed their large-cap counterparts in 1998.
Most strategists believe that the economies of Southeast Asia will bottom out
in 1999, that Japan may begin to recover from its recession, and that the
Federal Reserve has the capability, and the will, to keep the U.S. economy
growing. As long as the economy continues to grow, we think the stock market
will enjoy a favorable environment, though volatility may continue and returns
may not be in the 20+% range we have seen for the past four years.
On the following pages, the performance of each Series of Premium Fund is
discussed in detail. After a difficult period like we encountered in 1998, it is
important to remember that your annuity is a long-term investment that requires
patience and a long-term perspective. We thank you for placing your confidence
in Delaware Investments.

Sincerely,

/s/ Jeffrey J. Nick

Jeffrey J. Nick
Chairman, President and Chief Executive Officer
Delaware Investments Family of Funds

<PAGE>

FOR GROWTH OF CAPITAL

Small Cap Value Series
(Formerly Value Series)

Investment Strategy and Performance in 1998
After a strong start early in 1998, small company stocks lagged the broader
stock market for most of our 1998 fiscal period. Mounting concerns over
shrinking corporate profits, slowing economic growth and the possibility of
recession led investors to shun small company stocks for the perceived safety of
larger companies.
Small Cap Value Series delivered a disappointing total return of -4.79%
(capital change plus reinvestment of distributions) for the 12 months ended
December 31, 1998. This was slightly worse than the -2.55% return of its
benchmark, the Russell 2000 Index.
Because of our long-term focus on undervalued companies, we did not invest
significantly in growth sectors of the market, including technology. Technology
was the year's best performing sector, a key reason why we underperformed the
Index, which has a higher concentration of growth companies.
We typically invest in small companies that are temporarily undervalued,
out-of-favor, or relatively unknown, and which we believe offer higher sales and
earnings potential relative to competitors.
As investors worried about earnings disappointments from smaller companies,
stock prices fell during the summer months and finding buyers for stocks in
small, relatively unknown companies was especially difficult. Stronger earnings
from large-cap growth companies made investors view that sector as a safer place
to invest in 1998.

Portfolio Snapshot
In selecting stocks for the Small Cap Value Series portfolio, we target our
research on U.S. companies that have a market capitalization between $400
million and $1.4 billion. From this universe--which consists of approximately
2,500 companies--we narrow our selection to 100 companies.
A company's cash flow is one of the most important factors we evaluate.
Measuring the amount of money the business generates through operations helps us
rate a company's ability to expand, respond to competition and handle unexpected
challenges.
In fiscal 1998, Small Cap Value Series held the largest portion of its assets
in the financial services industry, focusing on banking and insurance companies.
Questionable management and lending practices in this industry caused some
investor concern and resulted in lackluster performance from the sector as a
whole.
The Series also held a relatively large position in real estate investment
trusts (REITs). Fundamentals in the real estate market remained positive in
1998. Rent and property prices were stable, and demand for commercial and
residential rental space was strong. Still, our investments in this sector did
not perform well. This was due in part to limited availability of credit capital
for REITs to expand.

Investment Outlook
The Federal Reserve has been providing and may continue to provide
substantial liquidity to financial markets in 1999. This could pave the way for
stronger performance from small-cap stocks. In our experience, a growing
domestic economy coupled with easing Fed policies has historically been a
favorable environment for small-cap stocks.
Already, there are some positive indications that the environment for
small-cap value stocks may improve. In late December, the government's report on
U.S. economic activity--the Conference Board's Index of Leading Economic
Indicators--confirmed the strength of the U.S. economy. In November the Index
recorded its biggest monthly increase in nearly two years.
We are confident that over the long term, small, undervalued companies offer
investors substantial opportunities for capital appreciation.

- --------------------------------------------------------------------------------
Small Cap Value Series Investment Objective
Seeks capital appreciation. It attempts to achieve this objective by investing
in stocks of small companies whose market value appears low relative to
underlying value or future earnings and growth potential. Emphasis is placed on
companies that may be temporarily out of favor or whose value is not yet
recognized by the market.
- --------------------------------------------------------------------------------

Small Cap Value-1

<PAGE>

Growth of a $10,000 Investment
December 27, 1993 through
December 31, 1998

Small Cap Value Series Russell 2000 Index
12/27/93 $10,000 $10,000
3/31/94 $10,139 $ 9,593
6/30/94 $ 9,979 $ 8,991
9/30/94 $10,468 $ 9,829
12/31/94 $10,288 $ 9,757
3/31/95 $10,637 $10,292
6/30/95 $11,178 $11,313
9/30/95 $12,067 $12,599
12/31/95 $12,741 $12,785
3/31/96 $13,287 $13,520
6/30/96 $13,858 $14,310
9/30/96 $13,750 $14,188
12/31/96 $14,870 $14,225
3/31/97 $16,063 $12,733
6/30/97 $17,326 $14,969
9/30/97 $20,767 $17,501
12/31/97 $20,756 $16,068
3/31/98 $22,021 $17,684
6/30/98 $20,928 $16,860
9/30/98 $17,552 $13,463
12/31/98 $19,762 $15,659

Small Cap Value Series
Average Annual Total Returns
- ----------------------------
Lifetime +14.55%
Five Years +14.12%
One Year -4.79%
For periods ending December 31, 1998

Past performance is not a guarantee of future results. Return and share price
will fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.

The chart above shows a $10,000 investment in both the Small Cap Value Series
and the Russell 2000 Index for the period from the Series' inception on December
27, 1993 through December 31, 1998. All dividends and capital gains were
reinvested. The Index is unmanaged, with no set investment objective and does
not include the "real world" costs of managing a mutual fund. Earnings from a
variable annuity investment compound tax-free until withdrawal, so no
adjustments were made for income taxes. The effect of an expense limitation is
included in the chart. Performance does not reflect insurance fees related to a
variable annuity product investment nor the deferred sales charge that would
apply to certain withdrawals of investments held for less than eight years.
Performance shown here would have been reduced if such fees were included and
the expense limitation was removed. For more information about fees, consult
your variable annuity prospectus.

