DELAWARE GROUP PREMIUM FUND INC, N-30D, 1999-03-08

DELAWARE GROUP PREMIUM FUND INC
N-30D, 1999-03-08

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<PAGE>

Delaware-Lincoln
ChoicePlusSM
Variable Annuity

1998
Delaware-Lincoln
ChoicePlusSM Variable Annuity
Annual Report

<PAGE>

January 10, 1999

Dear Policy Holder:

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

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

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

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

Sincerely,

/s/ Jeffrey J. Nick

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

<PAGE>

FOR GROWTH OF CAPITAL

Trend Series

Investment Strategy and Performance in 1998

Bigger was better in fiscal 1998 as large-cap growth stocks dominated the
marketplace in spite of a temporary pricing setback during the summer. Small
company stocks, which trailed large-caps for much of the year, staged a strong
rally in the fall after the Federal Reserve's three interest rate cuts. This
rebound came too little too late for small stocks, which underperformed
large-cap stocks by a wide margin for the year.
Trend Series delivered a total return of +16.04% (capital change plus
reinvestment of distributions) for the 12 months ended December 31, 1998,
outdistancing its benchmark Russell 2000 Growth Index, which returned +1.23%.
The large-cap Standard & Poor's 500 Index had a total return of +28.56% for the
same 12-month period, reflecting the wide gap between large and small stock
performance.
In seeking long-term capital appreciation, the Series invests in small
companies that its portfolio management believes are positioned to profit from
dynamics within their industry, new products coming to market, and/or innovative
changes in technology or marketing concepts.
In 1998, technology stocks soared as investors clamored to own stocks in
computer and internet-related companies. This sector led the Russell 2000 Growth
Index with a +12.76% total return for the year ended December 31. Because Trend
Series tends to hold a larger weighting in small technology stocks than the
Index, this pushed our return ahead of the Index in 1998.

Portfolio Snapshot

As of year end, Trend Series had 24.19% of its net assets invested in
technology companies, including several small manufacturers of semiconductors
(microchips used in virtually all electronics products, from computers to
microwave ovens). Our weighting in the technology sector contributed positively
to the Series' 1998 performance.
In November 1998, worldwide sales of semiconductors increased to $11.4
billion, the highest mark since December 1997, according to the Semiconductor
Industry Association. We continue to see strong profit margins from small
companies operating in this arena, and we expect this industry to be prosperous
over the coming years.
One of our biggest areas for concern in 1998 was software companies, which
did not perform well due to decreased business demand for software. Because
software companies are focusing so much on solving Year 2000 problems, they are
not developing as much new software, which has led to slowing sales. Once we
pass the millennium milestone, we believe the software sector will regain
earnings momentum and perform well.
The health care sector had disappointing performance in 1998, largely the
result of underperformance in the service side of the industry--that is,
hospitals and hospital management companies. We were not heavily weighted in
this sector during the past year.

Investment Outlook

The small-cap market looks promising to us in 1999. Low inflation, a
relatively strong economy and willingness by the Federal Reserve and central
banks throughout the world to maintain a high level of liquidity in the
financial markets offer a supportive backdrop for small-cap companies to
increase their earnings.
The silver lining in small-cap underperformance in 1998 is that small stocks
are now selling at historically low prices relative to large stocks. This
superior value, compared to their larger peers, provides encouragement for
future performance.
With that in mind, we have positioned the Series' portfolio in the stocks of
small companies that should be able to participate to a greater extent than
large companies in the next performance cycle.

- --------------------------------------------------------------------------------
Trend Series Investment Objective

Seeks long-term capital appreciation. It attempts to achieve this objective by
investing primarily in small capitalization common stocks and convertible
securities of emerging and other growth-oriented companies which we believe are
responsive to changes in the marketplace and have the fundamental
characteristics to support growth.
- --------------------------------------------------------------------------------
Trend-1

<PAGE>

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

Russell 2000 NASDAQ
Trend Series Growth Index Industrial Index
12/27/93 $10,000 $10,000 $15,289
3/31/94 $10,060 $ 9,593 $14,781
6/30/94 $ 9,791 $ 8,991 $13,552
9/30/94 $10,221 $ 9,829 $14,752
12/31/94 $10,161 $ 9,757 $14,304
3/31/95 $10,786 $10,292 $15,214
6/30/95 $11,996 $11,313 $16,795
9/30/95 $13,669 $12,599 $19,628
12/31/95 $14,145 $12,785 $18,307
3/31/96 $14,494 $13,520 $19,447
6/30/96 $16,350 $14,310 $21,071
9/30/96 $16,036 $14,188 $21,019
12/31/96 $15,755 $14,225 $21,057
3/31/97 $15,845 $12,733 $19,317
6/30/97 $15,779 $14,969 $22,443
9/30/97 $19,942 $17,501 $26,097
12/31/97 $19,055 $16,068 $23,170
3/31/98 $21,070 $17,977 $27,127
6/30/98 $21,146 $16,945 $28,038
9/30/98 $17,864 $13,156 $25,114
12/31/98 $22,110 $16,266 $31,749

Trend Series
Average Annual Total Returns
-------------------------------
Lifetime +17.15%
Five Years +16.73%
One Year +16.04%

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 Trend Series, Russell 2000
Growth Index and the NASDAQ Industrial Index for the period from the Series'
inception on December 27, 1993 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.

Trend-2

<PAGE>

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

Number Market
of Shares Value

COMMON STOCK-94.96%
Aerospace & Defense-0.45%
AAR ........................................... 31,850 $ 760,419
-----------
760,419
-----------
Banking, Finance & Insurance-8.86%
Ambac Financial Group ......................... 72,300 4,351,556
Blanch (E.W.) Holdings ........................ 26,300 1,247,606
Doral Financial ............................... 17,800 398,275
First American (Tennessee) .................... 86,000 3,816,250
+Metris ........................................ 58,800 2,951,025
Resource Asset Investment Trust ............... 37,200 409,200
Webster Financial ............................. 63,100 1,733,278
-----------
14,907,190
-----------
Buildings & Materials-1.74%
*Comfort Systems USA ........................... 117,500 2,100,312
*National Equipment Services ................... 71,600 823,400
-----------
2,923,712
-----------
Business Services-2.19%
*+Profit Recovery Group ......................... 98,000 3,681,125
-----------
3,681,125
-----------
Cable, Media & Publishing-12.01%
*Chancellor Media Class A ...................... 101,200 4,841,788
*+Consolidated Graphics ......................... 69,800 4,715,863
*Emmis Broadcasting ............................ 40,300 1,748,012
*+Metro Networks ................................ 26,500 1,127,906
*+Snyder Communications ......................... 94,700 3,196,125
TCA Cable TV .................................. 32,300 1,151,697
*+USA Networks .................................. 103,604 3,428,645
-----------
20,210,036
-----------
Chemicals-2.72%
*+Mettler-Toledo International .................. 163,100 4,576,994
-----------
4,576,994
-----------
Computers & Technology-24.19%
*+AnswerThink Consulting Group .................. 56,600 1,521,125
*+Aspect Development ............................ 48,000 2,145,000
*Bindview Development .......................... 72,800 2,011,100
*Clarify ....................................... 25,800 631,294
*+DSET .......................................... 34,400 381,625
*EMC ........................................... 84,100 7,148,500
*Fore Systems .................................. 61,400 1,122,469
+Henry (Jack) & Associates ..................... 73,100 3,645,863
*Hyperion Solutions ............................ 25,890 467,638
*Infospace.com ................................. 9,700 369,813
*Inso .......................................... 13,900 348,369
*J.D. Edwards .................................. 51,900 1,474,284
*Network Appliance ............................. 83,200 3,723,200
*NOVA .......................................... 67,449 2,339,620
*+PLATINUM technology ........................... 155,195 2,982,654
*+Policy Management Systems ..................... 10,400 525,200
*Softworks ..................................... 55,800 395,831
*SPR ........................................... 63,800 1,084,600
*SunGard Data Systems .......................... 116,000 4,603,750
*+Veritas Software .............................. 63,475 3,800,566
-----------
40,722,501
-----------
- ----------------
Top 10 stock holdings, representing 30.9% of net assets, are printed in bold.

<PAGE>

Number Market
of Shares Value
COMMON STOCK (CONTINUED)
Consumer Products-4.02%
*+Concepts Direct ............................... 24,900 $ 210,094
+G&K Services .................................. 26,300 1,397,187
*Gemstar International
Group Limited ................................ 90,100 5,155,409
-----------
6,762,690
-----------
Electronics & Electrical Equipment-8.64%
*+Applied Micro Circuits ........................ 148,900 5,062,600
*+Integrated Electrical Services ................ 47,300 1,052,425
*+Micrel ........................................ 63,800 3,524,950
*Novellus Systems .............................. 31,400 1,551,356
*+Protection One ................................ 144,900 1,240,706
*Teradyne ...................................... 49,600 2,101,800
-----------
14,533,837
-----------
Food, Beverage & Tobacco-2.08%
*Cheesecake Factory ............................ 87,700 2,600,853
+Ruby Tuesday .................................. 42,100 894,625
-----------
3,495,478
-----------
Healthcare & Pharmaceuticals-8.40%
*+ABR Information Services ...................... 51,800 1,000,387
*+Alternative Living Services ................... 58,900 2,017,325
*Brookdale Living Communities .................. 140,200 2,681,325
*+Coulter Pharmaceuticals ....................... 39,000 1,161,469
*+Renal Care Group .............................. 47,375 1,373,875
*+Sunrise Assisted Living ....................... 90,500 4,677,719
*Trigon Healthcare ............................. 32,600 1,216,388
-----------
14,128,488
-----------
Industrial Machinery-0.11%
*Spinnaker Industries Class A .................. 4,500 81,000
*Spinnaker Industries Common ................... 5,800 101,500
-----------
182,500
-----------
Leisure, Lodging & Entertainment-1.32%
*Dave & Buster's ............................... 80,300 1,844,391
*+Extended Stay America ......................... 36,401 382,206
-----------
2,226,597
-----------
Retail-12.33%
*Cost Plus ..................................... 94,900 2,971,556
*+Dollar Tree Stores ............................ 77,100 3,365,897
*Hibbett Sporting Goods ........................ 60,000 1,451,250
*+Linens 'n Things .............................. 91,300 3,617,763
*MSC Industrial Direct Class A ................. 40,500 916,313
Schultz Sav-O Stores .......................... 30,000 500,625
*Sonic ......................................... 70,850 1,700,400
*Staples ....................................... 118,075 5,162,091
*Wilmar Industries ............................. 51,900 1,052,597
-----------
20,738,492
-----------
Telecommunications-5.90%
*+Aware ......................................... 23,500 639,641
*+Genesys Telecommunication Laboratories ........ 40,700 920,837
*+GeoTel Communications ......................... 161,100 5,980,837
*+Nextlink Communications Class A ............... 63,000 1,803,375
*Star Telecommunications ....................... 47,000 574,281
-----------
9,918,971
-----------
Total Common Stock
(cost $118,547,939) .......................... 159,769,030
-----------

Trend-3
<PAGE>

Trend Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
REPURCHASE AGREEMENTS-6.25%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $2,712,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$3,008,678) .................................. $2,948,000 $2,948,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $3,760,000
U.S. Treasury Notes 5.75% due
10/31/00, market value
$3,867,937) .................................. 3,788,000 3,788,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98, collateralized by
$824,000 U.S. Treasury Notes 7.75%
due 12/31/99, market value $849,412 and
$1,152,000 U.S. Treasury Notes 7.75%
due 1/31/00, market value $1,227,269 and
$1,157,000 U.S. Treasury Notes 6.25%
due 8/31/00, market value $1,211,474 and
$552,000 U.S. Treasury Notes 6.50%
due 5/31/01, market value $577,866) .......... $3,788,000 $3,788,000
----------
Total Repurchase Agreements
(cost $10,524,000) ........................... 10,524,000
----------

TOTAL MARKET VALUE OF SECURITIES-101.21% (cost $129,071,939) .... $170,293,030

LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(1.21%) ......... (2,041,820)
------------
NET ASSETS APPLICABLE TO 8,516,814 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $19.76 PER SHARE-100.00% .......... $168,251,210
============
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 ...... $128,369,931
Undistributed net investment income ............................. 12,547
Accumulated net realized loss on investments .................... (1,352,359)
Net unrealized appreciation of investments ...................... 41,221,091
------------
Total net assets ................................................ $168,251,210
============
- ------------------
* Non-income producing security for the year ended December 31, 1998.
+ Security is partially or fully on loan.

