INCORPORATED BY REFERENCE, PAGE 10 OF THE COMPANY'S 1996 ANNUAL 
                      REPORT TO SHAREHOLDERS

SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                       Years Ended December 31

                                                   1996             1995             1994             1993             1992
             <S>                              <C>              <C>              <C>              <C>              <C>

             Policy Revenue                   $  31,116,162    $  28,073,997    $  24,893,483    $  22,156,822    $  19,415,368
             Investment & Other Income           46,617,179       41,519,626       36,100,738       31,363,811       28,538,090
             Realized Gains on Investments        4,986,897        7,483,798        4,411,334       10,433,318        9,647,470

             Total Revenue                    $  82,720,238    $  77,077,421    $  65,405,555    $  63,953,951    $  57,600,928

             Benefits & Expenses                 56,077,551       50,673,549       38,926,049       36,077,676       32,259,393

             Operating Income Before Taxes       26,642,687       26,403,872       26,479,506       27,876,275       25,341,535

             Federal Income Tax 
                  Current                         5,378,656        7,607,573        8,179,901        8,275,631        7,791,598
                  Deferred                        3,597,781          914,707        1,469,927        1,496,402        1,655,339
             Total Federal Income Tax             8,976,437        8,522,280        9,649,828        9,772,033        9,446,937

             Cumulative effect on years prior to
             1993 on changing the method of
             accounting for income taxes                  0                0                0         (567,610)               0

             Net Income                       $  17,666,250    $  17,881,592    $  16,829,678    $  17,536,632    $  15,894,598

             Earnings per share               $        1.87    $        1.89    $        1.78    $        1.86    $        1.68
             Cash dividends declared per share$        0.50    $       0.453    $        0.40    $       0.367    $       0.333
             Total Assets                     $ 740,650,660    $ 673,794,161    $ 528,632,132    $ 455,135,563    $ 376,485,292
             Stockholders Equity              $ 132,630,489    $ 128,905,402    $  90,855,581    $  89,744,886    $  75,427,308
             Book Value per share             $       14.03    $       13.64    $        9.61    $        9.50    $        7.98
             Average Number of
                  Shares Outstanding              9,450,000        9,450,000        9,450,000        9,450,000        9,450,000

<FN>
All per share data has been adjusted to reflect the three-for-one common stock split effective May 2, 1996.
</FN>
</TABLE>

<PAGE>
INCORPORATED BY REFERENCE, PAGE 11 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                   MANAGEMENT'S DISCUSSION AND ANALYSIS OF

                FINANCIAL CONDITION & RESULTS OF OPERATION


The following  discussion and analysis  should be read in  conjunction  with the
financial  statements  and  related  notes  found on pages 21 - 28,  since  they
contain  important  information  that is helpful  in  evaluating  the  Company's
operating  results and financial  condition.  (Note: A glossary of certain terms
used in this  discussion  can be found on page 19. The terms are  italicized the
first time they appear in the text.)


OVERVIEW

Erie  Family  Life  Insurance  Company  (the  Company)  is  incorporated  in the
Commonwealth of Pennsylvania.  The Company is engaged  primarily in the business
of  underwriting  and  selling  non-participating   individual  and  group  life
insurance policies,  including universal life and annuities. The Company markets
its  products  through  independent  agents and  operates in eight states in the
Eastern  U.S. and the  District of Columbia  and is subject to  supervision  and
regulations  of the  states in which it does  business.  A large  portion of the
Company's business is written in Pennsylvania.

Net  income  decreased  to  $17,666,250,  or  $1.87  per  share,  in  1996  from
$17,881,592, or $1.89 per share in 1995, a decrease of 1.2 percent. The decrease
in  non-recurring  realized  gains  on  investment  from  $7,483,798  in 1995 to
$4,986,897  in 1996  was one of the  primary  reasons  for the  decrease  in net
income.  Operating  results  remained  strong  as policy  revenues  grew by 10.8
percent  in 1996 and life  insurance  in force  grew by more than  $1.2  billion
during 1996.  Total life  insurance in force at December 31, 1996 grew to almost
$10.8  billion.  Investment  income,  net of  expenses,  grew by 12.2 percent to
$45,948,969  in 1996 from  $40,962,812  in 1995.  Total  assets  of the  Company
increased by 9.9 percent to $740,650,660.


REVENUES

Policy Revenues

Life premiums  increased 12.7 percent to $29,038,797 in 1996 from $25,764,413 in
1995 and $22,931,783 in 1994. New life insurance coverage placed in force during
1996 was  $2,129,639,000,  compared to $1,877,983,000 in 1995 and $1,884,722,000
in 1994.  This  represents an increase of 13.4 percent in 1996 and a decrease of
0.4 percent in 1995 compared to 1994.  First-year  life insurance  premiums were
$6,505,484 in 1996,  $5,624,117  in 1995 and  $5,563,765 in 1994, an increase of
15.7 percent in 1996 and 1.1 percent in 1995.  Renewal  premium  increased  11.9
percent in 1996 to $22,533,313.  Group policy revenues decreased 10.1 percent to
$2,077,365 in 1996 from $2,309,584 in 1995. The 1995 group policy revenue amount
included  $449,000 in annuity  loads on  structured  settlement  deposits.  This
annuity  load was  charged to pay the 2% annuity  premium  tax on  non-qualified
annuities.  Effective  January 1, 1996, the  Pennsylvania  tax on  non-qualified
annuities  was  repealed.  In  response  to  this  tax  change,  the 2%  load on
structured settlement premium has been discontinued by the Company.


<PAGE>
INCORPORATED BY REFERENCE, PAGES 11 AND 12 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



First-year and single  universal life and annuity  deposits were  $50,651,063 in
1996,  $57,606,715 in 1995 and  $53,965,315 in 1994,  representing a decrease of
12.1 percent in 1996 and an increase of 6.7 percent in 1995 over 1994.  Total
annuity and universal life deposits were $67,716,398,  $74,541,897, and
$69,530,697 in 1996, 1995,  and 1994,  respectively.  Annuity  deposits recorded
in connection  with annuity  contracts  purchased by the Erie Insurance  Group
Retirement Plan for retired vested Employees receiving benefits were $4,894,042,
$6,024,125, and $8,880,714 for the years ended December 31, 1996, 1995, and
1994,  respectively.  Also  included  in  annuity  deposits  are  annuities
purchased  by  affiliated property/casualty companies for use in connection with
the structured settlement of  insurance  claims.  Structured  settlement annuity
deposits  sold  to Erie Insurance  Group  affiliate  companies  totaled
$13,504,953,  $22,018,313,  and $11,431,965  in 1996,  1995 and 1994,
respectively.  Generally,  lower interest rates and a  flattened  yield curve in
1996 and 1995 made fixed  annuities  and structured  settlement  annuities  less
attractive  compared  to other  savings alternatives.

The Company's lapse ratio, as reported to the Pennsylvania Insurance Department,
increased  to 8.2  percent in 1996.  The lapse ratio was 7.9 percent in 1995 and
8.4 percent in 1994.  The lapse ratio is an important  measure of the success of
the Company's sales and service efforts.  Consequently,  it is monitored closely
as a  barometer  of future  life  insurance  product  profitability  and premium
growth.

Investment Income, Net of Expenses

Net investment  income in 1996 was  $45,948,969  compared to $40,962,812 in 1995
and $35,566,249 in 1994, an increase of 12.2 percent in 1996 and 15.2 percent in
1995. The ratio of net investment income to mean invested assets declined during
1996 to 7.4  percent,  compared  to 7.8 percent in 1995 and 8.3 percent in 1994.
This decline in portfolio yield was the result of generally lower interest rates
and a flattened yield curve in 1996 and 1995. The decrease in overall  portfolio
yield was offset by a 9.3 percent  increase in invested assets of the Company in
1996 versus 1995,  due to the cash flows  generated by the Company's  operations
and annuity and universal life deposits.

Realized Gain on Investments

During 1996, 1995 and 1994, the Company generated  realized gains of $4,986,897,
$7,483,798 and 4,411,334,  respectively,  which resulted from the sale of equity
and fixed income securities.


BENEFITS AND EXPENSES

Death Benefits

Net death benefits on life insurance  policies increased 30.2 percent in 1996 to
$9,688,242,  compared to $7,438,758 in 1995 and $4,068,876 in 1994. Although the
increase  in death  benefits  in 1996 was  greater  than the growth in  in-force
policies in 1996,  from 1991 through 1996 net death benefits  increased by about
120  percent,  consistent  with the 106  percent  growth in the  Company's  life
insurance  in  force,  over the same  period.  Mortality  experience  should  be
analyzed   over  the  long  term,   rather  than  short  periods  where  unusual
fluctuations may influence the results.  This is particularly true for a company
the size of Erie Family Life,  which is growing  rapidly.  The Company  believes
that its underwriting philosophy and practices are sound.


<PAGE>
INCORPORATED BY REFERENCE, PAGE 12 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



Interest on Annuity and Universal Life Deposits

Total  interest  credited  on deposits  rose 11.6  percent to  $28,299,828  from
$25,347,183  in 1995.  This increase in interest  expense was due to new annuity
and universal life deposits of $67,716,398 made by Policyholders during 1996. At
December 31, 1996 annuity  deposits  accruing  interest  were $451  million,  an
increase of 11.2 percent from  December 31, 1995,  and  universal  life deposits
accruing  interest  were $57 million,  an increase of 23.7 percent from December
31, 1995.  During 1996,  the interest rate  credited on universal  life deposits
remained  in the 6.25  percent to 7.00  percent  range.  The rates  credited  on
annuity deposits remained in the 5.00 percent to 6.75 percent range.

On January 1, 1996, a "10 Percent Preferred Withdrawal" endorsement was added to
all Erie Family Life annuity policies.  This policy  endorsement  allows annuity
Policyholders  to  withdraw  up to 10 percent  of their  annuity  account  value
without incurring a surrender charge,  once each policy year, subject to certain
restrictions.

Increase in Future Life Policy Benefits

The liability for future life policy  benefits is computed  considering  various
factors such as anticipated mortality, future investment yields, withdrawals and
anticipated  credit for  reinsurance.  The 1996  increase  in future life policy
benefits was $4,549,404,  compared to $4,619,996 in 1995 and $2,611,084 in 1994.
The  decrease  in 1996 is due to an increase in  estimated  reinsurance  credits
applied  against the liability  for future  policy life benefits in 1995,  along
with a general  increase in the provision due to the increased life insurance in
force. Beginning January 1, 1995, the retention limit on an acceptable insurance
risk was increased to $300,000 on each individual life written. Prior to January
1, 1995, the risk retention limit was $225,000.

Amortization of Deferred Policy Acquisition Costs

Generally,  the costs  incurred  by the Company to acquire  business,  including
underwriting,  commission  and  bonus  costs,  are  deferred.  These  costs  are
amortized and charged  against  earnings  over the premium  paying period of the
related policies in proportion to the ratio of the annual premium revenue to the
total  anticipated  premium revenue.  The  amortization of deferred  acquisition
costs (DAC) rose 33.2 percent to $3,141,350 in 1996 from $2,358,127 in 1995. The
growth in  amortization  expense  was  affected  by changes  in premium  revenue
patterns and by a decrease in policy persistency.

