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>

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 TOTAL RETURN

Decatur Total Return Series

Investment Strategy and Performance in 1998
Large-cap growth stocks continued to dominate market returns in 1998. This
made it difficult for Decatur Total Return Series' large-cap value strategy to
keep pace.
For the 12 months ended December 31, 1998, the Series provided a total return
of +11.35% (capital change plus reinvestment of distributions). This was less
than half the 28.56% return of the unmanaged Standard & Poor's 500 Index for the
same period.
Much of the S&P 500's 12-month return was driven by a select group of
large-cap growth companies. These stocks did not meet our investment criteria
because their dividend yields were well below the average yield of the Index.
Decatur Total Return Series' portfolio consists primarily of stocks that
yield more than the average yield of the S&P 500. The potential benefits of this
strategy are two-fold: a high yield may signal future appreciation potential and
dividends offer investors up-front income while they wait for that possible
appreciation.

Portfolio Snapshot
During fiscal 1998, Decatur Total Return Series did not invest in technology
stocks. None met our dividend-yield expectations. This was detrimental to the
Series' 1998 performance since technology stocks were among the year's top
performing sectors.
Financial services stocks represented the largest percentage of portfolio net
assets, though we modestly reduced our holdings of smaller banks. With the
mergers completed in the banking industry in 1998, market prices have shifted in
favor of banks that have merged. Therefore, we shifted our focus toward large
banks. We believe they now offer better opportunities for capital appreciation
and income potential than small banks.
Our holdings of several pharmaceutical companies contributed positively to
the Series' total return in 1998. These included companies that manufacture
drugs to treat a range of conditions, from male pattern baldness and arthritis
to infectious diseases.
In a highly unusual move for the Series, we added more utility stocks.
Deregulation in the electric industry has, in our opinion, created a unique
opportunity for meaningful stock returns.

Investment Outlook
In our opinion, this past year's volatility in the stock market signals the
beginning of stock returns more consistent with historic trends. Over the next
few years, we think annual returns from stocks may be moderate, ranging from 8%
to 12% returns--still attractive compared to most investment alternatives.
Historically, Decatur Total Return Series' large-cap value discipline has
contributed the most to the portfolio during periods of more "normal" stock
returns. Though past performance is not a guarantee of the future, we believe we
may soon embark upon a new cycle of outperformance for our yield-oriented
strategy.
Given the challenges equity investors faced in 1998, it appears that
investors have begun to pay closer attention to investment risk. In our view, a
value-oriented approach like Decatur Total Return Series employs can help manage
such risk within your portfolio.

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

Decatur Total Return Series Investment Objective
Seeks long-term growth by investing primarily in securities that offer the
potential for income and capital appreciation without undue risk to principal.

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

Decatur Total Return-1
<PAGE>
Growth of a $10,000 investment
January 1, 1989 through
December 31, 1998

Decatur Total Return Series S&P 500 Index
12/31/88 $10,000 $10,000
12/31/89 $11,303 $13,169
12/30/90 $ 9,807 $12,759
12/31/91 $11,997 $16,647
12/31/92 $13,055 $17,916
12/31/93 $15,072 $19,722
12/31/94 $15,039 $19,982
12/31/95 $20,473 $27,492
12/31/96 $24,713 $33,802
12/31/97 $32,325 $45,080
12/31/98 $36,021 $58,037

Decatur Total Return Series
Average Annual Total Returns
----------------------------
10 Years +13.67%
Five Years +19.06%
One Year +11.35%
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 Decatur Total Return
Series and the S&P 500 Index for the 10-year period from January 1, 1989 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.
Decatur Total Return-2

<PAGE>

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

Number Market
of Shares Value
COMMON STOCK-97.95%
Aerospace & Defense-1.40%
Lockheed Martin ................................... 95,800 $ 8,119,050
------------
8,119,050
------------
Automobiles & Automotive Parts-3.69%
Ford Motor ........................................ 217,200 12,746,925
General Motors .................................... 121,100 8,666,219
------------
21,413,144
------------
Banking, Finance & Insurance-18.63%
American General .................................. 185,900 14,500,200
Aon ............................................... 111,425 6,170,159
Bank One .......................................... 216,594 11,059,831
BankAmerica ....................................... 209,011 12,566,786
BankBoston ........................................ 168,200 6,549,288
Chubb ............................................. 149,300 9,685,838
First Union ....................................... 197,126 11,987,725
Mellon Bank ....................................... 148,800 10,230,000
+St. Paul .......................................... 217,000 7,540,750
Summit Bancorp .................................... 174,775 7,635,483
Wells Fargo ....................................... 252,800 10,096,200
------------
108,022,260
------------
Cable, Media & Publishing-3.06%
McGraw-Hill ....................................... 174,200 17,746,625
------------
17,746,625
Chemicals-4.68% ------------
duPont(E.I.)deNemours ............................. 191,500 10,161,469
+Imperial Chemical ADR ............................. 313,100 10,938,931
PPG Industries .................................... 104,000 6,058,000
------------
27,158,400
------------
Consumer Products-2.79%
Kimberly-Clark .................................... 297,000 16,186,500
------------
16,186,500
------------
Electronics & Electrical Equipment-5.70%
Cooper Industries ................................. 169,000 8,059,188
Emerson Electric .................................. 191,600 11,986,975
Thomas & Betts .................................... 126,400 5,474,700
+Xerox ............................................. 63,700 7,516,600
------------
33,037,463
------------
Energy-8.00%
+British Petroleum ADR ............................. 90,742 8,620,490
Chevron ........................................... 159,800 13,253,413
Mobil ............................................. 98,500 8,581,813
Royal Dutch Petroleum ............................. 204,700 9,800,013
USX-Marathon Group ................................ 203,800 6,139,475
------------
46,395,204
------------
Environmental Services-1.15%
Browning Ferris ................................... 233,980 6,653,806
------------
6,653,806
------------
Food, Beverage & Tobacco-5.94%
Bestfoods ......................................... 280,300 14,925,975
Fortune Brands .................................... 273,900 8,662,088
Heinz (H.J.) ...................................... 191,800 10,860,675
------------
34,448,738
------------
- ----------
Top 10 stock holdings, representing 25.5% of net assets, are printed in bold.
<PAGE>
Number Market
of Shares Value
COMMON STOCK (Continued)
Healthcare & Pharmaceuticals-8.42%
American Home Products ............................207,200 $11,667,950
Baxter International ..............................186,300 11,981,419
+Glaxo Wellcome ADR ................................166,200 11,550,900
Pharmacia & Upjohn ................................237,400 13,442,775
Zeneca Group ADR .................................. 3,900 175,013
-----------
48,818,057
-----------
Industrial Machinery-1.29%
Deere & Co. .......................................225,900 7,482,938
-----------
7,482,938
-----------
Metals & Mining-2.51%
Allegheny Teledyne ................................217,800 4,451,288
Aluminum Company of America .......................135,400 10,095,763
-----------
14,547,051
-----------
Paper & Forest Products-2.03%
Union Camp ........................................174,500 11,778,750
-----------
11,778,750
-----------
Retail-3.44%
May Department Stores .............................176,200 10,638,075
+Penney (J.C.) .....................................198,600 9,309,375
-----------
19,947,450
-----------
Telecommunications-10.42%
AT&T .............................................. 77,300 5,816,825
Ameritech .........................................203,600 12,903,150
Bell Atlantic .....................................167,700 9,527,456
+Cable & Wireless ADR ..............................159,100 5,846,925
Frontier ..........................................372,400 12,661,600
GTE ...............................................203,200 13,703,300
-----------
60,459,256
-----------
Transportation & Shipping-1.58%
+British Airways ADR ...............................135,000 9,154,688
-----------
9,154,688
-----------
Utilities-7.82%
Dominion Resources ................................244,100 11,411,675
Enron .............................................136,200 7,771,913
Southern ..........................................188,400 5,475,375
Texas Utilities ...................................244,600 11,419,763
+Williams ..........................................297,000 9,262,688
-----------
45,341,414
-----------
Miscellaneous-5.40%
Pitney Bowes ......................................278,900 18,424,831
Tenneco ...........................................378,800 12,902,875
-----------
31,327,706
-----------
Total Common Stock
(cost $509,648,621) ............................... 568,038,500
-----------

Decatur Total Return-3
<PAGE>
<TABLE>
<CAPTION>
Decatur Total Return Series
Statement of Net Assets (Continued)
Principal Market
Amount Value

<S> <C> <C>
REPURCHASE AGREEMENTS-1.78%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $2,663,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$2,954,359) .......................................... $2,895,000 $ 2,895,000
With J.P. Morgan Securities
4.75% 1/4/99 (dated 12/31/98,
collateralized by $3,693,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$3,798,106) .......................................... 3,720,000 3,720,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $809,000
U.S. Treasury Notes 7.75%
due 12/31/99, market value
$834,077 and $1,132,000 U.S.
Treasury Notes 7.75% due 1/31/00,
market value $1,205,112 and
$1,136,000 U.S. Treasury Notes
6.25% due 8/31/00, market value
$1,189,602 and $542,000 U.S.
Treasury Notes 6.50% due
5/31/01, market value $567,433) ....................... $3,719,000 $ 3,719,000
------------
Total Repurchase Agreements
(cost $10,334,000) ................................... 10,334,000
------------

TOTAL MARKET VALUE OF SECURITIES-99.73% (cost $519,982,621) ..................... $578,372,500

RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES-0.27% ........................... 1,534,197
------------
NET ASSETS APPLICABLE TO 29,856,557 SHARES ($0.01 PAR VALUE) OUTSTANDING;
EQUIVALENT TO $19.42 PER SHARE-100.00% ....................................... $579,906,697
============
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.......................... $476,116,153
Undistributed net investment income ............................................. 1,818,869
Accumulated net realized gain on investments..................................... 43,581,796
Net unrealized appreciation of investments ...................................... 58,389,879
------------
Total net assets ................................................................ $579,906,697
============
</TABLE>
- ------------------
+Security is partially or fully on loan.

ADR-American Depository Receipt

See accompanying notes

Decatur Total Return-4
<PAGE>

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

INVESTMENT INCOME:
Dividends ........................................ $ 12,937,962
Interest ......................................... 760,320
------------
13,698,282
------------

EXPENSES:
Management fees .................................. 3,018,521
Accounting and administration .................... 198,278
Professional fees ................................ 71,825
Reports and statements to shareholders ........... 70,923
Registration fees ................................ 69,542
Taxes (other than taxes on income) ............... 47,069
Custodian fees ................................... 12,520
Dividend disbursing and transfer agent
fees and expenses ............................. 9,000
Directors' fees .................................. 6,649
Other ............................................ 77,069
------------
Total expenses ................................... 3,581,396
------------

NET INVESTMENT INCOME ............................ 10,116,886
------------

NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments ................. 43,739,574
Net change in unrealized appreciation /
depreciation of investments ................... (3,304,465)
------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ........................... 40,435,109
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ..................... $ 50,551,995
============
See accompanying notes
<PAGE>
Delaware Group Premium Fund, Inc.-
Decatur Total Return 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 ............................ $ 10,116,886 $ 5,543,484
Net realized gain on investments ................. 43,739,574 23,181,744
Net change in unrealized appreciation /
depreciation of investments ................... (3,304,465) 40,216,861
------------ ------------
Net increase in net assets resulting from
operations .................................... 50,551,995 68,942,089
------------ ------------

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................ (8,876,285) (5,726,790)
Net realized gain on investments ................. (23,162,228) (14,788,457)
------------ ------------
(32,038,513) (20,515,247)
------------ ------------