See accompanying notes

Trend-4
<PAGE>

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

INVESTMENT INCOME:
Interest ....................................................... $ 721,333
Dividends ...................................................... 429,627
-----------
1,150,960
-----------
EXPENSES:
Management fees ................................................ 1,025,600
Accounting and administration .................................. 53,754
Professional fees .............................................. 16,710
Custodian fees ................................................. 12,736
Reports and statements to shareholders ......................... 10,938
Taxes (other than taxes on income) ............................. 8,490
Registration fees .............................................. 6,430
Dividend disbursing and transfer agent
fees and expenses ........................................... 2,664
Directors' fees ................................................ 2,373
Other .......................................................... 16,644
-----------
1,156,339
-----------
Less expenses absorbed or waived by
Delaware Management Company ................................. (48,079)
-----------
Total expenses ................................................. 1,108,260
-----------
NET INVESTMENT INCOME .......................................... 42,700
-----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized loss on investments ............................... (1,048,182)
Net change in unrealized appreciation/
depreciation of investments ................................. 23,501,658
-----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ......................................... 22,453,476
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $22,496,176
===========
See accompanying notes

<PAGE>

Delaware Group Premium Fund, Inc.-Trend 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........................ $ 42,700 $ 132,509
Net realized gain (loss) on investments...... (1,048,182) 2,089,208
Net change in unrealized appreciation /
depreciation of investments............... 23,501,658 13,569,520
------------ ------------
Net increase in net assets resulting from
operations................................ 22,496,176 15,791,237
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................ (135,410) (204,613)
Net realized gain on investments............. (2,315,513) (736,608)
------------ ------------
(2,450,923) (941,221)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold.................... 113,799,362 56,666,244
Net asset value of shares issued upon
reinvestment of distributions from net
investment income and net realized
gain on investments....................... 2,450,923 941,222
------------ ------------
116,250,285 57,607,466
Cost of shares repurchased................... (86,320,418) (10,604,885)
------------ ------------
Increase in net assets derived from capital
share transactions........................ 29,929,867 47,002,581
------------ ------------
NET INCREASE IN NET ASSETS................... 49,975,120 61,852,597
------------ ------------
NET ASSETS:
Beginning of year............................ 118,276,090 56,423,493
------------ ------------
End of year.................................. $168,251,210 $118,276,090
============ ============

See accompanying notes

Trend-5
<PAGE>

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

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

Year Ended December 31,
1998 1997 1996 1995 1994
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $17.380 $14.560 $14.020 $10.160 $10.200

Income (loss) from investment operations:
Net investment income ..................................... 0.006 0.019 0.050 0.098 0.079
Net realized and unrealized gain (loss) on investments .... 2.736 3.031 1.380 3.852 (0.119)
------- ------- ------- ------- -------
Total from investment operations .......................... 2.742 3.050 1.430 3.950 (0.040)
------- ------- ------- ------- -------
Less dividends and distributions:
Dividends from net investment income ...................... (0.020) (0.050) (0.090) (0.090) none
Distributions from net realized gain on investments ....... (0.342) (0.180) (0.800) none none
------- ------- ------- ------- -------
Total dividends and distributions ......................... (0.362) (0.230) (0.890) (0.090) none
------- ------- ------- ------- -------

Net asset value, end of year .............................. $19.760 $17.380 $14.560 $14.020 $10.160
======= ======= ======= ======= =======

Total return .............................................. 16.04% 21.37% 11.00% 39.21% (0.39%)

Ratios and supplemental data:
Net assets, end of year (000 omitted) ..................... $168,251 $118,276 $56,423 $20,510 $7,087
Ratio of expenses to average net assets ................... 0.81% 0.80% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets
prior to expense limitation ............................ 0.85% 0.88% 0.92% 0.96% 1.47%
Ratio of net investment income to average net assets ...... 0.03% 0.16% 0.56% 1.03% 1.63%
Ratio of net investment income (loss) to average net
assets prior to expense limitation ..................... (0.01%) 0.08% 0.44% 0.87% 0.96%
Portfolio turnover ........................................ 121% 125% 112% 76% 59%

</TABLE>
See accompanying notes

Trend-6
<PAGE>

Delaware Group Premium Fund, Inc.-Trend 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 Trend
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.

The Trend 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.

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%.

Trend-7
<PAGE>

Trend 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
-------------- -------------------
$99,360 $5,886

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 ............. $185,532,545
Sales ................. $153,307,565

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
expiration
2006
----------
$916,288

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 ..... 6,458,076 147,114 (4,891,718) 1,713,472
Year ended December 31, 1997 ..... 3,548,538 63,254 (682,630) 2,929,162

</TABLE>
<PAGE>

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
------------------ ---------------
$30,681,640 $30,653,648

Net income from securities lending activities for the year ended December 31,
1998 was $72,047 and is included in interest income on the statement of
operations.

Trend-8
<PAGE>

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

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

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

Trend-9

<PAGE>

FOR GROWTH OF CAPITAL

Small Cap Value Series
(Formerly Value Series)

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

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

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

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

Small Cap Value-1

<PAGE>

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

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

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

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

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

Small Cap Value-2

<PAGE>

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

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

<PAGE>

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

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

Small Cap Value-3

<PAGE>

Small Cap Value Series
Statement of Net Assets (Continued)

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

<PAGE>

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

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

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

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

See accompanying notes

Small Cap Value-4

<PAGE>

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

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

See accompanying notes

<PAGE>

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

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

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

See accompanying notes

Small Cap Value-5

<PAGE>

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

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

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

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

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

See accompanying notes

Small Cap Value-6

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

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

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

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

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

Small Cap Value-7
<PAGE>

Small Cap Value 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
-------------- -------------------
$61,761 $3,695

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

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

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

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

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

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

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

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

Small Cap Value-8

<PAGE>

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

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

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

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

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

Small Cap Value-9

<PAGE>
FOR GROWTH OF CAPITAL

Social Awareness Series
(Formerly Quantum Series)

Investment Strategy and Performance in 1998
During fiscal 1998, volatility in the stock market caused investor emotions
to run high. Stocks across the board fell sharply last summer upon concerns
about lower than expected corporate profits and a slowing U.S. economy.
In the fall, the Federal Reserve lowered its target for short-term interest
rates, which inspired renewed interest in U.S. stocks after almost three months
of volatility. Many large capitalization stocks rose to near record price
levels. Stocks of mid-size companies did not fare as well and their prices rose
to a much lesser extent.
Consequently, Social Awareness Series--which invests in both mid- and
large-cap stocks--did not benefit as much from this past autumn's stock market
rally. The Series provided a total return of +15.45% (capital change plus
reinvestment of distributions) for the 12 months ended December 31, 1998. The
Series' performance benchmarks, the Standard & Poor's 500 Index and the Domini
Social 400 Index, delivered better returns of 28.56% and 22.99%, respectively.
Both of these unmanaged indexes are composed primarily of large-cap stocks.
We believe Social Awareness Series' approach to stock selection can be
effective in emotion-driven markets, providing an advantage to its shareholders
over the long term. The Series employs computer-driven quantitative analysis to
choose stocks that appear to have superior long-term capital appreciation
potential. This eliminates emotion and speculation from the investment process.

Portfolio Snapshot
Social Awareness Series seeks companies that meet certain socially
responsible criteria and exhibit both growth and value characteristics. Our
quantitative computer software sifts through over 1,200 mid-size and large U.S.
companies to uncover stocks with strong capital appreciation potential. We apply
a series of social screens to each company, avoiding companies that:
o Pollute the environment;
o Make alcoholic beverages or tobacco products;
o Produce nuclear power;
o Manufacture military weapons;
o Are involved in the gambling industry; or
o Conduct animal testing for cosmetics or personal care products.
On July 1, 1998, we expanded the Series' socially responsible mandate to
include animal testing. The Series no longer invests in cosmetics manufacturers
that test products and/or potentially harmful chemicals on animals. This screen
does not apply to pharmaceutical products, which must undergo animal testing as
a matter of law. Approximately 800 companies typically pass our social screens.
Our computer then analyzes each company based on stock price and earnings
fundamentals. We seek stocks that are selling below their fair market value and
also demonstrate accelerating earnings growth.
During fiscal 1998, financial stocks were the Series' largest sector
allocation. This also reduced our performance because investor concern regarding
the financial sector's exposure to overseas securities and loans drove the share
prices of many insurance and banking firms lower.
In 1998, we avoided most "supercap" stocks--very large company stocks with
relatively high price to earnings ratios. These stocks led the stock market
during fiscal 1998. However, they failed to rate highly according to our growth
and value parameters, and some did not meet our socially responsible criteria.
This made it difficult for us to keep pace with the market during the past year.
On the positive side, bolstering the Series' performance were technology and
health care stocks, which offered attractive capital appreciation prospects.

- --------------------------------------------------------------------------------
Social Awareness Series Investment Objective
Seeks long-term capital appreciation. It attempts to achieve this objective by
investing in large- and mid-capitalization stocks of U.S. companies expected to
grow over time and deemed socially responsible. On May 1, 1998, Quantum Series
was renamed Social Awareness Series to more clearly reflect its socially
responsible investment strategy. The Series' investment objective and strategy
were not affected by the name change.
- --------------------------------------------------------------------------------

Social Awareness-1

<PAGE>

Investment Outlook
We believe that the economy may slow from its brisk pace in fiscal 1998, but
still has plenty of momentum to keep expanding in fiscal 1999.
Social Awareness Series has been positioned over the past fiscal year to
benefit from U.S. economic growth while escaping the full impact of struggling
international markets. Many of the companies in which we invest generate the
majority of their revenues from U.S. and/or European markets.
Overall, we expect additional stock market volatility in fiscal 1999.
Fortunately, we believe our quantitative investment strategy will not only
endure the short-term effects of market volatility, but ultimately reward
patient, long-term investors.

Growth of a $10,000 Investment
May 1, 1997 through December 31, 1998

Social Awareness Domini Social 400
Series Index S&P 500 Index
5/1/97 $10,000 $10,000 $10,000
5/31/97 $10,480 $10,544 $10,000
6/30/97 $10,790 $10,944 $10,448
7/31/97 $11,860 $11,917 $11,297
8/31/97 $11,440 $11,241 $10,647
9/30/97 $12,290 $11,862 $11,231
10/31/97 $12,020 $11,491 $10,856
11/30/97 $12,560 $12,196 $11,358
12/31/97 $12,840 $12,419 $11,553
1/31/98 $12,681 $11,681
2/28/98 $13,629 $12,523
3/31/98 $14,671 $14,209 $13,165
4/30/98 $14,307 $13,297
5/31/98 $14,045 $13,068
6/30/98 $14,742 $14,769 $13,599
7/31/98 $14,702 $13,454
8/31/98 $12,524 $11,509
9/30/98 $12,205 $13,352 $12,246
10/31/98 $14,536 $13,243
11/30/98 $15,544 $14,045
12/31/98 $14,823 $16,710 $13,219

Social Awareness Series
Average Annual Total Returns
----------------------------
Lifetime +26.56%
One Year +15.45%
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 Social Awareness Series, the
S&P 500 Index and the Domini Social 400 Index for the period from the Series'
inception on May 1, 1997 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.

Social Awareness-2
<PAGE>

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

Number of Market
Shares Value
COMMON STOCK-96.93%
Automobiles & Automotive Parts-0.04%
PACCAR ........................................ 300 $ 12,300
---------
12,300
---------
Banking, Finance & Insurance-21.42%
A.G. Edwards .................................. 4,745 176,751
Allstate ...................................... 6,780 261,878
American Express .............................. 2,800 286,300
American International Group .................. 2,700 260,888
AmSouth Bancorporation ........................ 2,970 135,506
BankBoston .................................... 3,240 126,158
Bank One ...................................... 3,512 179,332
Bankers Trust New York ........................ 1,400 119,613
Chase Manhattan ............................... 3,810 259,318
Citigroup ..................................... 4,590 227,205
City National ................................. 4,025 167,541
Comerica ...................................... 2,662 181,515
Conseco ....................................... 3,700 113,081
Countrywide Credit Industries ................. 2,400 120,450
Dime Bancorp .................................. 8,800 232,650
EXEL Limited Class A .......................... 858 64,350
Federal Home Loan Mortgage .................... 1,800 115,988
Federal National Mortgage Association ......... 3,600 266,400
First American Financial ...................... 6,200 199,175
*FIRSTPLUS Financial Group ..................... 10,800 29,700
First Union ................................... 4,670 283,994
John Nuveen ................................... 3,000 111,375
Marsh & McLennan .............................. 1,415 82,689
Mellon Bank ................................... 2,105 144,719
Metris ........................................ 5,755 288,829
Morgan Stanley Dean Witter .................... 1,500 106,500
National City ................................. 1,610 116,725
Old Republic International .................... 8,090 182,025
PaineWebber Group ............................. 3,870 149,479
PNC Financial Group ........................... 3,800 205,675
Protective Life ............................... 3,300 131,381
Reliance Group Holdings ....................... 8,870 114,201
Republic New York ............................. 2,500 113,906
SLM Holding ................................... 3,002 144,096
T. Rowe Price Associates ...................... 2,200 74,938
---------
5,774,331
---------
Buildings & Materials-1.51%
Kaufman & Broad Home .......................... 8,000 230,000
Premark International ......................... 5,100 176,588
---------
406,588
---------
Cable, Media & Publishing-4.98%
Dun & Bradstreet .............................. 4,805 151,658
Ennis Business Forms .......................... 715 7,105
Gannett ....................................... 2,070 137,008
McGraw-Hill ................................... 2,900 295,438
New York Times ................................ 3,100 107,531
Omnicom Group ................................. 2,400 139,200
Reynolds & Reynolds Class A ................... 6,700 153,681
R.H.Donnelley ................................. 961 13,995
*Snyder Communications ......................... 3,700 124,875

- --------------
Top 10 stock holdings, representing 17.6% of net assets, are printed in bold.
<PAGE>

