INCORPORATED BY REFERENCE, PAGE 16 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS

SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                                          Years Ended December 31
                                        1998                 1997                  1996                1995                1994
<S>                               <C>                  <C>                  <C>                  <C>                 <C>
OPERATING DATA

Total policy revenue              $   38,238,556       $   35,193,472       $   31,116,162       $   28,073,997      $   24,893,483 
Investment & other income             53,088,424           50,642,561           46,617,179           41,519,626          36,100,738 
Net realized gains on investments      4,882,586            5,201,365            4,986,897            7,483,798           4,411,334 

Total Revenues                    $   96,209,566       $   91,037,398       $   82,720,238       $   77,077,421      $   65,405,555 

Benefits & expenses                   62,268,502           60,834,143           56,077,551           50,673,549          38,926,049

Income from operations            $   33,941,064       $   30,203,255       $   26,642,687       $   26,403,872      $   26,479,506 

Provision for federal income taxes    11,855,585           10,642,887            8,976,437            8,522,280           9,649,828 

Net income                        $   22,085,479       $   19,560,368       $   17,666,250       $   17,881,592      $   16,829,678 

Net income per share              $         2.34       $         2.07       $         1.87       $         1.89      $         1.78 


FINANCIAL POSITION     

Total assets                      $  917,605,628       $  832,533,863       $  740,650,660       $  673,794,161      $  528,632,132 

Shareholders' equity              $  182,530,509       $  160,379,201       $  132,630,489       $  128,905,402      $   90,855,581 

Book value per share              $        19.32       $        16.97       $        14.03       $        13.64      $         9.61 

Dividends declared per share      $         0.60       $         0.54       $         0.50       $        0.453      $         0.40 

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 give retroactive effect for the three-for-one common stock split effective May 2, 1996.
</FN>
</TABLE>





                                       47
<PAGE>


INCORPORATED BY REFERENCE, PAGE 17 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS
    
                       ERIE FAMILY LIFE INSURANCE COMPANY

                     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 26-36,  as they contain
important  information  that is helpful in evaluating  the  Company's  operating
results and financial condition.

RESULTS OF OPERATIONS

OVERVIEW

Net  income  increased  to  $22,085,479,  or  $2.34  per  share,  in  1998  from
$19,560,368,  or $2.07 per share in 1997, an increase of 12.9 percent. Operating
results  remained  strong as total  policy  revenue  increased by 8.7 percent in
1998.  Life  insurance  in force  increased  by more than $1.3 billion to almost
$13.3 billion at December 31, 1998.

REVENUES

Analysis of Policy Revenue

Life premiums increased $2,905,757,  or 8.9 percent, for the year ended December
31, 1998 and $3,788,030,  or 13.0 percent, for the year ended December 31, 1997.
The growth in total life  premiums  is a  function  of growth in the  renewal of
policies written in prior years. Renewal premiums increased 11.6 percent in 1998
to  $28,969,834.  New life  insurance  coverage  placed in force during 1998 was
$2,562,163,000  compared to $2,224,323,000  in 1997 and  $2,129,639,000 in 1996.
Group  premiums  increased 5.9 percent to $2,505,972 in 1998 and 13.9 percent to
$2,366,645 in 1997.

First-year and single  universal life and annuity deposits  remained  relatively
constant at  $50,820,133 in 1998,  $50,675,240 in 1997 and  $50,651,063 in 1996.
Total annuity and universal  life deposits  were  $67,420,294,  $69,040,378  and
$67,716,398  in 1998,  1997 and  1996,  respectively.  Generally,  lower  market
interest  rates and a  flattening  interest  yield  curve made  fixed  annuities
relatively less attractive  compared to other investment  alternatives.  Annuity
deposits  recorded in connection  with annuity  contracts  purchased by the Erie
Insurance  Group  Retirement  Plan,  for  retired  vested  Employees   receiving
benefits,  were  $6,413,460,  $1,992,060  and  $4,894,042  for the  years  ended
December  31,  1998,  1997 and 1996,  respectively.  Also  included  in  annuity
deposits are  annuities  purchased  by  affiliated  property/casualty  insurance
companies  for use in  connection  with the  structured  settlement of insurance
claims.  Structured  settlement  annuity  deposits sold to Erie Insurance  Group
affiliate  companies totaled  $17,883,171,  $17,780,582 and $13,504,953 in 1998,
1997 and 1996, respectively.