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ........................ 180,559,930 187,531,270
Net asset value of shares issued upon
reinvestment of distributions from net
investment income and net realized
gain on investments ........................... 32,038,513 20,515,247
------------ ------------
212,598,443 208,046,517
Cost of shares repurchased ....................... (52,607,198) (21,717,966)
------------ ------------
Increase in net assets derived from capital
share transactions ............................ 159,991,245 186,328,551
------------ ------------

NET INCREASE IN NET ASSETS ....................... 178,504,727 234,755,393
------------ ------------

NET ASSETS:
Beginning of year ................................ 401,401,970 166,646,577
------------ ------------
End of year ...................................... $579,906,697 $401,401,970
============ ============
See accompanying notes

Decatur Total Return-5

<PAGE>

Delaware Group Premium Fund, Inc.-Decatur Total Return Series
Financial Highlights

<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $ 18.800 $ 15.980 $ 14.830 $11.480 $12.510

Income (loss) from investment operations:
Net investment income ..................................... 0.361 0.324 0.377 0.416 0.412
Net realized and unrealized gain (loss) on investments .... 1.636 4.216 2.398 3.574 (0.422)
-------- -------- -------- ------- -------
Total from investment operations .......................... 1.997 4.540 2.775 3.990 (0.010)
-------- -------- -------- ------- -------
Less dividends and distributions:
Dividends from net investment income ...................... (0.327) (0.370) (0.420) (0.430) (0.420)
Distributions from net realized gain on investments ....... (1.050) (1.350) (1.205) (0.210) (0.600)
-------- -------- -------- ------- -------
Total dividends and distributions ......................... (1.377) (1.720) (1.625) (0.640) (1.020)
-------- -------- -------- ------- -------

Net asset value, end of year .............................. $19.420 $ 18.800 $ 15.980 $14.830 $11.480
======== ======== ======== ======= =======
Total return .............................................. 11.35% 31.00% 20.72% 36.12% (0.20%)

Ratios and supplemental data:
Net assets, end of year (000 omitted) ..................... $579,907 $401,402 $166,647 $109,003 $72,725
Ratio of expenses to average net assets ................... 0.71% 0.71% 0.67% 0.69% 0.71%
Ratio of net investment income to average net assets ...... 2.00% 2.02% 2.66% 3.24% 3.63%
Portfolio turnover ........................................ 81% 54% 81% 85% 91%
</TABLE>
See accompanying notes

Decatur Total Return-6
<PAGE>
Delaware Group Premium Fund, Inc.-Decatur Total Return 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 Decatur
Total Return 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 Decatur Total Return 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.

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 0.60% of the average daily net
assets of the Series, less the fees paid to the unaffiliated directors.

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.

Decatur Total Return-7
<PAGE>
Decatur Total Return 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
-------------------- ------------------
$183,612 $20,076

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 ................ $529,741,970
Sales .................... $393,176,423

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

Aggregate Aggregate
Cost of unrealized unrealized Net unrealized
investments appreciation depreciation appreciation
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
$520,269,948 $84,653,404 ($26,550,852) $58,102,552
</TABLE>
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 ........................ 9,550,511 1,783,160 (2,829,984) 8,503,687
Year ended December 31, 1997 ........................ 10,893,570 1,321,652 (1,289,152) 10,926,070
</TABLE>

5. 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
------------------ ---------------
$26,530,685 $26,480,706

Net income from securities lending activities for the year ended December 31,
1998 was $88,424 and is included in interest income on the statement of
operations.

Decatur Total Return-8
<PAGE>
Delaware Group Premium Fund, Inc.-Decatur Total Return Series
Report of Independent Auditors

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Decatur Total Return 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.-Decatur Total Return 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

Decatur Total Return-9

<PAGE>
FOR INCOME

Delchester Series

Investment Strategy and Performance in 1998
High-yield bond market performance in the middle of fiscal 1998 closely
followed the equity market's decline. Erosion of equity values in late summer,
combined with dramatically heightened volatility, quickly altered conditions in
the high-yield market.
Delchester Series had a disappointing total return of -1.83% (capital change
plus reinvestment of distributions) for the 12 months ended December 31, 1998,
underperforming its benchmark Salomon SmithBarney High-Yield Bond Index, which
returned +4.43%. We replaced the Merrill Lynch High Yield Bond Index with the
Salomon SmithBarney High Yield Bond Index because unlike the Merrill Index, the
Salomon SmithBarney Index does not include significant holdings of zero coupon
bonds which do not make cash payments. We do not tend to invest very much of our
assets in these types of bonds, so the Salomon SmithBarney Index is
representative of our strategy.
Concerns about Asia's troubled economies and Russia's loan default led to
increased investor sensitivity to credit risk in 1998. As a result, investors
pumped large amounts of cash into U.S. Treasuries in August to shield themselves
from extreme price volatility in the marketplace. This caused a liquidity
drought in the high-yield bond market, which resulted in a loss in principal
value for the Series' holdings.
After the Federal Reserve lowered interest rates this past fall, liquidity in
many high-yield issues improved. High-yield bond prices moved slightly higher by
year end which helped the Series regain some of its earlier losses.
Delchester Series invests in high yielding, higher risk bonds with a primary
focus on bonds rated B and BB--the higher quality tiers of the high-yield,
non-investment grade bond market. The BB segment, due to its relatively higher
credit quality and greater interest-rate sensitivity, fared better than other
credit quality sectors within the high-yield market. The Series' holdings had a
bias toward bonds rated B, with the balance in bonds rated BB.

Portfolio Snapshot
Performance in individual sectors of the high-yield market varied widely in
1998 according to global economic exposure and near-term reliance on the capital
markets for future funding. Cyclical companies (representing 7.94% of the
Series' net assets at year end) performed poorly. Consumer-related
companies--cable and media, home builders, lodging and utilities companies--did
quite well. We held 9.88% of net assets in consumer stocks.
Slowing economies worldwide have reduced the demand for many commodities. As
a result, high-yield issuers in the metals and mining and paper industries
posted negative double-digit returns in 1998. The Series held approximately
5.69% of net assets in these two sectors.
Illiquid conditions in 1998 temporarily halted new debt issuance. As the Fed
lowered interest rates in the fall, this enabled corporations to sell new bonds;
however, new issuance so late in the year did not keep up with renewed investor
demand. This imbalance pushed high-yield bond prices modestly higher, pushing
yields down as a result.

Investment Outlook
While changing economic tides have increased investors' risk sensitivity,
underlying credit quality is unchanged. The default rate has moved slightly
above its low, but it is still well below the historical average of 3.4%.
Additionally, credit agencies have downgraded their ratings on less than 6%
of net issuers, further suggesting to us that a material decline in relative
credit quality has not occurred. Indications point to the U.S. economy slowing,
but clear signs of underlying weakness have yet to appear.
Over time, illiquid and volatile markets ultimately lead to swelling mutual
fund cash balances. We believe this, combined with a lack of new supply, will
propel the high-yield market forward as historically high-yield premiums
eventually attract more investors.

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

Delchester Series Investment Objective
Seeks as high a level of current income as possible. It attempts to achieve its
objective by investing in rated and unrated corporate bonds, including higher
risk, non-investment grade bonds, U.S. government securities and commercial
paper.

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

Delchester-1
<PAGE>
Growth of a $10,000 Investment
January 1, 1989 through
December 31, 1998
<TABLE>
<CAPTION>

Merrill Lynch High Yield Bond Index Salomon SmithBarney
Delchester Series Cash Pay High-Yield Bond Index
<S> <C> <C> <C>
12/31/88 $10,000 $10,000 $10,000
12/31/89 $10,462 $10,424 $10,107
12/31/90 $ 9,718 $ 9,970 $ 9,396
12/31/91 $13,365 $13,418 $12,611
12/31/92 $15,160 $15,855 $14,919
12/31/93 $17,641 $18,579 $17,511
12/31/94 $17,135 $18,699 $17,368
12/31/95 $19,791 $22,422 $20,710
12/31/96 $22,318 $24,903 $22,956
12/31/97 $25,359 $28,035 $25,964
12/31/98 $24,898 $29,050 $27,113
</TABLE>

Delchester Series
Average Annual Total Returns
----------------------------
10 Years +9.55%
Five Years +7.14%
One Year -1.83%
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 Delchester Series, the Salomon
SmithBarney Cash Pay High-Yield Bond Index and the Merrill Lynch High Yield Bond
Index for the 10-year period from January 1, 1989 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.

Delchester-2
<PAGE>
Delaware Group Premium Fund, Inc.-Delchester Series
Statement of Net Assets
December 31,1998
Principal Market
Amount Value
CORPORATE BONDS-85.12%
Aerospace & Defense-0.45%
Federal Data sr sub nts
10.125% 8/1/05 .............................. $ 550,000 $ 544,500
----------
544,500
----------
Automobiles & Automotive Parts-2.48%
ADV Accessory/AAS Capital sr sub nts
9.75% 10/1/07 ............................... 650,000 650,000
Hayes Lemmerz International co
guarantee 8.25% 12/15/08 .................... 500,000 500,000
Newcor co guarantee 9.875% 3/1/08 ............ 450,000 429,750
Special Devices sr sub nts
11.375% 12/15/08 ............................ 200,000 203,500
Stanadyne Automotive sr sub nts
10.25% 12/15/07 ............................. 800,000 816,000
Talon Automotive Group sr sub nts
9.625% 5/1/08 ............................... 400,000 394,000
----------
2,993,250
----------
Banking, Finance & Insurance-0.95%
American Banknote unsec sr sub nts
11.25% 12/1/07 .............................. 1,500,000 1,065,000
Western Financial Bank sub debs
8.875% 8/1/07 ............................... 100,000 79,750
----------
1,144,750
----------
Buildings & Materials-2.73%
American Builders and Contractors sr
unsec sub nts 10.625% 5/15/07 ............... 225,000 212,625
Clark Materials Handling unsec sr nts
10.75% 11/15/06 ............................. 500,000 515,000
Collins & Aikman sr sub nts
10.00% 1/15/07 .............................. 350,000 366,188
Nortek sr nts 9.25% 3/15/07 .................. 500,000 518,750
Safelite Glass sr sub nts
9.875% 12/15/06 ............................. 500,000 465,000
WESCO Distribution co guarantee
9.125% 6/1/08 ............................... 750,000 762,188
+WESCO International sr disc nts
11.125% 6/1/08 ............................... 750,000 450,000
----------
3,289,751
----------
Cable, Media & Publishing-4.81%
Amtran co guarantee 9.625% 12/15/05 .......... 250,000 250,000
+Falcon Holding Group debs
9.285% 4/15/10 .............................. 1,100,000 759,000
Mail-Well sr sub nts 8.75% 12/15/08 .......... 1,000,000 1,005,000
Northland Cable Television sr sub nts
10.25% 11/15/07 ............................. 550,000 580,250
Pathnet sr nts 12.25% 4/15/08 ................ 300,000 210,000
Pegasus Communications sr nts
9.625% 10/15/05 ............................. 250,000 250,000
PREMIER GRAPHICS sr nts
11.50% 12/1/05 .............................. 400,000 400,500
+PX Escrow sr disc nts 9.625% 2/1/06 .......... 1,250,000 692,188
+Radio Unica sr disc nts 11.75% 8/1/06 ........ 500,000 270,625
<PAGE>