Number of Market
Shares Value
COMMON STOCK (Continued)
Cable, Media & Publishing (Continued)
Time Warner ..................................... 2,200 $ 136,538
*World Color Press ............................... 2,500 76,094
---------
1,343,123
---------
Computers & Technology-16.27%
*America Online .................................. 1,100 176,000
*American Power Conversion ....................... 4,925 238,401
*Apple Computer .................................. 5,800 237,619
*BMC Software .................................... 4,600 205,131
*Cisco Systems ................................... 4,600 427,081
Compaq Computer ................................. 5,000 209,688
*Dell Computer ................................... 5,000 366,094
Deluxe .......................................... 3,315 121,205
*EMC ............................................. 5,070 430,950
HBO ............................................. 7,680 220,560
Keane ........................................... 1,900 75,881
*Lexmark International Group A ................... 3,600 361,800
*Microsoft ....................................... 6,380 883,829
*Storage Technology .............................. 3,840 136,560
*The Learning Company ............................ 11,400 295,688
---------
4,386,487
---------
Consumer Products-1.73%
Avon Products ................................... 2,260 100,005
Clorox .......................................... 1,090 127,326
Gillete ......................................... 3,300 159,431
United Stationers ............................... 3,000 80,813
---------
467,575
---------
Electronics & Electrical Equipment-4.03%
General Cable ................................... 9,000 184,500
*Solectron ....................................... 3,700 343,869
*Waters .......................................... 6,400 558,400
---------
1,086,769
---------
Energy-0.47%
Helmerich & Payne ............................... 4,780 92,600
*Oryx Energy ..................................... 2,610 35,072
---------
127,672
---------
Food & Beverage-5.09%
*Agribrands International ........................ 27 810
Flowers Industries .............................. 9,670 231,476
General Mills ................................... 3,200 248,800
International Multifoods ........................ 920 23,748
Interstate Bakeries ............................. 6,770 178,982
McCormick and Company ........................... 3,600 121,613
Quaker Oats ..................................... 3,925 233,538
Ralston-Purina Group ............................ 4,610 149,249
*Suiza Foods ..................................... 1,900 96,781
Universal Foods ................................. 3,200 87,800
---------
1,372,797
---------
Healthcare & Pharmaceuticals-11.44%
Allegiance ...................................... 8,600 400,975
*AmeriSource Health Class A ...................... 1,400 91,000
*Amgen ........................................... 3,200 334,400
*Arterial Vascular Engineering ................... 6,900 361,603
Bergen Brunswig Class A ......................... 8,400 292,950
*Beverly Enterprises ............................. 11,150 75,263

Social Awareness-3

<PAGE>

Social Awareness Series
Statement of Net Assets (Continued)

Number of Market
Shares Value
COMMON STOCK (Continued)
Healthcare & Pharmaceuticals (Continued)
Eli Lilly ....................................... 2,600 $ 231,075
Guidant ......................................... 900 99,225
*Health Management Associates Class A ............ 12,250 264,906
*Lincare Holdings ................................ 2,590 104,976
McKesson ........................................ 3,000 237,188
Mylan Laboratories .............................. 6,200 195,300
*NBTY ............................................ 11,700 82,997
*PharMerica ...................................... 1,433 8,643
*Rexall Sundown .................................. 12,900 179,794
*Twinlab ......................................... 9,400 123,082
---------
3,083,377
---------
Industrial Machinery-1.13%
Deere & Co. ..................................... 975 32,297
Ingersoll-Rand .................................. 3,600 168,975
Tredegar Industries ............................. 4,600 103,500
---------
304,772
---------
Leisure, Lodging & Entertainment-2.15%
*Brinker International ........................... 8,600 248,325
McDonald's ...................................... 2,100 160,913
Walt Disney ..................................... 5,700 171,000
---------
580,238
---------
Metals & Mining-0.72%
Cleveland Cliffs Iron ........................... 4,800 193,500
---------
193,500
---------
Packaging & Containers-0.09%
*Sealed Air ...................................... 500 25,531
---------
25,531
---------
Retail-9.24%
*Dollar Tree Stores .............................. 3,500 152,797
Fingerhut ....................................... 5,200 80,275
Gap ............................................. 3,213 180,731
Home Depot ...................................... 4,500 275,344
Jostens ......................................... 7,245 189,728
Lowe's Companies ................................ 3,800 194,513
Neiman-Marcus Group ............................. 5,000 124,688
Ross Stores ..................................... 5,730 225,440
*Safeway ......................................... 3,260 198,656
<PAGE>

Number of Market
Shares Value
COMMON STOCK (Continued)
Retail (Continued)
TJX ............................................. 8,520 $ 247,080
Wal-Mart Stores ................................. 5,100 415,331
*Zale ............................................ 6,400 206,400
----------
2,490,983
----------
Telecommunications-11.74%
*ADC Telecommunications .......................... 8,500 294,313
*AirTouch Communications ......................... 2,000 144,875
ALLTEL .......................................... 4,850 290,091
Ameritech ....................................... 4,650 294,694
AT&T ............................................ 5,195 390,924
BellSouth ....................................... 10,180 507,728
Century Telecommunications
Enterprises .................................... 2,900 195,750
*MCI Worldcom .................................... 4,100 294,303
SBC Communications .............................. 5,590 299,764
*Tellabs ......................................... 2,000 137,125
US West Communications Group .................... 4,870 314,724
----------
3,164,291
----------
Textiles, Apparel & Furniture-1.71%
*Knoll ........................................... 1,300 38,513
Miller (Herman) ................................. 1,400 37,538
*Tommy Hilfiger .................................. 3,320 199,200
*Westpoint Stevens ............................... 5,900 186,034
----------
461,285
----------
Transportation & Shipping-0.98%
*AMR ............................................. 2,320 137,750
Tidewater ....................................... 2,400 55,650
*UAL ............................................. 1,180 70,431
----------
263,831
----------
Utilities-2.19%
Enron ........................................... 4,400 251,075
OGE Energy ...................................... 7,900 228,606
UtiliCorp United ................................ 3,000 110,063
----------
589,744
----------
Total Common Stock
(cost $22,445,940 ) ............................ 26,135,194
----------

Social Awareness-4
<PAGE>

Social Awareness Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
REPURCHASE AGREEMENTS-4.39%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $305,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$338,205)..................................... $331,000 $331,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $423,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$434,794)..................................... 426,000 426,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $93,000
U.S. Treasury Notes 7.75%
due 12/31/99, market value
$95,482 and $130,000 U.S.
Treasury Notes 7.75% due
1/31/00, market value
$137,957 and $130,000 U.S.
Treasury Notes 6.25% due
8/31/00, market value
$136,181 and $62,000
U.S. Treasury Notes
6.50% due 5/31/01,
market value $64,958)......................... $426,000 $426,000
---------
Total Repurchase Agreements
(cost $1,183,000)............................. 1,183,000
---------

TOTAL MARKET VALUE OF SECURTIES-101.32% (cost $23,628,940 )...... $27,318,194

LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(1.32%).......... (356,296)
-----------

NET ASSETS APPLICABLE TO 1,853,052 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $14.55 PER SHARE-100.00%........... $26,961,898
===========

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.......................................... $23,730,841
Undistributed net investment income ............................. 119,544
Accumulated net realized loss on investments..................... (577,741)
Net unrealized appreciation of investments....................... 3,689,254
-----------
Total net assets................................................. $26,961,898
===========

- ---------------
*Non income producing security for the year ended December 31, 1998.

See accompanying notes

Social Awareness-5
<PAGE>

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

Investment Income:
Dividends ................................................. $ 180,300
Interest .................................................. 74,819
-----------
255,119
-----------

Expenses:
Management fees ........................................... 117,271
Accounting and administration ............................. 6,249
Custodian fees ............................................ 4,669
Registration fees ......................................... 3,650
Professional fees ......................................... 2,664
Reports and statements to shareholders .................... 1,750
Taxes (other than taxes on income) ........................ 729
Dividend disbursing and transfer agent
fees and expenses ........................................ 637
Directors' fees ........................................... 443
Other ..................................................... 1,189
-----------
139,251
-----------
Less expenses absorbed or waived by
Delaware Management Company .............................. (8,769)
-----------

Total expenses ............................................ 130,482
-----------

Net Investment Income ..................................... 124,637
-----------

Net Realized and Unrealized Gain (Loss)
on Investments:
Net realized loss on investments .......................... (574,831)
Net change in unrealized appreciation /
depreciation of investments .............................. 3,051,264
-----------
Net Realized and Unrealized Gain
on Investments ........................................... 2,476,433
-----------

Net Increase in Net Assets
Resulting from Operations ................................ $ 2,601,070
===========

See accompanying notes
<PAGE>

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

Year Ended 5/1/97* to
12/31/98 12/31/97
---------- -----------
Increase (Decrease) In Net Assets
From Operations:
Net investment income .......................... $ 124,637 $ 30,982
Net realized gain (loss) on investments ........ (574,831) 119,612
Net change in unrealized appreciation /
depreciation of investments ................... 3,051,264 637,990
------------ ------------
Net increase in net assets
resulting from operations ..................... 2,601,070 788,584
------------ ------------

Distributions To Shareholders From:
Net investment income .......................... (33,744) --
Net realized gain on investments ............... (124,853) --
------------ ------------
(158,597) --
------------ ------------
Capital Share Transactions:
Proceeds from shares sold ...................... 19,771,054 8,018,354
Net asset value of shares issued upon
reinvestment of distributions from net
investment income and net realized
gain on investments ........................... 158,597 --
------------ ------------
19,929,651 8,018,354
Cost of shares repurchased ..................... (3,210,331) (1,006,833)
------------ ------------
Increase in net assets derived from capital
share transactions ............................ 16,719,320 7,011,521
------------ ------------

Net Increase In Net Assets ..................... 19,161,793 7,800,105
------------ ------------

Net Assets:
Beginning of period ............................ 7,800,105 --
------------ ------------
End of period .................................. $ 26,961,898 $ 7,800,105
============ ============
- -----------------
*Date of commencement of operations.

See accompanying notes

Social Awareness-6
<PAGE>

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

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

Year 5/1/97(1)
Ended to
12/31/98 12/31/97
-------- ---------
Net asset value, beginning of period ............... $ 12.840 $ 10.000

Income from investment operations:
Net investment income .............................. 0.065 0.051
Net realized and unrealized gain on investments .... 1.880 2.789
-------- ---------
Total from investment operations ................... 1.945 2.840
-------- ---------

Less dividends and distributions:
Dividends from net investment income ............... (0.050) none
Distributions from net realized gain on investments (0.185) none
-------- ---------
Total dividends and distributions .................. (0.235) none
-------- ---------

Net asset value, end of period ..................... $ 14.550 $ 12.840
======== =========

Total return ....................................... 15.45% 28.40%

Ratios and supplemental data:
Net assets, end of period (000 omitted) ............ $ 26,962 $ 7,800
Ratio of expenses to average net assets ............ 0.83% 0.80%
Ratio of expenses to average net assets
prior to expense limitation ..................... 0.89% 1.40%
Ratio of net investment income to average net assets 0.80% 1.13%
Ratio of net investment income to average net
assets prior to expense limitation .............. 0.74% 0.53%
Portfolio turnover ................................. 30% 52%

- ---------------
(1)Date of commencement of operations; ratios have been annualized and total
return has not been annualized.

See accompanying notes

Social Awareness-7
<PAGE>
Delaware Group Premium Fund, Inc.-Social Awareness 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 Social
Awareness 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 Social Awareness Series will make payments from net investment income and
net realized gain on investments, if any, following the close of the fiscal
year.

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

2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Series
pays Delaware Management Company ("DMC"), the Investment Manager of the Series,
an annual fee which is calculated at the rate of 0.75% of the average daily net
assets of the Series. Vantage Global Advisors, Inc., an affiliate of DMC,
receives a fee equal to 0.25% of average daily net assets up to $20 million,
0.35% of average daily net assets between $20 million and $50 million, and 0.40%
of average daily net assets over $50 million of the Series for acting as a
sub-advisor to the Series. The Series does not pay any fees to the sub-adviser.

Social Awareness-8
<PAGE>

Social Awareness 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
-------------- --------------------
$15,282 $957

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............ $20,650,066
Sales ............... $ 4,377,130

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
expiration
2006
----------
$577,691

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> <C> <C>
Year ended December 31, 1998........ 1,464,605 12,698 (231,596) 1,245,707
Period ended December 31, 1997*..... 695,631 - (88,286) 607,345
</TABLE>

- ------------------
*Commenced operations on 5/1/97.

Social Awareness-9
<PAGE>

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

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Social Awareness Series (the "Fund") as of December 31, 1998,
and the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for each of the
periods indicated therein. 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.-Social Awareness Series at December 31, 1998,
the results of its operations for the year then ended, and the changes in its
net assets and its financial highlights for each of the periods indicated
therein, in conformity with generally accepted accounting principles.

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

Philadelphia, Pennsylvania
February 5, 1999

Social Awareness-10

<PAGE>

FOR TOTAL RETURN

Devon Series

Investment Strategy and Performance in 1998
Despite difficult market conditions, Devon Series provided strong results in
fiscal 1998. For the 12 months ended December 31, 1998, the Series delivered a
robust total return of +24.05% (capital change plus reinvestment of
distributions). The unmanaged Standard & Poor's 500 Index had a total return of
28.56% for the same period.
During fiscal 1998, Devon Series' growth and value selection process led to
investments in large and mid-size companies that performed well. The Series
focuses on what we call transition stocks--companies whose stocks currently meet
value investment parameters, but at the same time have the potential to become
strongly performing growth stocks.
In evaluating a stock's total return prospects, we seek five indicators of a
company's potential success:
o An attractive stock price relative to the rest of the market;
o A history of stable earnings growth; o Substantial positive cash flow;
o Evidence of a major fundamental change (expansion or acquisition); and
o Are not widely followed or are misunderstood by Wall Street analysts.
By using a strict buy and sell discipline, we believe the Series' investment
approach reduced exposure to market risks during the past year, especially when
compared with more aggressive equity strategies.