                                       48
<PAGE>


INCORPORATED BY REFERENCE, PAGES 17 AND 18 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS


Analysis of Investment-related Income

Net investment income increased  $2,415,051,  or 4.8 percent, for the year ended
December 31, 1998 and  $3,965,323,  or 8.6 percent,  for the year ended December
31, 1997. The ratio of net investment  income to mean invested assets  continues
to remain steady at 7.2 percent in 1998, compared to 7.5 percent in 1997 and 7.4
percent  in 1996.  The  majority  of the  increase  in income  generated  by the
investment  portfolio was due to increased  levels of investment from cash flows
generated by the  Company's  operations  and by cash from annuity and  universal
life  deposits.  Net cash  provided in 1998 from annuity  deposits and universal
life deposits was $34,458,958 and $12,463,714, respectively.

During  1998,  1997 and  1996,  the  Company  generated  net  realized  gains on
investments of $4,882,586,  $5,201,365 and $4,986,897,  respectively,  primarily
from the sale of equity securities and fixed maturity investments.

BENEFITS AND EXPENSES

Analysis of Policy-related Benefits and Expenses

Net death benefits on life insurance  policies  declined 23.9 percent in 1998 to
$8,459,035,  compared to $11,117,175  in 1997 and $9,688,242 in 1996.  Mortality
experience  is  best  viewed  as a  long-term  consideration,  since  short-term
fluctuations  may  significantly  influence  results.  The  Company's  mortality
experience  has been good over the past several  years and  management  believes
that its underwriting philosophy and practices are sound.

Total  interest  credited  on annuity  and  universal  life  deposits  increased
$2,936,673, or 9.3 percent, for the year ended December 31, 1998 and $3,285,801,
or 11.6 percent, for the year ended December 31, 1997. This increase in interest
expense  was  primarily  due to new  annuity  and  universal  life  deposits  of
$67,420,294  received from  Policyholders  during 1998 and $69,040,378  received
during 1997. At December 31, 1998,  annuity deposits accruing interest were $524
million,  an increase of 7.1 percent from December 31, 1997,  and universal life
deposits  accruing  interest were $81 million,  an increase of 18.1 percent from
December 31, 1997. The interest rate credited on universal life deposits  ranged
from 6.25 percent to 7.00 percent.  The rate credited on annuity deposits ranged
from 5.00 percent to 6.00 percent.

Surrender  and other  benefits  increased  by $512,690 to $816,008  for the year
ended  December 31, 1998 and declined by $744,156 to $303,318 for the year ended
December 31, 1997. Surrender and other benefits include life surrender benefits,
matured endowments,  disability benefits, interest on death benefits and changes
in the  Company's  share of the  Pennsylvania  Employees  Group  Life  Insurance
(PEGLI) pool. PEGLI is a voluntary  reinsurance  pool that provides  reinsurance
coverage to primary insurers who insure  Commonwealth of Pennsylvania  employees
upon  their  retirement.  The  CIGNA  group  administers  the plan and  provides
information to determine each company's  share of pool assets and liabilities on
a yearly basis. During 1998, the change in the Company's share of the PEGLI pool
caused a decrease in benefits of $279,584  compared to a decrease of $904,897 in
1997.  The  change  in the  Company's  share of the  PEGLI  pool is  subject  to
fluctuations inherent in the underwriting of life insurance products.