Commissions

In 1996, commission expenses increased 20.2 percent to $1,841,861.  Most of this
commission  increase was due to an increase in life  insurance  premiums of 10.8
percent  along with an  increase  in the average  commission  rate.  The average
commission  rate  increased  due to an increase in  persistency  for policies in
their  second  policy  year as well as  changes  in the mix of life and  annuity
business sold.  Second-year  renewal  commission rates are higher than third and
subsequent year commission  rates and increases in second-year  persistency will
result in an increase in the average commission rate.

Commission  reimbursements  from ceded reinsurance  contracts have been deducted
from the gross commission expense. These reimbursements represent the first- and
second- year commissions paid on


<PAGE>
INCORPORATED BY REFERENCE, PAGES 12 AND 13 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



policies that were reinsured under a number of different reinsurance agreements.
These  reimbursements  totaled  $1,367,873  in  1996,  $1,272,530  in  1995  and
$1,363,267 in 1994.

Commission costs, which vary with and are related primarily to the production of
new business, have been deferred and are capitalized as DAC. Most first-year and
some  second-year  commissions  qualify  for  deferral.  These  costs  are being
amortized over the premium  paying period of the related  policies in proportion
to the ratio of the  annual  premium  revenue to the total  anticipated  premium
revenue (see Note 2 of the Notes to Financial Statements).

General Expenses

General  expenses  amounted to  $5,839,795  compared to  $5,802,088  in 1995 and
$5,775,026  in 1994.  General  expenses  include  wages and  salaries,  employee
benefits,  data  processing  expenses,  occupancy  expenses and other office and
general administrative expenses of the Company.  Certain general expenses of the
Company are deferred as policy acquisition  costs,  including medical inspection
and exam fees related to new business production,  wages,  salaries and Employee
benefits of underwriting  personnel,  and bonuses paid to branch sales Employees
for the production of life and annuity business.  Deferred acquisition costs are
amortized over the premium  paying period of the related  policies in proportion
to the ratio of the  annual  premium  revenue to the total  anticipated  premium
revenue.

Certain operating expenses of the Company are paid by Erie Indemnity Company and
reimbursed  monthly  by the  Company.  Additionally,  a  portion  of the  common
overhead expenses of the Erie Insurance Group are allocated to Erie Family Life.
These expenses  comprise the majority of the Company's  general  expenses.  Erie
Indemnity  Company is a 21.6 percent  shareholder  of Erie Family Life Insurance
Company stock and the management company for the Erie Insurance Exchange.

Taxes, Licenses and Fees

Taxes,  licenses  and fees  decreased  $1,184,590  to  $1,669,597  in 1996.  The
decrease  was due to  decreased  assessments  made by the state  life  insurance
guaranty  associations and repeal of the tax on non-qualified  annuities.  These
assessments totaled $707,000 in 1996, $1,251,000 in 1995 and $1,072,000 in 1994.
The  assessments  are mandated by statute and are used by the various state life
insurance  guaranty  associations  to  guarantee  the life,  annuity  and health
insurance policies of companies that have become insolvent.  About $2,000 of the
1996  assessments,  $340,000 of the 1995  assessments  and  $300,000 of the 1994
assessments  can be  recovered  as credits on the  Company's  state  premium tax
returns.  These credits generally have remained available but are not guaranteed
by the states.

In 1991, the Pennsylvania legislature enacted a new law that imposed a 2 percent
premium  tax on all  non-qualified  annuity  premiums.  This tax  increased  the
Company's  premium  taxes by $686,000 in 1995 and $522,000 in 1994.  On June 30,
1995,  Pennsylvania  Act 21-1995 was signed into law which  repealed  the tax on
non-qualified annuities effective January 1, 1996.






<PAGE>
INCORPORATED BY REFERENCE, PAGES 13 AND 14 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of the  Company's  ability to secure  enough cash to meet
its contractual  obligation and operating needs.  Generally,  insurance premiums
are  collected  prior to claims and  benefit  disbursements  and these funds are
invested to provide  necessary cash flows in future years.  The Company's  major
sources of cash from  operations  are life  insurance  premiums  and  investment
income.  The net positive cash flow is used to fund Company  commitments  and to
build the investment  portfolio,  thereby increasing future investment  returns.
Net cash provided by operating  activities in 1996 was  $14,480,503  compared to
$8,297,378 in 1995, and  $12,805,742 in 1994. The Company's  liquidity  position
remains  strong as  invested  assets  grew by 14.8  percent  during 1996 to $654
million at  December  31,  1996.  The  majority  of  invested  assets are liquid
marketable securities.

Premium  from the sale of new  policies,  combined  with the premium on existing
policies,  accounted  for  approximately  37.6 percent of total revenue in 1996,
36.4  percent in 1995,  and 38.1  percent  in 1994.  Investment  income,  net of
expenses,  generated 55.5 percent of total revenue in 1996, 53.1 percent in 1995
and 54.4 percent in 1994.  Also,  the Company had realized  gains on the sale of
investments which generated 6.0 percent of total revenue in 1996, 9.7 percent in
1995 and 6.7 percent in 1994.

Annuity  and  universal  life  deposits,  which do not  appear as revenue on the
financial  statements,  also  generate  cash.  These  deposits  do not involve a
mortality or morbidity  risk and are accounted  for using methods  applicable to
comparable   "interest-bearing   obligations"   of  other  types  of   financial
institutions.  This method of accounting  records deposits as a liability rather
than as revenue.  Annuity and universal life deposits were  $67,716,398 in 1996,
$74,541,897 in 1995, and $69,530,697 in 1994.

The Company's commitments for expenditures as of December 31, 1996 are primarily
for policy death benefits, policy surrenders and withdrawals,  general operating
expense,  federal  income taxes,  dividends to  shareholders  and the new policy
administration system,  described below. These commitments are met by cash flows
from policy revenue,  annuity and universal life deposits and investment income.
Management  believes  its cash flow  from  operations,  its  liquid  assets  and
marketable  securities,  and its line of  credit  with a bank  will  enable  the
Company to meet any  foreseeable  cash  requirements.  At December 31, 1996, the
Company's  line of credit with PNC Bank totaled $10  million,  none of which was
outstanding.

During 1996,  the Company made a decision to replace its life and annuity policy
administration  systems with a new  state-of-the art system called the Cyberlife
policy  administration  system from Cybertek  Corporation of Dallas,  Texas.  In
addition  to the  cost of the  software,  expenditures  for  computer  hardware,
technical and user training,  project  administration,  and  consulting  will be
incurred in connection  with this project.  The financial  commitments  for this
system were made by Erie  Indemnity  Company,  which will charge the Company for
the cost of the system over its estimated  useful life.  The total capital costs
of this project are expected to be about $2 million.

The amount of dividends Erie Family Life, a Pennsylvania-domiciled life insurer,
can pay to its  shareholders  without  the prior  approval  of the  Pennsylvania
Insurance  Commissioner  is limited by statute to not more than the  greater of:
(a) 10 percent of its statutory surplus as regards  policyholders as reported on
its last annual  statement,  or (b) the net income of the insurer as reported on
its last annual statement, not including any pro rata distributions of any class
of the insurer's own securities.


<PAGE>
INCORPORATED BY REFERENCE, PAGE 14 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



Accordingly, the maximum dividend payout which may be made in 1997 without prior
Pennsylvania commissioner approval is $10,516,000.


Risk-Based Capital

The Commonwealth of Pennsylvania has adopted the statutory  accounting practices
(SAP) minimum risk- based capital  requirements for domestic insurance companies
that were  developed by the  National  Association  of  Insurance  Commissioners
(NAIC).  The formulas for determining  the amount of risk-based  capital specify
various  weighing  factors  that are  applied to  financial  balances or various
levels  of  activity  based on the  perceived  degree  of risk.  These  formulas
determine a ratio of the  Company's  regulatory  total  adjusted  capital to its
authorized control level risk-based capital,  as defined by the NAIC.  Companies
below specific  trigger points or ratios are classified  within certain  levels,
each of which requires specified corrective action. The levels and ratios are as
follows:


                                            Ratio of Total Adjusted Capital to
  NAIC                                      Authorized Control Level Risk-Based
  Regulatory Event                          Capital (Less than or Equal to)

Company action level                        2.0 (or 2.5 with negative trends)
Regulatory action level                     1.5
Authorized control level                    1.0
Mandatory control level                     0.7


Erie Family Life had regulatory  total  adjusted  capital of $84 million and $76
million at  December  31,  1996,  and 1995,  respectively,  and a ratio of total
adjusted capital to authorized  control level risk-based  capital of 7.1 at both
December 31, 1996, and 1995, respectively. These levels exceed, by a substantial
margin, the minimum risk-based capital requirements.

During  1994,   Pennsylvania  adopted  the  NAIC  Model  Actuarial  Opinion  and
Memorandum Regulation. As a result, the Company's actuarial opinion for 1996 and
1995 included the results of an asset adequacy analysis, based primarily on cash
flow testing.  The testing consisted of 20-year projections of existing business
under  each of ten  different  interest  rate  scenarios.  The  cash  flows  and
projected market value surplus results were positive under all ten scenarios.

Surplus Note

On December  29, 1995, a surplus note in the amount of $15 million was issued by
the Company in  accordance  with  Section  322.1 of the  Pennsylvania  Insurance
Company Law of 1921 as amended by the Act of December 18, 1992, P.L. 792 No. 178
(40 P.S.  ss.445.1) to the Erie  Indemnity  Company  (Indemnity) in exchange for
cash of $15 million.  Interest on this note will be charged at an annual rate of
6.45 percent.




<PAGE>
INCORPORATED BY REFERENCE, PAGES 14 AND 15 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



Notwithstanding  any other  provision  in this  note,  no  payment of all or any
portion of the  principal  amount of this note shall be  demanded  by  Indemnity
prior to  December  31,  2005,  provided  that the Company may pay upon ten (10)
days' prior written notice to Indemnity,  the interest on, or all or any portion
of the principal of, this note at any time without  premium of penalty,  subject
to the prior  consent  of the  Insurance  Commissioner  of the  Commonwealth  of
Pennsylvania  (the  "Commissioner")  to such  repayment in  accordance  with the
provisions of Section 322.1 of the Insurance Company Law of 1921.  Commencing on
December 31, 2005, the outstanding principal balance of this note (including all
accrued  interest) shall be repayable on demand by Indemnity or under such terms
as Indemnity may elect, subject to the prior consent of the Commissioner to such
repayment in accordance with the provisions of law.  Payment of principal and/or
interest is subordinated to payment of all other liabilities of the Company.


RESERVE LIABILITIES

The Company's primary commitment is its obligation to meet the payment of future
policy benefits under the terms of its life insurance and annuity contracts.  To
meet these future  obligations,  the Company establishes life insurance reserves
based upon the type of policy,  the age of the insured,  and the number of years
the policy has been in force. The Company also establishes annuity and universal
life reserves  based on the amount of  Policyholder  deposits  (less  applicable
policy charges) plus interest  earned on those  deposits.  On December 31, 1996,
there was no material  difference  between the carrying  value and fair value of
the  Company's  investment-type  policies.  These  life  insurance  and  annuity
reserves  are  supported  primarily  by the  Company's  long-term,  fixed income
investments as the underlying  policy reserves are generally also of a long-term
nature.


INVESTMENTS

The Company's  investment  strategies and portfolios are structured to match the
features of the life  insurance and annuity  products sold by the Company.  Erie
Family Life's  annuities  and life  insurance  policies are long-term  products;
therefore,  the  Company's  investment  strategy  takes a long-term  perspective
emphasizing  investment  quality,   diversification,   and  superior  investment
returns.  The  Company's  investments  are managed  prudently  on a total return
approach that focuses on current income and capital appreciation.