Portfolio Snapshot
Even as the U.S. stock market suffered its worst short-term setback since the
October 1987 crash, we still found many opportunities for Devon Series to excel
in fiscal 1998.
We achieved above-average 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 strategy
also helped us to preserve capital during the summer when many stocks fell
significantly from their highs.
Leading the portfolio's strong performance were pharmaceutical stocks,
specialty service and capital goods stocks, and non-bank financial stocks.
Retail stocks were strong early in the year, but faded during the second half as
consumer spending tapered off somewhat.
Many of the holdings in the portfolio are mid-size companies in niche
businesses in transition. We believe investors can reap substantial capital
appreciation potential from stocks that are making a positive transition from
being undervalued (compared to their industry) to being highly prized by
growth-oriented investors.

Investment Outlook
With the outlook for many American corporations uncertain, we are focusing
Devon Series on companies that appear well-positioned to generate earnings
growth of at least 10% per year even if the U.S. economy slows in 1999.
By purchasing and holding stocks with P/E ratios that are reasonable compared
to the S&P 500 Index, we believe Devon Series can benefit should the Federal
Reserve decide to further reduce interest rates in 1999. Companies with
relatively low P/Es typically benefit the most from interest rate cuts.
We also believe that even though a recession is unlikely, business profits
and overall economic conditions will continue to soften as the effects of global
economic turmoil penetrate the U.S.
To maximize the efficiency of our research efforts, we will continue to
maintain a relatively concentrated portfolio. Our target for 1999 is to have the
portfolio's top 10 holdings represent about 35% of Devon's net assets, and the
top 20 stocks to represent slightly more than half of net assets. We're
comfortable with a portfolio of 50 to 70 stocks.

- --------------------------------------------------------------------------------
Devon Series Investment Objective
Seeks current income and capital appreciation. It attempts to achieve this
objective by investing primarily in income-producing common stocks of large- and
mid-cap U.S. companies that the investment manager believes have the potential
for above-average dividend increases over time.
- --------------------------------------------------------------------------------

Devon-1

<PAGE>

Growth of a $10,000 Investment
May 1, 1997 through
December 31, 1998

Devon Series S&P500 Index
------------ -------------
5/1/97 $10,000 $10,000
5/31/97 $10,440 $10,000
6/30/97 $10,900 $10,448
7/31/97 $11,790 $11,279
8/31/97 $11,400 $10,647
9/30/97 $12,030 $11,231
10/31/97 $11,700 $10,856
11/30/97 $12,220 $11,358
12/31/97 $12,730 $11,553
1/31/98 $11,681
2/28/98 $12,523
3/31/98 $14,256 $13,165
4/30/98 $13,297
5/31/98 $13,068
6/30/98 $14,236 $13,599
7/31/98 $13,454
8/31/98 $11,509
9/30/98 $13,070 $12,246
10/31/98 $13,243
11/30/98 $14,045
12/31/98 $15,790 $13,219

Devon Series
Average Annual Total Returns
----------------------------
Lifetime +31.44%
One Year +24.05%
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 Devon Series and the S&P
500 Index for the period from the Series' inception on May 1, 1997 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.

Devon-2
<PAGE>

Delaware Group Premium Fund, Inc.-Devon Series
Statement of Net Assets
December 31, 1998
Number Market
of Shares Value
COMMON STOCK-89.11%
Aerospace & Defense-0.35%
GenCorp .......................................... 9,700 $ 241,894
----------
241,894
----------
Automobiles & Automotive Parts-4.41%
Danaher .......................................... 23,500 1,276,344
Federal Signal ................................... 64,000 1,752,000
----------
3,028,344
----------
Banking, Finance & Insurance-14.35%
AFLAC ............................................ 36,800 1,619,200
American International Group ..................... 10,225 987,991
Chubb ............................................ 6,200 402,225
Equifax .......................................... 56,800 1,941,850
Federal Home Loan Mortgage ....................... 38,900 2,506,619
Mercury General .................................. 10,100 442,506
Nationwide Financial Services Class A ............ 13,200 682,275
Unum ............................................. 21,900 1,278,413
----------
9,861,079
----------
Buildings & Materials-4.03%
Masco ............................................ 72,100 2,072,875
Premark International ............................ 20,200 699,425
----------
2,772,300
----------
Cable, Media & Publishing-0.66%
Wallace Computer Services ........................ 17,100 451,013
----------
451,013
----------
Chemicals-2.49%
Crompton & Knowles ............................... 20,500 424,094
Hercules ......................................... 9,300 254,588
Valspar .......................................... 27,700 1,033,556
----------
1,712,238
----------
Computers & Technology-5.27%
Hewlett-Packard .................................. 40,600 2,773,488
*SunGard Data Systems ............................. 21,300 845,344
----------
3,618,832
----------
Electronics & Electrical Equipment-4.22%
Intel ............................................ 7,700 912,691
Pittston Brinks Group ............................ 20,100 640,688
Symbol Technologies .............................. 7,050 450,759
Teleflex ......................................... 19,700 898,813
----------
2,902,951
----------
Energy-2.01%
Amoco ............................................ 9,700 572,300
Total S. A. ADR .................................. 16,200 805,950
----------
1,378,250
----------
Environmental Services-4.37%
Ecolab ........................................... 83,000 3,003,563
----------
3,003,563
----------
Food, Beverage & Tobacco-6.38%
Campbell Soup .................................... 11,500 632,500
ConAgra .......................................... 16,300 513,450
Hannaford Brothers ............................... 6,400 339,200
Philip Morris .................................... 23,800 1,273,300
Ralston-Purina Group ............................. 18,800 608,650
Universal Foods .................................. 37,200 1,020,675
----------
4,387,775
----------
- ----------------------
Top 10 stock holdings, representing 35.8% of net assets, are printed in bold.

<PAGE>
Number Market
of Shares Value
COMMON STOCK (Continued)
Healthcare & Pharmaceuticals-8.39%
American Home Products ............................ 42,900 $2,415,806
Johnson & Johnson ................................. 10,900 914,238
Mylan Laboratories ................................ 60,500 1,905,750
Zeneca Group ADR .................................. 11,800 529,525
----------
5,765,319
----------
Real Estate-1.02%
Developers Diversified Realty ..................... 10,200 181,050
Nationwide Health Properties ...................... 12,200 263,063
Sun Communities ................................... 7,300 254,131
----------
698,244
----------
Retail-9.44%
Food Lion Class A ................................. 58,700 620,019
Intimate Brands ................................... 52,000 1,553,500
May Department Stores ............................. 6,100 368,288
Rite Aid .......................................... 63,200 3,132,350
Sherwin-Williams .................................. 20,400 599,250
Storage USA ....................................... 6,700 216,494
----------
6,489,901
----------
Telecommunications-4.12%
Alltel ............................................ 12,000 717,750
Ericsson ADR ...................................... 17,100 408,797
SBC Communications ................................ 31,800 1,705,275
----------
2,831,822
----------
Textiles, Apparel & Furniture-5.16%
Hillenbrand Industries ............................ 17,600 1,001,000
HON Industries .................................... 41,200 986,225
Miller (Herman) ................................... 20,700 555,019
Newell ............................................ 24,300 1,002,375
----------
3,544,619
----------
Utilities-1.44%
CMS Energy ........................................ 10,300 498,906
Edison International .............................. 6,800 189,550
PacifiCorp ........................................ 14,200 299,088
----------
987,544
----------
Miscellaneous-11.00%
CarrAmerica Realty ................................ 6,500 156,000
Pentair ........................................... 17,800 708,663
Service International ............................. 57,500 2,188,607
Stewart Enterprises ............................... 83,200 1,848,600
Tyco International ................................ 35,200 2,655,400
----------
7,557,270
----------
Total Common Stock
(cost $52,853,070) 61,232,958
----------
CONVERTIBLE PREFERRED STOCK-1.38%
Freeport McMoRan Copper & Gold .................... 20,700 307,913
Sealed Air ........................................ 12,390 642,731
----------
Total Convertible Preferred Stock
(cost $888,499) ................................ 950,644
----------

Devon-3
<PAGE>

Devon Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
REPURCHASE AGREEMENTS-9.86%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $1,745,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$1,936,029) .................................... $1,897,000 $1,897,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $2,420,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$2,488,947) .................................... 2,438,000 2,438,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $530,000
U.S. Treasury Notes 7.50%
due 12/31/99, market value
$546,581 and $742,000 U.S.
Treasury Notes 7.75% due
1/31/00, market value $789,725
and $744,000 U.S. Treasury Notes
6.25% due 8/31/00, market value
$779,561 and $355,000 U.S.
Treasury Notes 6.50% due
5/31/01, market value $371,846) ................ $2,437,000 $ 2,437,000
-----------
Total Repurchase Agreements
(cost $6,772,000) .............................. 6,772,000
-----------

TOTAL MARKET VALUE OF SECURITIES-100.35%
(cost $60,513,569) ............................. $68,955,602

LIABILITIES NET OF RECEIVABLES AND OTHER
ASSETS-(0.35)% ................................. (241,337)
-----------
NET ASSETS APPLICABLE TO 4,451,179 SHARES
($0.01 PAR VALUE) OUTSTANDING;
EQUIVALENT TO $15.44 PER SHARE-100.00% ......... $68,714,265
===========

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 ...... $58,859,971
Undistributed net investment income ............... 472,525
Accumulated net realized gain on investments ...... 939,736
Net unrealized appreciation of investments ........ 8,442,033
-----------
Total net assets .................................. $68,714,265
===========
- ----------------------
* Non-income producing security for the year ended December 31, 1998.

ADR - American Depository Receipt

See accompanying notes

Devon-4
<PAGE>

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

INVESTMENT INCOME:
Dividends ......................................... $523,636
Interest .......................................... 193,633
----------
717,269
----------
EXPENSES:
Management fees ................................... 218,772
Accounting and administration ..................... 13,551
Dividend disbursing and transfer agent fees
and expenses ................................... 1,723
Custodian fees .................................... 1,171
Reports and statements to shareholders ............ 592
Directors' fees ................................... 532
Registration fees ................................. 380
Professional fees ................................. 330
Taxes (other than taxes on income) ................ 157
Other ............................................. 5,580
----------
242,788
----------
Less expenses absorbed or waived by
Delaware Management Company .................... (2,505)
----------
Total expenses .................................... 240,283
----------
NET INVESTMENT INCOME 476,986
----------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS: ................................
Net realized gain on investments .................. 947,836
Net change in unrealized appreciation/
depreciation of investments .................... 7,281,217
----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ............................ 8,229,053
----------

NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................... $8,706,039
==========

See accompanying notes

<PAGE>

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

Year Ended 5/1/97* to
12/31/98 12/31/97
---------- ----------
INCREASE IN NET ASSETS FROM
OPERATIONS:
Net investment income ............................. $476,986 $105,114
Net realized gain on investments .................. 947,836 273,934
Net change in unrealized appreciation/
depreciation of investments .................... 7,281,217 1,160,816
----------- -----------
Net increase in net assets resulting from
operations ..................................... 8,706,039 1,539,864
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................. (109,925) -
Net realized gain on investments .................. (281,684) -
----------- -----------
(391,609) -
----------- -----------

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ......................... 48,520,957 16,373,026
Net asset value of shares issued upon
reinvestment of distributions from net
investment income and net realized
gain on investments ............................ 391,609 -
----------- -----------
48,912,566 16,373,026
Cost of shares repurchased ........................ (5,166,222) (1,259,399)
----------- -----------
Increase in net assets derived from capital
share transactions ............................. 43,746,344 15,113,627
----------- -----------
NET INCREASE IN NET ASSETS ........................ 52,060,774 16,653,491
----------- -----------
NET ASSETS:
Beginning of period ............................... 16,653,491 -
----------- -----------
End of period ..................................... $68,714,265 $16,653,491
----------- -----------
- ----------------------
*Date of commencement of operations.

See accompanying notes

Devon-5
<PAGE>

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

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

Year 5/1/97(1)
Ended to
12/31/98 12/31/97
---------- ----------
Net asset value, beginning of period .............. $12.730 $10.000

Income from investment operations:
Net investment income ............................. 0.106 0.080
Net realized and unrealized gain on
investments .................................... 2.889 2.650
------- -------
Total from investment operations .................. 2.995 2.730
------- -------
Less dividends and distributions:
Dividends from net investment income .............. (0.080) none
Distributions from net realized gain on
investments .................................... (0.205) none
------- -------
Total dividends and distributions ................. (0.285) none
------- -------
Net asset value, end of period .................... $15.440 $12.730
======= =======
Total return ...................................... 24.05% 27.30%

Ratios and supplemental data:
Net assets, end of period (000 omitted) ........... $68,714 $16,653
Ratio of expenses to average net assets ........... 0.66% 0.80%
Ratio of expenses to average net assets
prior to expense limitation .................... 0.66% 0.91%
Ratio of net investment income to average
net assets ..................................... 1.30% 2.01%
Ratio of net investment income to average net
assets prior to expense limitation ............. 1.30% 1.90%
Portfolio turnover ................................ 34% 80%
- ----------------------
(1)Date of commencement of operations; ratios have been annualized and total
return has not been annualized.