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 1998  increase  in future life policy
benefits  totaled  $4,172,578,  compared to $4,538,298 in 1997 and $4,549,404 in
1996.  In 1998,  the future  policy  benefit  additions,  due to increased  life
insurance in force, were offset by increased credits for reinsurance and a shift
in product mix from whole life policies to term policies.

Generally,  the costs  incurred  by the Company to acquire  business,  including
underwriting,  commission and bonus costs,  are capitalized and 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 policy
acquisition costs (DAC) increased $700,589,  or 19.0 percent, for the year ended
December 31, 1998 and $553,616, or 17.6 percent, for the year ended December 31,
1997.  The growth in  amortization  expense in 1998 and 1997 was  affected  by a
decrease in underlying interest rate assumptions.





                                       49
<PAGE>


INCORPORATED BY REFERENCE, PAGE 18 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS

Analysis of Other Expenses

Direct  commission  costs include new and renewal  commissions,  and promotional
incentives  to Agents.  These  direct  commission  expenses  are offset by ceded
commissions  received from reinsurers.  The reported expense is also affected by
the amount of commission  expenses  capitalized to the DAC.  Commissions,  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 incentive  commissions
and some  second-year  commissions  qualify for deferral as DAC. 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.

Commission  expense increased  slightly to $1,776,577 in 1998 from $1,765,563 in
1997. Commission expense fell 4.1 percent in 1997 from $1,841,861 in 1996. Ceded
reinsurance commissions are netted against commission expense. Ceded commissions
totaled $1,653,737 in 1998, $1,462,295 in 1997 and $1,367,873 in 1996.

Company  promotional  incentives include trips awarded to Agents for selling the
Company's  products.  In 1998,  the Company  participated  in the Erie Insurance
Group travel  incentive  program  "Caribbean  Classic,"  where Agents can earn a
Caribbean  cruise in March,  2000 for  meeting  certain  production  goals.  The
contest  period runs from June of 1998 to August of 1999.  In 1996,  the Company
participated  in another travel  incentive  program  "California  Dreamin'." The
estimated  cost of these  incentive  awards,  net of  deferrals,  is included in
commission expense.

Operating  expenses  of the  Company  are  paid by Erie  Indemnity  Company  and
reimbursed  monthly by the Company.  The portion of Erie Insurance  Group common
overhead expenses attributable to the Company are also reimbursed monthly. These
expenses,   which  consist  of  salaries  and  wages,  employee  benefits,  data
processing   expenses,   occupancy   costs,   and  other   office  and   general
administrative expenses,  comprise a majority of the Company's general expenses.
Certain of these  expenses  of the Company  are  deferred as policy  acquisition
costs,  including medical  inspection and exam fees related to new policy sales,
salaries and Employee benefits of underwriting  personnel,  and incentive awards
to sales management for the production of life and annuity business.

General  expenses  increased  $1,186,484,  or 18.7  percent,  for the year ended
December 31, 1998 and $518,815,  or 8.9 percent, for the year ended December 31,
1997. The 1998 increase is primarily due to  approximately  $680,000 of start-up
project  costs  related to new policy  administration  system  (the  "Cyberlife"
system). There were no Cyberlife system expenses charged to operations in 1997.

Taxes,  licenses and fees declined  $889,231 to $581,353 in 1998 and $199,013 to
$1,470,584 in 1997. The 1998 decrease was a result of a $954,000  refund due the
Company from the  Pennsylvania  Life and Health Insurance  Guaranty  Association
resulting from a recalculation  of annuity  assessments  paid in previous years.
The  1997  decrease  was  due to  reduced  assessments  made by the  state  life
insurance guaranty associations.






                                       50
<PAGE>


INCORPORATED BY REFERENCE, PAGE 19 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS


FINANCIAL CONDITION

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, 1998,
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 are designed and portfolios are structured
to match the features of the life  insurance  and annuity  products  sold by the
Company.   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 capital appreciation and current income.