The Company's  invested  assets also are liquid in order to meet the  short-term
and long-term  commitments  to  Policyholders.  At December 31, 1996 Erie Family
Life's   investment   portfolio   of  cash   and   money   market   investments,
investment-grade  bonds,  common stocks,  and preferred stocks, all of which are
extremely  marketable,  totaled $636  million or 85.9  percent of total  assets.
These  resources  provide the liquidity the Company  requires to meet unforeseen
demands on its funds.

The total  invested  assets  of the  Company  consist  of  investments  in fixed
maturities,  preferred  stock,  common stock,  real estate,  mortgage and policy
loans and other  invested  assets.  At December 31, 1996,  78.8 percent of total
invested assets were invested in fixed  maturities.  Preferred  stocks represent
16.9  percent or $111  million  and common  stocks  represent  0.9 percent or $6
million of total  invested  assets at December 31,  1996,  while real estate and
mortgage loans make up only 1.6 percent of total invested assets.  Mortgage loan
and real estate investments have the potential for higher returns but also carry
more risk,  including less liquidity and greater  uncertainty of rate of return.
Consequently,  these investments have been kept to a minimum. Invested assets at
December 31, 1996 and 1995 consisted of the following:


<PAGE>
INCORPORATED BY REFERENCE, PAGE 15 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS




                                             Invested Assets
                                              In Thousands

                                      1996              1995

Fixed Maturities
         Available-for-Sale         $515,530          $ 426,381
Equity Securities
         Preferred Stock             110,566            122,910
         Common Stock                  5,986              3,415
Real Estate                            1,710              1,796
Mortgage Loans                         8,956              7,063
Policy Loans                           4,382              3,694
Other Invested Assets                  6,787              4,166
Total Invested Assets               $653,917           $569,425

Fixed Maturities

The Company's  fixed  maturities at December 31, 1996 consist of  investments in
bonds of $513.4 million and  investments in redeemable  preferred  stock of $2.1
million.  It is the Company's  objective that the fixed maturity portfolio be of
very high quality and well diversified  within each market sector. The portfolio
is managed  conservatively  with the goal of achieving  reasonable returns while
limiting exposure to risk.




<PAGE>
INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



At December 31, 1996 the carrying value of fixed maturities was $515,529,699, or
78.8 percent of total invested assets. At December 31, 1996, the amortized cost,
carrying/market  values,  gross unrealized gains and gross unrealized losses for
fixed maturities were as follows:

                                               Fixed Maturities at 12-31-96
<TABLE>
<CAPTION>

                                  Amortized             Carrying/          Unrealized           Unrealized
                                     Cost            Market Values             Gains                Losses
<S>                            <C>                   <C>                   <C>                   <C>

U.S. Treasuries                $    6,476,927        $    6,943,977        $    467,050          $         0
Foreign governments                 2,986,046             2,970,000                   0               16,046
Political
  subdivisions                      4,676,466             5,003,331             326,865                    0
Special revenue                    24,697,215            25,021,613             827,261              502,863
Public utilities                   92,987,333            93,608,151           2,154,870            1,534,052
U.S. industrial and
  miscellaneous                   370,740,927           374,435,097           8,244,393            4,550,223
Foreign industrial
  and miscellaneous                 7,062,274             7,547,530             485,256                    0
                               ---------------       ---------------       -------------         ------------


Total fixed
  maturities
  available-for-
  sale                         $  509,627,188        $  515,529,699        $ 12,505,695          $  6,603,184
                               ===============       ===============       =============         =============
</TABLE>

The  bond  investments  included  in the  fixed  maturity  category  consist  of
high-quality, marketable securities, 99.6 percent or $511.6 million of which are
rated  at  investment-grade  levels  (Baa/BBB  or  better).   Included  in  this
investment-grade  category are $319.2 million of bonds  characterized  as of the
"highest"  quality  or "Class  1"  securities  as  defined  by the  NAIC.  Below
investment-grade  bonds totaled $1.9 million at December 31, 1996 and are a very
manageable  0.3  percent  of  total  invested  assets.  Included  in  the  below
investment-grade category are $1.9 million of "medium" quality bonds and none of
the bonds are  considered  "low" quality.  All of the  securities  classified as
below-investment-grade  are current and in good standing.  Generally,  the fixed
maturity  securities  in the Company's  portfolio  are rated by external  rating
agencies.  If not  externally  rated,  they are rated by the  Company on a basis
consistent with the basis used by the rating agencies.

If management  determines that any declines in market value of these investments
are other than temporary,  the securities will be written down to the realizable
value of the investment and reflected in the statement of operations.  If a bond
is in default of interest  payments and it is determined that liquidation of the
security would be in the Company's  best interest,  the security will be sold to
return the proceeds to income-producing assets.

At December 31, 1996, the Company's  five largest  investments in corporate debt
securities  totaled  $31,000,655,  none  of  which  individually  exceeded  $6.7
million. These investments had a market value of $30.7 million.




<PAGE>
INCORPORATED BY REFERENCE, PAGES 16 AND 17 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



During the fourth  quarter of 1995,  the Financial  Accounting  Standards  Board
(FASB) released a special report on FAS 115,  Accounting for Certain Investments
in Debt and Equity  Securities.  The special  report was  prepared as a guide in
helping  companies  understand  and comply with the  provisions  of FAS 115. The
special report also included important transition provisions that gave reporting
enterprises  a limited  period  to  reassess  and  reclassify  their  securities
holdings into FAS 115's three reporting categories. This "fresh start" provision
allowed  reporting  enterprises to reclassify  "held-to-maturity"  securities to
either of the two other categories without restriction. Any security transferred
from held-to-maturity to the available-for-sale or trading  classifications were
to be  marked-to-market  at the time of  transfer.  At December  15,  1995,  the
Company reclassified  $152,135,307 or 100 percent of its held-to-maturity  fixed
maturity securities to available-for-sale  pursuant to the transition provisions
of the FASB's Special Report. As a result, the Company recognized  $1,455,550 of
unrealized  gains,  net of deferred  income  taxes,  at December 15, 1995, as an
adjustment to shareholders' equity related to this reclassification.  Management
believes  that  having all fixed  maturities  classified  as  available-for-sale
securities  will  allow the  Company  to meet its  liquidity  needs and  provide
greater  flexibility  for its investment  managers to restructure  the Company's
investments in response to changes in market conditions or strategic  direction.
Securities  classified  as  available-for-sale  are carried at market value with
unrealized  gains and losses included in shareholders'  equity.  At December 31,
1996 and 1995, unrealized gains on fixed maturities  available-for-sale amounted
to $3,836,632 and $15,966,153, respectively, net of deferred taxes. Prior to the
adoption  of FAS 115 in 1994,  gains  and  losses on fixed  maturities  were not
recognized in the Company's financial  statements until they were sold or became
impaired. At December 31, 1996, fixed maturities  available-for-sale  had a cost
of $509,627,188 and a market value of  $515,529,699,  representing an unrealized
gain of $5,902,511.

Equity Securities

Equity securities consist of common and nonredeemable preferred stocks which are
carried on the  statements of financial  position at current  market  value.  At
December 31, 1996, common and nonredeemable  preferred stock held by the Company
had a cost of $111,463,042 and a market value of  $116,552,145,  representing an
unrealized  gain of  $5,089,103.  As with  the  bond  portfolio,  the  Company's
nonredeemable  preferred stock portfolio provides a source of highly predictable
current income that is very competitive with high-grade bonds.  These securities
are well diversified within each market sector and support the investment return
provided to Policyholders.  The nonredeemable  preferred stocks are of very high
quality and extremely marketable, 96.3 percent or $106.5 million of which are of
the "highest" or "high"  quality,  as defined by the NAIC.  The  remaining  $4.1
million of nonredeemable preferred stocks have a "medium" NAIC rating. There are
no  nonredeemable  preferred stocks in Erie Family Life's portfolio rated in the
"low," "lowest," or "in or near default" quality  categories  established by the
NAIC.




<PAGE>
INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                           Equity Securities at 12-31-96
<TABLE>
<CAPTION>

                                                       Carrying/            Unrealized             Unrealized
                                Actual Cost          Market Values             Gains                 Losses
<S>                            <C>                   <C>                  <C>                   <C>  

Common stock:
  Industrial and
    miscellaneous              $   5,500,006         $  5,985,570         $   490,855           $    5,291
Preferred stock:
  Public utilities                 4,000,000            3,940,000                   0               60,000
  U.S. banks, trusts
    and insurance
    companies                     78,622,165           81,682,550           3,685,885              625,500
  Foreign banks,
    trusts and insurance
    companies                      3,000,000            3,180,000             180,000                    0
  U.S. industrial and
    miscellaneous                 16,440,871           17,804,025           1,363,154                    0
  Foreign industrial
    and miscellaneous              3,900,000            3,960,000              60,000                    0
                               --------------         ------------        ------------          -----------

Total equity
  securities                   $ 111,463,042         $116,552,145         $ 5,779,894           $  690,791
                               ==============        =============        ============          ===========
</TABLE>


Other Investments

Real estate  investments  are carried on the statement of financial  position at
cost, less allowances for depreciation and possible losses.  Commercial mortgage
loans  on real  estate  are  carried  at their  unpaid  balances,  adjusted  for
amortization of premium or discount, less allowances for possible loan losses.
Policy loans are carried at their unpaid balances.

The fair values of the Company's  investments  in real estate,  mortgage  loans,
policy loans, and other invested  assets,  approximate the book values presented
in the financial statements.

At December 31, 1996, the Company did not own any derivatives.


MANAGEMENT CHANGES

At the Board of  Directors  meeting on  February  12,  1996,  the Board  elected
Stephen A. Milne  President  and Chief  Executive  Officer of Erie  Family  Life
Insurance Company,  Erie Indemnity Company and Erie Insurance Company.  On March
11,  1996,  Mr.  Milne was  elected  President  and Chief  Executive  Officer of
Flagship City Insurance Company, Erie Insurance Property & Casualty Company, and
Erie  Insurance  Company of New York. Mr. Milne  previously  served as Executive
Vice  President of Insurance  Operations  since 1993. Mr. Milne began his career
with the  Erie  Indemnity  Company  (Indemnity)  in 1973  and has  held  several
positions in the claims and sales  functions of  Indemnity.  In 1984 he became a
Vice  President and in 1987 was named Senior Vice  President of the  Indemnity's
Marketing Services Division. Mr. Milne also was an ERIE Agent for three years.


<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



The former President and CEO and previous Chief  Investment  Officer of the Erie
Insurance  Group of Companies,  John M. Petersen,  who retired as an employee of
Indemnity  on December 31, 1995,  entered  into a  consulting  arrangement  with
Indemnity  effective  January  2,  1996.  Under  the  terms of the  arrangement,
Indemnity  engaged Mr.  Petersen as a consultant  to furnish the company and its
pension  trust,  the Erie  Insurance  Exchange,  and Erie Family Life  Insurance
Company,  with investment  services with respect to their  investments in common
stocks.