Small Cap Value-2

<PAGE>

Delaware Group Premium Fund, Inc.-Small Cap Value Series
Statement of Net Assets
December 31, 1998

Number Market
of Shares Value
COMMON STOCK-94.34%
Aerospace & Defense-0.51%
Cordant Technologies ........................... 14,200 $ 532,500
----------
532,500
----------
Automobiles & Automotive Parts-5.19%
Arvin Industries ............................... 35,800 1,492,413
CLARCOR ........................................ 51,750 1,035,000
Federal Signal ................................. 66,900 1,831,388
Smith (A.O.) ................................... 42,050 1,032,853
----------
5,391,654
----------
Banking, Finance & Insurance-16.64%
*Avis Rent A Car ................................ 73,800 1,785,038
CMAC Investment ................................ 22,500 1,033,594
Enhance Financial Services Group ............... 57,200 1,716,000
Everest Re Holdings ............................ 31,400 1,189,275
*Farm Family Holdings ........................... 28,600 972,400
*Financial Federal .............................. 47,950 1,186,763
Horace Mann Educators .......................... 68,600 1,955,100
M & T Bank ..................................... 1,725 895,167
NAC RE Group ................................... 19,000 891,813
North Fork Bancorporation ...................... 80,750 1,932,953
Peoples Heritage Financial Group ............... 87,000 1,742,719
SCPIE Holdings ................................. 15,000 454,688
Westamerica Bancorporation ..................... 42,200 1,552,169
----------
17,307,679
----------
Buildings & Materials-4.04%
Chicago Bridge and Iron ........................ 36,600 450,638
D.R. Horton .................................... 74,900 1,722,700
*Jacobs Engineering Group ....................... 49,900 2,033,425
----------
4,206,763
----------
Cable, Media & Publishing-1.74%
Cadmus Communications .......................... 23,700 451,781
*World Color Press .............................. 44,600 1,357,513
----------
1,809,294
----------
Chemicals-5.09%
Crompton & Knowles ............................. 41,800 864,738
Ferro .......................................... 23,100 600,600
OM Group ....................................... 29,700 1,084,050
RPM ............................................ 39,900 638,400
*Scotts ......................................... 54,900 2,110,219
----------
5,298,007
----------
Computers & Technology-6.84%
*Etec Systems ................................... 23,300 932,000
*Novellus Systems ............................... 16,700 825,084
*Quantum ........................................ 35,300 749,022
*SCI Systems .................................... 25,900 1,495,725
Scientific-Atlanta ............................. 55,400 1,263,813
*Synopsys ....................................... 34,100 1,847,794
----------
7,113,438
----------
Electronics & Electrical Equipment-2.13%
Kuhlman ......................................... 58,600 2,219,475
----------
2,219,475
----------
- ----------------------
Top 10 stock holdings, representing 21.3% of net assets, are printed in bold.

<PAGE>

Number Market
of Shares Value
COMMON STOCK (Continued)
Energy-5.12%
*BJ Services ...................................... 29,700 $ 464,063
Nicor ............................................ 37,100 1,567,475
*Oceaneering International ........................ 68,800 1,032,000
*Santa Fe Energy Resources ........................ 68,900 508,138
*Seagull Energy ................................... 87,600 552,975
Vintage Petroleum ................................ 84,200 726,225
*Weatherford International ........................ 24,500 474,688
----------
5,325,564
----------
Food, Beverage & Tobacco-3.65%
Corn Products .................................... 43,300 1,315,238
Universal Foods .................................. 90,200 2,474,863
----------
3,790,101
----------

Healthcare & Pharmaceuticals-3.28%
Arrow International .............................. 35,800 1,125,463
*Trigon Healthcare ................................ 61,100 2,279,794
----------
3,405,257
----------
Industrial Machinery-4.05%
Columbus McKinnon ................................ 36,800 655,500
*Global Industries Technology ..................... 21,100 225,506
IDEX ............................................. 35,850 878,325
Milacron ......................................... 51,500 991,375
Regal Beloit ..................................... 41,100 945,300
Watts Industries ................................. 31,100 517,038
----------
4,213,044
----------
Leisure, Lodging & Entertainment-3.69%
*Hollywood Park ................................... 31,200 259,350
*King World Productions ........................... 39,200 1,153,950
Viad ............................................. 79,700 2,420,888
----------
3,834,188
----------
Paper & Forest Products-3.77%
Bowater .......................................... 22,300 924,056
Caraustar Industries ............................. 31,500 897,750
Chesapeake ....................................... 15,900 586,313
Glatfelter (P.H.) ................................ 44,600 551,925
Rayonier ......................................... 20,900 960,094
----------
3,920,138
----------
Real Estate-9.02%
Cabot Industrial Trust ........................... 59,200 1,209,900
Chateau Communities .............................. 22,715 665,833
Duke Realty Investments .......................... 44,500 1,034,625
Kilroy Realty .................................... 16,800 386,400
MeriStar Hospitality ............................. 44,945 834,292
New Plan Excel Realty Trust ...................... 42,480 942,525
Pan Pacific Retail Properties .................... 54,800 1,092,575
Patriot American Hospitality ..................... 33,932 203,592
Prentiss Properties Trust ........................ 51,000 1,137,938
Public Storage ................................... 22,100 598,081
Reckson Associates Realty ........................ 57,500 1,275,781
----------
9,381,542
----------

Small Cap Value-3

<PAGE>

Small Cap Value Series
Statement of Net Assets (Continued)

Number Market
of Shares Value
COMMON STOCK (Continued)
Retail-6.70%
*BJ's Wholesale Club .............................. 49,200 $2,278,575
Casey's General Stores ........................... 77,800 1,013,831
Pier 1 Imports ................................... 124,800 1,209,000
*Zale ............................................. 76,300 2,460,675
----------
6,962,081
----------
Textiles, Apparel & Furniture-6.16%
*Furniture Brands International ................... 55,300 1,506,925
HON Industries ................................... 65,000 1,555,938
*Jones Apparel Group .............................. 48,300 1,065,619
Kellwood ......................................... 48,300 1,207,500
*Quaker Fabric .................................... 16,750 106,520
Wolverine World Wide ............................. 72,500 960,625
----------
6,403,127
----------
Transportation & Shipping-3.48%
*Mesaba Holdings .................................. 59,300 1,221,209
*M.S. Carriers .................................... 39,900 1,301,738
USFreightways .................................... 37,700 1,098,013
----------
3,620,960
----------
Utilities-3.24%
American Water Works ............................. 56,100 1,893,375
Public Service Company of New Mexico ............. 26,900 549,769
Sierra Pacific Resources ......................... 24,400 927,200
----------
3,370,344
----------
Total Common Stock
(cost $89,840,116) .............................. 98,105,156
----------

<PAGE>

Principal Market
Amount Value
Repurchase Agreements-7.24%
With Chase Manhattan 4.50% 1/4/99
(dated 12/31/98, collateralized by
$1,941,000 U.S. Treasury Notes 7.875%
due 8/15/01, market value $2,153,017) .......... $2,109,000 $2,109,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98, collateralized
by $2,691,000 U.S. Treasury Notes
5.75% due 10/31/00, market value $2,767,905) ... 2,711,000 2,711,000
With PaineWebber 4.85% 1/4/99
(dated 12/31/98, collateralized by
$590,000 U.S. Treasury Notes 7.75% due
12/31/99, market value $607,841
and $825,000 U.S. Treasury Notes 7.75% due
1/31/00, market value $878,237 and
$828,000 U.S. Treasury Notes 6.25% due
8/31/00, market value $866,934 and $395,000
U.S. Treasury Notes 6.50% due
5/31/01, market value $413,522) ................ 2,711,000 2,711,000
----------
Total Repurchase Agreements
(cost $7,531,000) .............................. 7,531,000
----------

TOTAL MARKET VALUE OF SECURITIES-101.58%
(cost $97,371,116) ............................. $105,636,156

LIABILITIES NET OF RECEIVABLES AND OTHER
ASSETS-(1.58%) ................................. (1,646,732)
------------
NET ASSETS APPLICABLE TO 6,320,130 SHARES
($0.01, PAR VALUE) OUTSTANDING; EQUIVALENT TO
$16.45 PER SHARE-100.00% ....................... $103,989,424
============

COMPONENTS OF NET ASSETS AT DECEMBER 31, 1998:
Common stock, $0.01 par value, 1,000,000,000 shares
authorized to the Fund with 50,000,000 shares
allocated to the Series ........................ $ 95,332,481
Undistributed net investment income ............... 1,223,580
Accumulated net realized loss on investments ...... (831,677)
Net unrealized appreciation of investments ........ 8,265,040
------------
Total net assets .................................. $103,989,424
============
- ----------------------
* Non-income producing security for the year ended December 31, 1998.