At  December  31,  1998,  the  Company's   investment  portfolio  consisting  of
marketable  short-term  investments,  investment-grade  bonds, common stocks and
preferred stocks totaled $777 million, or 84.7 percent,  of total assets.  These
resources  provide  the  liquidity  the  Company  requires  to  meet  known  and
unforeseen  demands on its funds.  At December 31,  1998,  78.1 percent of total
invested assets were invested in fixed  maturities.  Preferred stock  represents
10.1 percent or $78 million and common  stock  represents  7.4  percent,  or $57
million,  of total invested  assets at December 31, 1998,  while real estate and
mortgage loans and other invested assets  (primarily  investments in real estate
and security  limited  partnership)  make up only 3.6 percent of total  invested
assets. Mortgage loans 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 consisted of the following:
                     
                                                   Invested Assets
                                                   (In Thousands)
                                                     December 31,
                                               1998               1997
                                             --------          --------

Fixed maturities available-
      for-sale                               $605,523          $558,177
Equity securities:
Preferred stock                                78,479            92,502
Common stock                                   57,315            28,340
Real estate                                     1,541             1,624
Mortgage loans                                 10,070            10,050
Policy loans                                    6,013             5,100
Other invested assets                          15,941             7,240
                                             --------          --------
   Total invested assets                     $774,882          $703,033
                                             --------          --------





                                       51
<PAGE>


INCORPORATED BY REFERENCE, PAGE 20 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS


Fixed Maturities

The  Company's  fixed  maturities  consist of  investments  in bonds.  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.


Diversification of Fixed Maturities
at December 31, 1998
<TABLE>
<CAPTION>
                                                            Gross            Gross
                                          Amortized      Unrealized       Unrealized         Carrying
                                            Cost            Gains           Losses             Value       
(In Thousands)
<S>                                       <C>              <C>              <C>              <C>
U.S. Treasuries and
  government agencies                     $ 20,431         $ 1,360          $   27           $ 21,764
States and political
  subdivisions                               2,056             107               0              2,163
Special revenue                             11,065             783               0             11,848
Public utilities                            70,265           3,731             455             73,541
U. S. banks, trusts and
  insurance companies                      113,543           8,531           1,086             120,988
U. S. industrial and
  miscellaneous                            331,432          17,019           1,202             347,249
Foreign governments-
  agency                                     2,990               0             308               2,682
Foreign industrial
  and miscellaneous                         24,693             908             313              25,288
                                          --------         -------          ------           ---------

Total fixed maturities                    $576,475         $32,439          $3,391           $ 605,523 
                                          ========         =======          ======           =========
</TABLE>

Fixed maturity  investments  consist of  high-quality,  marketable  bonds,  98.1
percent or $594 million of which are rated at  investment-grade  levels (Baa/BBB
or better). Included in this investment-grade category are $349 million of bonds
characterized as of the "highest"  quality or "Class 1" securities as defined by
the  National   Association  of  Insurance   Commissioners   (NAIC).  The  below
investment-grade  category consisted of $11.8 million of "medium" quality bonds.
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.

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 respond 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, 1998 and 1997, net unrealized
gains on fixed maturities available-for-sale amounted to $18.9 million and $14.6
million, respectively, net of deferred taxes.





                                       52
<PAGE>


INCORPORATED BY REFERENCE, PAGE 21 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS


Equity Securities

Equity securities consist of common and nonredeemable preferred stocks which are
carried on the statements of financial position at market value. At December 31,
1998 and 1997, common and nonredeemable  preferred stock held by the Company had
net unrealized  gains of $7.3 million and $5.9 million,  net of deferred  taxes,
respectively.  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,  all of which are of the "highest" or "high" quality,  as
defined  by  the  NAIC.   The  common  stock   portfolio   provides   liquidity,
diversification and income  opportunities to meet the earnings objectives of the
Company.