FACTORS WHICH MAY AFFECT FUTURE RESULTS

During 1996 federal banking reform  legislation was proposed in Congress but was
hampered by issues  surrounding  the  integration of banking and other financial
services, specifically banks affiliation with insurers and the sale of insurance
products by banks. In 1997 Congress most likely will advance  financial  service
and banking reform measures,  including the issue of bank insurance  powers.  In
addition,  during 1996 the U. S.  Supreme  Court ruled in the Barnett  Bank case
that national banks can use subsidiary  offices in small towns to sell insurance
anywhere in the country.  The Barnett Bank  decision  held that state  insurance
laws "that prevent or  significantly  interfere" with bank insurance  activities
are  preempted by federal  banking  laws.  Regulatory  and  legislative  reforms
affecting  bank  insurance  powers and public policy will continue in 1997.  The
Company could be affected  adversely by regulatory  and/or  legislative  reforms
which allow banks to sell life insurance products in the Company's markets.

In 1996 life insurance  marketing reform legislation was enacted in Pennsylvania
with implementation  required in 1997. The legislation  regulates life insurance
policy  illustrations,  adds  standard  proof of delivery  regulations  for life
policy illustrations and life policies,  and regulates  replacements of policies
with another policy issued by the same insurer.  The new disclosures and
documentation  required by the legislation will increase the Company's costs
to market and deliver its life insurance products.


MARKET FOR THE REGISTRANT'S
COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

Currently  there is no market on which the  Registrant's  stock is  traded.  The
Company had 1,146 shareholders of common stock on December 31, 1996.

The Company affected a three-for-one (3 for 1) split of its common stock on
May 2, 1996.


<PAGE>
INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                      Date Dividends Declared    Dividends per Share Declared *

                      March 2, 1995                           .113
                      April 25, 1995                          .113
                      June 22, 1995                           .113
                      September 21, 1995                      .113
                      February 29, 1996                       .125
                      May 1, 1996                             .125
                      June 17, 1996                           .125
                      September 17, 1996                      .125

*Adjusted to reflect three-for-one stock split effective May 2, 1996.

"Safe Harbor"  Statement Under the Private  Securities  Litigation Reform Act of
1995:  Statements  contained herein expressing the beliefs of management such as
those  contained  in  the  "Benefits  and  Expenses",   "Liquidity  and  Capital
Resources",  and the "Factors Which May Affect Future Results"  sections hereof,
and the  other  statements  which are not  historical  facts  contained  in this
report,  are forward looking  statements  that involve risks and  uncertainties.
These risks and  uncertainties  include  but are not  limited  to:  legislative,
judicial,  and  regulatory  changes,  the  impact of  competitive  products  and
pricing,  product development,  geographic spread of risk,  catastrophic events,
better  (or  worse)  morbidity  rates,   securities   market   fluctuations  and
technological difficulties and advancements.



<PAGE>
INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


GLOSSARY OF SELECTED INSURANCE TERMS


Annuity - Contract  which  provides  for a series of fixed or variable  periodic
payments from a stated or contingent date for a specified period,  such as for a
number of years or for life.

Carrying Value - The amount  reported for an asset or liability in the financial
statements in conformity with generally accepted accounting  principles ("GAAP")
or  statutory  accounting  practices  ("SAP"),  whichever is  applicable  in the
circumstances.

Deferred Policy  Acquisition  Costs (DAC) - The costs of acquiring new business,
principally  commissions  and  certain  costs  of  issuing  policies,  including
underwriting,  salaries and medical examinations, all of which vary with and are
related  primarily to the  production of new business.  These costs are deferred
and  amortized  over the  premium  paying  period  on the  related  policies  in
proportion to the ratio of the annual premium  revenue to the total  anticipated
premium revenue.

Future Policy  Benefits - Liabilities  established on a GAAP basis whose minimum
levels are determined by law and which are established to adequately provide for
benefits ultimately payable to policyholders.


Interest  Rate  Credited - Interest  rate  applied  to funds  accumulated  under
annuity and universal life contracts,  whether  guaranteed or currently declared
by the insurer.

In Force - Total amount of  insurance  coverage or number of policies or annuity
contracts that are in effect.

Independent Agents - Independent  contractors who represent one or more insurers
and are licensed to sell the insurers' products.

National  Association of Insurance  Commissioners (NAIC) - An association of the
top regulatory officials of all 50 states and the District of Columbia organized
to  promote  consistency  of  regulatory   practices  and  statutory  accounting
practices throughout the United States.

Premiums  - Money  paid  by the  policyholder  to an  insurance  company  for an
insurance policy or annuity.

Statutory Accounting  Practices (SAP) - SAP provides for recording  transactions
and preparing  financial  statements in accordance with the rules and procedures
prescribed  or  permitted  by state  statute  or  regulatory  authorities.  Such
practices  generally reflect a liquidating  rather than a going concern basis of
accounting. The principal difference between SAP and GAAP are as follows:

(a) under SAP,  certain assets  ("nonadmitted"  assets) are eliminated  from the
statements of financial  position;  (b) under SAP, policy  acquisition costs are
expensed as incurred, while under GAAP, they are deferred and amortized over the
premium paying period of the related  policies sold; (c) under SAP, no provision
is made for  deferred  income  taxes and (d) under  SAP,  certain  reserves  are
recognized which are not recognized for GAAP.

Statutory  Capital and Surplus - Statutory  Capital is the amount  received from
the sale of shares of stock in the Company.  Statutory  Surplus is the excess of
assets over liabilities and capital,  as determined in accordance with statutory
accounting practices.


<PAGE>




            Index to Graphs included in the Investment Section
               of The Management's Discussion and Analysis

Graph #1    DISTRIBUTION OF INVESTED ASSETS
                         at December 31, 1996                             

            Fixed Maturities - Available for Sale    78.8%
            Nonredeemable Preferred Stocks           16.9%
            Mortgage Loans                            1.4%
            Other Invested Assets                     1.0%
            Common Stocks                             0.9%
            Policy Loans                              0.7%
            Real Estate                               0.3%


Graph #2    DIVERSIFICATION OF FIXED MATURITIES
              at December 31, 1996 - Carrying/Market Value

            U.S. Industrial & Miscellaneous       72.6%
            Public Utilities                      18.2%
            Special Revenue                        4.8%
            Foreign Industrial & Miscellaneous     1.5%
            U.S. Treasuries                        1.3%
            Political Subdivision                  1.0%
            Foreign Governments                    0.6%


Graph #3           QUALITY*  OF BOND PORTFOLIO
              at December 31, 1996 - Carrying/Market Value

                    A/A         $217.1 Million    42.3%
                  BBB/Baa       $155.6 Million    30.3%
                  AAA/Aaa        $72.4 Million    14.1%
                   AA/Aa         $66.4 Million    12.9%
                   BB/Ba          $1.9 Million     0.4%

            * As rated by Standard & Poor's or Moody's Investor's Service, Inc.


Graph #4    DIVERSIFICATION OF EQUITY SECURITIES
              at December 31, 1996 - Carrying/Market Value


            (2) U.S. Banks & Insurance                70.1%
            (2) U.S. Industrial & Miscellaneous       15.3%
            (1) Industrial & Miscellaneous             5.1%
            (2) Public Utilities                       3.4%
            (2) Foreign Industrial & Miscellaneous     3.4%
            (2) Foreign Banks & Insurance              2.7%


            (1)  Common Stock
            (2)  Preferred Stock

<PAGE>





INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Shareholders
Erie Family Life Insurance Company
Erie, Pennsylvania

We have audited the accompanying statements of financial position of Erie Family
Life  Insurance  Company  as of  December  31,  1996 and 1995,  and the  related
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended December 31, 1996.  These  financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements 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 are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  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  referred to above present fairly, in
all material  respects,  the  financial  position of Erie Family Life  Insurance
Company as of December 31, 1996 and 1995,  and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1996
in conformity with generally accepted accounting principles.









Erie, Pennsylvania
February 18, 1997








                                                                            

<PAGE>
INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                             ERIE FAMILY LIFE INSURANCE COMPANY

                                              STATEMENTS OF FINANCIAL POSITION
                                              As of December 31, 1996 and 1995
<TABLE>
<CAPTION>


   ASSETS                                                                                  1996                    1995
                                                                                       ------------            ------------
<S>                                                                                    <C>                     <C>

Investments
  Fixed maturities, at fair value
    (amortized cost of $509,627,188
    and $401,771,542)                                                                  $515,529,699            $426,381,008
  Equity securities, at fair value
    (cost of $111,463,042 and
    $125,763,874, respectively)                                                         116,552,145             126,324,721
  Real estate                                                                             1,710,329               1,796,395
  Policy loans                                                                            4,381,657               3,694,530
  Mortgage loans on real estate                                                           8,955,760               7,062,742
  Other invested assets                                                                   6,787,226               4,165,721
                                                                                       ------------            ------------

          Total investments                                                            $653,916,816            $569,425,117

Cash, including short-term cash
  investments of $7,789,063
  and $35,230,606, respectively                                                           6,284,102              34,847,347
Premiums receivable                                                                       2,974,305               2,701,578
Reinsurance recoverable                                                                     212,583                 265,514
Other receivables                                                                           567,216                 254,674
Accrued investment income                                                                 9,792,095               9,044,136
Deferred policy acquisition costs                                                        58,026,428              50,762,292
Reserve credit for reinsurance ceded                                                      4,199,907               3,484,190
Other assets                                                                              4,677,208               3,009,313




          Total assets                                                                 $740,650,660            $673,794,161
                                                                                       ============            ============



</TABLE>
                                                                       

<PAGE>


INCORPORATED BY REFERENCE, PAGE 22 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS





<TABLE>
<CAPTION>


   LIABILITIES AND SHAREHOLDERS' EQUITY                                           1996                     1995
                                                                              ------------             ------------
<S>                                                                           <C>                      <C>

LIABILITIES
  Policy liabilities and accruals:
    Future life policy benefits                                               $ 54,033,860             $ 48,768,739
    Policy and contract claims                                                   1,703,105                  897,026
    Annuity deposits                                                           450,570,003              405,346,808
    Universal life deposits                                                     56,856,590               45,971,842
    Supplementary contracts not
      including life contingencies                                                 839,258                  872,745
  Other policyholder funds                                                       5,763,271                5,238,897
  Current federal income taxes
    payable                                                                        686,353                  261,471
  Deferred federal income taxes                                                 15,614,492               16,979,255
  Reinsurance premium due                                                          203,198                  360,478
  Accounts payable and accrued
    liabilities                                                                  4,519,782                2,728,133
  Note payable to affiliate                                                     15,000,000               15,000,000
  Due to affiliate                                                               1,049,007                1,392,365
  Dividends payable                                                              1,181,252                1,071,000
                                                                              ------------             ------------

                  Total liabilities                                           $608,020,171             $544,888,759
                                                                              ------------             ------------


SHAREHOLDERS' EQUITY
  Common stock, $.40 par value
    per share; authorized
    15,000,000 shares;
    9,450,000 shares issued
    and outstanding                                                           $  3,780,000             $  3,780,000
  Additional paid-in capital                                                       630,000                  630,000
  Net unrealized appreciation
    on investment securities,
    net of deferred taxes of
    $3,847,065 and $8,809,609,
    respectively                                                                 7,144,549               16,360,704
  Retained earnings                                                            121,075,940              108,134,698
                                                                              ------------             ------------

                  Net shareholders' equity                                    $132,630,489             $128,905,402
                                                                              ------------             ------------

                  Total liabilities and
                    shareholders' equity                                      $740,650,660             $673,794,161
                                                                              ============             ============

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                        

<PAGE>

INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                         ERIE FAMILY LIFE INSURANCE COMPANY

                                              STATEMENTS OF OPERATIONS
                                    Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

                                                              1996                   1995                   1994
                                                          -----------            -----------            -----------
<S>                                                       <C>                    <C>                    <C>  