See accompanying notes

Small Cap Value-4

<PAGE>

Delaware Group Premium Fund, Inc.-
Small Cap Value Series
Statement of Operations
Year Ended December 31, 1998

INVESTMENT INCOME:
Dividends ......................................... $1,693,215
Interest .......................................... 331,712
-----------
2,024,927
-----------
EXPENSES:
Management fees ................................... 706,066
Accounting and administration ..................... 37,011
Registration fees ................................. 11,649
Professional fees ................................. 11,011
Reports and statements to shareholders ............ 8,850
Custodian fees .................................... 7,804
Taxes (other than taxes on income) ................ 5,119
Dividend disbursing and transfer agent
fees and expenses .............................. 1,500
Directors' fees ................................... 1,467
Other ............................................. 15,116
-----------
805,593
-----------
Less expenses absorbed or waived by
Delaware Management Company .................... (25,707)
-----------
Total expenses .................................... 779,886
-----------
NET INVESTMENT INCOME ............................. 1,245,041
-----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Net realized loss on investments .................. (827,096)
Net change in unrealized appreciation/
depreciation of investments .................... (5,586,278)
-----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS ............................ (6,413,374)
-----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................... ($5,168,333)
-----------

See accompanying notes

<PAGE>

Delaware Group Premium Fund, Inc.-
Small Cap Value Series
Statements of Changes in Net Assets

Year Ended Year Ended
12/31/98 12/31/97
---------- ----------

INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ............................. $ 1,245,041 $ 629,715
Net realized gain (loss) on investments ........... (827,096) 2,326,391
Net change in unrealized appreciation /
depreciation of investments .................... (5,586,278) 10,895,658
------------ -----------
Net increase (decrease) in net assets
resulting from operations ...................... (5,168,333) 13,851,764
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................. (638,385) (197,794)
Net realized gain on investments .................. (2,340,745) (1,672,255)
------------ -----------
(2,979,130) (1,870,049)
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ......................... 34,478,733 49,431,262
Net asset value of shares issued upon
reinvestment of distributions from net
investment income and net realized
gain on investments ............................ 2,979,130 1,870,049
------------ -----------
37,457,863 51,301,311
Cost of shares repurchased ........................ (9,392,119) (2,894,623)
------------ -----------
Increase in net assets derived from capital
share transactions ............................. 28,065,744 48,406,688
------------ -----------
NET INCREASE IN NET ASSETS ........................ 19,918,281 60,388,403
------------ -----------
NET ASSETS:
Beginning of year ................................. 84,071,143 23,682,740
------------ -----------
End of year ....................................... $103,989,424 $84,071,143
============ ===========

See accompanying notes

Small Cap Value-5

<PAGE>

Delaware Group Premium Fund, Inc.-Small Cap Value Series
Financial Highlights

Selected data for each share of the Series outstanding throughout each period
were as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ................ $ 17.920 $14.500 $12.470 $10.290 $10.210

Income (loss) from investment operations:
Net investment income ............................. 0.196 0.122 0.112 0.192 0.148
Net realized and unrealized gain (loss) on
investments .................................... (1.036) 4.338 2.548 2.208 (0.068)
-------- ------- ------- ------- -------
Total from investment operations .................. (0.840) 4.460 2.660 2.400 0.080
-------- ------- ------- ------- -------
Less dividends and distributions:
Dividends from net investment income .............. (0.135) (0.110) (0.180) (0.150) none
Distributions from net realized gain
on investments ................................. (0.495) (0.930) (0.450) (0.070) none
-------- ------- ------- ------- -------
Total dividends and distributions ................. (0.630) (1.040) (0.630) (0.220) none
-------- ------- ------- ------- -------
Net asset value, end of year ...................... $ 16.450 $17.920 $14.500 $12.470 $10.290
======== ======= ======= ======= =======
Total return ...................................... (4.79%) 32.91% 22.55% 23.85% 0.78%

Ratios and supplemental data:
Net assets, end of year (000 omitted) ............. $103,989 $84,071 $23,683 $11,929 $ 6,291
Ratio of expenses to average net assets ........... 0.83% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation .................... 0.85% 0.90% 0.99% 0.96% 1.41%
Ratio of net investment income to average
net assets ..................................... 1.32% 1.24% 1.28% 2.13% 2.62%
Ratio of net investment income to average net
assets prior to expense limitation ............. 1.30% 1.14% 1.09% 1.97% 2.01%
Portfolio turnover ................................ 45% 41% 84% 71% 26%
</TABLE>

See accompanying notes

Small Cap Value-6

<PAGE>
Delaware Group Premium Fund, Inc.-Small Cap Value Series
Notes to Financial Statements
December 31, 1998

Delaware Group Premium Fund, Inc. (the "Fund") is registered as a diversified
open-end investment company under the Investment Company Act of 1940, as
amended. The Fund is organized as a Maryland Corporation and offers 16 series:
the Trend Series, the DelCap Series, the Small Cap Value Series (formerly the
Value Series), the Social Awareness Series (formerly the Quantum Series), the
Devon Series, the Decatur Total Return Series, the REIT Series, the Delaware
Series, the Convertible Securities Series, the Emerging Markets Series, the
International Equity Series, the Global Bond Series, the Delchester Series, the
Strategic Income Series, the Capital Reserves Series, and the Cash Reserve
Series. These financial statements and the related notes pertain to the Small
Cap Value Series (the "Series"). The shares of the Fund are sold only to
separate accounts of life insurance companies.

1. Significant Accounting Policies
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Series.

Security Valuation--Securities listed on an exchange are valued at the last
quoted sales price as of the close of the NYSE on the valuation date. Securities
not traded or securities not listed on an exchange are valued at the mean of the
last quoted bid and asked prices. Money market instruments having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Fund's Board of Directors.

Federal Income Taxes--The Series intends to continue to qualify as a regulated
investment company and make the requisite distributions to shareholders.
Accordingly, no provision for federal income taxes has been made in the
financial statements. Income and capital gain distributions are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles.