Diversification of Equity Securities
at December 31, 1998
<TABLE>
<CAPTION>
                                                            Gross           Gross
                                          Amortized      Unrealized      Unrealized          Carrying
                                            Cost            Gains          Losses              Value       
(In Thousands)
<S>                                       <C>              <C>              <C>              <C>
Common stock:
  U. S. banks, trusts
    and insurance
    companies                             $  7,254         $ 4,523          $  172           $ 11,605
  U. S. industrial and
    miscellaneous                           40,574          11,751           6,615             45,710
Preferred stock:
  Public utilities                           4,000              40               0              4,040
  U. S. banks, trusts
    and insurance
    companies                               43,057           1,864             151             44,770
  U. S. industrial and
    miscellaneous                           12,951             216             529             12,638
  Foreign banks,
    trusts and insurance
    companies                               12,874             441             384             12,931
  Foreign industrial
    and miscellaneous                        3,900             200               0              4,100
                                          --------         -------          ------           --------

Total equity securities                   $124,610         $19,035          $7,851           $135,794 
                                          ========         =======          ======           ========
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

GENERAL CONSIDERATIONS & ANALYSIS

Liquidity is a measure of the  Company's  ability to secure  enough cash to meet
its contractual obligations 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 1998 was  $19,803,314  compared to
$14,963,909 in 1997, and $14,480,503 in 1996. The Company's  liquidity  position
remains  strong as invested  assets  increased  10.2  percent to $775 million at
December  31,  1998.  The  majority  of  invested  assets are liquid  marketable
securities.




                                       53
<PAGE>


INCORPORATED BY REFERENCE, PAGES 21 AND 22 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS


Annuity  and  universal  life  deposits,  which do not  appear as revenue on the
financial  statements,  are a source of funds.  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  received were $67,420,294
in 1998, $69,040,378 in 1997 and $67,716,398 in 1996.

The Company's commitments for expenditures as of December 31, 1998 are primarily
for policy death benefits, policy surrenders and withdrawals,  general operating
expenses,  federal income taxes,  dividends to  shareholders  and its additional
investment  in  the  new  policy   administration   system  (Cyberlife).   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  and its liquid  assets and  marketable  securities  will  enable the
Company to meet foreseeable cash requirements. The Company has also arranged for
a $10 million line of credit with a commercial  bank.  There were no  borrowings
under this credit line in 1998, 1997 or 1996.

The Company's  actuarial  opinion for each year includes 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 nine  different
interest rate  scenarios.  The  projected  annual gains and market value surplus
results were positive under all nine scenarios.

REGULATORY CONSIDERATIONS

Risk-Based Capital

The  Commonwealth of  Pennsylvania  follows the statutory  accounting  practices
(SAP) minimum  Risk-Based  Capital  (RBC)  requirements  for domestic  insurance
companies  that were  developed by the NAIC. The NAIC standard set for measuring
RBC is a method of calculating the minimum amount of capital  appropriate for an
insurance company to support its overall business operations in consideration of
its  size and risk  profile.  The RBC  formula  is used by the  state  insurance
regulators as an early  warning tool to identify,  for the purpose of initiating
regulatory  action,   insurance  companies  that  potentially  are  inadequately
capitalized.  In addition,  the formula defines  minimum capital  standards that
will  supplement  the current  system of low fixed  minimum  capital and surplus
requirements  on a  state-by-state  basis.  At December  31,  1998,  the Company
substantially  exceeded  the minimum  risk-based  capital  levels  that  require
regulatory action.

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 for $15 million.  Interest on
this note is charged at an annual rate of 6.45 percent.

