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

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

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<PAGE>

January 10, 1999

Dear Policy Holder:

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

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

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

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

Sincerely,

/s/ Jeffrey J. Nick

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

<PAGE>

FOR 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.

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

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

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:

Aggregate Aggregate
Cost of unrealized unrealized Net unrealized
investments appreciation depreciation appreciation
----------- ------------ ------------ --------------
$129,508,010 $43,775,819 ($2,990,799) $40,785,020

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 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:

Aggregate Aggregate
Cost of unrealized unrealized Net unrealized
investments appreciation depreciation depreciation
----------- ------------ ------------ -------------
$8,517,994 $59,629 ($3,245,033) ($3,185,404)

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 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