Revenues
  Policy
    Life premiums                                         $29,038,797            $25,764,413            $22,931,783
    Group                                                   2,077,365              2,309,584              1,961,700
                                                          -----------            -----------            -----------

                  Total policy
                    revenues                              $31,116,162            $28,073,997            $24,893,483

  Investment income, net
    of expenses                                            45,948,969             40,962,812             35,566,249
  Realized gains on
    investments                                             4,986,897              7,483,798              4,411,334
  Other income                                                668,210                556,814                534,489
                                                          -----------            -----------            -----------

                  Total revenues                          $82,720,238            $77,077,421            $65,405,555
                                                          -----------            -----------            -----------

Benefits and expenses
  Death benefits                                          $ 9,688,242            $ 7,438,758            $ 4,068,876
  Interest on annuity
    deposits                                               25,108,877             22,718,786             18,163,588
  Interest on universal
    life deposits                                           3,190,951              2,628,397              1,981,767
  Surrender and other
    benefits                                                1,047,474                721,412                607,947
  Increase in future life
    policy benefit                                          4,549,404              4,619,996              2,611,084
  Amortization of deferred
    policy acquisition
    costs                                                   3,141,350              2,358,127              1,979,765
  Commissions                                               1,841,861              1,531,798                930,183
  General expenses                                          5,839,795              5,802,088              5,775,026
  Taxes, licenses,
    and fees                                                1,669,597              2,854,187              2,807,813
                                                          -----------            -----------            -----------

                  Total benefits
                    and expenses                          $56,077,551            $50,673,549            $38,926,049
                                                          -----------            -----------            -----------

                  Income from
                    operations                            $26,642,687            $26,403,872            $26,479,506
                                                          -----------            -----------            -----------

Federal income taxes
  Current                                                 $ 5,378,656            $ 7,607,573            $ 8,179,901
  Deferred                                                  3,597,781                914,707              1,469,927
                                                          -----------            -----------            -----------

                  Total federal
                    income taxes                          $ 8,976,437            $ 8,522,280            $ 9,649,828
                                                          -----------            -----------            -----------

                  Net income                              $17,666,250            $17,881,592            $16,829,678
                                                          ===========            ===========            ===========

                  Net income per
                    share                                 $      1.87            $      1.89            $      1.78
                                                          ===========            ===========            ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                      

<PAGE>
INCORPORATED BY REFERENCE, PAGE 24 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                         ERIE FAMILY LIFE INSURANCE COMPANY

                                         STATEMENTS OF SHAREHOLDERS' EQUITY
                                    Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>

                                                                             Net
                                                                          Unrealized
                                                                         Appreciation
                                                                        (Depreciation)                                     Net
                                                  Additional            on Available-                                     Share-
                                 Common            Paid-In                 for-Sale               Retained               holders'
                                  Stock            Capital                Securities              Earnings                Equity
<S>                           <C>                <C>                   <C>                     <C>                   <C>

Balance at
 January 1,
 1994                          $3,780,000         $630,000              $ 3,847,458             $ 81,487,428          $ 89,744,886

 Net income                                                                                       16,829,678            16,829,678
 Net change
  during year                                                          ( 21,437,365)                                 (  21,437,365)
 FAS 115
  cumulative
  effect,
  net of
  deferred
  taxes                                                                   9,498,382                                      9,498,382
 Dividends
  declared,
  $.40 per
  share                                                                                        (   3,780,000)        (   3,780,000)
                               ----------         --------              -----------             ------------          ------------

Balance at
 December 31,
 1994                          $3,780,000         $630,000             ($ 8,091,525)            $ 94,537,106          $ 90,855,581

 Net income                                                                                       17,881,592            17,881,592
 Net change
  during year                                                            24,452,229                                     24,452,229
 Dividends
  declared,
  $.453 per
  share                                                                                        (   4,284,000)        (   4,284,000)
                               ----------         --------              -----------             ------------          ------------

Balance at
 December 31,
 1995                          $3,780,000         $630,000              $16,360,704             $108,134,698          $128,905,402

 Net income                                                                                       17,666,250            17,666,250
 Net change
  during year                                                          (  9,216,155)                                 (   9,216,155)
 Dividends
  declared,
  $.50 per
  share                                                                                        (   4,725,008)        (   4,725,008)
                               ----------         --------              -----------             ------------          ------------

Balance at
 December 31,
 1996                          $3,780,000         $630,000              $ 7,144,549             $121,075,940          $132,630,489
                               ==========         ========              ===========             ============          ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                      

<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                       ERIE FAMILY LIFE INSURANCE COMPANY

                            STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>


                                                                1996                     1995                    1994
                                                            ------------             ------------            -----------
<S>                                                        <C>                      <C>                     <C>

CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                 $ 17,666,250             $ 17,881,592            $16,829,678
 Adjustments to reconcile
  net income to net cash
  provided by operating
  activities:
   Net amortization of
    bond and mortgage
    premium and discount                                         733,881                  129,922                 55,548
   Amortization of deferred
    policy acquisition
    costs                                                      3,141,350                2,358,127              1,979,765
   Real estate depreciation                                       86,066                  102,233                103,697
   Deferred federal
    income taxes                                               3,597,781                  914,707              1,469,927
   Realized gains on
    investments                                            (   4,986,897)           (   7,483,798)          (  4,411,334)
 Increase in premiums
  receivable                                               (     272,727)           (     400,857)          (    320,456)
 (Increase) decrease in
  other receivables                                        (     312,542)                   6,904                 57,007
 Increase in accrued
  investment income                                        (     747,959)           (     655,835)          (  2,478,420)
 Deferred policy
  acquisition costs                                        (  10,405,486)           (   8,168,624)          (  8,448,722)
 Increase in other assets                                  (   1,667,895)           (   1,017,015)          (    320,519)
 Increase in reinsurance
  receivables and reserve
  credits                                                  (     662,786)           (      51,832)          (  1,064,706)
 Increase in future life
  policy benefits and
  claims                                                       6,071,200                4,818,105              3,373,539
 Increase (decrease) in
  other policyholder funds                                       524,374            (   1,113,579)             4,703,564
 (Decrease) increase in
  reinsurance premium due                                  (     157,280)                 167,343                 62,937
 Increase in federal
  income taxes currently
  payable                                                        424,882                1,112,791                112,759
 Increase (decrease) in
  accounts payable and
  due to affiliate                                             1,448,291            (     302,806)             1,101,478
                                                            ------------             ------------            -----------

    Net cash provided by
      operating activities                                  $ 14,480,503             $  8,297,378            $12,805,742
                                                            ------------             ------------            -----------

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>


                                                                    

<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                 ERIE FAMILY LIFE INSURANCE COMPANY

                               STATEMENTS  OF CASH FLOWS - CONTINUED
                          Years Ended  December 31, 1996,  1995 and  1994
<TABLE>
<CAPTION>

                                                                1996                     1995                    1994
                                                            ------------             ------------            -----------
<S>                                                        <C>                      <C>                     <C>

CASH FLOWS FROM INVESTING ACTIVITIES
 Fixed maturity securities:
  Held-to-maturity:
   Maturities                                               $                        $  7,948,330            $11,255,303
   Purchases                                                                                                ( 40,754,128)
  Available-for-sale:
   Maturities                                                 24,052,115                6,764,396              3,107,563
   Sales proceeds                                             17,218,796               45,479,179             36,191,487
   Purchases                                               ( 149,403,614)           ( 119,758,853)          ( 95,059,515)
 Equity securities:
  Sales proceeds                                              37,128,238               37,486,994             18,402,366
  Purchases                                                (  18,394,580)           (  40,995,932)          ( 26,662,706)
 Purchase of mortgage loans                                (   2,752,196)                                   (  2,000,000)
 Principal payments received
  on mortgage loans                                            1,026,426                  572,056              5,991,967
 Loans made to policyholders                               (   1,317,369)           (     999,584)          (    821,201)
 Payments received on
  policy loans                                                   630,242                  486,365                449,806
 Purchase of other invested
  assets                                                   (   3,170,391)           (   2,510,832)          (  1,644,339)
 Sales of other invested
  assets                                                         478,885                  602,254              6,172,966
                                                            ------------             ------------            -----------

    Net cash used in
     investing activities                                  ($ 94,503,448)           ($ 64,925,627)          ($85,370,431)
                                                            ------------             ------------            -----------

CASH FLOWS FROM FINANCING ACTIVITIES
 Increase in annuity
  deposits and
  supplementary contracts                                   $ 45,189,708             $ 64,209,943            $59,661,171
 Increase in universal
  life deposits                                               10,884,748                9,864,440              8,363,194
 Borrowed money                                                                        15,000,000
 Dividends paid to
  shareholders                                             (   4,614,756)           (   4,158,000)          (  3,701,253)
                                                            ------------             ------------            -----------

    Net cash provided by
     financing activities                                   $ 51,459,700             $ 84,916,383            $64,323,112
                                                            ------------             ------------            -----------

Net increase (decrease) in
 cash and short-term cash
 investments                                               ($ 28,563,245)            $ 28,288,134           ($ 8,241,577)

Cash and short-term cash
 investments at beginning
 of year                                                      34,847,347                6,559,213             14,800,790
                                                            ------------             ------------            -----------

Cash and short-term cash
 investments at end of year                                 $  6,284,102             $ 34,847,347            $ 6,559,213
                                                            ============             ============            ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>


                                                                

<PAGE>
INCORPORATED BY REFERENCE, PAGE 23 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                          ERIE FAMILY LIFE INSURANCE COMPANY

                        STATEMENTS  OF CASH FLOWS - CONTINUED
                      Years Ended  December 31, 1996,  1995 and  1994
<TABLE>
<CAPTION>

                                                                1996                     1995                   1994
                                                            ------------             ------------            -----------
<S>                                                         <C>                      <C>                     <C>

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the
    year for:
    Interest                                                $    971,154             $        632            $    37,580
    Income taxes                                               4,953,774                6,494,782              8,067,142





<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

                                                                 

<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS




                                           ERIE FAMILY LIFE INSURANCE COMPANY

                                              NOTES TO FINANCIAL STATEMENTS
                                            December 31, 1996, 1995 and 1994


Note 1.  Nature of Business

                Erie  Family  Life   Insurance   Company   (the   Company)   was
                incorporated  in the  Commonwealth  of  Pennsylvania  on May 23,
                1967. The Company is engaged in the business of underwriting and
                selling  nonparticipating  individual  and group life  insurance
                policies,  including  universal life, and annuity products.  The
                Company markets its products through independent agents in eight
                states  and  the   District  of  Columbia   and  is  subject  to
                supervision  and  regulations  of the  states  in  which it does
                business.  A majority  of the  Company's  business is written in
                Pennsylvania,  Ohio,  Maryland  and  Virginia.  The Company also
                sells  a  significant  amount  of  annuities  to its  affiliated
                companies  of the Erie  Insurance  Group.  Approximately  32% of
                annuity  reserves at December  31, 1996 relate to business  with
                Erie Insurance Group affiliates. See also Note 7.


Note 2.  Basis of Presentation and Significant Accounting Policies

                The  accompanying  financial  statements  have been  prepared in
                conformity with generally accepted accounting principles (GAAP).


                (a)      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
                         and disclosure of contingent  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.

                (b)      Investments

                         Investments are shown on the following bases:

                             Fixed maturities  available-for-sale which consists
                             of bonds, notes, and redeemable  preferred stocks -
                             at fair value.