Notwithstanding  any other  provision  in this  note,  no  payment of all or any
portion  of the  principal  amount  of this  note  may be  demanded  by the Erie
Indemnity Company prior to December 31, 2005,  provided that the Company may pay
upon ten (10) days' prior  written  notice to the Erie  Indemnity  Company,  the
interest  on, all or any  portion  of the  principal  of,  this note at any time
without  premium  or  penalty,  subject to the prior  consent  of the  Insurance
Commissioner  of  the   Commonwealth  of  Pennsylvania   (the   "Commissioner").
Commencing on December 31, 2005, the outstanding  principal balance of this note
(including  all  accrued  interest)  shall be  repayable  on  demand by the Erie
Indemnity  Company or under such terms as the Erie Indemnity  Company 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.




                                       54
<PAGE>


INCORPORATED BY REFERENCE, PAGES 22 AND 23 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS


IMPACT OF RECENT ACCOUNTING STANDARDS

CAPITALIZATION OF INTERNAL USE SOFTWARE COSTS

In March of 1998, the American  Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." This SOP was effective for fiscal years
beginning  after  December 15, 1998 and provided  guidance on accounting for the
costs of computer  software  developed or obtained for internal use. The Company
adopted  this SOP in the first  quarter of 1998.  Certain  salaries and benefits
were capitalized and deferred and will be charged against future operations.

DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE

In June 1997,  the  Financial  Accounting  Standards  Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related  Information." SFAS No.
131 requires a company to utilize a "management  approach" to reporting  segment
information.  The Company currently reports segment information  consistent with
that of internal  management  reporting  and, as a result,  the adoption of this
standard  has  little  effect on current  presentation  of  financial  statement
information.


FACTORS WHICH MAY AFFECT FUTURE RESULTS

GEOGRAPHIC EXPANSION

In addition to its current operating territory,  which includes eight states and
the  District  of  Columbia,  the  Company,  Erie  Insurance  Exchange  and Erie
Insurance Company are licensed to do business in the state of Illinois. The Erie
Insurance Group,  through these entities,  began marketing insurance in Illinois
early in 1999.  All products  currently  being  marketed in other states will be
written in Illinois,  subject to the requirements of Illinois law. The expansion
into a new operating territory offers the opportunity for premium growth.

FINANCIAL SERVICES DEREGULATION

Federal action begun in 1997 could  culminate in significant  changes in the way
insurance companies, banks and securities firms are regulated in the future. The
elimination of some regulatory  barriers to banks entering the insurance  market
and the interjection of Federal  governmental  regulation into the traditionally
state-regulated  insurance industry could  dramatically  change the ground rules
under which  insurance  products  are  marketed.  Further  action and  advancing
technology  will likely  influence  the way the  property  and casualty and life
insurance industries distribute, price and service their products.

MARKETING CONSIDERATIONS

The Company  offers  investment  products  which  compete  with  numerous  other
investment alternatives commercially available. The Company's ability to attract
investors  depends in large part on the relative  attractiveness of its products
compared to those other  available  products.  Factors such as the interest rate
environment and the  performance of the stock market  influence this ability but
are not controllable by management.

INVESTMENT OPERATIONS

The Company's portfolio of fixed maturities and equity securities, in particular
the common stock  portfolio,  is subject to the ongoing  risks  associated  with
fluctuations  in  interest  rates,   the  stock  market  and  general   business
conditions. Past investment results are not indicative of investment performance
in future periods. The Company's common stock portfolio of $57.3 million, or 7.4
percent of invested  assets,  is subject to stock market price  volatility  that
could  affect  the  investment  returns  from  these  assets  and the  Company's
operating results.




                                       55
<PAGE>
INCORPORATED BY REFERENCE, PAGES 23 AND 24 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS

YEAR 2000 READINESS DISCLOSURE

Erie Family Life  Insurance  Company is dependent on electronic  processing  and
information   systems  to  conduct  business.   Like  all  companies  with  such
dependencies,  the Company is continually  faced with significant  decisions and
technology  challenges.  Among  these  challenges  is the  so-called  "Year 2000
Issue," the inability of many computer systems to recognize dates beginning with
the  year  2000 and  beyond.  The Year  2000  Issue  presents  a  profound  risk
management  issue which is perhaps more  pervasive than any previous issue faced
by businesses of all types. To effectively  manage the risks associated with the
Year 2000 Issue,  management has taken measures  designed to reduce  exposure to
business interruption.