Principal Market
Amount Value
CORPORATE BONDS (Continued)
Cable, Media & Publishing (Continued)
Sullivan Graphics sr sub nts
12.75% 8/1/05 ................................ $ 250,000 $ 255,000
+21st Century Telecom Group sr
disc nts 12.25% 2/15/08 ...................... 900,000 379,125
+United International Holdings sr disc nts
10.75% 2/15/08 ................................ 1,400,000 756,000
----------
5,807,688
----------
Chemicals-3.60%
Aqua Chemical sr sub nts
11.25% 7/1/08 ................................. 800,000 760,000
Brunner Mond Group sr sub nts
11.00% 7/15/08 ................................ 400,000 372,000
Geo Specialty Chemicals sr sub nts
10.125% 8/1/08 ................................ 200,000 195,000
Huntsman sr sub nts 9.50% 7/1/07 ............... 400,000 401,000
Koppers Industries unsec sr sub nts
9.875% 12/1/07 ................................ 500,000 490,000
LaRoche Industries sr sub nts
9.50% 9/15/07 ................................. 1,500,000 1,365,000
PCI Chemical Canada guaranteed
sub nts 9.25% 10/15/07 ........................ 50,000 40,438
+Sterling Chemical sr disc nts
13.50% 8/15/08 ................................ 1,775,000 727,750
----------
4,351,188
----------
Computers & Technology-1.57%
+Cellnet Data Systems sr disc nts
14.00% 10/1/07 ................................ 1,000,000 510,000
PSINet sr nts 10.00% 2/15/05 ................... 1,040,000 1,029,600
PSINet sr nts 11.50% 11/1/08 ................... 100,000 104,000
Statia Terminals mtg nts
11.75% 11/15/03 ............................... 250,000 252,500
----------
1,896,100
----------
Consumer Products-5.85%
Desa International sr sub nts
9.875% 12/15/07 ............................... 1,115,000 847,400
Drypers sr nts 10.25% 6/15/07 .................. 500,000 481,250
EV International sr sub nts
11.00% 3/15/07 ................................ 1,000,000 900,000
French Fragrance sr nts
10.375% 5/15/07 ............................... 1,000,000 998,750
Home Interiors and Gifts sr sub nts
10.125% 6/1/08 ................................ 1,150,000 1,138,500
Iron Age co guarantee 9.875% 5/1/08 ............ 1,000,000 912,500
+Iron Age sr disc nts 12.125% 5/1/09 ............ 500,000 270,000
Prime Succession Acquisition sr sub nts
10.75% 8/15/04 ................................ 200,000 196,250
Riddell Sports sr unsec sub nts
10.50% 7/15/07 ................................ 400,000 380,000
Spinnaker Industries sr nts
10.75% 10/15/06 ............................... 300,000 261,000
Telex Communications sr sub nts
10.50% 5/1/07 ................................. 750,000 674,063
----------
7,059,713
----------

Delchester-3
<PAGE>
Delchester Series
Statement of Net Assets (Continued)
Principal Market
Amount Value
CORPORATE BONDS (Continued)
Electronics & Electrical Equipment-0.56%
Elgar Holdings co guarantee
9.875% 2/1/08 ................................. $ 200,000 $ 184,000
Phase Metrics co guarantee
10.75% 2/1/05 ................................. 700,000 493,500
----------
677,500
----------
Energy-4.33%
Abraxas Petro co guarantee
11.50% 11/1/04 ................................ 150,000 115,500
First Wave Marine sr nts
11.00% 2/1/08 ................................. 1,100,000 1,034,000
Michael Petroleum sr nts
11.50% 4/1/05 ................................. 400,000 280,000
Outboard Marine sr nts
10.75% 6/1/08 ................................. 850,000 833,000
Panaco unsec sr sub nts
10.625% 10/1/04 ............................... 850,000 646,000
Rutherford-Moran Oil sr sub nts
10.75% 10/1/04 ................................ 750,000 862,500
TransAmerican Energy sr nts
11.50% 6/15/02 ................................ 250,000 95,000
+TransAmerican Energy sr disc nts
13.00% 6/15/02 ................................ 1,000,000 340,000
TransAmerican Refining units
16.00% 6/30/03 ................................ 1,000,000 420,000
+Universal Compression sr disc nts
9.875% 2/15/08 ................................ 1,000,000 600,000
----------
5,226,000
----------
Enviromental Services-0.23%
Hydrochem Industrial Services sr sub nts
10.375% 8/1/07 ................................ 275,000 273,625
----------
273,625
----------
Food, Beverage & Tobacco-5.30%
Albecca sr sub nts 10.75% 8/15/08 .............. 500,000 510,000
Ameriserve Food sr sub nts
10.125% 7/15/07 ............................... 1,000,000 910,000
Carrols sr sub nts 9.50% 12/1/08 ............... 1,000,000 1,020,000
Core-Mark International sr sub nts
11.375% 9/15/03 ............................... 200,000 204,000
+Del Monte Foods sr disc nts
12.50% 12/15/07 ............................... 2,050,000 1,435,000
DiGiorgio sr nts 10.00% 6/15/07 ................ 775,000 724,625
+Electronic Retailing Systems sr disc nts
13.25% 2/1/04 ................................. 500,000 182,500
Favorite Brands sr nts 10.75% 5/15/06 .......... 800,000 656,000
Fresh Foods co guarantee
10.75% 6/1/06 ................................. 800,000 760,000
----------
6,402,125
----------
Healthcare & Pharmaceuticals-2.99%
+Alaris Medical sr disc nts
11.125% 8/1/08 ................................ 1,000,000 560,000
Alliance Imaging sr sub nts
9.625% 12/15/05 ............................... 600,000 591,000
<PAGE>
Principal Market
Amount Value
CORPORATE BONDS (Continued)
Healthcare & Pharmaceuticals (Continued)
Dynacare sr nts 10.75% 1/15/06 ................. $ 500,000 $ 505,000
Insight Health Services co guarantee
9.625% 6/15/08 ................................. 1,000,000 970,000
Kinetic Concepts sr sub nts
9.625% 11/1/07 ................................. 1,000,000 986,250
----------
3,612,250
----------
Industrial Machinery-3.86%
AEP Industries sr sub nts
9.875% 11/15/07 ................................ 150,000 151,500
Burke Industries unsec sr nts
10.00% 8/15/07 ................................. 500,000 492,500
Cambridge Industries sr sub nts
10.25% 7/15/07 ................................. 800,000 692,000
Grove Worldwide sr sub nts
9.25% 5/1/08 ................................... 1,050,000 971,250
Motors and Gears sr nts
10.75% 11/15/06 ................................ 200,000 210,750
Nationsrent sr sub nts
10.375% 12/15/08 ............................... 250,000 250,000
Republic Engineered Steel mtg nts
9.875% 12/15/01 ................................ 1,250,000 1,284,375
Safety Components International
sr sub nts 10.125% 7/15/07 ..................... 600,000 605,250
----------
4,657,625
----------
Leisure, Lodging & Entertainment-2.95%
+Aladdin Gaming units 13.50% 3/1/10 .............. 1,250,000 350,000
HMH Properties sr nts 8.45% 12/1/08 ............ 825,000 828,094
+Premier Parks sr disc nts
10.00% 4/1/08 .................................. 1,200,000 816,000
Silver Cinemas sr sub nts
10.50% 4/15/05 ................................. 600,000 444,000
United Artists Theatre sr sub nts
9.75% 4/15/08 .................................. 1,175,000 1,128,000
----------
3,566,094
----------
Metals & Mining-4.36%
Commonwealth Aluminum sr sub nts
10.75% 10/1/06 ................................. 200,000 200,250
Doe Run Resources co guarantee
11.25% 3/15/05 ................................. 1,200,000 930,000
Great Lakes Carbon co guarantee
10.25% 5/15/08 ................................. 750,000 760,313
Jorgensen Earle sr nts 9.50% 4/1/05 ............. 1,300,000 1,241,500
Metallurg co guarantee
11.00% 12/1/07 ................................. 1,250,000 1,198,438
Ormet co guarantee 11.00% 8/15/08 ............... 500,000 477,500
P & L Coal Holdings sr sub nts
9.625% 5/15/08 ................................. 450,000 457,875
----------
5,265,876
----------
Packaging & Containers-2.78%
Gaylord Container sr nts
9.75% 6/15/07 .................................. 550,000 467,500
Gaylord Container sr nts
9.875% 2/15/08 ................................. 800,000 544,000

Delchester-4
<PAGE>
Delchester Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
CORPORATE BONDS (Continued)
Packaging & Containers (Continued)
+Graham Packaging/GPC Capital
sr disc nts 10.75% 1/15/09 ..................... $1,000,000 $ 695,000
Riverwood International unsec sr sub nts
10.875% 4/1/08 ................................ 1,800,000 1,647,000
----------
3,353,500
----------
Paper & Forest Products-1.33%
Fibermark sr nts 9.375% 10/15/06 ................ 400,000 405,000
MAXXAM Group sr sec nts
12.00% 8/1/03 ................................. 600,000 609,000
US Office Products sr sub nts
9.75% 6/15/08 ................................. 900,000 594,000
----------
1,608,000
----------
Retail-4.80%
Advance Stores sr sub nts
10.25% 4/15/08 ................................ 800,000 812,000
Fleming sr sub nts 10.50% 12/1/04 ............... 1,750,000 1,671,250
Frank's Nursery & Crafts sr sub nts
10.25% 3/1/08 ................................. 800,000 794,000
Jitney-Jungle Stores unsec sr sub nts
10.375% 9/15/07 ............................... 1,300,000 1,342,250
Leslie's Poolmart sr nts
10.375% 7/15/04 ............................... 500,000 520,000
Petro Stopping Centers sr nts
10.50% 2/1/07 ................................. 250,000 262,500
Sonic Automotive sr sub nts
11.00% 8/1/08 ................................. 400,000 388,000
----------
5,790,000
----------
Telecommunications-18.17%
AMSC Acquisition sr nts
12.25% 4/1/08 ................................. 950,000 608,000
Arch Communications sr nts
12.75% 7/1/07 ................................. 1,000,000 1,000,000
BTI Telecom sr nts 10.50% 9/15/07 ............... 1,500,000 1,230,000
+Call-Net Enterprises sr disc nts
8.94% 8/15/08 .................................. 1,000,000 585,000
Caprock Communications sr nts
12.00% 7/15/08 ................................ 1,500,000 1,425,000
Convergent Communication units
13.00% 4/1/08 ................................. 500,000 440,000
+DTI Holdings sr disc nts
12.50% 3/1/08 .................................. 1,250,000 318,750
+Econophone sr disc nts 11.00% 2/15/08 ........... 800,000 384,000
+FirstWorld Communication units
13.00% 4/15/08 ................................. 1,500,000 465,000
Global Crossing co guarantee
9.625% 5/15/08 ................................. 600,000 637,500
+GST USA sr disc nts 13.875% 12/15/05 ............ 1,000,000 730,000
Jacor Communications unsec sr sub nts
9.75% 12/15/06 ................................. 500,000 555,000
+KMC Telecom Holdings sr disc nts
12.50% 2/15/08 ................................. 1,500,000 723,750
+McCaw International sr disc nts
13.00% 4/15/07 ................................. 600,000 330,000
<PAGE>
Principal Market
Amount Value
CORPORATE BONDS (Continued)
Telecommunications (Continued)
Metrocall unsec sr sub nts
10.375% 10/1/07 .............................. $ 1,475,000 $ 1,517,406
Metromedia Fiber sr nts
10.00% 11/15/08 .............................. 350,000 362,688
+MetroNet Communications sr disc nts
9.95% 6/15/08 ................................ 1,200,000 741,000
+NEXTEL Communications sr disc nts
9.95% 2/15/08 ................................ 2,400,000 1,446,000
+NextLink Communications sr disc nts
9.45% 4/15/08 ................................ 700,000 400,750
Nextlink Communications sr nts
9.625% 10/1/07 ............................... 500,000 483,750
NextLink Communications sr nts
10.75% 11/15/08 .............................. 600,000 616,500
+RCN sr disc nts 9.80% 2/15/08 ................. 1,900,000 1,026,000
+RCN sr disc nts
11.125% 10/15/07 ............................. 2,750,000 1,608,750
RCN sr nts 10.00% 10/15/07 .................... 200,000 192,000
+Rhythms Netconnections units
13.50% 5/15/08 ............................... 1,400,000 686,000
Splitrock Services units
11.75% 7/15/08 ............................... 400,000 362,000
+Teligent sr disc nts 11.50% 3/1/08 ............ 1,750,000 857,500
Teligent sr nts 11.50% 12/1/07 ................ 1,300,000 1,222,000
USA Mobile Communication sr nts
14.00% 11/1/04 ............................... 500,000 525,000
+Viatel units 12.50% 4/15/08 ................... 775,000 453,375
-----------
21,932,719
-----------
Textiles, Apparel & Furniture-0.66%
Globe Manufacturing sr sub nts
10.00% 8/1/08 ................................ 550,000 500,500
Scovill Fasteners sr unsec nts
11.25% 11/30/07 .............................. 300,000 299,250
-----------
799,750
-----------
Transportation & Shipping-3.75%
American Reefer mtg nts
10.25% 3/1/08 ................................ 350,000 222,250
Ameriking sr nts 10.75% 12/1/06 ............... 450,000 470,250
Atlas Air sr nts 9.25% 4/15/08 ................ 750,000 749,063
Atlas Air sr nts 9.375% 11/15/06 .............. 500,000 509,375
Continental Airlines nts 8.00% 12/15/05 ....... 500,000 499,375
Eletson Holdings mtg nts
9.25% 11/15/03 ............................... 430,000 423,550
Holt Group sr nts 9.75% 1/15/06 ............... 1,000,000 700,000
Millenium Seacarriers units
12.00% 7/15/05 ............................... 200,000 168,000
Navigator Gas Transport nts
10.50% 6/30/07 ............................... 400,000 348,000
Navigator Gas Transport units
12.00% 6/30/07 ............................... 400,000 432,000
-----------
4,521,863
-----------
Utilities-0.98%
Trench Electric & Trench co guarantee
10.25% 12/15/07 .............................. 1,250,000 1,178,125
-----------
1,178,125
-----------
Delchester-5
<PAGE>