                             Equity  securities  which  consists  of common  and
                             nonredeemable preferred stocks - at fair value.








                                                                    

<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 2.  Basis of Presentation and Significant Accounting Policies
                (Continued)

                         Fair values are  determined by quoted market prices for
                         those instruments that are actively traded in financial
                         markets.  In cases where quoted  market  prices are not
                         available,  the  Company  uses the  services of various
                         brokerage companies to assist in pricing. The effect of
                         revaluing   available-for-sale   securities   to  their
                         respective  fair  values,  net of  deferred  taxes,  is
                         reflected  as a  separate  component  of  shareholders'
                         equity.

                         No securities are held for trading purposes.

                         Realized gains and losses on sales of  investments  are
                         recognized on a specific identification basis.

                         In May 1993, the Financial  Accounting  Standards Board
                         issued Statement of Financial  Accounting Standards No.
                         115,  "Accounting  for Certain  Investments in Debt and
                         Equity  Securities"  (FAS 115). The Company adopted the
                         provisions of the new standard for investments  held as
                         of  January  1,  1994.  The  cumulative  effect,  as of
                         January  1,  1994,   of  adopting  FAS  115   increased
                         shareholders'  equity by $9,498,382  (net of $5,114,513
                         in deferred income taxes) to reflect the net unrealized
                         gains on securities  classified  as  available-for-sale
                         previously  carried at amortized  cost or lower of cost
                         or market  value.  Adoption of FAS 115 did not have any
                         effect on deferred policy acquisition costs.

                         FAS  115   requires   management   to   determine   the
                         appropriate classification of securities at the date of
                         adoption,   and  thereafter  at  the  date   individual
                         investment securities are acquired. The appropriateness
                         of  such  classification  is  also  reassessed  at each
                         balance sheet date.

                         During 1995, the Financial  Accounting  Standards Board
                         (FASB)   allowed   a   one-time   reclassification   of
                         held-to-maturity   securities   to   available-for-sale
                         securities.   At  December   15,   1995,   the  Company
                         reclassified    $152,135,307    or    100%    of    its
                         held-to-maturity   securities  to   available-for-sale,
                         pursuant  to the  transition  provisions  of the FASB's
                         special  report  on FAS  115.  The  Company  recognized
                         $1,455,550 of unrealized  gains net of deferred  income
                         taxes  at   December   15,   1995   relating   to  this
                         reclassification.

                         Premiums   and   discounts  on   investments   in  debt
                         securities are amortized over their contractual  lives.
                         Realized  gains  and  losses,   including  losses  from
                         declines in value of specific securities  determined by
                         management to be other-than-temporary,  are included in
                         income.



                                                                       

<PAGE>

INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                              NOTES TO FINANCIAL STATEMENTS


Note 2.  Basis of Presentation and Significant Accounting Policies
                (Continued)

                (c)      Deferred Policy Acquisition Costs

                         The  costs  of  acquiring  new  business,   principally
                         commissions  and  certain  costs of  issuing  policies,
                         including    underwriting    salaries    and    medical
                         examinations,  all of which vary with and are primarily
                         related to the  production of new  business,  have been
                         deferred.  For traditional life insurance,  these costs
                         are being  amortized  over the premium paying period of
                         the  related   policies  in  proportion  to  the  total
                         anticipated premium revenue stream. Anticipated premium
                         revenue was estimated using the same assumptions  which
                         were used for computing  liabilities  for future policy
                         benefits.  The amount of costs to be deferred  would be
                         reduced  to  the  extent  future  policy  premiums  and
                         anticipated  investment income would not exceed related
                         costs.

                         Universal life and annuity deferred  acquisition  costs
                         are being amortized in relation to the present value of
                         estimated  future gross profits on the contracts over a
                         20 year period.

                         Policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>

                                              1996                   1995                   1994
                                           -----------            -----------            -----------
     <S>                                  <C>                    <C>                    <C>

     Balance at
      beginning
      of year                              $50,762,292            $44,951,795            $38,482,838
     Additions                              10,405,486              8,168,624              8,448,722
     Amortization                         (  3,141,350)          (  2,358,127)          (  1,979,765)
                                           -----------            -----------            -----------

     Balance at end
      of year                              $58,026,428            $50,762,292            $44,951,795
                                           ===========            ===========            ===========
</TABLE>

                (d)      Policy Revenues and Deposits

                         Premiums on traditional  life  insurance  contracts are
                         reported as earned revenue when due. For universal life
                         and  annuity  contracts,  deposits  are  recorded  in a
                         policyholder   account   which  is   classified   as  a
                         liability.   Revenue  is   recognized  as  amounts  are
                         assessed against the policyholder account for mortality
                         coverage and contract expenses.

                         Annuity  deposits  in  1996,  1995  and  1994  included
                         $4,894,042, $6,024,125 and $8,880,714, respectively, of
                         deposits  on annuity  contracts  purchased  by the Erie
                         Insurance   Group   Retirement   Plan  for   Employees.
                         Structured   settlement  annuities  sold  to  affiliate
                         property and casualty  companies of the Erie  Insurance
                         Group    totalled    $13,504,953,    $22,018,313    and
                         $11,431,965, in 1996, 1995, and 1994, respectively.


                                                                 

<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 2.  Basis of Presentation and Significant Accounting Policies
                (Continued)

                (e)      Policy Liabilities and Accruals

                         Liabilities   for  life  insurance  and   income-paying
                         annuity  future  policy  benefits  have  been  computed
                         primarily  by  the  net  level   premium   method  with
                         assumptions as to anticipated  mortality,  withdrawals,
                         lapses, and investment yields.  Deferred annuity future
                         policy  benefit  liabilities  have been  established at
                         accumulated  values  without  reduction  for  surrender
                         charges.  Reserves for  universal  life and  investment
                         contracts are based on the contract account balance, if
                         future  benefit  payments  in  excess  of  the  account
                         balance are not  guaranteed,  or the  present  value of
                         future   benefit   payments   when  such  payments  are
                         guaranteed.    Variations    are   inherent   in   such
                         calculations  due  to  the  estimates  and  assumptions
                         necessary in the calculations.  Significant assumptions
                         pertinent to policy liabilities follow:
<TABLE>
<CAPTION>

  Years
 of Issue            Policy Type                 Interest                 Mortality                         Withdrawal
<S>                 <C>                         <C>                  <C>                                    <C>

1967-1975           All life                    4% graded            1955-60 Basic Select                   Modified
                                                to 3 1/2%               Plus Ultimate                          Linton B
1976-1980           All life                    6% graded            1955-60 Basic Select                   Linton B
                                                to 4%                Plus Ultimate

1981-1988           Permanent life              7 1/4% graded           85% of 1965-70                         150% of
                                                to 6%                Select and Ultimate                    Linton A

1981-1988           Other life                  7 1/4% graded           85% or 90% of 1965-                    Pricing
                                                to 6%                70                                     assumptions
                                                                     Select and Ultimate

1988-1996           All life and                7% graded            Multiples of 1965-                     Pricing
                    annual renew-               to 6%                70                                     assumptions
                    able term                                        Select and Ultimate

1987-1996           Universal life              7 1/4% graded           85% or 90% of 1965-                    Pricing
                                                to 6%                70                                     assumptions
                                                                     Select and Ultimate
</TABLE>


                         Annuities  are  subject  to  varying   interest   rates
                         determined at the discretion of the Company  subject to
                         certain minimums.  During 1996, annuity deposits earned
                         interest  at  rates   ranging   from  5.00%  to  6.75%.
                         Management  believes  the  fair  value of  annuity  and
                         universal  life  deposits   approximates   the  amounts
                         recorded  in  the  financial  statements,  since  these
                         obligations   are  generally   subject  to  fluctuating
                         interest rates.



                                                                  

<PAGE>
INCORPORATED BY REFERENCE, PAGE 25 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 2.  Basis of Presentation and Significant Accounting Policies
                (Continued)

                (f)      Mortgage Loans and Other Invested Assets

                         Mortgage  loans are  comprised  primarily of commercial
                         real  estate  mortgage  loans  and are  carried  on the
                         statements  of  financial  position at unpaid  balances
                         adjusted for amortization of premium or discount,  less
                         allowance for possible  losses.  Other invested  assets
                         (primarily   investments   in   real   estate   limited
                         partnerships)  are recorded  under the equity method of
                         accounting. The fair values of mortgage loans and other
                         invested assets  approximate  the amounts  presented in
                         the financial  statements.  Fair values were determined
                         based on  analyses  of  historic  and  forecasted  cash
                         flows.

                (g)      Segment Information

                         All of the  operations  of the Company  are  considered
                         "life insurance" operations.

                (h)      Earnings per Share

                         Earnings  per share  amounts are based on the  weighted
                         average number of common shares outstanding during each
                         of the respective years.

                (i)      Income Taxes

                         Income tax  provisions  are based on earnings  reported
                         for financial statement purposes. Provisions for income
                         taxes include  deferred taxes resulting from changes in
                         cumulative temporary  differences between the tax bases
                         and   financial   statement   bases   of   assets   and
                         liabilities.

                         Deferred  tax assets and  liabilities  are adjusted for
                         the  effects  of  changes  in tax laws and rates on the
                         date of enactment.

                (j)      Short-Term Investments

                         The Company  considers  all highly  liquid  investments
                         purchased with an original  maturity of three months or
                         less to be  short-term  investments.  Carrying  amounts
                         approximate fair value because of the short maturity of
                         these investments.

                (k)      Reclassifications

                         Certain  amounts  as  previously   reported  have  been
                         reclassified   to   conform  to  the   current   year's
                         presentation.





                                                                   

<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 3.  Investments

                Fixed Maturities:

                At December 31, 1996, the amortized cost, estimated fair values,
                unrealized gains, and unrealized losses for investments in fixed
                maturities (all of which are available-for-sale) are as follows:
<TABLE>
<CAPTION>

                                           Amortized                Estimated              Unrealized           Unrealized
                                             Cost                  Fair Values               Gains                Losses
<S>                                     <C>                      <C>                       <C>                   <C>

U. S. Treasuries                        $  6,476,927             $  6,943,977              $   467,050           $
Foreign govern-
 ments                                     2,986,046                2,970,000                                         16,046
Political
 subdivisions                              4,676,466                5,003,331                  326,865
Special revenue                           24,697,215               25,021,613                  827,261               502,863
Public utilities                          92,987,333               93,608,151                2,154,870             1,534,052
U. S. industrial
 and miscellaneous                       370,740,927              374,435,097                8,244,393             4,550,223
Foreign industrial
 and miscellaneous                         7,062,274                7,547,530                  485,256
                                        ------------             ------------              -----------           -----------      

Total fixed
 maturities
 available-for-
 sale                                   $509,627,188             $515,529,699              $12,505,695           $ 6,603,184
                                        ============             ============              ===========           ===========
</TABLE>

                At December 31, 1995, the amortized cost, estimated fair values,
                unrealized gains, and unrealized losses for investments in fixed
                maturities available-for-sale were as follows:
<TABLE>
<CAPTION>

                                           Amortized                Estimated              Unrealized             Unrealized
                                             Cost                  Fair Values               Gains                   Losses
<S>                                      <C>                      <C>                       <C>                    <C>

U. S. Treasuries                         $  6,568,499             $  7,442,496              $   874,234            $       237
Political
 subdivisions                               2,063,013                2,310,929                  247,916
Special revenue                            50,683,120               52,853,098                2,861,312                691,334
Public utilities                          101,653,629              105,456,784                4,289,346                486,191
U. S. industrial
 and miscellaneous                        233,734,928              250,337,701               17,226,921                624,148
Foreign industrial
 and miscellaneous                          7,068,353                7,980,000                  911,647
                                         ------------             ------------              -----------            -----------

Total fixed
 maturities
 available-for-
 sale                                    $401,771,542             $426,381,008              $26,411,376            $ 1,801,910
                                         ============             ============              ===========            ===========
</TABLE>






                                                                    

<PAGE>

INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                              NOTES TO FINANCIAL STATEMENTS


Note 3.  Investments (Continued)

                The    following    is   a   summary    of   fixed    maturities
                available-for-sale  at December 31, 1996,  by remaining  term to
                contractual maturity:
<TABLE>
<CAPTION>

                                                                                     Amortized                Estimated
                                                                                       Cost                  Fair Values
                         <S>                                                       <C>                      <C>  

                         Maturity during the year
                         ending December 31
                           1997                                                    $    249,806             $    252,813
                           1998-2001                                                 60,650,272               59,549,556
                           2002-2006                                                105,473,662              105,235,615
                           Subsequent to 2006                                       341,253,448              348,421,715
                         Redeemable preferred stock                                   2,000,000                2,070,000
                                                                                   ------------             ------------

                                                                                   $509,627,188             $515,529,699
                                                                                   ============             ============
</TABLE>


                Bonds  having a fair value of  $1,903,500  at December  31, 1996
                were on deposit with various regulatory  authorities as required
                by law.  Bonds  having  a fair  value  of  $16,175,000  are also
                pledged as  collateral  on a  $10,000,000  line of credit with a
                bank.  There were no  borrowings  outstanding  on the line as of
                December 31, 1996.