The effect of the Year 2000 Issue cannot be measured  exactly with certainty and
any  forecasts  about  the  effect  of  the  Year  2000  Issue  and  remediation
projections  are necessarily  forward-looking  statements and are subject to the
risks and uncertainties noted on page 24.

Company's State of Readiness

Exposure  to systems  failure is a risk faced by the Company  every day.  Unlike
these other risks,  the date change to the Year 2000 is predictable.  Efforts to
mitigate the Company's  exposure through effective  identification,  remediation
and contingency planning at the Company are organized and being conducted on all
major business processes to minimize the risks.

To assure that the Company effectively  addresses this risk at all levels of the
organization,  management  has in place a structure  that provides  oversight of
Year 2000 risk management  activities  being conducted within the major business
units of the  Company.  Oversight by Executive  and Senior  Management  is being
facilitated  through a dedicated project office. This office, (the "Y2K Office")
works in consultation with each business unit to assure consistency and adequacy
of risk management activities and to collect companywide project status and cost
information.

Within each key business unit,  each key business  process is being evaluated to
assure that  underlying  systems and  components  exposed to potential Year 2000
failure are appropriately identified and addressed. Underlying system components
include  internal  operating  systems  (hardware and  software),  infrastructure
elements,   including   non-information   technology   components  and  systems,
communications systems and devices, internally developed mainframe applications,
personal  computer  hardware and  software,  external  parties and providers and
peripheral devices.

Each  of the  underlying  components  supporting  key  business  processes  were
identified and mission critical business processes were prioritized during 1998.
Priority was assigned  based on the relative  importance of the component to the
business process and based on the importance of the business process relative to
other business processes.

Efforts to remediate  non-compliant internal components began in January of 1999
and are  continuing  throughout  the first quarter of 1999. It is estimated that
the total effort for all remediation, including application reviews conducted in
1998,  will  amount to  approximately  1000  hours.  Management  estimates  that
approximately  300 hours of programming  effort  remains to be completed  during
1999, which the Company believes to be insignificant.

As individual  components are being re-coded,  component  functionality is being
tested  prior to placing  remediated  systems  into  production.  To  supplement
component testing and to provide a greater degree of assurance that our business
functions will be  uninterrupted,  full systems Year 2000 simulation  testing is
planned  for March,  April and May of 1999.  Full  systems  testing  will entail
simultaneous  testing of the  underlying  components  necessary  to support  key
business processes. This effort incorporates key third parties with which we are
coordinating our testing efforts. As testing  progresses,  each business unit is
consulting  with the Y2K Office to  develop  contingency  plans to  address  the
possibility of component or business process failures. The extent of contingency
planning will be  responsive to the risk of failure and the relative  importance
of the component or business  process.  Contingency  planning is addressing both
business continuity and system recovery.

Cost to Address Year 2000 Issues

Based upon known  factors and the measures  taken to date,  management  does not
anticipate  significant  future  costs in order to address  the Year 2000 Issue.
Costs  anticipated  include  personnel  costs (to test  internal  systems,  test
external party  interfaces,  develop  contingency plans and replace software and
hardware  devices  that are not  Year  2000  compliant)  and  personal  computer
software and hardware  replacement  costs. Costs that have been incurred to date
have been charged to operations as incurred. Estimates of both the cost incurred
to date and future costs are not material to the financial  position and results
of operations of the Company.  Management  believes the cost (if any) to replace
non-compliant software and hardware will be insignificant.

                                       56
<PAGE>
INCORPORATED BY REFERENCE, PAGES 24 AND 25 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS

During the first quarter of 1999,  Erie Indemnity  Company  engaged  consultants
from an  international  professional  services  firm to  prepare  a Y2K  project
methodology  evaluation.  The Y2K  project  of the  Company is  included  in the
engagement.  The consultants  recommendations  concerning certain aspects of our
project  methodology and  remediation,  testing and planning  effort,  have been
incorporated into our Y2K program. Approximately $25,000 of consulting fees will
be borne by Erie Family Life in 1999.