Delchester Series
Statement of Net Assets (Continued)
Principal Market
Amount Value
CORPORATE BONDS (Continued)
Miscellaneous-5.63%
Accuride sr sub nts 9.25% 2/1/08 ............ $ 1,000,000 $ 1,020,000
Allied Waste NA sr nts
7.875% 1/1/09 .............................. 800,000 813,000
AXIA co guarantee 10.75% 7/15/08 ............ 300,000 304,500
Comforce Operating sr nts
12.00% 12/1/07 ............................. 450,000 455,625
Derby Cycle/Lyon sr nts
10.00% 5/15/08 ............................. 1,300,000 1,235,000
Eagle-Picher Industries co guarantee
9.375% 3/1/08 .............................. 1,000,000 960,000
Indesco International sr sub nts
9.75% 4/15/08 .............................. 500,000 467,500
Perry-Judd co guarantee
10.625% 12/15/07 ........................... 500,000 525,000
Protection One sr sub nts
8.125% 1/15/09 ............................. 200,000 200,500
+Spin Cycle units 12.75% 5/1/05 .............. 500,000 270,000
+Thermadyne Holdings debs
12.50% 6/1/08 .............................. 500,000 245,625
United Rentals sr sub nts
9.25% 1/15/09 .............................. 300,000 303,000
------------
6,799,750
------------
Total Corporate Bonds
(cost $113,246,222) ........................ 102,751,742
------------
PREFERRED STOCK-1.70%
Dobson Communications pik ..................... 273 $ 273,220
*Eagle-Picher Holdings ......................... 90 441,000
El Paso Electric pik .......................... 6,993 728,122
Nebco Evans Holding pik ....................... 4,339 291,797
Pegasus Communications pik .................... 65 61,891
Pegasus Communications Unit ................... 250 245,000
------------
Total Preferred Stock
(cost $2,231,876) ............................ 2,041,030
------------

CONVERTIBLE PREFERRED STOCK-0.35%
E. Spire Communications pik ................... 736 426,739
------------
Total Convertible Preferred Stock
(cost $752,919) .............................. 426,739
------------

RIGHTS AND WARRANTS-0.06%
*American Banknote ............................. 1,500 15,000
*American Mobile Satellite ..................... 950 3,685
*Cellnet Data Systems .......................... 1,000 25,000
*DTI Holdings .................................. 1,250 624
*Electronic Retailing System ................... 500 2,500
*Gothic Energy ................................. 1,400 1,400
*KMC Telecom Holdings .......................... 1,500 5,624
*Nextel International .......................... 300 150
*Pathnet ....................................... 300 3,000
*Terex-Appreciation ............................ 800 16,000
------------
Total Rights and Warrants
(cost $106,717) .............................. 72,983
------------
Delchester-6
<PAGE>
Delchester Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
REPURCHASE AGREEMENTS-10.99%
With Chase Manhattan 4.50% 1/4/99 (dated
12/31/98, collateralized by $3,418,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$3,791,437) ................................... $3,715,000 $ 3,715,000
With J.P. Morgan Securities
4.75% 1/4/99 (dated 12/31/98,
collateralized by $4,739,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$4,874,248) ................................... 4,774,000 4,774,000

REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85% 1/4/99
(dated 12/31/98, collateralized by
$1,038,000 U.S. Treasury Notes 7.75%
due 12/31/99, market value
$1,070,401 and $1,452,000
U.S. Treasury Notes 7.75%
due 1/31/00, market value
$1,546,564 and $1,458,000
U.S. Treasury Notes 6.25%
due 8/31/00, market value
$1,526,660 and $695,000
U.S. Treasury Notes 6.50%
due 5/31/01, market value
$728,208) ................................... $4,773,000 $ 4,773,000
------------
Total Repurchase Agreements
(cost $13,262,000) 13,262,000
------------

TOTAL MARKET VALUE OF SECURITIES-98.22% (cost $129,599,734) .. $118,554,494

RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES-1.78% ........ 2,153,778
------------

NET ASSETS APPLICABLE TO 14,264,527 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $8.46 PER SHARE-100.00% ......... $120,708,272
============
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 ................................................ $132,213,364
Undistributed net investment income .......................... 118,123
Accumulated net realized loss on investments ................. (577,975)
Net unrealized depreciation of investments ................... (11,045,240)
------------
Total net assets ............................................. $120,708,272
=============

- --------------
*Non-income producing security for the year ended December 31 ,1998.
+Zero coupon security as of December 31, 1998. The coupon shown is the step
up rate.

Summary of Abbreviations:
co guarantee - company guaranteed
debs - debentures
disc - discount
mtg - mortgage
nts- notes
pik - payment in kind
sr - senior
sub-subordinated
unsec- unsecured

See accompanying notes
Delchester-7
<PAGE>
Delaware Group Premium Fund, Inc.-
Delchester Series
Statement of Operations
Year Ended December 31, 1998

INVESTMENT INCOME:
Interest .................................................. $ 11,758,269
Dividends ................................................. 406,247
------------
12,164,516
------------

EXPENSES:
Management fees ........................................... 689,099
Accounting and administration ............................. 45,308
Professional fees ......................................... 13,120
Taxes (other than taxes on income) ........................ 10,649
Reports and statements to shareholders .................... 7,396
Registration fees ......................................... 6,610
Custodian fees ............................................ 4,569
Dividend disbursing and transfer agent
fees and expenses ........................................ 3,802
Directors' fees ........................................... 2,139
Other ..................................................... 23,544
------------
Total expenses ............................................ 806,236
------------

NET INVESTMENT INCOME ..................................... 11,358,280
------------

NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Net realized loss on investments .......................... (577,975)
Net change in unrealized appreciation /
depreciation of investments .............................. (13,468,140)
------------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS ...................................... (14,046,115)
------------

NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................... ($ 2,687,835)
============

See accompanying notes
<PAGE>

Delaware Group Premium Fund, Inc.-
Delchester 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 ........................ $ 11,358,280 $ 7,487,122
Net realized gain (loss) on investments ...... (577,975) 3,130,833
Net change in unrealized appreciation /
depreciation of investments ............... (13,468,140) (168,776)
------------- -------------
Net increase (decrease) in net assets
resulting from operations ................. (2,687,835) 10,449,179
------------- -------------

DISTRIBUTIONS TO SHAREHOLDERS
FROM:
Net investment income ........................ (11,317,743) (7,411,254)
Net realized gain on investments ............. (32,038) --
------------- -------------
(11,349,781) (7,411,254)
------------- -------------

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold .................... 45,702,613 32,766,122
Net asset value of shares issued
upon reinvestment of distributions from net
investment income and net realized
gain on investments ......................... 11,048,248 7,413,795
------------- -------------
56,750,861 40,179,917
Cost of shares repurchased ................... (20,879,855) (12,007,637)
------------- -------------
Increase in net assets derived from capital
share transactions .......................... 35,871,006 28,172,280
------------- -------------

NET INCREASE IN NET ASSETS ................... 21,833,390 31,210,205
------------- -------------

NET ASSETS:
Beginning of year ............................ 98,874,882 67,664,677
------------- -------------
End of year .................................. $ 120,708,272 $ 98,874,882
============= =============
See accompanying notes

Delchester-8
<PAGE>
Delaware Group Premium Fund, Inc.-Delchester 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 ....................... $ 9.510 $ 9.170 $ 8.940 $ 8.540 $ 9.770

Income (loss) from investment operations:
Net investment income .................................... 0.906 0.863 0.853 0.872 0.962
Net realized and unrealized gain (loss) on investments ... (1.048) 0.332 0.230 0.400 (1.230)
-------- ------- ------- ------- -------
Total from investment operations ......................... (0.142) 1.195 1.083 1.272 (0.268)
-------- ------- ------- ------- -------

Less dividends and distributions:
Dividends from net investment income ..................... (0.905) (0.855) (0.853) (0.872) (0.962)
Distributions from net realized gain on investments ...... (0.003) none none none none
-------- ------- ------- ------- -------
Total dividends and distributions ........................ (0.908) (0.855) (0.853) (0.872) (0.962)
-------- ------- ------- ------- -------

Net asset value, end of year ............................. $8.460 $9.510 $9.170 $8.940 $8.540
======== ======= ======= ======= =======

Total return ............................................. (1.83%) 13.63% 12.79% 15.50% (2.87%)

Ratios and supplemental data:
Net assets, end of year (000 omitted) .................... $120,708 $98,875 $67,665 $56,605 $43,686
Ratio of expenses to average net assets .................. 0.70% 0.70% 0.70% 0.69% 0.72%
Ratio of net investment income to average net assets ..... 9.85% 9.24% 9.54% 9.87% 10.56%
Portfolio turnover ....................................... 86% 121% 93% 74% 47%
</TABLE>
See accompanying notes

Delchester-9
<PAGE>
Delaware Group Premium Fund, Inc.-Delchester 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
Delchester 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 Delchester Series declares dividends daily from net investment income and
pays such dividends monthly. Distributions from net realized gain on
investments, if any, normally will be distributed 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 0.60% on the average daily net
assets of the Series, less the fees paid to the unaffiliated directors.