                Equity Securities:

                At December 31, 1996,  cost,  estimated fair values,  unrealized
                gains,   and  unrealized   losses  for   investments  in  equity
                securities were as follows:
<TABLE>
<CAPTION>

                                                                         Estimated          Unrealized          Unrealized
                                                    Cost                Fair Values           Gains               Losses
<S>                                           <C>                     <C>                      <C>                  <C>

Common stock:
 Industrial and
  miscellaneous                               $  5,500,006            $  5,985,570             $  490,855           $  5,291

Preferred stock:
 Public utilities                                4,000,000               3,940,000                                    60,000
 U. S. banks,
  trusts and
  insurance companies                           78,622,165              81,682,550              3,685,885            625,500
 Foreign banks, trusts
  and insurance
  companies                                      3,000,000               3,180,000                180,000
 U. S. industrial
  and miscellaneous                             16,440,871              17,804,025              1,363,154
 Foreign industrial
  and miscellaneous                              3,900,000               3,960,000                 60,000
                                              ------------            ------------             ----------           --------

Total equity
 securities                                   $111,463,042            $116,552,145             $5,779,894           $690,791
                                              ============            ============             ==========           ========
</TABLE>






                                                                         

<PAGE>

INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                              NOTES TO FINANCIAL STATEMENTS


Note 3.  Investments (Continued)

                At December 31, 1995,  cost,  estimated fair values,  unrealized
                gains,   and  unrealized   losses  for   investments  in  equity
                securities were as follows:
<TABLE>
<CAPTION>

                                                                         Estimated          Unrealized          Unrealized
                                                    Cost                Fair Values           Gains               Losses
<S>                                            <C>                    <C>                      <C>                <C>

Common stock:
 Industrial and
  miscellaneous                                $  3,500,006           $  3,414,640             $                  $   85,366

Preferred stock:
 Public utilities                                 5,273,282              5,299,712                 26,430
 U. S. banks, trusts
  and insurance
  companies                                      80,749,715             81,431,625              2,811,760          2,129,850
 Foreign banks, trusts
  and insurance
  companies                                       3,000,000              3,225,000                225,000
 U. S. industrial
  and miscellaneous                              29,340,871             29,013,744              1,575,500          1,902,627
 Foreign industrial
  and miscellaneous                               3,900,000              3,940,000                 40,000
                                               ------------           ------------             ----------         ---------- 

Total equity
 securities                                    $125,763,874           $126,324,721             $4,678,690         $4,117,843
                                               ============           ============             ==========         ==========
</TABLE>

                Net  unrealized   gains  and  losses  on  investments  in  fixed
                maturities available-for-sale and equity securities are credited
                to or charged directly against shareholders' equity. At December
                31, 1996, net unrealized gains on these securities of $7,144,549
                consisted of $18,285,589 in unrealized  gains less $7,293,975 in
                unrealized losses and deferred taxes of $3,847,065.

                At December 31, 1996,  the Company did not have  investments  in
                securities of any single  issuer which  equalled or exceeded 10%
                of net  shareholders'  equity,  except  for  federal  home  loan
                debentures,  which equal  approximately 10% of net shareholders'
                equity.
















                                                              

<PAGE>
INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 3.  Investments (Continued)

                Realized   gains  and  losses  for  fixed   maturity  or  equity
                securities were as follows for the years ended December 31,:
<TABLE>
<CAPTION>

                                                                            1996               1995                1994
                                                                         ----------         ----------          ----------
                <S>                                                      <C>                <C>                 <C>

                Realized gains:
                  Fixed maturities                                          778,043          3,339,981           2,950,262
                  Preferred stock                                           652,786          3,655,231           1,465,492
                  Common stock                                            4,258,198          2,978,421           1,097,548
                                                                         ----------         ----------          ----------
                                                                          5,689,027          9,973,633           5,513,302
                                                                         ==========         ==========          ==========

                Realized losses:
                  Fixed maturities                                          325,843          1,711,293           1,016,607
                  Preferred stock                                            85,976            508,085              85,341
                  Common stock                                              290,311            270,457                  20
                                                                         ----------         ----------          ----------
                                                                            702,130          2,489,835           1,101,968
                                                                         ==========         ==========          ==========
</TABLE>

                Changes in unrealized  gains (losses)  include the following for
                the years ended December 31:
<TABLE>
<CAPTION>

                                                                  1996                    1995                   1994
                                                               -----------            -----------            -----------
                <S>                                           <C>                    <C>                    <C>

                Equity securities                              $ 4,528,256            $ 8,580,049           ($13,938,368)
                Debt securities
                 available-for-sale                           ( 18,706,955)            26,799,457           ( 19,042,193)
                Transferred to
                 available-for-sale
                 securities                                                             2,239,307
                Deferred federal
                 income taxes                                    4,962,544           ( 13,166,584)            11,543,196
                                                               -----------            -----------            -----------

                  Net unrealized
                   capital gains
                   (losses) for the
                   year                                       ($ 9,216,155)           $24,452,229           ($21,437,365)
                                                               ===========            ===========            ===========
</TABLE>


                Investment income consists of the following:
<TABLE>
<CAPTION>

                                                                   1996                   1995                   1994
                                                               -----------            -----------            -----------
                <S>                                           <C>                    <C>                    <C>

                Dividends                                      $10,168,153            $10,033,662            $ 9,413,996
                Interest                                        36,755,946             31,160,233             26,085,767
                Other                                              423,120                464,892                461,320
                Less expenses                                 (  1,398,250)          (    695,975)          (    394,834)
                                                               -----------            -----------            -----------

                                                               $45,948,969            $40,962,812            $35,566,249
                                                               ===========            ===========            ===========
</TABLE>

                                                           

<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 4.         Liability for Unpaid Policy and Contract Claims

                Activity in the liability for unpaid policy and contract  claims
                is as follows:
<TABLE>
<CAPTION>

                                                                       1996                 1995                 1994
                                                                    ----------           ----------           ----------
                <S>                                                <C>                  <C>                  <C>

                Balance at January 1                                $  897,026           $  797,485           $1,155,359
                Less reinsurance
                 recoverables                                      (   135,597)         (   112,203)         (   271,806)
                Less unpaid matured
                 endowments                                        (    16,370)
                                                                    ----------

                Net balance at January 1                            $  745,059           $  685,282           $  883,553

                Total death claims
                 incurred                                            9,688,242            7,438,758            4,068,876
                Total death claims paid                              8,863,167            7,378,981            4,267,147
                                                                    ----------           ----------           ----------

                Net balance at
                 December 31                                        $1,570,134           $  745,059           $  685,282
                Plus reinsurance
                 recoverables                                          132,971              135,597              112,203
                Plus unpaid matured
                 endowment                                                                   16,370

                Balance at December 31                              $1,703,105           $  897,026           $  797,485
                                                                    ==========           ==========           ==========
</TABLE>


Note 5.         Life Premiums and Annual Annuity and Universal Life Deposits

                Premiums on life insurance contracts and deposits on annuity and
                universal life contracts are summarized as follows:
<TABLE>
<CAPTION>

                                                                  1996                   1995                   1994
                                                               -----------            -----------            -----------
                         <S>                                   <C>                    <C>                    <C>

                         Life insurance premiums:
                          First year                           $ 6,505,484            $ 5,624,117            $ 5,563,765
                          Renewal                               22,533,313             20,140,296             17,368,018
                                                               -----------            -----------            -----------

                                                               $29,038,797            $25,764,413            $22,931,783
                                                               ===========            ===========            ===========

                         Annuity and universal
                          life deposits, net
                          of loading:
                          First year
                           and single                          $50,651,063            $57,606,715            $53,965,315
                          Renewal                               17,065,335             16,935,182             15,565,382
                                                               -----------            -----------            -----------

                                                               $67,716,398            $74,541,897            $69,530,697
                                                               ===========            ===========            ===========
</TABLE>




                                                                        

<PAGE>

INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                              NOTES TO FINANCIAL STATEMENTS


Note 6.         Federal Income Taxes

                Differences  between  tax  expense  and the amount  computed  by
                applying  the  federal  income  tax rate of 35% to  income  from
                operations are set forth as follows:
<TABLE>
<CAPTION>

                                                                       1996                 1995                 1994
                                                                    ----------           ----------           -------
                <S>                                                <C>                  <C>                  <C>

                Federal income taxes
                 at statutory rates                                 $9,324,940           $9,241,355           $9,267,827
                Dividends received
                 deduction and
                 tax-exempt interest                               (   772,484)         (   437,130)         (   398,527)
                Other                                                  423,981          (   281,945)             780,528
                                                                    ----------           ----------           ----------

                Income tax expense                                  $8,976,437           $8,522,280           $9,649,828
                                                                    ==========           ==========           ==========
</TABLE>

                Temporary  differences  between the financial statement carrying
                amounts and tax bases of assets and  liabilities  that give rise
                to deferred  tax assets  (liabilities)  at December 31, 1996 and
                1995, relate to the following:
<TABLE>
<CAPTION>

                                                                                         1996                   1995
                                                                                      -----------            -----------
                <S>                                                                  <C>                    <C>

                Deferred policy acquisition costs                                    ($17,613,507)          ($15,404,226)
                Liability for future life and
                 annuity policy benefits                                                6,739,570              7,527,275
                Unrealized gains                                                     (  3,847,065)          (  8,809,609)
                Other                                                                (    893,490)          (    292,695)
                                                                                      -----------            -----------

                                                                                     ($15,614,492)          ($16,979,255)
                                                                                      ===========            ===========
</TABLE>



Note 7.         Related Party Transactions

                The Erie  Family  Life  Insurance  Company is owned 21.6% by the
                Erie Indemnity Company and 52.2% by the Erie Insurance Exchange.