See accompanying notes

Devon-6

<PAGE>

Delaware Group Premium Fund, Inc.-Devon 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 Devon
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 Devon 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.

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.

Devon-7
<PAGE>

Devon 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
-------------- ------------------
$27,967 $2,385

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 ...................................... $50,184,952
Sales .......................................... $11,185,648

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 ....... 3,519,429 31,229 (407,718) 3,142,940
Period ended December 31, 1997* .... 1,418,088 -- (109,849) 1,308,239
</TABLE>

- ----------------------
*Commenced operations on 5/1/97.

Devon-8
<PAGE>

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

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Devon Series (the "Fund") as of December 31, 1998, and the
related statement of operations for the year then ended, and the statements of
changes in net assets and financial highlights for each of the periods indicated
therein. 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.-Devon Series at December 31, 1998, the results
of its operations for the year then ended, and the changes in its net assets and
its financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.

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

Devon-9

<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.

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.

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)

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>

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.

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 TOTAL RETURN

REIT Series

Investment Strategy and Performance in 1998
During 1998, share prices of real estate investment trusts (REITs) declined
as investors and lending institutions became wary of credit risk. Loan defaults
overseas and in the U.S. raised concerns about lenders' ability to finance
development.
REIT Series was introduced on May 4, 1998, just a few months before stock
market volatility and negative industry trends began to brew in the real estate
market. Between May 4, 1998 and December 31, 1998, the Series had a total return
of -9.00% (capital change plus reinvestment of distributions). We do not think
our performance during this short time period is indicative of long-term
performance.
During the same eight-month period, the Series' performance benchmark--the
NAREIT Equity REIT Index--had a total return of -14.33%.
More cautious lending in late summer made it difficult for REITs to raise
capital needed to acquire new properties and companies. Lack of capital drove
down prices on commercial real estate by as much as 25%, and reduced the supply
of new construction. Even REITs with better financing opportunities did not
escape the year unscathed.
In this difficult environment, we focused on REITs that seemed able to expand
using cash flow from operations. We believe these companies are better equipped
to sustain their growth rates going forward than REITs that rely heavily on
acquisitions to grow.

Portfolio Snapshot
Many of REIT Series' portfolio holdings are companies that own and operate
properties in "infill" locations; that is, areas of the country that have
tremendous appeal, but where land is expensive and zoning laws are more
restrictive. The demand for these "garden spots" outweighs the supply, which
bodes well for companies that own and operate them. In 1998, we found infill
locations in the Northwest, Northeast and Mid-Atlantic regions of the country.
The Series' largest sector allocation through December 31, 1998 was in office
and industrial REITs. We believe this sector has solid earnings potential, and
we are focusing on companies that have strong internal growth rates.
Retail strip center REITs were a source of positive performance for the
Series. We believe this sector is more stable, since leases are generally for
longer time periods. The retail sector also relies more on internal expansion to
drive earnings growth.

Investment Outlook
Credit markets improved somewhat in recent months as the Federal Reserve
reduced its target for short-term interest rates by cutting the federal funds
rate by a total of 0.75%. We believe lending and market conditions will continue
to improve in 1999.
Even so, we will continue to focus REIT Series on quality companies that have
solid management, strong balance sheets and good capital structure. We will try
to avoid companies whose earnings are primarily acquisition-driven in an effort
to preserve capital in the portfolio.
We expect growth rates in the real estate industry to moderate in 1999 and
2000. However, we believe that the earnings growth from REITs will remain higher
than that of large companies in the unmanaged Standard & Poor's 500 Index.
Our long-term outlook for the real estate market remains positive. We believe
the current credit crunch will benefit REITs long term as long as it does not
lead to a recession. We remain confident that REIT Series can play an integral
part of a long-term asset allocation strategy.

- --------------------------------------------------------------------------------
REIT Series Investment Objective
Seeks to achieve maximum long-term total return. Capital appreciation is a
secondary objective. It seeks to achieve its objectives by investing in
securities of companies primarily engaged in the real estate industry.
- --------------------------------------------------------------------------------

REIT-1
<PAGE>

Performance of a $10,000 Investment
May 4, 1998 through
December 31, 1998

REIT Series NAREIT Equity REIT Index
----------- ------------------------

5/1/98 $10,000 $10,000
5/31/98 $ 9,900 $10,000
6/30/98 $ 9,850 $ 9,932
7/31/98 $ 9,329 $ 9,287
8/31/98 $ 8,590 $ 8,411
9/30/98 $ 9,020 $ 8,887
10/31/98 $ 8,810 $ 8,722
11/30/98 $ 9,049 $ 8,850
12/31/98 $ 9,100 $ 8,627

REIT Series
Cumulative Total Return
- -----------------------
Lifetime -9.00%
From May 4, 1998 through 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 REIT
Series and the NAREIT Equity REIT Index for the period from the Series'
inception on May 4, 1998 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.

REIT-2
<PAGE>

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

Number Market
of Shares Value
COMMON STOCK-93.23%
Health Care REITs-2.09%
Healthcare Realty Trust .................................5,200 $116,025
--------
116,025
--------
Hotels/Diversified REITs-8.32%
*Catellus Development ....................................10,900 156,006
Newhall Land & Farming ..................................5,810 151,060
Starwood Hotels & Resorts Trust .........................6,870 155,863
--------
462,929
--------
Mall REITs-5.86%
General Growth Properties ...............................4,050 153,394
Simon Property Group ....................................6,050 172,425
--------
325,819
--------
Manufactured Housing REITs-5.37%
Chateau Communities .....................................4,660 136,596
Sun Communities .........................................4,660 162,226
--------
298,822
--------
Multifamily REITs-16.42%
Apartment Investment &
Management ..............................................4,710 175,153
AvalonBay Communities ...................................4,673 160,054
Camden Property Trust ...................................5,380 139,880
Equity Residential Properties ...........................3,250 131,422
Essex Property Trust ....................................6,060 180,285
Grove Property Trust ...................................10,750 126,313
--------
913,107
--------
Office/Industrial REITs-37.95%
Alexandria Real Estate Equities .........................4,370 135,197
AMB Property ............................................6,290 138,380
- -------------------
Top 10 stock holdings, representing 32.4% of net assets, are printed in bold.

Number Market
of Shares Value
COMMON STOCK (Continued)
Office/Industrial REITs (Continued)
Boston Properties ........................................3,500 $106,750
Cabot Industrial Trust ...................................8,400 171,675
CarrAmerica Realty .......................................7,680 184,320
Duke Realty Investments ..................................7,300 169,725
Equity Office Properties Trust ...........................7,290 174,960
First Industrial Realty ..................................5,270 141,302
Liberty Property Trust ...................................4,760 117,215
Prentiss Properties Trust ................................6,280 140,122
Reckson Associates Realty ................................8,390 186,153
SL Green Realty ..........................................7,090 153,321
Spieker Properties .......................................4,515 156,332
Trizec Hahn ..............................................6,600 135,300
---------
2,110,752
---------
Retail Strip Center REITs-14.35%
Developers Diversified Realty ............................8,680 154,070
First Washington .........................................5,400 127,913
JDN Realty ...............................................8,270 178,322
Kimco Realty .............................................5,200 206,375
Pan Pacific Retail Properties ............................6,590 131,388
---------
798,068
---------
Self Storage REITs-2.87%
Public Storage ...........................................5,900 159,669
---------
159,669
---------
Total Common Stock
(cost $5,288,590 )........................................ 5,185,191
---------

REIT-3
<PAGE>

REIT Series
Statement of Net Assets (Continued)

Principal Market
Amount Value
REPURCHASE AGREEMENTS-6.94%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $99,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$110,353) ............................................$108,000 $108,000
With J.P. Morgan Securities
4.75% 1/4/99 (dated 12/31/98,
collateralized by $138,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$141,869) .............................................139,000 139,000

Principal Market
Amount Value
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98,
collateralized by $30,000
U.S. Treasury Notes 7.75%
due 12/31/99, market value
$31,155 and $42,000 U.S.
Treasury Notes 7.75% due 1/31/00,
market value $45,014 and
$42,000 U.S. Treasury Notes
6.25% due 8/31/00, market value
$44,435 and $20,000 U.S.
Treasury Notes 6.50% due
5/31/01, market value $21,195) .......................$139,000 $139,000
--------
Total Repurchase Agreements
(cost $386,000) .............................................. $386,000
--------

TOTAL MARKET VALUE OF SECURITIES-100.17% (cost $5,674,590) $5,571,191

LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.17%) .................(9,399)
----------
NET ASSETS APPLICABLE TO 611,400 SHARES ($0.01 PAR VALUE) OUTSTANDING;
EQUIVALENT TO $9.10 PER SHARE-100.00% ..............................$5,561,792
==========

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 ................$5,708,620

Undistributed net investment income ...................................132,582
Accumulated net realized loss on investments .........................(176,011)
Net unrealized depreciation of investments ...........................(103,399)
----------
Total net assets $5,561,792
==========
- ----------
*Non-income producing security for the period ended December 31, 1998.

REIT - Real Estate Investment Trust

See accompanying notes

REIT-4
<PAGE>

Delaware Group Premium Fund, Inc.-REIT Series
Statement of Operations
5/4/98* to
12/31/98
----------
INVESTMENT INCOME:
Dividends .......................................................... $137,776
Interest ........................................................... 12,034
--------
149,810
--------

EXPENSES:
Management fees .................................................... 15,449
Reports and statements to shareholders ............................. 2,249
Accounting and administration ...................................... 827
Custodian fees ..................................................... 768
Registration fees .................................................. 550
Professional fees .................................................. 344
Taxes (other than taxes on income) ................................. 125
Dividend disbursing and transfer agent fees and expenses ........... 58
Directors' fees 50
Other 362
--------
................................................................... 20,782
--------
Less expenses absorbed or waived by
Delaware Management Company ..................................... (3,554)
--------

Total expenses ..................................................... 17,228
--------

NET INVESTMENT INCOME .............................................. 132,582
--------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS:
Net realized loss on investments ................................... (176,011)
Net change in unrealized appreciation /
depreciation of investments ..................................... (103,399)
--------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS ............................................. (279,410)
--------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ....................................... ($146,828)
=========
- ----------
*Date of commencement of operations.

See accompanying notes

Delaware Group Premium Fund, Inc.-REIT Series
Statement of Changes in Net Assets
5/4/98* to
12/31/98
----------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income .............................................. $132,582
Net realized loss on investments ................................... (176,011)
Net change in unrealized appreciation /
depreciation of investments ..................................... (103,399)
--------
Net decrease in net assets resulting from
operations ...................................................... (146,828)
---------

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold .......................................... 5,925,102
Cost of shares repurchased ......................................... (216,482)
---------
Increase in net assets derived from capital
share transactions .............................................. 5,708,620
---------

NET INCREASE IN NET ASSETS ......................................... 5,561,792
---------

NET ASSETS:
Beginning of period ................................................ -
----------
End of period ...................................................... $5,561,792
==========
- ----------
*Date of commencement of operations.

See accompanying notes
REIT-5
<PAGE>

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

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

5/4/98(1)
to
12/31/98
--------

Net asset value, beginning of period ............................... $10.000

Income (loss) from investment operations:
Net investment income .............................................. 0.217
Net realized and unrealized loss on investments .................... (1.117)
---------
Total from investment operations ................................... (0.900)
---------

Net asset value, end of period ..................................... $ 9.100
=========

Total return ....................................................... (9.00%)

Ratios and supplemental data:
Net assets, end of period (000 omitted) ............................ $ 5,562
Ratio of expenses to average net assets ............................ 0.85%
Ratio of expenses to average net assets
prior to expense limitation ..................................... 1.02%
Ratio of net investment income to average net assets 6.42%
Ratio of net investment income to average net
assets prior to expense limitation .............................. 6.25%
Portfolio turnover ................................................. 39%

- ---------
(1) Date of commencement of operations; ratios have been annualized and total
return has not been annualized.

See accompanying notes

REIT-6

<PAGE>

Delaware Group Premium Fund, Inc.-REIT 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 REIT
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.

Federal Income Taxes--The Series intends 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.

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

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

2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Series
pays Delaware Management Company ("DMC"), the Investment Manager of the Series,
an annual fee which is calculated daily at the rate of 0.75% on the first $500
million, 0.70% on the next $500 million, 0.65% on the next $1,500 million, and
0.60% on the net assets over $2,500 million. Lincoln Investment Management,
Inc., an affiliate of DMC, receives 30% of the advisory fee paid to DMC for
acting as a sub-adviser to the Series.

REIT-7
<PAGE>

REIT 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
-------------- ------------------
$3,060 $190

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 period 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 ....................................... $6,295,802
Sales ........................................... $832,170

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

Aggregate Aggregate
Cost of unrealized unrealized Net unrealized
investments appreciation depreciation depreciation
----------- ------------ ------------ --------------
$5,684,053 $85,908 ($198,770) ($112,862)

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>
Period ended December 31, 1998* ..... 636,299 - (24,899) 611,400
</TABLE>

- ---------------
*Commenced operations on 5/4/98.