Delchester-10
<PAGE>
Delchester Series
Notes to Financial Statements (Continued)

On December 31, 1998, the Series had liabilities payable to affiliates as
follows
<TABLE>
<CAPTION>
Dividend disbursing Other
Investment transfer agent, expenses
management accounting fees payable
fee payable to and other expenses to DMC
DMC payable to DSC and affiliates
-------------- -------------------- --------------
<S> <C> <C> <C>
$44,899 $13,835 $6,549
</TABLE>
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 .................... $121,823,312
Sales ........................ $91,699,677

At December 31, 1998, the aggregate cost of securities and unrealized
appreciation (depreciation) for federal income tax purposes for the Series were
as follows:
<TABLE>
<CAPTION>
Aggregate Aggregate
Cost of unrealized unrealized Net unrealized
investments appreciation depreciation depreciation
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
$129,599,734 $1,165,794 ($12,211,034) ($11,045,240)
</TABLE>

For federal income tax purposes, the Series had accumulated capital losses at
December 31, 1998 as follows:
<TABLE>
<CAPTION>
<S> <C>
Year of
expiration
2006
----------
$577,975
</TABLE>
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 ... 4,940,859 1,206,292 (2,277,223) 3,869,928
Year ended December 31, 1997 ... 3,508,373 793,870 (1,287,419) 3,014,824
</TABLE>

5. Credit and Market Risk
The Series may invest in high-yield fixed income securities which carry ratings
of BB or lower by S&P and/or Ba or lower by Moody's. Investments in these higher
yielding securities may be accompanied by a greater degree of credit risk than
higher rated securities. Additionally, lower rated securities may be more
susceptible to adverse economic and competitive industry conditions than
investment grade securities.

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.

Delchester-11
<PAGE>
Delaware Group Premium Fund, Inc.-Delchester Series
Report of Independent Auditors

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Delchester 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.-Delchester Series at December 31, 1998, the
results of its operations for the year then ended, and 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

Delchester-12

<PAGE>

FOR INCOME

Capital Reserves Series

Investment Strategy and Performance in 1998
In fiscal 1998, worries of global recession sent investors scrambling to own
U.S. Treasury securities for their safety and liquidity. Treasury bond prices
soared as a result. However, investors' reluctance to buy just about anything
but government securities hurt performance in other sectors of the fixed-income
market.
For the 12 months ended December 31, 1998, Capital Reserves Series provided a
total return of +6.78% (capital change plus reinvestment of distributions),
trailing its benchmark Lehman Brothers Intermediate Government/Corporate Bond
Index, which had a total return of +8.44%.
We attribute the Series' underperformance to a lower weighting in U.S.
Treasuries than the Index, as well as poor performance from our investments in
mortgage bonds and asset-backed securities, which came under pressure in 1998
amidst renewed investor sensitivity to credit risk. The Index does not include
mortgages and asset-backed securities.
In seeking to provide high current income with capital preservation, the
Series invests primarily in high-quality U.S. government and corporate bonds
with a credit quality rating of Aaa to Bbb (Aaa being the highest), as rated by
Standard & Poor's and Moody's Investors Service. At year end, the average rating
of bonds in the portfolio was Aa1, indicating an overall high-grade quality
rating.

Portfolio Snapshot
In 1998, our yield-based orientation led us to hold a lower percentage of
assets in U.S. Treasury and agency bonds than the Index. Instead, we owned
securities that tend to offer higher income potential, such as corporate bonds
and mortgage securities. The Series had roughly 15% of its net asses in U.S.
Treasuries and U.S. agency bonds. Our lower weighting meant we benefited less
than the Index as Treasuries rallied in 1998.
As we lowered our position in Treasuries throughout 1998, we increased our
holdings in corporate bonds to 32.54% of net assets by year end. Although
corporate bond prices fell during the second half of 1998 as concern about
credit risk caused investors to flee non-government bonds, we were able to take
advantage of much higher yields from corporate bonds than were available from
Treasuries.
The risk-averse environment also created problems for mortgages and
asset-backed securities, which accounted for 53% of the Series' net assets as of
December 31. Unlike the Index, which includes only government and corporate
bonds, we included mortgages and asset-backed securities for their strong income
potential. Much to our disappointment, they too finished the year behind most
other types of bonds.

Investment Outlook
Following the Federal Reserve's recent actions to lower interest rates, there
has been a consistent accommodation by central banks in more than 60 nations
throughout the world to provide financial stimulus--i.e., lower interest
rates--that could help sustain the global economy. Until we see how financial
markets develop, we don't want to be overly positive about the longer term
benefits for the bond market.
We believe there could be further disruptions in the bond market over the
next 12 months. Certainly, corporate bonds could decline further in 1999. If
that happens, we believe the current widening of spreads--that is, the amount
that corporate bonds yield above and beyond what Treasuries and other types of
investment-grade bonds are yielding--will continue to offer us a strong
incentive to own corporate bonds. If the opposite happens and prices increase,
yield available from corporate bonds may drop, but we could then profit from
appreciating bond prices.

- --------------------------------------------------------------------------------
Capital Reserves Series Investment Objective

Seeks a high, stable level of current income while attempting to minimize
fluctuations in principal and provide maximum liquidity. It attempts to achieve
its objective by investing in short- and intermediate-term securities.
- --------------------------------------------------------------------------------

Capital Reserves-1

<PAGE>

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

Capital Reserves Lehman Brothers Govt./Corp. Lehman Brothers
Series Bond Index Intermediate Govt./
Corp. Bond Index
12/31/88 $10,000 $10,000 $10,000
12/31/89 $10,887 $11,423 $11,277
12/31/90 $11,779 $12,369 $12,309
12/31/91 $12,820 $14,364 $14,109
12/31/92 $13,742 $15,453 $15,121
12/31/93 $14,821 $17,158 $16,450
12/31/94 $14,423 $16,555 $16,132
12/31/95 $16,454 $19,742 $18,606
12/31/96 $17,121 $20,314 $19,360
12/31/97 $18,422 $22,297 $20,882
12/31/98 $19,676 $24,409 $22,642

Capital Reserves Series
Average Annual Total Returns
------------------------------
10 Years +7.00%
Five Years +5.82%
One Year +6.78%
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. We have added the Lehman Brothers Intermediate
Government/Corporate Bond Index to our performance comparison. We believe this
intermediate Index is a better benchmark for our Series because its target
duration closely approximates our target duration for Capital Reserves Series.
In the future this Index will replace the Lehman Brothers Government/Corporate
Bond Index.

The chart above shows a $10,000 investment in the Capital Reserves Series, the
Lehman Brothers Government/Corporate Bond Index and the Lehman Brothers
Intermediate 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 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.

Capital Reserves-2
<PAGE>

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

Principal Market
Amount Value
ASSET-BACKED SECURITIES-8.16%
American Finance Home Equity
Series 91-1A 8.00% 7/25/06 ....................... $16,792 $ 17,249
Series 94-2A 6.95% 6/25/24 ....................... 62,519 62,469
EQCC Home Equity Loan Trust
Series 96-2 A6 6.88% 7/15/14 ..................... 570,000 580,944
Series 98-2 A3F 6.23% 3/15/13 .................... 410,000 412,114
MetLife Capital Equipment Loan Trust
Series 97-A A 6.85% 5/20/08 ...................... 410,000 423,530
NationsCredit Grantor Trust
Series 96-1 A 5.85% 9/15/11 ...................... 144,209 143,661
Series 97-1 A 6.75% 8/15/13 ...................... 438,337 447,190
Philadelphia, Pennsylvania Authority For
Industrial Development Series 97 A
6.488% 6/15/04 ................................... 353,459 350,805
UCFC Home Equity Loan
Series 96-B1 A3 7.30% 4/15/14 .................... 521,212 522,307
World Omni Automobile Lease Securitization
Series 97-B A4 6.20% 11/25/03 .................... 439,756 444,901
----------
Total Asset-Backed Securities
(cost $3,385,889) 3,405,170
----------
COLLATERALIZED MORTGAGE OBLIGATIONS-19.99%
Asset Securitization Corporation
Series 96-D3 A1B 7.21% 10/13/26 .................. 400,000 419,313
Series 97-D4 A1 7.35% 4/14/29 .................... 315,880 326,048
Series 97-D5 A2 6.8152% 2/14/41 .................. 430,000 439,608
Series 97-D5 A3 6.8652% 2/14/41 .................. 320,000 320,500
California Infrastructure PG&E
Series 97-1 A4 6.16% 6/25/03 ..................... 555,000 564,158
Capco America Securitization
Series 98-D7 6.26% 9/16/30 ....................... 420,000 423,150
CIT RV Trust
Series 98-A A5 6.12% 7/15/14 ..................... 440,000 442,552
Federal Home Loan Mortgage Corporation
Series 2091 6.00% 4/15/21 ........................ 765,000 769,284
Federal National Mortgage Association
Whole Loan Series 98-W3 A2
6.50% 7/25/28 .................................... 475,000 479,898
GE Capital Mortgage Services
Series 98-6 1A6 6.75% 4/25/28 .................... 335,000 336,884
Lehman Large Loan
Series 97-LLI A1 6.79% 6/12/04 ................... 423,560 439,047
Mortgage Capital Funding
Conti Series 96-MCI D 7.80% 4/15/06 .............. 360,000 383,625
Series 96-MC2 C 7.224% 9/20/06 ................... 400,000 416,625
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 ................... 433,019 447,972
Series 96-MD5 A3 7.6373% 4/13/36 ................. 460,000 486,163
Residential Accredit Loans
Series 97-QS3 A3 7.50% 4/25/27 ................... 540,000 543,110
Series 98-QS9 A5 6.75% 7/25/28 ................... 400,000 400,875
Residential Funding Mortgage Securities
Series 96-S9 A10 7.25% 4/25/26 ................... 355,834 364,216
----------
Total Collateralized Mortgage Obligations
(cost $8,234,414) ................................ 8,339,852
----------
<PAGE>

Principal Market
Amount Value
MORTGAGE-BACKED SECURITIES-24.43%
Federal National Mortgage Association
5.625% 3/15/01 ................................... $1,590,000 $ 1,615,930
6.00% 4/1/13 to 10/1/28 .......................... 3,365,157 3,339,799
6.50% 1/1/12 to 4/1/13 ........................... 3,163,890 3,218,590
7.00% 7/1/28 ..................................... 740,775 756,979
7.00% 8/1/28 ..................................... 368,799 376,867
7.50% 6/1/28 ..................................... 293,708 302,335
9.50% 11/1/21 .................................... 119,320 128,530
Government National Mortgage Association
6.50% 12/15/23 ................................... 174,081 176,964
6.50% 1/15/24 .................................... 161,091 163,759
12.00% 6/20/14 ................................... 33,477 37,797
12.00% 3/20/15 ................................... 18,313 21,140
12.00% 6/20/15 ................................... 32,921 37,181
12.00% 2/20/16 ................................... 11,724 13,358
-----------
Total Mortgage-Backed Securities
(cost $10,117,518) 10,189,229
-----------
CORPORATE BONDS-32.47%
AT&T Capital 7.50% 11/15/00 ......................... 735,000 746,944
Banco Santander-Chile 6.50% 11/1/05 ................. 340,000 344,675
Banco Santiago S.A. 7.00% 7/18/07 ................... 270,000 225,450
Cardinal Health 6.25% 7/15/08 ....................... 280,000 286,300
CIT Group Holdings 5.625% 10/15/03 .................. 780,000 777,075
Computer Assoc. 6.50% 4/15/08 ....................... 1,050,000 1,036,875
Consumers Energy 6.375% 2/1/08 ...................... 335,000 342,538
Continental Airlines 6.80% 1/2/09 ................... 402,180 395,645
Cox Communications 6.15% 8/1/03 ..................... 375,000 382,969
Credit Foncier de France
8.00% 1/14/02 .................................... 340,000 362,100
Firstar Capital 8.32% 12/15/26 ...................... 315,000 347,680
General Electric Capital
5.89% 5/11/01 .................................... 675,000 687,656
General Motors Acceptance
5.75% 11/10/03 ................................... 615,000 618,844
Great Western Financial 8.206% 2/1/27 ............... 500,000 536,250
Household Finance 6.50% 11/15/08 .................... 700,000 729,750
Health and Retirement Properties
6.75% 12/18/02 ................................... 360,000 350,550
MCI Worldcom 7.55% 4/1/04 ........................... 670,000 726,113
Philip Morris 7.20% 2/1/07 .......................... 700,000 759,500
Raychem 7.20% 10/15/08 .............................. 525,000 538,780
Raytheon 5.95% 3/15/01 .............................. 570,000 574,275
Southern Investments UK
6.375% 11/15/01 .................................. 320,000 323,200
Sprint Capital 6.125% 11/15/08 ...................... 625,000 639,844
Summit Bank 6.75% 6/15/03 ........................... 430,000 446,125
Tommy Hilfiger 6.85% 6/1/08 ......................... 315,000 310,669
U.S. Bancorp 8.125% 5/15/02 ......................... 120,000 128,700
United Health Care 6.60% 12/1/03 .................... 625,000 627,344
USA Waste Services 6.125% 7/15/01 ................... 295,000 295,000
-----------
Total Corporate Bonds
(cost $13,364,088) 13,540,851
-----------