                The Erie Indemnity Company (EIC) is the attorney-in-fact for the
                Erie Insurance Exchange  (Exchange).  Certain operating expenses
                of  the  Company  are  paid  by  EIC  and  common  expenses  are
                allocated. Such allocated expenses comprise the major portion of
                Company general expenses.

                The Company  owns certain real estate which it leases to EIC for
                rentals of $423,120 per year through December 31, 2000. The real
                estate is recorded net of accumulated depreciation of $1,110,419
                and $1,024,352 at December 31, 1996 and 1995, respectively.







                                                                    

<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 7.         Related Party Transactions (Continued)

                The Erie Insurance Group affiliated  property/casualty insurance
                companies  periodically  purchase  annuities from the Company in
                connection with the structured  settlement of claims.  Also, the
                Erie Insurance  Group  Retirement  Plan for Employees  purchases
                from the  Company,  individual  annuities  for  some  terminated
                vested employees or beneficiaries  receiving benefits (excluding
                disabled   and   deferred   vested   participants).   These  are
                non-participating  annuity contracts under which the Company has
                unconditionally  contracted  to provide  specified  benefits  to
                beneficiaries  in  return  for a fixed  premium  from the  Plan.
                Annuity  deposit  balances   outstanding   relating  to  pension
                annuities sold to the Erie Insurance  Group  Retirement Plan are
                $32,812,000  and  $28,744,000  at  December  31,  1996 and 1995,
                respectively.   The  reserves  held  for  structured  settlement
                annuities  sold to the  affiliated  property/casualty  insurance
                companies equal $94,096,000 and $81,709,000 at December 31, 1996
                and 1995, respectively.

                On  December   29,  1995  a  Note   Payable  in  the  amount  of
                $15,000,000,  was  issued  by the  Company  in  accordance  with
                Pennsylvania  Insurance Company Law to the EIC in exchange for a
                cash sum of $15,000,000.  Interest on this Note is charged at an
                annual rate of 6.45% per annum. No payment of any portion of the
                principal  amount of this Note shall be demanded by EIC prior to
                December 31, 2005.  However,  the Company may pay, upon ten days
                prior written  notice to EIC, the interest or any portion of the
                principal  of this Note without  premium of penalty,  subject to
                the  prior  consent  of  the  Insurance   Commissioner   of  the
                Commonwealth  of  Pennsylvania.  Commencing on December 31, 2005
                the  outstanding  principal  balance of this Note (including all
                accrued  interest)  shall be repayable on demand by EIC or under
                such terms as EIC may elect, subject to the prior consent of the
                Commissioner.













                                                                    

<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 8.  Reinsurance

                The Company  cedes  insurance to other  insurers and  reinsurers
                under  various   contracts   (typically  under  excess  of  loss
                contracts)  which  cover  individual  risks.  These  reinsurance
                arrangements  minimize  losses  arising from large risks or from
                hazards  of  an  unusual  nature.   The  Company   accounts  for
                reinsurance activities in accordance with Statement of Financial
                Accounting  Standards  No. 113  ("SFAS  113"),  "Accounting  and
                Reporting for Reinsurance of  Short-Duration  and  Long-Duration
                Contracts." Pursuant to these standards,  amounts recoverable or
                credited  under  reinsurance  contracts,  are  included in total
                assets as reinsurance  recoverable  or credited for  reinsurance
                ceded.   The  cost  of  reinsurance   related  to  long-duration
                contracts  is  accounted  for  over  the  life of the  reinsured
                policies using assumptions consistent with those used to account
                for the underlying policies.

                A  contingent  liability  exists  with  respect  to  reinsurance
                receivables and the reserve credit for  reinsurance  ceded which
                would become a liability in the event such reinsurance companies
                are  unable  to  meet  their   obligations  under  the  existing
                reinsurance  agreements.  These  agreements  do not  relieve the
                Company of its primary obligation to its policyholders.

                Policy  revenues,   benefits  and  expenses   reflected  in  the
                statements  of  operations  have been  reduced by the  following
                amounts due to reinsurance cessions:
<TABLE>
<CAPTION>

                                                                     1996                   1995                   1994
                                                                  ----------             ----------             ----------
                  <S>                                             <C>                    <C>                    <C>

                  Policy revenues                                 $3,634,876             $3,354,484             $3,185,718


                  Death benefits                                   1,846,353              1,040,858                695,567


                  Future life policy
                   benefits                                          715,717                 98,567              1,120,329


                  Commissions                                      1,367,873              1,272,530              1,363,267
</TABLE>


 The Company has an insignificant amount of reinsurance assumed activity.













                                                               

<PAGE>
INCORPORATED BY REFERENCE, PAGE 27 AND 28 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                                              NOTES TO FINANCIAL STATEMENTS


Note 9.           Statutory Net Income and Shareholders' Equity, Dividend
                  Restrictions, and Accounting Practices

                  A  reconciliation  of net  income  as  filed  with  regulatory
                  authorities  to  net  income  reported  in  the   accompanying
                  financial  statements  for the years ended  December 31, 1996,
                  1995 and 1994, follows:
<TABLE>
<CAPTION>

                                                                       1996                   1995                  1994
                                                                   -----------            -----------           -----------
                  <S>                                             <C>                    <C>                   <C>

                  Statutory net income                             $12,636,652            $ 9,373,483           $ 9,678,535

                  Reconciling items:
                   Policy liabilities
                    and accruals                                     1,326,891                287,030               898,212
                   Deferred policy
                    acquisition costs,
                    net of amortization                              7,264,136              5,810,497             6,468,957
                   Investment valuation
                    differences                                        836,719              3,436,669             1,494,951
                   Deferred taxes                                 (  3,597,781)          (    914,707)         (  1,469,927)
                   Other, net                                     (    800,367)          (    111,380)         (    241,050)
                                                                   -----------            -----------           -----------

                  GAAP net income                                  $17,666,250            $17,881,592           $16,829,678
                                                                   ===========            ===========           ===========
</TABLE>


                  A  reconciliation  of  shareholders'   equity  as  filed  with
                  regulatory authorities to shareholders' equity reported in the
                  accompanying  financial statements as of December 31, 1996 and
                  1995, follows:
<TABLE>
<CAPTION>

                                                                                           1996                    1995
                                                                                       ------------            ------------
                  <S>                                                                 <C>                     <C>

                  Statutory shareholders' equity                                       $ 73,410,532            $ 66,735,780

                  Reconciling items:
                   Asset valuation and interest
                    maintenance reserves                                                 23,909,912              22,167,637
                   Investment valuation differences                                       9,236,050              23,400,679
                   Deferred policy acquisition costs                                     58,026,428              50,762,292
                   Surplus note                                                       (  15,000,000)          (  15,000,000)
                   Policy liabilities and accruals                                        2,073,738                 377,644
                   Deferred taxes                                                     (  15,614,492)          (  16,979,255)
                   Deferred and uncollected
                    prem                                                              (   3,952,730)          (   3,421,669)
                   Other, net                                                               541,051                 862,294
                                                                                       ------------            ------------

                  GAAP shareholders' equity                                            $132,630,489            $128,905,402
                                                                                       ============            ============
</TABLE>






                                                             

<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS



                          NOTES TO FINANCIAL STATEMENTS


Note 9.           Statutory Net Income and Shareholders' Equity, Dividend
                  Restrictions, and Accounting Practices (Continued)

                  As a Pennsylvania domiciled insurance company, the Company may
                  pay dividends  within the preceding  twelve months of not more
                  than the greater of (i) 10% of its statutory  surplus as shown
                  on its last annual  statement or (ii) the  statutory  net gain
                  from operations after dividends to  policyholders  and federal
                  income  taxes and  before  realized  gains or  losses  for the
                  period  covered by such  statement.  Accordingly,  the maximum
                  dividend  payout  which  may be  made in  1997  without  prior
                  Pennsylvania Commissioner approval is $10,516,000.

                  The Company  prepares its  statutory  financial  statements in
                  accordance  with  accounting   practices   prescribed  by  the
                  Pennsylvania   Insurance   Department.   Prescribed  statutory
                  accounting  practices include a variety of publications of the
                  National  Association of Insurance  Commissioners  (NAIC),  as
                  well as state laws,  regulations,  and general  administrative
                  rules.


Note 10.          Stock Split

                  On May 1, 1996 a three-for-one common stock split in which two
                  additional shares were issued for each share held was approved
                  by the Company's  shareholders  effective for  shareholders of
                  record May 2, 1996.  The par value of each share of the common
                  stock was changed to $.40 per share.  The number of authorized
                  shares was  increased to  15,000,000  shares and the number of
                  shares issued and outstanding was increased to 9,450,000.  All
                  per share data in the  accompanying  financial  statements has
                  been restated to reflect this change.
























                                                                   

<PAGE>
INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1996 ANNUAL
                        REPORT TO SHAREHOLDERS


                                               NOTES TO FINANCIAL STATEMENTS


Note 11.          Unaudited Quarterly Summary of Operations

                  The following summaries of operations for the four quarters of
                  1996 and 1995 are  unaudited.  In the opinion of the Company's
                  management,  all  adjustments  -  consisting  only  of  normal
                  recurring  accruals - necessary for a fair presentation of the
                  interim periods presented have been included.
<TABLE>
<CAPTION>

                                                  First                 Second               Third                Fourth
                                                 Quarter               Quarter              Quarter              Quarter
<S>                                            <C>                 <C>                   <C>                  <C>

1996

Policy revenues                                $ 7,167,502         $ 7,985,385           $ 7,680,471          $ 8,282,804
Investment income                               11,273,287          11,401,321            11,622,874           11,651,487
Realized gain
 on investments                                     10,322             762,305               898,400            3,315,870

Other income                                       136,492             214,533               126,258              190,927
                                               -----------         -----------           -----------          -----------

  Total revenues                               $18,587,603         $20,363,544           $20,328,003          $23,441,088
                                               ===========         ===========           ===========          ===========

Income from
 operations                                    $ 4,224,697         $ 6,991,906           $ 6,220,400          $ 9,205,684

Federal income taxes                             1,545,891           2,580,512             1,678,397            3,171,637
                                               -----------         -----------           -----------          -----------

  Net income                                   $ 2,678,806         $ 4,411,394           $ 4,542,003          $ 6,034,047
                                               ===========         ===========           ===========          ===========

  Earnings
   per share                                   $      0.28         $      0.47           $      0.48          $      0.64
                                               ===========         ===========           ===========          ===========


1995

Policy revenues                                $ 6,470,366         $ 7,266,659           $ 7,195,175          $ 7,141,797
Investment income                                9,903,802          10,141,044            10,465,117           10,452,849
Realized gain
 on investments                                    538,950             776,767             4,690,581            1,477,500

Other income                                       119,612             136,453               146,774              153,975
                                               -----------         -----------           -----------          -----------

  Total revenues                               $17,032,730         $18,320,923           $22,497,647          $19,226,121
                                               ===========         ===========           ===========          ===========

Income from
 operations                                    $ 4,588,580         $ 4,799,789           $10,011,847          $ 7,003,656

Federal income taxes                             1,502,821           1,641,840             3,075,792            2,301,827
                                               -----------         -----------           -----------          -----------

  Net income                                   $ 3,085,759         $ 3,157,949           $ 6,936,055          $ 4,701,829
                                               ===========         ===========           ===========          ===========

  Earnings
   per share                                   $      0.33         $      0.33           $      0.73          $      0.50
                                               ===========         ===========           ===========          ===========

</TABLE>

                                                               

<PAGE>