Repurchase Agreements--The Series may invest in a pooled cash account along with
other members of the Delaware Investments Family of Funds. The aggregate daily
balance of the pooled cash account is invested in repurchase agreements secured
by obligations of the U.S. government. The respective collateral is held by the
Series' custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 100% collateralized. However,
in the event of default or bankruptcy by the counterparty to the agreement,
realization of the collateral may be subject to legal proceedings.

Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Other--Expenses common to all funds within the Delaware Investments Family of
Funds are allocated amongst the funds on the basis of average net assets.
Security transactions are recorded on the date the securities are purchased or
sold (trade date). Costs used in calculating realized gains and losses on the
sale of investment securities are those of the specific securities sold.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis.

The Small Cap Value Series will make payments from net investment income and net
realized gain on investments, if any, following the close of the fiscal year.

Certain expenses of the Fund are paid through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Series' average
daily net assets.

2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Series
pays Delaware Management Company ("DMC"), the Investment Manager of the Series,
an annual fee which is calculated at the rate of 0.75% of the average daily net
assets of the Series.

DMC has elected to waive that portion, if any, of the annual management fee
payable to the extent necessary to ensure that annual operating expenses
exclusive of taxes, interest, brokerage commissions and extraordinary expenses
do not exceed 0.85% of average daily net assets of the Series through April 30,
1999. Prior to May 1, 1998, the expense limitation was 0.80%.

Small Cap Value-7
<PAGE>

Small Cap Value Series
Notes to Financial Statements (Continued)

The Series has engaged Delaware Service Company, Inc. ("DSC"), an affiliate of
DMC, to provide dividend disbursing, transfer agent and accounting services. The
Series pays DSC a monthly fee based on the number of shareholder accounts,
shareholder transactions and average net assets, subject to certain minimums.

On December 31, 1998, the Series had liabilities payable to affiliates as
follows:

Dividend disbursing
Investment transfer agent,
management accounting fees
fee payable to and other expenses
DMC payable to DSC
-------------- -------------------
$61,761 $3,695

Certain officers of DMC and DSC are officers, directors and/or employees of the
Fund. These officers, directors and employees are paid no compensation by the
Fund.

3. Investments
During the year ended December 31, 1998, the Series made purchases and sales of
investment securities other than U.S. government securities and temporary cash
investments as follows:

Purchases ...................................... $67,051,105
Sales .......................................... $39,625,573

At December 31, 1998, the aggregate cost of securities and unrealized
appreciation (depreciation) for federal income tax purposes for the Series were
as follows:

Aggregate Aggregate
Cost of unrealized unrealized Net unrealized
investments appreciation depreciation appreciation
----------- ------------ ------------ --------------
$97,395,146 $14,628,809 ($6,387,799) $8,241,010

For federal income tax purposes, the Series had accumulated capital losses at
December 31, 1998 as follows:

Year of
expiration
2006
----------
$807,647

4. Capital Stock
Transactions in capital stock shares were as follows:

<TABLE>
<CAPTION>
Shares issued upon
reinvestment of distributions
from net investment
income and net realized Shares Net
Shares sold gain on investments repurchased increase
----------- ----------------------------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 ..... 2,030,407 175,656 (578,317) 1,627,746
Year ended December 31, 1997 ..... 3,108,967 135,708 (185,778) 3,058,897
</TABLE>

Small Cap Value-8

<PAGE>

Delaware Group Premium Fund, Inc.-Small Cap Value Series
Report of Independent Auditors

To the Shareholders and Board of Directors
Delaware Group Premium Fund, Inc.-Small Cap Value Series

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Small Cap Value Series (the "Fund") as of December 31, 1998,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the Fund's
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Premium Fund, Inc.-Small Cap Value Series at December 31, 1998,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.

/s/ Ernst & Young LLP
---------------------
Philadelphia, Pennsylvania Ernst & Young LLP
February 5, 1999

Small Cap Value-9

<PAGE>

FOR total return

Delaware Series

Investment Strategy and Performance in 1998
Delaware Series delivered a stellar performance in fiscal 1998, propelled by
its balanced mix of stocks and bonds. For the year ended December 31, 1998, the
Series provided a total return of +18.62% (capital change plus reinvestment of
distributions).
The portfolio's results were impressive considering the all-equity Standard &
Poor's 500 Index had a total return of +28.56% for the same period. The Series
far outpaced the +8.69% return of the Lehman Brothers Government/Corporate Bond
Index. Because the portfolio combines investments in both stocks and bonds, we
measure our performance against both of these unmanaged indexes.
We achieved robust performance in 1998 with a stock portfolio of large and
mid-size companies that had superior earnings and dividend growth potential.
This was complemented by holdings of U.S. Treasuries, mortgage-related
securities, and high-quality corporate bonds. Rising bond prices helped augment
the Series' total return.

Portfolio Snapshot
Not since the late 1980s have we seen such extreme levels of market
volatility as we saw during fiscal 1998. Still, we found many opportunities to
exploit stock market inefficiency and turmoil using a methodical growth and
value selection discipline. This also helped us preserve capital during the
height of the market's decline over the summer.
In the equity portion of the portfolio--which generally represents about
two-thirds of net assets--we attained strong results by focusing on
dividend-paying stocks and by avoiding companies whose stock prices relative to
earnings (P/E ratio) were more than 20% higher than the average stock in the S&P
500 Index. This was beneficial to Delaware Series as stock prices fell.
The Series' bond component--which accounted for slightly less than a third of
net assets--contributed less to total return than we would have liked. We had a
relatively small position in U.S. Treasuries, which benefited from unprecedented
investor demand in fiscal 1998. We maintained an above-average position in
mortgage-related securities because we believed they offered higher income
potential than U.S. Treasuries. This helped preserve the portfolio's income
potential.

Investment Outlook
In fiscal 1999, our focus for Delaware Series will be on companies that we
believe are positioned to generate annual earnings growth of at least 10%, even
in a slower growing U.S. economy. We think business profits and overall economic
conditions will continue to be moderate in 1999, but to what degree depends upon
how much global economic turmoil affects the U.S.
We believe that investing in stocks with reasonable P/E ratios relative to
the S&P 500 Index will benefit Delaware Series in 1999 should the Federal
Reserve further reduce its short-term interest rate target. Companies with
relatively low P/Es typically benefit the most from interest rate cuts.
Additional interest rate reductions would probably also boost bond prices,
including investment grade corporate bonds and U.S. government securities. We
plan to maintain a relatively high weighting in mortgage-related securities
because of the additional income potential these bonds can provide.

Delaware Series Investment Objective
Seeks a balance of capital appreciation, income and preservation of capital. It
attempts to achieve its objective by investing primarily in common stocks of
established companies believed to have potential for long-term capital growth
and in investment grade bonds.