Capital Reserves-3
<PAGE>

Capital Reserves Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
U.S. TREASURY OBLIGATIONS-14.63%
U.S. Treasury Notes
5.500% 2/15/08 ................................. $1,000,000 $1,060,220
5.500% 3/31/03 ................................. 1,185,000 1,220,939
6.375% 1/15/00 ................................. 3,755,000 3,821,228
----------
Total U.S. Treasury Obligations
(cost $6,113,073) .............................. 6,102,387
----------
REPURCHASE AGREEMENTS-2.05%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $220,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$244,148) ...................................... 239,000 239,000
With J.P. Morgan Securities
4.75% 1/4/99 (dated 12/31/98,
collateralized by $305,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$313,875) ...................................... 307,000 307,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $67,000
U.S. Treasury Notes 7.75%
due 12/31/99, market value
$68,928 and $94,000 U.S.
Treasury Notes 7.75% due 1/31/00,
market value $99,590 and
$94,000 U.S. Treasury Notes
6.25% due 8/31/00, market value
$98,309 and $45,000 U.S.
Treasury Notes 6.50% due
5/31/01, market value $46,893) ................. $308,000 $308,000
--------
Total Repurchase Agreements
(cost $854,000) ................................ 854,000
--------

TOTAL MARKET VALUE OF SECURITIES-101.73% (cost $42,068,982) ...... $42,431,489

LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(1.73%) .......... (720,005)
-----------

NET ASSETS APPLICABLE TO 4,222,887 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $9.88 PER SHARE-100.00% .............. $41,711,484
===========
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 .......................................... $42,543,257
Accumulated net realized loss on investments ..................... (1,194,280)
Net unrealized appreciation of investments ....................... 362,507
-----------
Total net assets ................................................. $41,711,484
===========
See accompanying notes

Capital Reserves-4
<PAGE>

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

INVESTMENT INCOME:
Interest ....................................................... $2,238,037
----------
2,238,037
----------
EXPENSES:
Management fees ................................................ 208,577
Accounting and administration .................................. 13,747
Custodian fees ................................................. 11,975
Reports and statements to shareholders ......................... 9,929
Professional fees .............................................. 7,677
Taxes (other than taxes on income) ............................. 5,561
Registration fees .............................................. 4,400
Dividend disbursing and transfer agent
fees and expenses ........................................... 1,055
Directors' fees ................................................ 914
Other .......................................................... 11,601
----------
Total expenses ................................................. 275,436
----------

NET INVESTMENT INCOME .......................................... 1,962,601
----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments ............................... 381,375
Net change in unrealized appreciation /
depreciation of investments ................................. (89,594)
----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ......................................... 291,781
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $2,254,382
==========

See accompanying notes

<PAGE>

Delaware Group Premium Fund, Inc.-
Capital Reserves 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 .............................. $1,962,601 $1,760,693
Net realized gain on investments ................... 381,375 47,064
Net change in unrealized appreciation/
depreciation of investments ..................... (89,594) 237,399
----------- -----------
Net increase in net assets resulting from
operations ...................................... 2,254,382 2,045,156
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .............................. (1,962,601) (1,761,161)
----------- -----------
(1,962,601) (1,761,161)
----------- -----------

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold .......................... 23,284,345 6,092,500
Net asset value of shares issued upon
reinvestment of dividends from net
investment income ............................... 1,906,213 1,762,129
----------- -----------
25,190,558 7,854,629
Cost of shares repurchased ......................... (12,947,687) (6,729,405)
----------- -----------
Increase in net assets derived from capital
share transactions .............................. 12,242,871 1,125,224
----------- -----------

NET INCREASE IN NET ASSETS ......................... 12,534,652 1,409,219
----------- -----------

NET ASSETS:
Beginning of year .................................. 29,176,832 27,767,613
----------- -----------
End of year ........................................ $41,711,484 $29,176,832
=========== ===========

See accompanying notes

Capital Reserves-5
<PAGE>

Delaware Group Premium Fund, Inc.-Capital Reserves 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 ....................... $9.790 $9.690 $9.930 $9.300 $10.260

Income (loss) from investment operations:
Net investment income .................................... 0.556 0.613 0.623 0.643 0.636
Net realized and unrealized gain (loss) on investments ... 0.090 0.100 (0.240) 0.630 (0.905)
------- ------- ------- ------- -------
Total from investment operations ......................... 0.646 0.713 0.383 1.273 (0.269)
------- ------- ------- ------- -------

Less dividends and distributions:
Dividends from net investment income ..................... (0.556) (0.613) (0.623) (0.643) (0.636)
Distributions from net realized gain on investments ...... none none none none (0.055)
------- ------- ------- ------- -------
Total dividends and distributions ........................ (0.556) (0.613) (0.623) (0.643) (0.691)
------- ------- ------- ------- -------

Net asset value, end of year ............................. $9.880 $9.790 $9.690 $9.930 $9.300
======= ======= ======= ======= =======
Total return ............................................. 6.78% 7.60% 4.05% 14.08% (2.68%)

Ratios and supplemental data:
Net assets, end of year (000 omitted) .................... $41,711 $29,177 $27,768 $27,935 $25,975
Ratio of expenses to average net assets .................. 0.79% 0.75% 0.72% 0.71% 0.74%
Ratio of net investment income to average net assets ..... 5.62% 6.31% 6.43% 6.64% 6.57%
Portfolio turnover ....................................... 166% 120% 122% 145% 219%

</TABLE>

See accompanying notes

Capital Reserves-6
<PAGE>

Delaware Group Premium Fund, Inc.-Capital Reserves 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 Capital
Reserves 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.

<PAGE>

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.
Interest income is recorded on the accrual basis. Original issue discounts are
accreted to interest income over the lives of the respective securities.

The Capital Reserves Series declares dividends daily from net investment income
and pays such dividends monthly. Distributions from net realized gain on
investments, if any, normally will be distributed 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 0.60% on the average daily net
assets of the Series, less the fees paid to the unaffiliated directors.

Capital Reserves-7
<PAGE>

Capital Reserves Series
Notes to Financial Statements (Continued)

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
-------------- --------------------
$20,251 $1,176

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 .......... $34,681,409
Sales .............. $21,757,373

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

Purchases .......... $34,867,250
Sales .............. $33,805,269

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

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

Year of Year of
expiration expiration
2002 2004
---------- -----------
$884,453 $292,208

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

<TABLE>
<CAPTION>
Shares issued upon
reinvestment of
dividends from net Shares Net
Shares sold investment income repurchased increase
----------- ------------------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 .. 2,364,760 193,836 (1,315,298) 1,243,298
Year ended December 31, 1997 .. 627,274 181,652 (694,053) 114,873

</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.

Capital Reserves-8

<PAGE>

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

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Capital Reserves 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.-Capital Reserves 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

Capital Reserves-9

<PAGE>

FOR INCOME

Cash Reserve Series

Investment Strategy and Performance in 1998
As the Federal Reserve slashed interest rates this past fall, yields on
short-term debt obligations declined sharply. Rates on commercial paper fell the
least, making it the most viable alternative for securing yield in the money
market arena.
Cash Reserve Series, which invests primarily in high quality commercial
paper, achieved its objective of providing current income while preserving
principal. The Series had a total return of +5.08%, with dividend distributions
reinvested.
Although investors worried about credit risk this past year as a result of
Asia's financial turmoil and Russia's loan defaults, we have not seen any
evidence that credit problems exist in the U.S. As for the Series, we maintain a
credit quality rating of A1, P1 (as rated by Standard & Poor's and Moody's
Investor Services). This is the highest quality rating available.

Investment Outlook
In its December 30, 1998, press release on leading economic indicators, the
Conference Board said that increases in several measures of U.S. economic growth
in November--including stock prices, money supply and consumer
expectations--showed "a healthy economy with bright prospects in 1999." We
believe the leading indicators are an accurate reflection of the environment in
which we find ourselves.
Still, until we see how the global economy responds to worldwide interest
rate reductions, we won't know whether these actions will help sustain world
economic growth. If rates in the U.S. continue to decline, this would further
diminish yields from money market securities. However, with inflation at its
lowest level in 28 years, money markets still offer investors the opportunity
for current income without undue risk to principal.

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

Cash Reserve Series

12/31/88 $10,000
12/31/89 $10,859
12/31/90 $11,677
12/31/91 $12,329
12/31/92 $12,727
12/31/93 $13,041
12/31/94 $13,432
12/31/95 $14,166
12/31/96 $14,864
12/31/97 $15,623
12/31/98 $16,538

Cash Reserve Series
Average Annual Total Returns
------------------------------
10 Years +5.16%
Five Years +4.85%
One Year +5.08%
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 Cash Reserve Series for the
10-year period from January 1, 1989 through December 31, 1998. All dividends
were reinvested. An investment in the Series is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
the Series seeks to preserve the value of your investment at $10.00 per share,
it is possible to lose money by investing in the Series. 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.

- --------------------------------------------------------------------------------
Cash Reserve Series Investment Objective
Seeks to provide maximum current income while preserving principal and
maintaining liquidity.
- --------------------------------------------------------------------------------

Cash Reserve-1
<PAGE>

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

Principal Market
Amount Value
COMMERCIAL PAPER-63.72%
Financial Services-39.46%
Abbey National North America
4.92% 2/16/99 .................................. $2,000,000 $ 1,987,426
Allianz of America 5.12% 2/18/99 .................. 2,000,000 1,986,347
Cargill Global Funding 4.98% 3/12/99 .............. 2,000,000 1,980,633
Citibank Capital Markets 5.40% 2/12/99 ............ 1,500,000 1,490,550
Commonwealth Bank of Australia
5.45% 1/29/99 .................................. 1,010,000 1,005,719
Corporate Asset Funding
5.33% 2/26/99 .................................. 2,000,000 1,983,418
General Electric Capital
4.94% 3/10/99 .................................. 625,000 619,168
General Electric Capital
5.44% 1/29/99 .................................. 1,000,000 995,769
Metlife Funding 5.41% 1/27/99 ..................... 1,604,000 1,597,733
New York Life Capital 4.75% 3/11/99 ............... 1,500,000 1,486,344
Swiss Re Finance Products
5.10% 1/13/99 .................................. 1,300,000 1,297,790
Swiss Re Financial Products
5.28% 2/16/99 .................................. 500,000 496,627
-----------
16,927,524
-----------
Industrial-5.74%
Daimler Benz 5.00% 4/23/99 ........................ 2,000,000 1,968,889
Washington Post 4.90% 4/9/99 ...................... 500,000 493,331
-----------
2,462,220
-----------
Mortgage Bankers & Brokers-18.52%
CS First Boston 5.14% 1/20/99 ..................... 1,500,000 1,495,931
Goldman Sachs Group 5.18% 2/24/99 ................. 2,000,000 1,985,180
Merrill Lynch 5.14% 3/18/99 ....................... 1,000,000 989,149
Morgan (J.P.) 5.02% 2/26/99 ....................... 2,000,000 1,984,382
Morgan Stanley Dean Witter
5.45% 2/12/99 .................................. 1,500,000 1,490,463
-----------
7,945,105
-----------
Total Commercial Paper ............................ 27,334,849
-----------