REIT-8

<PAGE>

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

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-REIT Series (the "Fund") as of December 31, 1998, and the
related statement of operations, statement of changes in net assets and
financial highlights for the period May 4, 1998 (commencement of operations)
through December 31, 1998. 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 audit.

We conducted our audit 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 audit provides 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.-REIT Series at December 31, 1998, and the
results of its operations, changes in its net assets and its financial
highlights for the period May 4, 1998 (commencement of operations) through
December 31, 1998, in conformity with generally accepted accounting principles.

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

Philadelphia, Pennsylvania
February 5, 1999

REIT-9

<PAGE>

FOR INTERNATIONAL DIVERSIFICATION

Emerging Markets Series

Investment Strategy and Performance in 1998
In fiscal 1998 emerging markets plunged dramatically as Asia's regional
economic and financial crisis spread to other global economies, including those
of Russia and Latin America. For emerging markets investors the impact was
profound. The Series benchmark Morgan Stanley Emerging Markets Free Index had a
total return of -25.34%.
The Emerging Markets Series itself was unable to preserve capital in this
environment, providing a total return of -32.48% (capital change plus
reinvestment of distributions). This disappointing performance can be attributed
mainly to the underperformance of value stocks relative to growth stocks, and of
smaller companies relative to larger. The Series is strongly focused on value
stocks and somewhat biased towards smaller companies, so performance was hit on
both counts. We believe that this is an anomaly, which may be corrected in due
course if investors begin to focus more on the fundamental worth of companies
once the short-term panic subsides.

Portfolio Snapshot
Because of the higher degree of risk associated with investing in emerging
markets, the Series maintains a diversified portfolio that included 78 different
stocks from 24 emerging markets countries at the end of the fiscal year. We
believe this broad diversification can help reduce investment risk over the long
term.
At year-end, the largest percentage of the Series' assets was invested in
Brazil. The position had been built up as stock prices collapsed in the face of
fears about the possibility of a currency devaluation and a return to
hyperinflation. The big difference between the average Brazilian stock and the
average Asian stock is that corporate balance sheets in Brazil are much
stronger, so, in our opinion, the risk of collapse is lower. We believe these
stocks are positioned for a substantial rebound in the next few years.
In Malaysia, government officials responded to its economic crisis by placing
capital controls on investors. These capital controls currently prohibit us from
withdrawing our investments from that country for 12 months (beginning in
September, 1998). This action further reduced the Emerging Markets Series' total
return.

Investment Outlook
Despite the pain caused by the weakness in emerging markets in recent years,
the silver lining is that many stocks have been pushed down to unrealistically
low levels. Short-term volatility will undoubtedly continue for some time yet,
but long-term value investors like ourselves have exciting opportunities to
purchase shares in very good companies at exceptional prices. There is potential
for substantial capital appreciation over the next few years if economies begin
to stabilize.

- --------------------------------------------------------------------------------
Emerging Markets Series Investment Objective
Seeks long-term capital appreciation. It seeks to achieve this objective by
investing primarily in the stocks of companies in emerging market countries.
- --------------------------------------------------------------------------------

Emerging Markets-1
<PAGE>

Performance of a $10,000 Investment
May 1, 1997 through December 31, 1998

Emerging Markets MSCI Emerging
Series Markets Free Index
---------------- ------------------
5/1/97 $10,000 $10,000
5/31/97 $10,000 $10,259
6/30/97 $10,524 $10,787
7/31/97 $10,719 $10,927
8/31/97 $ 9,815 $ 9,524
9/30/97 $10,301 $ 8,162
10/31/97 $ 8,912 $ 8,162
11/30/97 $ 8,601 $ 7,858
12/31/97 $ 8,621 $ 8,047
1/31/98 $ 8,075 $ 7,229
2/28/98 $ 9,087 $ 7,984
3/31/98 $ 9,278 $ 8,330
4/30/98 $ 9,328 $ 8,240
5/31/98 $ 8,246 $ 7,111
6/30/98 $ 7,214 $ 6,365
7/31/98 $ 7,354 $ 6,566
8/31/98 $ 5,400 $ 4,668
9/30/98 $ 5,681 $ 4,964
10/31/98 $ 5,942 $ 5,487
11/30/98 $ 6,313 $ 6,065
12/31/98 $ 5,996 $ 5,977

Emerging Markets Series
Average Annual Total Returns
----------------------------
Lifetime -26.37%
One Year -32.48%
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 Emerging Markets Series
and the Morgan Stanley Emerging Markets Free Index for the period from the
Series' inception on May 1, 1997 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.

Emerging Markets-2
<PAGE>

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

Market
Number Value
of Shares (U.S. $)
COMMON STOCK-85.61%
Argentina-4.36%
Central Puerto Class B 21,000 $48,976
Transportadora de Gas del Sur, Class B 44,500 88,192
YPF Sociedad Anonima ................. 1,300 36,369
YPF Sociedad Anonima ADR ............. 2,150 60,066
---------
233,603
---------
Brazil-21.31%
Aracruz Celulose ADR ................. 8,100 64,800
Brasmotor S.A ........................ 1,073,000 106,567
Centrais Eletricas de Santa Catarina . 198,000 88,492
Centrais Electricas
de Santa Catarina GDR ............... 600 26,816
Companhia Energetica de Minas Gerais . 2,700,000 51,397
Companhia Energetica
de Minas Gerais ADR ................. 3,937 74,949
Companhia Paranaense
de Energia Copel ADR ................ 17,092 121,780
Elevadores Atlas ..................... 7,500 85,351
Metalurgica Gerdau ................... 6,340,000 104,945
*Renner Participacoes ................. 870,000 612
Rossi Residential GDR ................ 4,500 7,449
Telecomunicacoes de Minas Gerais ..... 3,700,000 108,098
Telecomunicacoes de Parana ........... 700,000 124,555
Uniao de Bancos Brasileiros .......... 6,900,000 139,913
Usinas Siderurgicas de Minas Gerais .. 12,300 27,486
Usinas Siderurgicas
de Minas Gerais ADR ................. 3,734 8,345
---------
1,141,555
---------
Chile-2.88%
Administradora de Fondos de Pensiones
Provida ADR ......................... 5,000 67,188
Banco BHIF ADR ....................... 4,140 32,085
Empresa Nacional Electricidad ADR .... 4,850 55,169
---------
154,442
---------
Croatia-2.63%
*Zagrebacka Banka GDR ................. 9,540 140,715
---------
140,715
---------
Czech Republic-1.63%
*Komercni Banka I.F ................... 1,900 31,630
Restitucni Investment Fund ........... 1,800 55,438
---------
87,068
---------
Egypt-1.55%
Paints and Chemicals GDR ............. 12,825 83,042
---------
83,042
---------
Estonia-1.40%
*Eesti Uhispank GDR ................... 15,554 75,048
---------
75,048
---------
Hong Kong-7.63%
First Tractor ........................ 317,000 72,422
Guangdong Kelon Electric Holding ..... 128,000 113,998
Guangshen Railway .................... 774,000 89,913
*Hengan International Group ........... 40,000 14,585
Shenzhen Expressway .................. 507,300 117,863
---------
408,781
---------

- -----------------
Top 10 stock holdings, representing 23.2% of net assets, are printed in bold.

<PAGE>

Market
Number Value
of Shares (U.S. $)
COMMON STOCK (Continued)
Hungary-2.16%
Gedeon Richter GDR .............. 2,700 $115,425
--------
115,425
--------
India-4.33%
*India Fund (The) ................ 15,700 99,106
Larsen & Toubro GDR ............. 7,750 60,837
Mahanagar Telephone Nigam GDR ... 5,825 72,085
--------
232,028
--------
Indonesia-0.02%
*PT United Tractors .............. 15,500 969
--------
969
--------
Israel-1.95%
Bank Hapoalim ................... 57,800 104,591
--------
104,591
--------
Malaysia-5.29%
*Leader Universal Holdings ....... 139,000 28,787
Petronas Dagangan ............... 136,000 100,860
Public Finance .................. 17,000 5,633
Resorts World ................... 72,000 62,201
Sime Darby ...................... 100,000 85,996
--------
283,477
--------
Mexico-4.81%
ALFA de C.V. Class A ............ 20,300 57,180
Cemex de C.V. Class B ........... 24,500 60,477
*Grupo Minsa ADR ................. 2,400 10,500
*Grupo Minsa Shares C ............ 103,096 44,756
Vitro ADR ....................... 18,600 84,862
--------
257,775
--------
Peru-1.70%
Banco de Credito del Peru ....... 60,189 34,334
Creditcorp Limited .............. 2,475 22,275
Telefonica del Peru ADR ......... 2,700 34,256
--------
90,865
--------
Romania-0.64%
*Banco Turco Romana GDR .......... 6,700 34,338
--------
34,338
--------
Russia-1.11%
Gazprom ......................... 1,900 16,198
Gazprom ADR ..................... 1,200 10,230
Lukoil Holding ADR .............. 1,400 22,204
Mosenergo ADR ................... 2,100 4,015
Mosenergo ADR Reg S ............. 3,600 6,883
--------
59,530
--------
Slovenia-0.30%
Blagovno Trgovinski Center GDR .. 1,925 10,443
SKB Banka GDR ................... 800 5,740
--------
16,183
--------
South Africa-10.30%
Amalgamated Banks of South Africa 7,900 37,419
Anglo American Corporation
of South Africa Limited ........ 4,500 126,667
Edgars Stores ................... 3,779 11,388
Iscor ........................... 699,000 125,791
*Sanlam Limited .................. 56,000 55,617

Emerging Markets-3
<PAGE>

Emerging Markets Series
Statement of Net Assets (Continued)

Market
Number Value
of Shares (U.S. $)
COMMON STOCK (Continued)
South Africa (Continued)
Sappi Limited ..................... 21,500 $ 83,040
Sasol Limited ..................... 29,500 111,434
---------
551,356
---------
South Korea-1.31%
Pohang Iron & Steel ............... 500 31,902
Pohang Iron & Steel ADR ........... 2,280 38,475
---------
70,377
---------
Taiwan-1.79%
*Yageo GDR ......................... 14,760 95,940
---------
95,940
---------
Thailand-3.71%
*Hana Microelectronics
Public Co. Limited ............... 48,300 116,930
*K.R. Precision Public Co. ......... 122,000 59,574
Thai Reinsurance Public Co. Limited 8,600 22,239
---------
198,743
---------
Turkey-2.80%
*Efes Sinai Yatirim ADR ............ 24,731 21,640
*Efes Sinai Yatirim Holding ADR .... 4,696,200 45,405
Koc Holdings ...................... 605,600 52,793
*Netas-Northern Eleckrik
Telekomunikayson ................. 1,625,260 29,882
---------
149,720
---------
Total Common Stock
(cost $7,770,994) ................. 4,585,571
---------
<PAGE>

Market
Number Value
of Shares (U.S. $)

WARRANTS-0.00%
Hong Kong-0.00%
*Guangdong Investments 7/99 ........ 4,600 $ 19
---------
Total Warrants
(cost $0) ........................ 19
---------

Principal
Amount
REPURCHASE AGREEMENTS-13.95%
With Chase Manhattan 4.50% 1/4/99
(dated 12/31/98, collateralized
by $193,000 U.S. Treasury Notes
7.875% due 8/15/01,
market value $213,558) ........... $209,000 209,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $267,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$274,549) ........................ 269,000 269,000
With PaineWebber 4.85% 1/4/99
(dated 12/31/98, collateralized
by $58,000 U.S. Treasury Notes
7.75% due 12/31/99, market value
$60,292 and $82,000 U.S. Treasury
Notes 7.75% due 1/31/00, market
value $87,112 and $82,000
U.S. Treasury Notes 6.25% due
8/31/00, market value $85,991 and
$39,000 U.S. Treasury Notes 6.50%
due 5/31/01, market value $41,017) 269,000 269,000
---------
Total Repurchase Agreements
(cost $747,000) .................. 747,000
---------

TOTAL MARKET VALUE OF SECURITIES-99.56%
(cost $8,517,994)........................ $5,332,590

RECEIVABLES AND OTHER ASSETS NET OF
LIABILITIES-0.44%........................ 23,478
---------
NET ASSETS APPLICABLE TO 922,055 SHARES
($0.01 PAR VALUE) OUTSTANDING; EQUIVALENT
TO $5.81 PER SHARE-100.00%............... $5,356,068
==========
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................................... $8,656,946
Undistributed net investment income**..... 111,984
Accumulated net realized loss on investments (227,600)
Net unrealized depreciation of investments
and foreign currencies................... (3,185,262)
----------
Total net assets.......................... $5,356,068
==========
- --------------
*Non-income producing security for the year ended December 31, 1998.
**Undistributed net investment income includes net realized gains (losses) on
foreign currencies. Net realized gains (losses) on foreign currencies are
treated as net investment income in accordance with provisions of the Internal
Revenue Code.