Delaware-1

<PAGE>

Growth of a $10,000 investment
January 1, 1989 through
December 31, 1998

Lehman Bros.
Delaware Series S&P 500 Index Govt./Corp. Bond Index
12/31/88 $10,000 $10,000 $10,000
12/31/89 $11,661 $13,169 $11,423
12/31/90 $11,639 $12,759 $12,369
12/31/91 $14,732 $16,647 $14,364
12/31/92 $16,770 $17,916 $15,453
12/31/93 $18,142 $19,722 $17,158
12/31/94 $18,115 $19,982 $16,555
12/31/95 $22,929 $27,492 $19,742
12/31/96 $26,581 $33,802 $20,314
12/31/97 $33,601 $45,080 $22,297
12/31/98 $39,856 $58,037 $24,409

Delaware Series
Average Annual Total Returns
----------------------------
10 Years +14.83%
Five Years +17.04%
One Year +18.62%
For periods ending December 31, 1998

Past performance is not a guarantee of future results. Return and share price
will fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.

The chart above shows a $10,000 investment in the Delaware Series, the S&P 500
Index and the Lehman Brothers Government/Corporate Bond Index for the 10-year
period from January 1, 1989 through December 31, 1998. All dividends and capital
gains were reinvested. The Indexes are unmanaged, with no set investment
objectives and do not include the "real world" costs of managing a mutual fund.
Earnings from a variable annuity investment compound tax-free until withdrawal,
so no adjustments were made for income taxes. The effect of an expense
limitation is included in the chart. Performance does not reflect insurance fees
related to a variable annuity product investment nor the deferred sales charge
that would apply to certain withdrawals of investments held for less than eight
years. Performance shown here would have been reduced if such fees were included
and the expense limitation was removed. For more information about fees, consult
your variable annuity prospectus.

Delaware-2
<PAGE>

Delaware Group Premium Fund, Inc.-Delaware Series
Statement of Net Assets
December 31, 1998

Number of Market
Shares Value
COMMON STOCK-70.84%
Aerospace & Defense-0.41%
GenCorp ....................................... 32,900 $ 820,444
-----------
820,444
-----------
Automobiles & Automotive Parts-3.91%
Danaher ....................................... 72,000 3,910,500
+Federal Signal ................................ 145,600 3,985,800
-----------
7,896,300
-----------
Banking, Finance & Insurance-11.33%
AFLAC ......................................... 97,400 4,285,600
American International Group .................. 22,725 2,195,803
Chubb ......................................... 15,400 999,075
Equifax ....................................... 136,000 4,567,450
Federal Home Loan Mortgage .................... 92,400 5,954,025
Nationwide Financial Services Class A ......... 36,800 1,902,100
Unum .......................................... 50,600 2,953,775
-----------
22,857,828
-----------
Buildings & Materials-3.19%
Masco ......................................... 173,800 4,996,750
Premark International ......................... 41,900 1,450,788
-----------
6,447,538
-----------
Cable, Media & Publishing-0.80%
Wallace Computer Services ..................... 61,400 1,619,425
-----------
1,619,425
-----------
Chemicals-1.83%
Crompton & Knowles ............................ 54,000 1,117,125
Hercules ...................................... 21,100 577,613
+Valspar ....................................... 53,500 1,996,219
-----------
3,690,957
-----------
Computers & Technology-4.18%
Hewlett-Packard ............................... 96,700 6,605,819
*SunGard Data Systems .......................... 46,300 1,837,531
-----------
8,443,350
-----------
Electronics & Electrical Equipment-2.88%
Intel ......................................... 25,000 2,963,281
Symbol Technologies ........................... 15,600 997,425
Teleflex ...................................... 40,800 1,861,500
-----------
5,822,206
-----------
Energy-1.60%
Amoco ......................................... 24,600 1,451,400
Total S.A. ADR ................................ 35,758 1,778,960
-----------
3,230,360
-----------
Environmental Services-3.24%
Ecolab ........................................ 180,700 6,539,081
-----------
6,539,081
-----------
Food, Beverage & Tobacco-4.79%
Campbell Soup ................................. 20,500 1,127,500
ConAgra ....................................... 40,500 1,275,750
Philip Morris ................................. 61,000 3,263,500
Ralston-Purina Group .......................... 42,000 1,359,750
Universal Foods ............................... 96,200 2,639,488
-----------
9,665,988
-----------

- ---------
Top 10 stock holdings, representing 28.3% of net assets, are printed in bold.
<PAGE>

Number of Market
Shares Value
COMMON STOCK (Continued)
Funeral Services-4.21%
Service International ....................... 126,800 $ 4,826,325
Stewart Enterprises ......................... 165,000 3,666,094
-----------
8,492,419
-----------
Healthcare & Pharmaceuticals-7.23%
American Home Products ...................... 100,200 5,642,513
Johnson & Johnson ........................... 39,600 3,321,450
+Mylan Laboratories .......................... 133,500 4,205,250
Zeneca Group ADR ............................ 31,900 1,431,510
-----------
14,600,723
-----------
Industrial Machinery-0.76%
Pentair ..................................... 38,500 1,532,781
-----------
1,532,781
-----------
Real Estate-1.10%
Developers Diversified Realty ............... 37,400 663,850
Nationwide Health Properties ................ 33,900 730,969
Sun Communities ............................. 23,600 821,575
-----------
2,216,394
-----------
Retail-8.55%
Food Lion Class A ........................... 131,300 1,386,856
Hannaford Brothers .......................... 14,000 742,000
+Intimate Brands ............................. 124,500 3,719,438
May Department Stores ....................... 15,900 959,963
Rite Aid .................................... 159,100 7,885,394
Sherwin-Williams ............................ 64,600 1,897,625
+Storage USA ................................. 20,800 672,100
-----------
17,263,376
-----------
Telecommunications-3.42%
ALLTEL ...................................... 30,000 1,794,375
Ericsson ADR ................................ 49,000 1,171,406
SBC Communications .......................... 73,600 3,946,800
-----------
6,912,581
-----------
Textiles, Apparel & Furniture-3.46%
Hillenbrand Industries ...................... 41,400 2,354,625
HON Industries .............................. 72,000 1,723,500
+Miller (Herman) ............................. 30,700 823,144
+Newell ...................................... 50,300 2,074,875
-----------
6,976,144
-----------
Utilities-1.06%
CMS Energy .................................. 32,000 1,550,000
Edison International ........................ 21,500 599,310
-----------
2,149,310
-----------
Miscellaneous-2.89%
Tyco International .......................... 77,300 5,831,315
-----------
5,831,315
-----------
Total Common Stock
(cost $108,100,786) ........................ 143,008,520
-----------

CONVERTIBLE PREFERRED STOCK-1.09%
Freeport McMoRan Copper & Gold .............. 37,600 559,300
Sealed Air .................................. 31,573 1,637,851
-----------
Total Convertible Preferred Stock
(cost $2,197,137) .......................... 2,197,151
-----------