<PAGE>

Principal Market
Amount Value
CERTIFICATES OF DEPOSIT-13.99%
Domestic-4.66%
Wilmington Trust 5.07% 3/25/99 ................... $2,000,000 $2,000,000
-----------
2,000,000
-----------
Yankee-9.33%
Canadian Imperial Bank
5.705% 3/30/99 ................................... 2,000,000 2,002,077
WestDeutsche Bank 5.35% 3/18/99 .................. 2,000,000 2,000,000
-----------
4,002,077
-----------
Total Certificates of Deposit .................... 6,002,077
-----------

*FLOATING RATE NOTES-1.17%
Federal Home Loan Bank
4.988% 1/5/99 .................................... 500,000 499,962
-----------
Total Floating Rate Notes 499,962
-----------

U.S. GOVERNMENT AGENCY OBLIGATIONS-18.78%
Federal Home Loan Mortgage Corporation
Discount Note 4.75% 2/16/99 ...................... 2,000,000 1,987,861
Federal Home Loan Mortgage Corporation
Discount Note 4.84% 3/8/99 ....................... 500,000 495,563
Federal Home Loan Mortgage Corporation
Discount Note 4.94% 2/19/99 ...................... 500,000 496,638
Federal Home Loan Mortgage Corporation
Discount Note 4.96% 2/5/99 ....................... 500,000 497,589
Federal National Mortgage Association
Discount Note 4.76% 4/6/99 ....................... 500,000 493,719
Federal National Mortgage Association
Discount Note 4.855% 3/18/99 ..................... 610,000 603,748
Federal National Mortgage Association
Discount Note 4.88% 3/2/99 ....................... 1,500,000 1,487,800
Federal National Mortgage Association
Discount Note 4.922% 2/5/99 ...................... 2,000,000 1,990,429
-----------
Total U.S. Government Agency
Obligations ..................................... 8,053,347
-----------

Cash Reserve-2
<PAGE>

Cash Reserve Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
REPURCHASE AGREEMENTS-2.11%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $233,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$258,156) ......................................... $253,000 $253,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $323,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$331,884) ......................................... 325,000 325,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $71,000
U.S. Treasury Notes 7.75%
due 12/31/99, market value
$72,883 and $99,000
U.S. Treasury Notes 7.75%
due 1/31/00, market value
$105,304 and $99,000
U.S. Treasury Notes 6.25%
due 8/31/00, market value
$103,949 and $47,000
U.S. Treasury Notes 6.50%
due 5/31/01, market value
$49,583) .......................................... $325,000 $325,000
--------
Total Repurchase Agreements ........................ 903,000
--------

TOTAL MARKET VALUE OF SECURITIES-99.77% (cost $42,793,235)** ..... $42,793,235

RECEIVABLES AND OTHER ASSETS NET OF LIABILITIES-0.23% ............ 99,820
-----------
NET ASSETS APPLICABLE TO 4,289,306 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $10.00 PER SHARE-100.00% ............. $42,893,055
===========
- ----------------
* Floating Rate Notes-The interest rate shown is the rate as of December 31,
1998 and the maturity shown is the longer of the next interest readjustment
date or the date the principal amount shown can be recovered through demand.
** Also the cost for federal income tax purposes.

See accompanying notes

Cash Reserve-3
<PAGE>

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

INVESTMENT INCOME:
Interest ....................................................... $2,372,381
----------
2,372,381
----------
EXPENSES:
Management fees ................................................ 212,479
Accounting and administration .................................. 16,799
Taxes (other than taxes on income) ............................. 4,698
Professional fees .............................................. 3,240
Reports and statements to shareholders ......................... 3,180
Registration fees .............................................. 2,207
Custodian fees ................................................. 1,344
Directors' fees ................................................ 948
Dividend disbursing and transfer agent
fees and expenses ........................................... 871
Other .......................................................... 6,496
----------
Total expenses ................................................. 252,262
----------

NET INVESTMENT INCOME .......................................... 2,120,119
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $2,120,119
==========

See accompanying notes

Delaware Group Premium Fund, Inc.-
Cash Reserve 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 ............................. $2,120,119 $1,496,752
----------- -----------
Net increase in net assets resulting
from operations ................................ 2,120,119 1,496,752
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................. (2,120,119) (1,496,752)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ......................... 94,961,957 83,437,024
Net asset value of shares issued upon
reinvestment of dividends from net
investment income .............................. 2,068,676 1,497,151
----------- -----------
97,030,633 84,934,175
Cost of shares repurchased ........................ (84,848,754) (80,701,553)
----------- -----------
Increase in net assets derived from
capital share transactions ..................... 12,181,879 4,232,622
----------- -----------

NET INCREASE IN NET ASSETS ........................ 12,181,879 4,232,622
----------- -----------

NET ASSETS:
Beginning of year ................................. 30,711,176 26,478,554
----------- -----------
End of year ....................................... $42,893,055 $30,711,176
=========== ===========

See accompanying notes

Cash Reserve-4
<PAGE>

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

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

Income from investment operations:
Net investment income .................................... 0.497 0.497 0.482 0.535 0.361
------- ------- ------- ------- -------
Total from investment operations ......................... 0.497 0.497 0.482 0.535 0.361
------- ------- ------- ------- -------
Less dividends:
Dividends from net investment income ..................... (0.497) (0.497) (0.482) (0.535) (0.361)
------- ------- ------- ------- -------
Total dividends .......................................... (0.497) (0.497) (0.482) (0.535) (0.361)
------- ------- ------- ------- -------
Net asset value, end of year ............................. $10.000 $10.000 $10.000 $10.000 $10.000
======= ======= ======= ======= =======
Total return ............................................. 5.08% 5.10% 4.93% 5.48% 3.68%

Ratios and supplemental data:
Net assets, end of year (000 omitted) .................... $42,893 $30,711 $26,479 $16,338 $20,125
Ratio of expenses to average net assets .................. 0.59% 0.64% 0.61% 0.62% 0.66%
Ratio of net investment income to average net assets ..... 4.96% 4.98% 4.82% 5.35% 3.79%

</TABLE>

See accompanying notes

Cash Reserve-5
<PAGE>

Delaware Group Premium Fund, Inc.-Cash Reserve 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 Cash
Reserve 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 are valued at amortized cost, which approximates
market value.

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.
Interest income is recorded on the accrual basis. Discounts and premiums are
amortized to interest income over the lives of the respective securities.

<PAGE>

The Cash Reserve Series declares dividends daily from net investment income and
pays such dividends monthly. Distributions from net realized gain on
investments, if any, normally will be distributed 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 0.50% on the average daily net
assets of the Series, less the fees paid to the unaffiliated directors.

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
-------------- -------------------
$18,859 $1,490

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.

Cash Reserve-6
<PAGE>

Cash Reserve Series
Notes to Financial Statements (Continued)

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

<TABLE>
<CAPTION>
Shares issued upon
reinvestment of dividends
from net investment Shares Net
Shares sold income repurchased increase
----------- -------------------------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 ..... 9,496,196 206,867 (8,484,875) 1,218,188
Year ended December 31, 1997 ..... 8,343,717 149,715 (8,070,169) 423,263

</TABLE>

Cash Reserve-7
<PAGE>

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

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Cash Reserve 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.-Cash Reserve 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

Cash Reserve-8

<PAGE>

FOR GROWTH OF CAPITAL

DelCap Series

Investment Strategy and Performance in 1998
Global economic crisis in fiscal 1998 contributed to a very difficult period
for stocks.
Though the stock market rebounded late in the year--setting new highs after
the Federal Reserve's three interest rate cuts--large-cap growth stocks
benefited to a greater extent than other equity securities.
DelCap Series, which concentrates on medium-size companies, posted a modest
total return of +18.81% (capital change plus reinvestment of distributions) for
the 12 months ended December 31, 1998. The Series' benchmark Russell MidCap
Growth Index provided a total return of +17.86% for the same time period.
We seek stocks that have a demonstrated history of growth and have the
potential to support continued growth. We believe this investment strategy will
lead the Series to significant long-term growth opportunities while helping to
manage the short-term effects of changing economic and market conditions.

Portfolio Snapshot
During fiscal 1998, the Series' management team reduced the number of stocks
in the portfolio by more than 30%. This has given the team more focus on each
holding, allowing them even more opportunities to meet with corporate management
and conduct intensive research.
Liquidating our position in some consumer stocks this past summer and
increasing the Series' weighting in technology and media stocks helped our
performance in the second half of 1998. We are focusing on companies whose
business niche is likely to grow even if there is a general economic slowdown in
the U.S.
We also reduced the Series' allocation to health care stocks in 1998.
Competition and regulatory challenges within the health care sector have been
hurting profits. Our lower weighting in this sector minimized the effects of
negative performance on the portfolio.
By selecting companies with solid earnings track records, our aim is to tap
the long-term growth potential of some of America's best companies while
maintaining an attractive risk profile.

Investment Outlook
The U.S. Conference Board's late December report on leading economic
indicators suggests that growth is still robust, despite the global financial
crisis, a slowdown in U.S. manufacturing and lower corporate profits.
In our view, many domestic-oriented, medium-size companies exhibit strong
earnings prospects in 1999, especially given the likelihood of stagnant earnings
for larger companies. The market's decline this past summer gave us many
opportunities to select growth stocks that appear to offer attractive long-term
capital appreciation potential.
We cannot predict when medium-size and smaller companies will win renewed
favor on Wall Street. In the short run, we believe prices of many mid-cap stocks
are likely to be at least as volatile as those of large multinational companies.
We think portfolio managers will be required to conduct more fundamental
research in 1999, in order to provide investors with competitive results. In
this environment, industry specialists such as DelCap's management team will
have their skills tested. We are confident that we are well prepared for the
task ahead.

- --------------------------------------------------------------------------------
DelCap Series Investment Objective
Seeks long-term capital appreciation. It attempts to achieve this objective by
investing in securities exhibiting the potential for significant growth.
- --------------------------------------------------------------------------------

DelCap-1
<PAGE>

Growth of a $10,000 Investment
July 12, 1991 through
December 31, 1998

Russell Midcap NASDAQ
DelCap Series Growth Index Industrial Index
7/2/91 $10,000 $10,000 $10,000
9/30/91 $10,280 $10,198 $11,198
12/31/91 $11,031 $10,870 $12,692
3/31/92 $10,734 $11,389 $12,826
6/30/92 $ 9,550 $11,697 $11,414
9/30/92 $ 9,853 $12,323 $11,778
12/31/92 $11,248 $13,755 $13,753
3/31/93 $11,001 $13,880 $13,538
6/30/93 $11,443 $13,881 $13,841
9/30/93 $12,201 $14,816 $14,801
12/31/93 $12,549 $15,293 $15,289
3/31/94 $12,404 $14,819 $14,781
6/30/94 $11,559 $14,169 $13,552
9/30/94 $12,445 $15,176 $14,752
12/31/94 $12,105 $14,965 $14,304
3/31/95 $12,985 $16,583 $15,214
6/30/95 $13,690 $17,915 $16,795
9/30/95 $15,017 $19,681 $19,628
12/31/95 $15,679 $21,091 $18,307
3/31/96 $16,840 $22,452 $19,447
6/30/96 $18,005 $24,741 $21,071
9/30/96 $18,655 $25,584 $21,019
12/31/96 $17,955 $26,324 $21,057
3/31/97 $16,712 $25,366 $19,317
6/30/97 $19,042 $29,101 $22,443
9/30/97 $21,072 $33,171 $26,097
12/31/97 $20,302 $32,257 $23,170
3/31/98 $22,677 $35,612 $27,127
6/30/98 $23,065 $28,810 $28,038
9/30/98 $19,359 $24,413 $25,114
12/31/98 $24,501 $28,915 $31,749

DelCap Series
Average Annual Total Returns
- --------------------------------------------------------------------------------
Lifetime +12.74%
Five Years +14.32%
One Year +18.81%
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 DelCap Series, the Russell
MidCap Growth Index and the NASDAQ Industrial Index for the period from the
Series' inception on July 12, 1991 through December 31, 1998. All dividends and
capital gains were reinvested. The Indexes are unmanaged, with no set investment
objective 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.