ADR--American Depository Receipt
GDR--Global Depository Receipt
See accompanying notes

Emerging Markets-4
<PAGE>

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

INVESTMENT INCOME:
Dividends ........................................... $ 183,854
Interest ............................................ 44,150
Foreign tax withheld ................................ (9,309)
----------
218,695
----------

EXPENSES:
Management fees ..................................... 71,160
Custodian fees ...................................... 14,534
Accounting and administration ....................... 2,229
Reports and statements to shareholders .............. 1,800
Professional fees ................................... 1,300
Registration fees ................................... 1,002
Taxes (other than taxes on income) .................. 380
Dividend disbursing and transfer agent
fees and expenses ................................ 350
Directors' fees ..................................... 296
Other ............................................... 1,610
----------
94,661
----------

Less expenses absorbed or waived by
Delaware International Advisers Ltd. ............. (10,012)
----------

Total expenses ...................................... 84,649
----------

NET INVESTMENT INCOME ............................... 134,046
----------

NET REALIZED AND UNREALIZED LOSS
ON INVESTMENTS AND FOREIGN CURRENCIES:
Net realized loss on:
Investments ......................................... (227,600)
Foreign currencies .................................. (18,932)
----------
Net realized loss ................................... (246,532)
----------
Net change in unrealized appreciation /
depreciation of investments and foreign currencies (2,161,591)
----------
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS AND
FOREIGN CURRENCIES ............................... (2,408,123)
----------

NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................ ($2,274,077)
==========

See accompanying notes

<PAGE>

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

Year Ended 5/1/97* to
12/31/98 12/31/97
---------- ----------

INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS:
Net investment income ..................... $ 134,046 $ 26,256
Net realized gain (loss) on investments
and foreign currencies ................. (246,532) 128,987
Net change in unrealized appreciation /
depreciation of investments and foreign
currencies ............................. (2,161,591) (1,023,671)
----------- -----------
Net decrease in net assets
resulting from operations .............. (2,274,077) (868,428)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ..................... (19,005) --
Net realized gain on investments .......... (139,368) --
----------- -----------
(158,373) --
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ................. 2,966,309 7,423,878
Net asset value of shares issued upon
reinvestment of distributions from net
investment income and net realized
gain on investments .................... 158,373 --
----------- -----------
3,124,682 7,423,878
Cost of shares repurchased ................ (1,111,948) (779,666)
----------- -----------
Increase in net assets derived from capital
share transactions ..................... 2,012,734 6,644,212
----------- -----------
NET INCREASE (DECREASE)
IN NET ASSETS .......................... (419,716) 5,775,784
----------- -----------
NET ASSETS:
Beginning of period ....................... 5,775,784 --
----------- -----------
End of period ............................. $ 5,356,068 $ 5,775,784
=========== ===========
- --------
*Date of commencement of operations.

See accompanying notes

Emerging Markets-5
<PAGE>

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

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

Year 5/1/97(1)
Ended to
12/31/98 12/31/97
-------- --------

Net asset value, beginning of period ..................... $ 8.880 $10.000

Income (loss) from investment operations:
Net investment income(2) ................................. 0.171 0.060
Net realized and unrealized loss on investments
and foreign currencies ................................ (2.991) (1.180)
------- -------
Total from investment operations ......................... (2.820) (1.120)
------- -------
Less dividends and distributions:
Dividends from net investment income ..................... (0.030) none
Distributions from net realized gain on investments ...... (0.220) none
------- -------
Total dividends and distributions ........................ (0.250) none
------- -------

Net asset value, end of period ........................... $ 5.810 $ 8.880
======= =======
Total return ............................................. (32.48%) (11.20%)

Ratios and supplemental data:
Net assets, end of period (000 omitted) .................. $ 5,356 $ 5,776
Ratio of expenses to average net assets .................. 1.50% 1.50%
Ratio of expenses to average net assets
prior to expense limitation ........................... 1.67% 2.45%
Ratio of net investment income to average net assets ..... 2.34% 0.89%
Ratio of net investment income (loss) to average
net assets prior to expense limitation ................ 2.17% (0.06%)
Portfolio turnover ....................................... 38% 48%

- ---------------
(1) Date of commencement of operations; ratios have been annualized and total
return has not been annualized.
(2) Per share information was based on the average
shares outstanding method.

See accompanying notes

Emerging Markets-6
<PAGE>

Delaware Group Premium Fund, Inc.-Emerging Markets 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 Emerging
Markets 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. Securities listed on a foreign exchange are
valued at the last quoted sales price before the Series is valued. 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.

Foreign Currency Transactions--Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. The value
of all assets and liabilities denominated in foreign currencies are translated
into U.S. dollars at the exchange rate of such currencies against the U.S.
dollar as of 3:00 PM EST. Transaction gains or losses resulting from changes in
exchange rates during the reporting period or upon settlement of the foreign
currency transaction are reported in operations for the current period. It is
not practical to isolate that portion of both realized and unrealized gains and
losses on investments in equity securities in the statement of operations that
result from fluctuations in foreign currency exchange rates. The Series reports
certain foreign currency related transactions as components of realized gains
(losses) for financial reporting purposes, whereas such components are treated
as ordinary income (loss) for federal income tax purposes.

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. Foreign dividends are also recorded on the
ex-dividend date or as soon after the ex-dividend date that the Series became
aware of such dividends, net of all non-rebatable tax withholdings. Withholding
taxes on foreign dividends have been provided for in accordance with the Series'
understanding of the applicable country's tax rules and rates.

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

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

2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Series
pays Delaware International Advisers Ltd. ("DIAL"), the Investment Manager of
the Series, an annual fee which is calculated at the rate of 1.25% on the
average daily net assets of the Series.

DIAL 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 1.50% of average daily net assets of the Series through April 30,
1999.

The Series has engaged Delaware Service Company, Inc. ("DSC"), an affiliate of
Delaware Management Company ("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.

Emerging Markets-7
<PAGE>

Emerging Markets 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
-------------- --------------------
$5,178 $216

Certain officers of DMC, DSC and DIAL 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....... $4,028,770
Sales .......... $1,843,365

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
expiration
2006
----------
$227,600

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> <C> <C>
Year ended December 31, 1998......... 405,355 20,252 (153,929) 271,678
Period ended December 31, 1997*...... 727,021 - (76,644) 650,377
</TABLE>

- ---------------
*Commenced operations on 5/1/97.

5. Foreign Exchange Contracts
The Series will generally enter into forward foreign currency contracts as a way
of managing foreign exchange rate risk. These contracts may be entered into to
fix the U.S. dollar value of a security that it has agreed to buy or sell for
the period between the date the trade was entered into and the date the security
is delivered and paid for. They may also be used to hedge the U.S. dollar value
of securities it already owns denominated in foreign currencies.

Forward foreign currency contracts are valued at the mean between the bid and
asked prices of the contracts and are marked-to-market daily. Interpolated
values are derived when the settlement date of the contract is an interim date
for which quotations are not available. The change in market value is recorded
as an unrealized gain or loss. When the contract is closed, a realized gain or
loss is recorded equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.

Emerging Markets-8

<PAGE>

Emerging Markets Series
Notes to Financial Statements (Continued)

The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the Series' securities, but it does establish a rate of
exchange that can be achieved in the future. Although forward foreign currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, they also limit any potential gain that might result should the value
of the currency increase. In addition, a Series could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their contracts.

There were no forward foreign currency contracts outstanding at December 31,
1998.

6. Credit and Market Risk
Some countries in which the Series may invest require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is a deterioration in a
country's balance of payments or for other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.

The securities exchanges of certain foreign markets are substantially smaller,
less liquid and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Series
may be inhibited. In addition, a significant proportion of the aggregate market
value of equity securities listed on the major securities exchanges in emerging
markets are held by a smaller number of investors. This may limit the number of
shares available for acquisition or disposition by the Series.

The Series may invest up to 10% of its total assets in illiquid securities which
may include securities with contractual restrictions on resale 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.

Emerging Markets-9
<PAGE>

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

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

We have audited the accompanying statement of net assets of Delaware Group
Premium Fund, Inc.-Emerging Markets Series (the "Fund") as of December 31, 1998,
and the related statement of operations for the year then ended, and the
statements of changes in net assets and financial highlights for each of the
periods indicated therein. 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.-Emerging Markets Series at December 31, 1998,
the results of its operations for the year then ended, and the changes in its
net assets and its financial highlights for each of the periods indicated
therein, in conformity with generally accepted accounting principles.

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

Philadelphia, Pennsylvania
February 5, 1999

Emerging Markets-10

<PAGE>

FOR INTERNATIONAL DIVERSIFICATION

International Equity Series

Investment Strategy and Performance in 1998

Global markets faced economic and financial turmoil in fiscal 1998 as Asia's
financial crisis spread to other world economies. This presented us with a
challenging environment for International Equity Series.
For the 12 months ended December 31, 1998, the Series provided a total return
of +10.33% (capital change plus reinvestment of dividends). This was about half
the +20.33% return of our benchmark Morgan Stanley Europe, Australia, Far East
(EAFE) Index for the same period.
Asia's economic decline, which began in 1997, set the pace for more
widespread upheaval in 1998. In August, Russia's currency devaluation and
Brazil's burgeoning national debt added to investor concern about the safety of
international investment portfolios. Many investors cashed out their
international holdings in favor of the safe haven of U.S. Treasury bonds. World
equity markets declined as a result, curtailing the performance of most overseas
investments.
International Equity Series held the largest percentage of its net assets
(30.15%) in the United Kingdom at year end. This emphasis helped boost our
returns early in 1998 as the U.K. stock market performed extremely well. During
the summer, however, our U.K. holdings suffered as market volatility increased
and investors sold the stocks of even strong performing companies.
We focus on dividend-paying stocks in established markets. Traditionally, we
have had a heavy concentration in Western Europe. Our research of countries
evaluates the potential effects of currency fluctuations, inflation, local
economy and political issues. Next, we look for individual companies that offer
superior income and capital appreciation potential.
Our selection process, known as a dividend discount approach, seeks to lower
the Series' overall risk profile. We also attempt to reduce risk through
defensive currency hedging which helps protect the dollar value of our
investments.

Portfolio Snapshot
In fiscal 1998, we defensively hedged the British pound due to our heavy
exposure to U.K. securities and our belief that the pound was somewhat
overvalued. We used forward currency contracts to limit the risk of loss should
the pound decline in value. The added expense of this contract reduced the
Series' total return, but also reduced the risk to capital from fluctuating
exchange rates. We believe the added cost was worth the protection we acquired.
Because of the Series' value-oriented investment style, our holdings in
Japanese stocks have historically been lower than the Index. This remained true
as of year end; however, compared to our past, we held a slightly higher
position (15.87% of net assets). We believed that Japan's lower interest rates,
rising personal incomes and an effort to reform its banking system had improved
the country's prospects for economic recovery.
The International Monetary Fund (IMF) recently said that Japan is the key to
the global economic picture. We agree. In mid-October, the Japanese parliament
approved a $60 trillion yen ($509 billion) bank bailout package. Only time will
tell how effectively the banking plan is implemented. Certainly, Japan's
stabilization would help stimulate global economic recovery.

- --------------------------------------------------------------------------------
International Equity Series Investment Objective

Seeks long-term growth without undue risk to principal. It seeks to achieve this
objective by investing primarily in stocks of foreign companies providing the
potential for capital appreciation and income.
- --------------------------------------------------------------------------------

International Equity-1

<PAGE>

Investment Outlook

As we concluded 1998, the IMF lowered its forecast for world economic growth
in 1999. The IMF now predicts a 2.2% growth rate--down slightly from its
previous 2.5% prediction.
In its outlook, the IMF stated that it would be "premature to consider the
global economy's difficulties to be over," citing the risk of a possible global
recession. We believe the global economy should still perform reasonably well in
1999, especially if Japan stabilizes.
We expect market volatility to remain high in 1999, reflecting investors'
concerns over this past year's economic difficulties in Asia, Russia and Latin
America. This could certainly reduce the returns on international investments.
We continue to closely monitor the condition of the Japanese economy. We
anticipate keeping our position in Japanese stocks relatively small. The
nation's recent economic weakness is beginning to offer significant value to
investors and long-term potential for capital appreciation.
The new unified currency in Europe--the Euro--will also bear watching. A
unified European currency is expected to enhance trade and lead to increased
efficiency across borders. While the initial reaction is positive, issues of
labor mobility, nationalism and the ability for the European Central Bank to
remain independent create some uncertainty for long-term prospects.

Growth of a $10,000 Investment
October 29, 1992 through
December 31, 1998

International Equity Series MSCI EAFE Index
10/29/92 $10,000 $10,000
12/31/92 $10,030 $10,146
3/31/93 $10,090 $11,363
6/30/93 $10,150 $12,505
9/30/93 $10,800 $13,335
12/31/93 $11,630 $13,450
3/31/94 $11,668 $13,920
6/30/94 $11,809 $14,631
9/30/94 $12,041 $14,646
12/31/94 $11,930 $14,496
3/31/95 $12,323 $14,766
6/30/95 $12,500 $14,873
9/30/95 $13,226 $15,493
12/31/95 $13,599 $16,121
3/31/96 $14,336 $16,587
6/30/96 $14,864 $16,849
9/30/96 $15,264 $16,828
12/31/96 $16,323 $17,096
3/31/97 $16,919 $16,828
6/30/97 $18,600 $19,025
9/30/97 $18,702 $18,903
12/31/97 $17,403 $17,435
3/31/98 $19,576 $20,272
6/30/98 $19,565 $20,502
9/30/98 $16,779 $17,600
12/31/98 $19,196 $21,159

International Equity Series
Average Annual Total Returns
-------------------------------
Lifetime +11.14%
Five Years +10.54%
One Year +10.33%

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 International Equity
Series and the Morgan Stanley EAFE Index for the period from the Series'
inception on October 29, 1992 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.