Delaware-3
<PAGE>

Delaware Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
AGENCY MORTGAGE-BACKED
SECURITIES-0.47%
+Federal National Mortgage Association
5.75% 4/15/03 .................................... $620,000 $ 637,667
6.00% 5/15/08 .................................... 295,000 312,074
----------
Total Agency Mortgage-Backed
Securities (cost $962,992) ....................... 949,741
----------

ASSET-BACKED SECURITIES-2.59%
AFC Home Equity Loan Trust
6.95% 6/25/24 .................................... 17,694 17,680
7.20% 2/15/08 .................................... 53,304 53,507
American Finance Home Equity
8.00% 7/25/06 .................................... 5,947 6,109
California Infrastructure PG&E
Series 97-1 A4 6.16% 6/25/03 ..................... 640,000 650,560
CITRV 98-A A5 6.12% 7/15/14 ...................... 535,000 538,103
EQCC Home Equity Loan Trust
Series 96-2 A6 6.88% 7/15/14 ..................... 605,000 616,616
Series 98-2 A3F
6.229% 3/15/13 ................................... 500,000 502,578
MetLife Capital Equipment Loan Trust
6.85% 5/20/08 .................................... 420,000 433,860
NationsCredit Grantor Trust
Series 96-1A 5.85% 9/15/11 ....................... 152,692 152,112
Series 97-1A 6.75% 8/15/13 ....................... 811,734 828,131
Neiman Marcus Group Series 95-1 A
7.60% 6/15/03 .................................... 180,000 184,752
Philadelphia, Pennsylvania Industrial
Development Authority Revenue
Series 97 6.488% 6/15/04 ......................... 362,522 359,803
UCFC Home Equity Loan
Series 96-B1 A3 7.30% 4/15/14 .................... 383,612 384,418
World Omni Automobile Lease
Securitization
Series 97-B A4 6.20% 11/25/03 .................... 489,728 495,458
----------
Total Asset-Backed Securities
(cost $5,190,175) ................................ 5,223,687
----------

COLLATERALIZED MORTGAGE OBLIGATIONS-4.14%
Asset Securitization Corporation
Series 96-D3 A1B 7.21% 10/13/26 .................. 360,000 377,381
Series 97-D4 Class A1A
7.35% 4/14/29 .................................... 205,322 211,931
Series 97-D5 A2 6.815% 2/14/41 ................... 480,000 490,725
Series 97-D5 A3 6.865% 2/14/41 ................... 375,000 375,586
Series 97-MD7 Class A3
7.575% 1/13/30 ................................... 400,000 421,375
Capco America Securitization
Series 98-D7 A 6.26% 9/16/30 ..................... 510,000 513,825
Chase Commercial Mortgage Securities
Series 96-2 C 6.90% 11/19/06 ..................... 250,000 255,313
Federal Home Loan Mortgage
Corporation 6.00% 4/15/21 ........................ 810,000 814,536
Federal National Mortgage Association
Whole Loan 6.50% 7/25/28 ......................... 575,000 580,930
<PAGE>

Principal Market
Amount Value
COLLATERALIZED MORTGAGE
OBLIGATIONS (Continued)
GE Capital Mortgage Services
Series 98-6 1A6 6.75% 4/25/28 ................. $ 380,000 $ 382,138
Lehman Large Loan Series 97-LLI A1
6.79% 6/12/04 ................................. 433,297 449,140
Mortgage Capital Funding
Conti Series 96-MCI-D 7.80% 4/15/06 ........... 300,000 319,688
Series 96-MC2-C 7.224% 9/20/06 ................ 380,000 395,794
Nomura Asset Securities
Series 93-1 A1 6.68% 12/15/01 ................. 330,929 336,824
Series 95-MD3 A1A 8.17% 3/4/20 ................ 309,299 319,980
Series 96-MD5 A3 7.637% 4/13/36 ............... 340,000 359,338
Residential Accredit Loans
Series 97-QS3 A3 7.50% 4/25/27 ................ 445,000 447,563
Series 98-QS9 A3 6.75% 7/25/28 ................ 400,000 400,875
Residential Funding Mortgage Security
Series 96-S9 A10 7.25% 4/25/26 ................ 375,068 383,904
Series 98-S6 A6 6.75% 3/25/28 ................. 510,000 514,144
-----------
Total Collateralized Mortgage
Obligations (cost $8,246,151) ................. 8,350,990
-----------

MORTGAGE-BACKED SECURITIES-5.20%
Federal Home Loan Mortgage
Corporation-Gold 6.00% 3/1/11 ................. 192,174 193,975
Federal National Mortgage Association
6.00% 4/1/13 .................................. 679,587 681,923
6.00% 5/1/13 .................................. 359,739 360,976
6.00% 10/1/28 ................................. 3,417,046 3,376,469
6.50% 1/1/12 .................................. 1,980,001 2,017,744
6.50% 4/1/13 .................................. 1,810,754 1,837,916
7.00% 7/1/28 .................................. 913,622 933,608
7.00% 8/1/28 .................................. 446,441 456,207
7.50% 6/1/28 .................................. 376,821 387,891
9.50% 6/1/19 .................................. 160,072 172,127
Government National Mortgage
Association
6.50% 12/15/23 ................................ 45,261 46,011
6.50% 1/15/24 ................................. 35,440 36,027
-----------
Total Mortgage-Backed Securities
(cost $10,420,400) ............................ 10,500,874
-----------

CORPORATE BONDS-8.00%
ABN-AMRO Bank NV 8.25% 8/1/09 .................. 80,000 87,400
AT&T Capital 7.50% 11/15/00 .................... 785,000 797,756
Banco Santander 6.50% 11/1/05 .................. 360,000 364,950
Banco Santiago S.A. 7.00% 7/18/07 .............. 280,000 233,800
Cardinal Health 6.25% 7/15/08 .................. 340,000 347,650
CIT Group Holdings 5.625% 10/15/03 ............. 710,000 707,338
Commercial Credit 6.50% 8/1/04 ................. 450,000 466,875
Computer Associates 6.50% 4/15/08 .............. 1,250,000 1,234,375
Consumers Energy 6.375% 2/1/08 ................. 380,000 388,550
Continental Airlines 6.80% 1/2/09 .............. 353,024 347,287
Cox Communications
6.15% 8/1/03 .................................. 455,000 464,669
Credit Foncier de France
8.00% 1/14/02 ................................. 370,000 394,050