DelCap-2

<PAGE>

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

Number Market
of Shares Value
COMMON STOCK-96.34%
Banking, Finance & Insurance-17.99%
Ambac Financial Group ........................ 48,800 $ 2,937,150
Blanch(E.W.)Holdings ......................... 57,000 2,703,938
CIT Group Class A ............................ 126,400 4,021,100
Countrywide Credit Industries ................ 84,000 4,215,750
+Financial Security Assurance Holdings ........ 13,400 726,950
FINOVA Group ................................. 67,000 3,613,813
First American ............................... 50,400 2,236,500
Mellon Bank .................................. 23,600 1,622,500
PaineWebber Group ............................ 36,300 1,402,088
-----------
23,479,789
-----------
Cable, Media & Publishing-11.38%
*Chancellor Media Class A ..................... 69,400 3,320,356
*FORE Systems ................................. 168,200 3,074,906
+*Jacor Communications ......................... 45,100 2,917,406
*Lamar Advertising ............................ 41,600 1,560,000
+*Snyder Communications ........................ 73,300 2,473,875
*3Com ......................................... 33,600 1,506,750
-----------
14,853,293
-----------
Computers & Technology-22.96%
*Acxiom ....................................... 66,400 2,054,250
*BMC Software ................................. 25,700 1,146,059
+*Citrix Systems ............................... 36,200 3,512,531
*Compuware .................................... 39,800 3,108,131
*Documentum ................................... 16,400 879,963
*DST Systems .................................. 26,300 1,500,744
*J.D. Edwards ................................. 29,400 835,144
*Legato Systems ............................... 36,500 2,405,578
*Network Appliance ............................ 63,000 2,819,250
+*PLATINUM technology .......................... 93,000 1,787,344
*PMC - Sierra ................................. 57,800 3,643,232
*SunGard Data Systems ......................... 83,500 3,313,906
*Teradyne ..................................... 42,000 1,779,750
*Veritas Software ............................. 19,800 1,185,525
-----------
29,971,407
-----------
Consumer Products-2.69%
*Gemstar International Group .................. 61,300 3,507,509
-----------
3,507,509
-----------
Electronics & Electrical Equipment-5.65%
*Altera ....................................... 33,100 2,012,894
CBS .......................................... 49,900 1,634,225
*Novellus Systems ............................. 25,800 1,274,681
*Xilinx ....................................... 37,700 2,454,034
-----------
7,375,834
-----------
- -----------
Top 10 stock holdings, representing 30.2% of net assets, are printed in bold.

<PAGE>
Number Market
of Shares Value
COMMON STOCK (Continued)
Environmental Services-1.52%
Waste Management ............................. 42,580 $ 1,985,269
-----------
1,985,269
-----------
Food, Beverage & Tobacco-0.56%
*Aurora Foods ................................. 7,100 140,669
Food Lion Class A ............................ 56,000 591,500
-----------
732,169
-----------
Healthcare & Pharmaceuticals-2.63%
*Health Management Associates
Class A ...................................... 131,026 2,833,432
*HEALTHSOUTH .................................. 39,300 606,694
-----------
3,440,126
-----------
Industrial Machinery-1.09%
*Applied Materials ............................ 33,400 1,426,806
-----------
1,426,806
-----------
Leisure, Lodging & Entertainment-5.62%
*Outback Steakhouse ........................... 84,100 3,348,231
*Papa John's International .................... 59,500 2,621,719
+*Prime Hospitality ............................ 130,000 1,373,125
-----------
7,343,075
-----------
Retail-9.63%
*Bed Bath & Beyond ............................ 104,800 3,573,025
*Kohl's ....................................... 43,400 2,666,388
*Staples ...................................... 144,800 6,330,475
-----------
12,569,888
-----------
Telecommunications-11.44%
*American Tower Class A ....................... 122,900 3,633,231
+*Ascend Communications ........................ 17,700 1,164,328
*Clear Channel Communications ................. 62,300 3,395,349
*Global Crossing .............................. 34,000 1,532,125
*Heftel Broadcasting .......................... 28,500 1,407,188
+*Pacific Gateway Exchange ..................... 42,800 2,058,413
+*STAR Telecommunications ...................... 142,500 1,741,172
-----------
14,931,806
-----------
Miscellaneous-3.18%
Cintas ....................................... 23,000 1,619,363
*Robert Half International .................... 29,500 1,318,281
*Waters ....................................... 14,000 1,221,500
-----------
4,159,144
-----------
Total Common Stock
(cost $94,267,231) .......................... 125,776,115
-----------

DelCap-3
<PAGE>

DelCap Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
REPURCHASE AGREEMENTS-4.82%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $1,620,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$1,797,087) .................................. $1,761,000 $1,761,000
With J.P. Morgan Securities
4.75% 1/4/99 (dated 12/31/98,
collateralized by $2,246,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$2,310,324) .................................. 2,263,000 2,263,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $492,000
U.S. Treasury Notes 7.75%
due 12/31/99, market value
$507,355 and $688,000 U.S.
Treasury Notes 7.75% due 1/31/00,
market value $733,050 and
$691,000 U.S. Treasury Notes
6.25% due 8/31/00, market value
$723,615 and $329,000 U.S.
Treasury Notes 6.50% due
5/31/01, market value $345,160) .............. $2,262,000 $2,262,000
----------
Total Repurchase Agreements
(cost $6,286,000) ............................ 6,286,000
----------

TOTAL MARKET VALUE OF SECURITIES-101.16% (cost $100,553,231).......$132,062,115

LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(1.16%)............ (1,514,416)
------------
NET ASSETS APPLICABLE TO 7,035,860 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $18.55 PER SHARE-100.00%.............$130,547,699
============
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......... $93,131,365
Accumulated net realized gain on investments....................... 5,907,450
Net unrealized appreciation of investments ........................ 31,508,884
------------
Total net assets ..................................................$130,547,699
============
- ----------
*Non-income producing security for the year ended December 31, 1998.
+Security is partially or fully on loan.

See accompanying notes

DelCap-4
<PAGE>

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

INVESTMENT INCOME:
Interest .................................................. $ 489,276
Dividends ................................................. 237,900
------------
727,176
------------
EXPENSES:
Management fees ........................................... 846,793
Accounting and administration ............................. 45,654
Professional fees ......................................... 16,300
Custodian fees ............................................ 11,046
Registration fees ......................................... 9,800
Reports and statements to shareholders .................... 9,500
Taxes (other than taxes on income) ........................ 8,160
Directors' fees ........................................... 1,960
Dividend disbursing and transfer agent
fees and expenses ...................................... 1,800
Other ..................................................... 18,117
------------
969,130
------------
Less expenses absorbed or waived by
Delaware Management Company ............................ (64,911)
------------
Total expenses ............................................ 904,219
------------
NET INVESTMENT LOSS ....................................... (177,043)
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments .......................... 5,972,689
Net change in unrealized appreciation /
depreciation of investments ............................ 14,448,864
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS ......................................... 20,421,553
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................. $ 20,244,510
============
See accompanying notes
<PAGE>

Delaware Group Premium Fund, Inc. -
DelCap 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 loss ................... ($ 177,043) ($ 59,352)
Net realized gain on investments ...... 5,972,689 9,871,869
Net change in unrealized appreciation /
depreciation of investments ........ 14,448,864 3,608,725
------------ ------------
Net increase in net assets
resulting from operations .......... 20,244,510 13,421,242
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain on investments ...... (9,882,425) (4,513,513)
------------ ------------
(9,882,425) (4,513,513)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ............. 19,648,168 28,573,142
Net asset value of shares issued upon
reinvestment of distributions from
net realized gain on investments ... 9,882,425 4,513,513
------------ ------------
29,530,593 33,086,655
Cost of shares repurchased ............ (19,799,484) (11,440,355)
------------ ------------
Increase in net assets derived
from capital share transactions .... 9,731,109 21,646,300
------------ ------------
NET INCREASE IN NET ASSETS ............ 20,093,194 30,554,029
------------ ------------
NET ASSETS:
Beginning of year ..................... 110,454,505 79,900,476
------------ ------------
End of year ........................... $130,547,699 $110,454,505
============ ============

See accompanying notes

DelCap-5
<PAGE>

Delaware Group Premium Fund, Inc.-DelCap 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 ........................ $17.270 $15.890 $15.130 $11.750 $12.240

Income (loss) from investment operations:
Net investment income (loss)(1)............................ (0.026) (0.010) (0.015) 0.072 0.069
Net realized and unrealized gain (loss) on investments .... 2.901 2.260 2.030 3.378 (0.499)
------- ------- ------- ------- -------
Total from investment operations........................... 2.875 2.250 2.015 3.450 (0.430)
------- ------- ------- ------- -------

Less dividends and distributions:
Dividends from net investment income ...................... none none (0.070) (0.070) (0.060)
Distributions from net realized gain on investments ....... (1.595) (0.870) (1.185) none none
------- ------- ------- ------- -------
Total dividends and distributions.......................... (1.595) (0.870) (1.255) (0.070) (0.060)
------- ------- ------- ------- -------

Net asset value, end of year .............................. $18.550 $17.270 $15.890 $15.130 $11.750
======= ======= ======= ======= =======

Total return .............................................. 18.81% 14.90% 14.46% 29.53% (3.54%)

Ratios and supplemental data:
Net assets, end of year (000 omitted) ..................... $130,548 $110,455 $79,900 $58,123 $39,344
Ratio of expenses to average net assets ................... 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets prior to expense
limitation ............................................. 0.86% 0.87% 0.82% 0.85% 0.88%
Ratio of net investment income (loss) to average net assets (0.16%) (0.06%) (0.11%) 0.61% 0.64%
Ratio of net investment income (loss) to average net
assets prior to expense limitation ..................... (0.22%) (0.13%) (0.13%) 0.56% 0.56%
Portfolio turnover......................................... 142% 134% 85% 73% 43%
</TABLE>
- ------------
(1) Per share information for the years ended December 31, 1997 and 1998 was
based on the average shares outstanding method.

See accompanying notes

DelCap-6
<PAGE>

Delaware Group Premium Fund, Inc.-DelCap 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 DelCap
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.

The DelCap 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.
<PAGE>

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, less the fees paid to the unaffiliated directors.

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%.

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
-------------- -------------------
$78,657 $3,565

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.

DelCap--7
<PAGE>

DelCap 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 .................. $151,042,788
Sales ...................... $148,933,878

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 realized Shares Net
Shares sold gain on investments repurchased increase
----------- ------------------- ----------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 ...... 1,184,490 657,513 (1,201,127) 640,876
Year ended December 31, 1997 ...... 1,806,689 296,551 (737,831) 1,365,409
</TABLE>

5. 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 & Poor's 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
------------------ ---------------
$8,058,145 $8,189,102

Net income from securities lending activities for the year ended December 31,
1998 was $26,066 and is included in interest income on the statement of
operations.

DelCap--8
<PAGE>

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

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-DelCap 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.-DelCap 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

DelCap-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

Delaware-6
<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>

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.

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