International Equity-2
<PAGE>

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

Market
Number Value
of Shares (U.S. $)
COMMON STOCK-96.40%
Australia-11.23%
+Amcor .......................................... 1,415,000 $ 6,033,545
CSR ............................................ 1,904,966 4,647,898
Foster's Brewing Group ......................... 2,827,051 7,641,038
+National Australia Bank ........................ 393,757 5,923,247
Orica .......................................... 599,900 3,114,462
-----------
27,360,190
-----------
Belgium-2.37%
Electrabel ..................................... 13,115 5,762,415
-----------
5,762,415
-----------
France-7.77%
Alcatel Alsthom ................................ 38,015 4,652,965
Compagnie de Saint Gobain ...................... 34,299 4,842,584
Elf Aquitaine .................................. 43,583 5,038,118
Societe Generale ............................... 27,108 4,390,003
-----------
18,923,670
-----------
Germany-11.35%
+Bayer .......................................... 134,600 5,650,616
Bayerische Vereinsbank ......................... 60,900 4,817,211
Continental .................................... 117,200 3,256,654
RWE ............................................ 146,000 8,061,274
Siemens ........................................ 89,050 5,852,091
-----------
27,637,846
-----------
Hong Kong-2.15 %
Hong Kong Electric ............................. 810,000 2,456,921
Wharf Holdings ................................. 1,900,000 2,771,216
-----------
5,228,137
-----------
Japan-15.87%
Canon .......................................... 115,000 2,447,454
Eisai .......................................... 287,000 5,564,219
Hitachi ........................................ 888,000 5,477,856
+Kinki Coca-Cola Bottling ....................... 191,000 2,523,101
Koito Manufacturing ............................ 596,000 2,515,831
Matsushita Electric ............................ 435,000 7,663,050
Nichido Fire & Marine .......................... 783,000 3,829,608
West Japan Railway ............................. 1,959 8,631,854
-----------
38,652,973
-----------
Malaysia-0.37%
Oriental Holdings .............................. 510,720 589,292
Sime Darby ..................................... 380,000 326,785
-----------
916,077
-----------
Netherlands-5.22%
Elsevier ....................................... 199,500 2,794,720
Koninklijke Van Ommeren ........................ 60,100 1,872,708
Royal Dutch Petroleum .......................... 63,000 3,137,558
Unilever ....................................... 57,440 4,910,539
-----------
12,715,525
-----------

- -----------------
Top 10 stock holdings, representing 30.9% of net assets, are printed in bold.

<PAGE>

Market
Number Value
of Shares (U.S. $)
COMMON STOCK (Continued)
New Zealand-2.33%
Carter Holt Harvey ............................. 1,187,800 $ 1,062,535
+Telecom Corporation of New Zealand ............. 954,784 4,144,861
+Telecom Corporation of New Zealand IR .......... 209,409 457,293
-----------
5,664,689
-----------
Singapore-0.36%
Jardine Matheson Holdings Limited .............. 336,622 868,485
-----------
868,485
-----------
Spain-7.23%
Banco Central Hispanoamericano ................. 611,244 7,265,941
Iberdrola ...................................... 197,800 3,704,829
Telefonica de Espana ........................... 148,909 6,628,689
-----------
17,599,459
-----------
United Kingdom-30.15%
Bass ........................................... 436,964 6,124,978
BG ............................................. 867,647 5,462,432
Blue Circle Industry ........................... 918,236 5,282,372
Boots .......................................... 433,200 7,336,215
British Airways ................................ 889,473 6,001,660
Cable & Wireless ............................... 556,000 6,816,449
*Centrica ....................................... 700,000 1,401,298
GKN ............................................ 594,000 7,912,570
Glaxo Wellcome ................................. 214,470 7,328,073
Great Universal Stores ......................... 438,000 4,571,041
Rio Tinto ...................................... 522,100 6,007,011
Taylor Woodrow ................................. 1,365,000 3,405,762
Unigate ........................................ 808,000 5,786,825
-----------
73,436,686
-----------
Total Common Stock
(cost $199,255,236) 234,766,152
-----------
RIGHTS-0.05%
New Zealand-0.05%
*Telefonica de Espana ........................... 148,909 132,364
-----------
Total Rights (cost $0) 132,364
-----------
WARRANTS-0.00%
Hong Kong-0.00%
*Wharf Holdings ................................. 95,000 7,848
-----------
Total Warrants (cost $0) 7,848
-----------

International Equity-3
<PAGE>

International Equity Series
Statement of Net Assets (Continued)

Market
Principal Value
Amount (U.S.$)
REPURCHASE AGREEMENTS-3.61%
With Chase Manhattan 4.50%
1/4/99 (dated 12/31/98,
collateralized by $2,264,000
U.S. Treasury Notes 7.875%
due 8/15/01, market value
$2,511,805) .................................. $2,461,000 $2,461,000
With J.P. Morgan Securities 4.75%
1/4/99 (dated 12/31/98,
collateralized by $3,139,000
U.S. Treasury Notes 5.75%
due 10/31/00, market value
$3,229,162) .................................. 3,162,000 3,162,000

Market
Principal Value
Amount (U.S.$)
REPURCHASE AGREEMENTS (Continued)
With PaineWebber 4.85%
1/4/99 (dated 12/31/98, collateralized by $688,000
U.S. Treasury Notes 7.75% due 12/31/99, market value
$709,135 and $962,000 U.S. Treasury Notes 7.75%
due 1/31/00, market value $1,024,590 and $966,000
U.S. Treasury Notes 6.25% due 8/31/00, market value
$1,011,404 and $461,000 U.S. Treasury Notes 6.50%
due 5/31/01, market value $482,434) ............... $3,163,000 $3,163,000
----------
Total Repurchase Agreements
(cost $8,786,000) .................................. 8,786,000
----------

TOTAL MARKET VALUE OF SECURITIES-100.06% (cost $208,041,236) $243,692,364

LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS-(0.06%) (156,323)
------------
NET ASSETS APPLICABLE TO 14,780,659 SHARES ($0.01 PAR VALUE)
OUTSTANDING; EQUIVALENT TO $16.48 PER SHARE-100.00% $243,536,041
============
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 ........................................ $203,108,109
Undistributed net investment income** .......................... 4,931,609
Accumulated net realized loss on investments ................... (477,750)
Net unrealized appreciation of investments
and foreign currencies ......................................... 35,974,073
------------
Total net assets ............................................... $243,536,041
============
- ---------------
*Non-income producing security for the year ended December 31, 1998.
**Undistributed net investment income includes net realized gains (losses) on
foreign currencies. Net realized gains (losses) on foreign currencies are
treated as net investment income in accordance with provisions of the Internal
Revenue Code.
+Security is partially or fully on loan.

IR-Installment Receipts

See accompanying notes

International Equity-4
<PAGE>

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

INVESTMENT INCOME:
Dividends ...................................................... $7,078,322
Interest ....................................................... 815,143
Foreign tax withheld ........................................... (529,311)
-----------
7,364,154
-----------
EXPENSES:
Management fees ................................................ 1,679,911
Custodian fees ................................................. 93,175
Accounting and administration .................................. 91,538
Professional fees .............................................. 26,180
Reports and statements to shareholders ......................... 21,600
Registration fees .............................................. 11,350
Taxes (other than taxes on income) ............................. 11,149
Dividend disbursing and transfer agent
fees and expenses ............................................. 6,911
Directors' fees ................................................ 3,789
Other .......................................................... 31,506
-----------
1,977,109
-----------
Less expenses absorbed or waived by
Delaware International Advisers Ltd. ........................ (28,730)
-----------

Total expenses ................................................. 1,948,379
-----------

NET INVESTMENT INCOME .......................................... 5,415,775
-----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS AND FOREIGN CURRENCIES:
Net realized gain on:
Investments .................................................... 1,016,624
Foreign currencies ............................................. 14,464
-----------
Net realized gain .............................................. 1,031,088
Net change in unrealized appreciation / depreciation
of investments and foreign currencies ....................... 14,401,533
-----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS AND
FOREIGN CURRENCIES .......................................... 15,432,621
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $20,848,396
===========

See accompanying notes

<PAGE>

Delaware Group Premium Fund, Inc.-
International Equity 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 ........................... $5,415,775 $3,977,084
Net realized gain on investments
and foreign currencies ....................... 1,031,088 2,577,473
Net change in unrealized appreciation /
depreciation of investments and foreign
currencies ................................... 14,401,533 1,459,920
------------ ------------
Net increase in net assets resulting
from operations .............................. 20,848,396 8,014,477
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................... (7,631,302) (4,927,079)
------------ ------------
(7,631,302) (4,927,079)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold ....................... 66,971,858 70,066,962
Net asset value of shares issued upon
reinvestment of dividends from net
investment income ............................ 7,631,302 4,927,079
------------ ------------
74,603,160 74,994,041
Cost of shares repurchased ...................... (43,147,474) (10,645,895)
------------ ------------
Increase in net assets derived from capital
share transactions ........................... 31,455,686 64,348,146
------------ ------------

NET INCREASE IN NET ASSETS ...................... 44,672,780 67,435,544
------------ ------------

NET ASSETS:
Beginning of year ............................... 198,863,261 131,427,717
------------ ------------
End of year ..................................... $243,536,041 $198,863,261
============ ============

See accompanying notes

International Equity-5

<PAGE>

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

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

Year Ended December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..................... $15.520 $15.110 $13.120 $11.840 $11.620

Income from investment operations:
Net investment income(1) ............................... 0.386 0.359 0.557 0.419 0.220
Net realized and unrealized gain on
investments and foreign currencies .................. 1.169 0.596 1.966 1.191 0.080
------- ------- ------- ------- -------
Total from investment operations ....................... 1.555 0.955 2.523 1.610 0.300
------- ------- ------- ------- -------
Less dividends and distributions:
Dividends from net investment income ................... (0.595) (0.545) (0.420) (0.240) (0.070)
Distributions from net realized gain
on investments ...................................... none none (0.113) (0.090) (0.010)
------- ------- ------- ------- -------
Total dividends and distributions ...................... (0.595) (0.545) (0.533) (0.330) (0.080)
------- ------- ------- ------- -------
Net asset value, end of year ........................... $16.480 $15.520 $15.110 $13.120 $11.840
======= ======= ======= ======= =======
Total return ........................................... 10.33% 6.60% 20.03% 13.98% 2.57%

Ratios and supplemental data:
Net assets, end of year (000 omitted) .................. $243,536 $198,863 $131,428 $81,548 $57,649
Ratio of expenses to average net assets ................ 0.87% 0.85% 0.80% 0.80% 0.80%
Ratio of expenses to average net assets prior
to expense limitation ............................... 0.88% 0.90% 0.91% 0.89% 1.01%
Ratio of net investment income to average net assets ... 2.41% 2.28% 4.71% 3.69% 2.63%
Ratio of net investment income to average net
assets prior to expense limitation .................. 2.40% 2.23% 4.60% 3.60% 2.42%
Portfolio turnover ..................................... 5% 7% 8% 19% 13%

</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

International Equity-6
<PAGE>

Delaware Group Premium Fund, Inc.-International Equity 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
International Equity 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. Securities listed on a foreign exchange are
valued at the last quoted sales price before the Series is valued. 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>

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

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

2. Investment Management and Other Transactions with Affiliates
In accordance with the terms of the Investment Management Agreement, the Series
pays Delaware International Advisers Ltd. ("DIAL"), 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.

DIAL 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 0.95% of average daily net assets of the Series through April 30,
1999.

International Equity-7
<PAGE>

International Equity 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
DIAL payable to DSC
-------------- -------------------
$147,533 $7,387

Certain officers of DMC, DSC and DIAL 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 ........... $44,100,850
Sales ............... $10,988,732

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
expiration
2005
----------
$477,750

4. 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 .... 4,191,375 498,862 (2,725,472) 1,964,765
Year ended December 31, 1997 .... 4,451,284 342,396 (674,626) 4,119,054

</TABLE>

International Equity-8
<PAGE>

International Equity Series
Notes to Financial Statements (Continued)

Value of
In exchange contract at Settlement Unrealized appreciation
Contracts to Receive for 12/31/98 date (depreciation)
- -------------------- ----------- ----------- ---------- -----------------------
<S> <C> <C> <C> <C>
262,363 British Pounds $441,688 $434,910 1/5/99 ($6,778)
218,807 British Pounds 362,673 362,682 1/7/99 9

Value of
In exchange contract at Settlement Unrealized appreciation
Contracts to Deliver for 12/31/98 date (depreciation)
- -------------------- ----------- ----------- ---------- -----------------------
<S> <C> <C> <C> <C>
10,082,609 British Pounds $17,014,000 $16,698,634 1/29/99 $315,366

</TABLE>

7. 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
------------------ ---------------
$17,452,250 $18,312,259

Net income from securities lending activities for the year ended December 31,
1998 was $153,758 and is included in interest income on the statement of
operations.

International Equity-9
<PAGE>

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

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

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

International Equity-10

<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.

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. Original issue discounts are accreted to interest
income over the lives of the respective securities.

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.

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.

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>

AR-CP Delaware-Lincoln ChoicePlusSM Variable Annuity is issued and
distributed by Lincoln National Life Insurance Co., Ft. Wayne, IN
(Form AN425LL or any state variation), and wholesaled by
Delaware Distributors, L.P.