Delaware-4
<PAGE>

Delaware Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
CORPORATE BONDS (Continued)
Federal Express 7.65% 1/15/14 ................ $ 443,421 $ 457,832
Firstar Capital 8.32% 12/15/26 ............... 260,000 286,975
General Electric Capital 5.89% 5/11/01 ....... 670,000 682,563
General Motors Acceptance
5.75% 11/10/03 ............................... 655,000 659,094
Health and Retirement Properties
Trust 6.75% 12/18/02 ......................... 400,000 389,500
Household Finance 6.50% 11/15/08 ............. 775,000 807,938
MCI Communications
6.125% 4/15/02 ............................... 350,000 353,938
MCI Worldcom 7.55% 4/1/04 ..................... 650,000 704,438
Philip Morris 7.20% 2/1/07 .................... 640,000 694,400
Raychem 7.20% 10/15/08 ........................ 560,000 574,700
Raytheon 5.95% 3/15/01 ........................ 350,000 352,625
Southern Investments 6.375% 11/15/01 .......... 250,000 252,500
Sprint Capital 6.125% 11/15/08 ................ 665,000 680,794
Summit Bank 6.75% 6/15/03 ..................... 320,000 332,000
Tommy Hilfiger 6.85% 6/1/08 ................... 335,000 330,394
+Travelers Property Casualty
6.75% 4/15/01 ................................ 775,000 798,250
United Health Care 6.60% 12/1/03 .............. 665,000 667,494
U.S. Bancorp 8.125% 5/15/02 ................... 430,000 461,175
U.S. Bank N.A. 6.50% 2/1/08 ................... 450,000 471,938
USA Waste Services 6.125% 7/15/01 ............. 360,000 360,000
----------
Total Corporate Bonds
(cost $15,910,350) ........................... 16,153,248
----------
U.S. TREASURY OBLIGATIONS-4.43%
U.S. Treasury Bonds
+6.125% 11/15/27 ............................. 1,535,000 1,716,111
+6.375% 8/15/27 .............................. 250,000 286,901
7.50% 11/15/16 .............................. 925,000 1,149,420

<PAGE>
Principal Market
Amount Value

U.S. TREASURY OBLIGATIONS (Continued)
U.S. Treasury Notes
+5.375% 2/15/01 ............................... $1,330,000 $1,351,005
+5.50% 3/31/03 ................................ 880,000 906,689
+5.50% 2/15/08 ................................ 2,750,000 2,915,608
+6.375% 1/15/00 ............................... 600,000 610,582
----------
Total U.S. Treasury Obligations
(cost $8,791,883) ............................. 8,936,316
----------

REPURCHASE AGREEMENTS-3.63%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $1,888,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$2,094,696) ................................... 2,053,000 2,053,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $2,618,000
U.S. Treasury Notes 5.75% due
10/31/00, market value
$2,692,928) ................................... 2,637,000 2,637,000
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $574,000
U.S. Treasury Notes 7.75%
due 12/31/99, market value
$591,376 and $802,000
U.S. Treasury Notes 7.75%
due 1/31/00, market value
$854,447 and $805,000
U.S. Treasury Notes 6.25%
due 8/31/00, market value
$843,450 and $384,000
U.S. Treasury Notes 6.50%
due 5/31/01, market value
$402,321) ..................................... 2,637,000 2,637,000
----------
Total Repurchase Agreements
(cost $7,327,000) ............................. 7,327,000
----------

<TABLE>
<S> <C>
TOTAL MARKET VALUE OF SECURITIES-100.39% (cost $167,146,874) ...................... $202,647,527

LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.39%) ........................... (792,003)
------------

NET ASSETS APPLICABLE TO 10,074,484 SHARES ($0.01 PAR VALUE) OUTSTANDING;
EQUIVALENT TO $20.04 PER SHARE-100.00% ......................................... $201,855,524
============

COMPONENTS OF NET ASSETS AT DECEMBER 31, 1998:
Common stock, $0.01 par value, 1,000,000,000 shares authorized to the Fund with
50,000,000 shares allocated to the Series ...................................... $155,618,811
Undistributed net investment income ............................................... 2,451,550
Accumulated net realized gain on investments ...................................... 8,284,510
Net unrealized appreciation of investments ........................................ 35,500,653
------------
Total net assets .................................................................. $201,855,524
============
</TABLE>

* Non-income producing security for the year ended December 31, 1998.
+ Security is partially or fully on loan.

ADR-American Depository Receipt

See accompanying notes

Delaware-5
<PAGE>

Delaware Group Premium Fund, Inc.-
Delaware Series
Statement of Operations
Year Ended December 31, 1998

INVESTMENT INCOME:
Interest ................................................... $ 2,830,592
Dividends .................................................. 1,880,675
-----------
4,711,267
-----------

EXPENSES:
Management fees ............................................ 968,768
Accounting and administration .............................. 65,673
Professional fees .......................................... 21,250
Registration fees .......................................... 15,553
Custodian fees ............................................. 15,200
Taxes (other than taxes on income) ......................... 10,600
Reports and statements to shareholders ..................... 9,175
Dividend disbursing and transfer agent
fees and expenses ....................................... 5,541
Directors' fees ............................................ 2,620
Other ...................................................... 27,746
-----------
Total expenses ............................................. 1,142,126
-----------

NET INVESTMENT INCOME ...................................... 3,569,141
-----------

NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments ........................... 9,851,624
Net change in unrealized appreciation /
depreciation of investments ............................. 15,510,399
-----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS .......................................... 25,362,023
-----------

NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ......................................... $28,931,164
===========

See accompanying notes
<PAGE>

Delaware Group Premium Fund, Inc. -
Delaware Series
Statements of Changes in Net Assets

Year Ended Year Ended
12/31/98 12/31/97
INCREASE IN NET ASSETS FROM
OPERATIONS:
Net investment income ........................ $ 3,569,141 $ 2,840,175
Net realized gain on investments ............. 9,851,624 11,425,156
Net change in unrealized appreciation /
depreciation of investments ............... 15,510,399 9,349,683
------------- -------------
Net increase in net assets
resulting from operations ................. 28,931,164 23,615,014
------------- -------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................ (3,221,563) (2,590,776)
Net realized gain on investments ............. (12,969,759) (4,899,878)
------------- -------------
(16,191,322) (7,490,654)
------------- -------------

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold .................... 50,954,284 36,224,621
Net asset value of shares issued upon
reinvestment of distributions from
net investment income and net realized
gain on investments ....................... 16,191,322 7,490,655
------------- -------------
67,145,606 43,715,276
Cost of shares repurchased ................... (5,705,268) (7,566,399)
------------- -------------
Increase in net assets derived
from capital share transactions ........... 61,440,338 36,148,877
------------- -------------

NET INCREASE IN NET ASSETS ................... 74,180,180 52,273,237
------------- -------------

NET ASSETS:
Beginning of year ............................ 127,675,344 75,402,107
------------- -------------
End of year .................................. $ 201,855,524 $ 127,675,344
============= =============

See accompanying notes

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<PAGE>

Delaware Group Premium Fund, Inc.-Delaware Series
Financial Highlights

Selected data for each share of the Series outstanding throughout each period
were as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................... $ 19.050 $ 16.640 $ 15.500 $ 12.680 $ 13.330

Income (loss) from investment operations:
Net investment income .............................. 0.349 0.435 0.530 0.509 0.437
Net realized and unrealized gain (loss)
on investments .................................... 2.831 3.575 1.765 2.761 (0.447)
--------- --------- --------- --------- ---------
Total from investment operations ................... 3.180 4.010 2.295 3.270 (0.010)
--------- --------- --------- --------- ---------
Less dividends and distributions:
Dividends from net investment income ............... (0.420) (0.530) (0.500) (0.450) (0.340)
Distributions from net realized gain
on investments .................................... (1.770) (1.070) (0.655) none (0.300)
--------- --------- --------- --------- ---------
Total dividends and distributions .................. (2.190) (1.600) (1.155) (0.450) (0.640)
--------- --------- --------- --------- ---------

Net asset value, end of year .......................... $ 20.040 $ 19.050 $ 16.640 $ 15.500 $ 12.680
========= ========= ========= ========== =========
Total return .......................................... 18.62% 26.40% 15.91% 26.58% (0.15%)

Ratios and supplemental data:
Net assets, end of year (000 omitted) .............. $201,856 $ 127,675 $ 75,402 $ 63,215 $ 47,731
Ratio of expenses to average net assets ............ 0.70% 0.67% 0.68% 0.69% 0.70%
Ratio of net investment income to average net assets 2.20% 2.85% 3.56% 3.75% 3.71%
Portfolio turnover ................................. 94% 67% 92% 106% 140%
</TABLE>

See accompanying notes

Delaware-7
<PAGE>

Delaware Group Premium Fund, Inc.-Delaware Series
Notes to Financial Statements
December 31, 1998

Delaware Group Premium Fund, Inc. (the "Fund") is registered as a diversified
open-end investment company under the Investment Company Act of 1940, as
amended. The Fund is organized as a Maryland Corporation and offers 16 series:
the Trend Series, the DelCap Series, the Small Cap Value Series (formerly the
Value Series), the Social Awareness Series (formerly the Quantum Series), the
Devon Series, the Decatur Total Return Series, the REIT Series, the Delaware
Series, the Convertible Securities Series, the Emerging Markets Series, the
International Equity Series, the Global Bond Series, the Delchester Series, the
Strategic Income Series, the Capital Reserves Series, and the Cash Reserve
Series. These financial statements and the related notes pertain to the Delaware
Series (the "Series"). The shares of the Fund are sold only to separate accounts
of life insurance companies.

1. Significant Accounting Policies
The following accounting policies are in accordance with generally accepted
accounting principles and are consistently followed by the Series.

Security Valuation--Securities listed on an exchange are valued at the last
quoted sales price as of the close of the NYSE on the valuation date. Securities
not traded or securities not listed on an exchange are valued at the mean of the
last quoted bid and asked prices. Long-term debt securities are valued by an
independent pricing service and such prices are believed to reflect the fair
value of such securities. Money market instruments having less than 60 days to
maturity are valued at amortized cost, which approximates market value. Other
securities and assets for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Fund's Board of Directors.

The Delaware Series will make payments from net investment income quarterly and
distributions from net realized gain on investments, if any, following the close
of the fiscal year.

Certain expenses of the Fund are paid through "soft dollar" arrangements with
brokers. The amount of these expenses is less than 0.01% of the Series' average
daily net assets.
<PAGE>

DMC has elected to waive that portion, if any, of the annual management fee
payable to the extent necessary to ensure that annual operating expenses
exclusive of taxes, interest, brokerage commissions and extraordinary expenses
do not exceed 0.80% of average daily net assets of the Series through April 30,
1999. No reimbursement was due for the year ended December 31, 1998.

On December 31, 1998, the Series had liabilities payable to affiliates as
follows:

Dividend disbursing
Investment transfer agent,
management accounting fees
fee payable to and other expenses
DMC payable to DSC
-------------- ------------------
$85,870 $6,479

Certain officers of DMC and DSC are officers, directors and/or employees of the
Fund. These officers, directors and employees are paid no compensation by the
Fund.

Delaware-8
<PAGE>
Delaware Series
Notes to Financial Statements (Continued)

3. Investments
During the year ended December 31, 1998, the Series made purchases and sales of
investment securities other than U.S. government securities and temporary cash
investments as follows:

Purchases ............................... $124,483,604
Sales ................................... $78,642,284

During the year ended December 31, 1998, the Series made purchases and sales of
U.S. government securities as follows:

Purchases ............................... $69,836,183
Sales ................................... $68,639,739

At December 31, 1998, the aggregate cost of securities and unrealized
appreciation (depreciation) for federal income tax purposes for the Series were
as follows:

4. Capital Stock
Transactions in capital stock shares were as follows:
<TABLE>
<CAPTION>
Shares issued upon
reinvestment of distributions
from net investment
income and net realized Shares Net
Shares sold gain on investments repurchased increase
----------- ------------------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998: 2,757,318 928,152 (313,121) 3,372,349
Year ended December 31, 1997: 2,134,206 483,216 (447,850) 2,169,572
</TABLE>
5. Credit and Market Risk
The Series may invest in securities whose value is derived from an underlying
pool of mortgages or consumer loans. Prepayment of these loans may shorten the
stated maturity of the respective obligation and may result in a loss of
premium, if any has been paid.

The Series may invest up to 10% of its total assets in illiquid securities which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of some of these securities may adversely affect the Series' ability
to dispose of such securities in a timely manner and at a fair price when it is
necessary to liquidate such securities.

6. Securities Lending
The Series may participate, along with other funds in the Delaware Investments
Family of Funds, in a Securities Lending Agreement ("Lending Agreement").
Security loans made pursuant to the Lending Agreement are required at all times
to be secured by U.S. Treasury obligations and/or cash collateral at least equal
to 100% of the market value of securities issued in the U.S. and 105% of the
market value of securities issued outside of the U.S. Cash collateral received
is invested in fixed income securities, with a weighted average maturity not to
exceed 90 days, rated in one of the top two tiers by Standard & Poors Ratings
Group or Moody's Investors Service, Inc. or repurchase agreements collateralized
by such securities. However, in the event of default or bankruptcy by the
lending agent, realization and/or retention of the collateral may be subject to
legal proceedings. In the event that the borrower fails to return loaned
securities and the collateral received is insufficient to cover the value of the
loaned securities and provided such collateral is not the result of investment
losses, the lending agent has agreed to pay the amount of the shortfall to the
Series, or at the discretion of the lending agent, replace the loaned
securities. The market value of the securities on loan and the related
collateral received at December 31, 1998 were as follows:

Market value of Market value of
securities on loan collateral
------------------ ----------
$15,240,258 $15,375,847

Net income from securities lending activities for the year ended December 31,
1998 was $19,894 and is included in interest income on the statement of
operations.

Delaware-9
<PAGE>

Delaware Group Premium Fund, Inc.-Delaware Series
Report of Independent Auditors

To the Shareholders and Board of Directors
Delaware Group Premium Fund, Inc.-Delaware Series

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Delaware Series (the "Fund") as of December 31, 1998, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Delaware Group Premium Fund, Inc.-Delaware Series at December 31, 1998, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and its financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.

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

Philadelphia, Pennsylvania
February 5, 1999

Delaware-10