Risk of the Company's Year 2000 Issues

The proper  functioning of the Company's  computer  systems and  applications is
critical  to  the  continued   operations  of  the  Company.  By  systematically
addressing the Year 2000 Issue,  the costs and  uncertainty  associated  with it
have been reduced significantly.  Management believes that all critical business
process  systems and  applications  will be Year 2000 compliant  sufficiently in
advance  of  January  1, 2000 and,  therefore,  will not  adversely  affect  the
operations of the Company.

It is possible  that certain key external  parties will certify their systems as
year 2000  compliant  when in fact they are not. The inability of the Company to
respond to  uncontrollable  circumstances is always a concern.  For example,  if
numerous key third parties are unable to support the  operations of the Company,
operations  could be adversely  affected.  The Company,  as part of overall risk
management,  will be preparing  contingency plans during 1999 in response to the
possibility of key third party  failure.  Management  does not anticipate  these
scenarios as having a greater than remote possibility of occurrence.

Company's Contingency Plans if a Vendor or the Company fail to Address Year 2000
Issues

This risk described above will be addressed through  contingency  planning.  The
level of contingency  planning will be commensurate with the relative importance
of the external  party to the  operations  of the Company and the relative  risk
that  the  party  will  be  unable  to  operate  satisfactorily  in  2000.  Such
contingency  plans are being  developed  and will be finalized  during the first
nine months of 1999.

The statements herein are forward-looking  statements  containing the beliefs of
management that involve risks and  uncertainties.  These risks and uncertainties
include,  but are not limited to, human or mechanical  errors in correcting Year
2000 issues; incorrect or improper (intentional or otherwise) representations by
third parties as to their  compliance  or  remediation  efforts;  the failure of
third parties to follow through on their  remediation  efforts and the inability
to  identify  and/or  locate  processing  chips  that are  subject  to Year 2000
problems.


MARKET FOR THE REGISTRANT'S 
COMMON STOCK AND RELATED SHAREHOLDER MATTERS

Currently  there is no market on which the  Registrant's  stock is  traded.  The
Company had 1,108 shareholders of record of common stock on December 31, 1998.


Date Dividends Declared                           Dividends per Share Declared

February 17, 1998                                            $  .150
April 28, 1998                                                  .150
June 15, 1998                                                   .150
September 16, 1998                                              .150            
                                                             -------
                                                             $  .600            

March 5, 1997                                                $  .135
April 29, 1997                                                  .135
June 17, 1997                                                   .135
September 15, 1997                                              .135            
                                                             -------
                                                             $  .540            


"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,"  "Investments,"  "Factors Which May Affect Future  Results," and the
"Year 2000 Readiness Disclosure" 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)  mortality  rates,
securities market fluctuations and technological difficulties and advancements.

                                       57
<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, 1998            
                                                                     

                       Fixed Maturities - Available For Sale           78%
                       Preferred Stocks                                10%
                       Common Stocks                                    7%
                       Other Invested Assets                            2%
                       Mortgage Loans                                   1%
                       Policy Loans                                     1%
                       Real Estate                                      1%


Graph #2               DIVERSIFICATION OF FIXED MATURITIES
                       at December 31, 1998 - Carrying/Market Value

                       U.S. Industrial & Miscellaneous                 57%
                       U.S. Banks, Trusts and Insurance Companies      20%
                       Public Utilities                                12%
                       Foreign Industrial & Miscellaneous               4%
                       U.S. Treasuries & Government Agencies            3%
                       Special Revenue                                  2%
                       Foreign Government Agencies                      1% 
                       States & Political Subdivisions                  1%



Graph #3               QUALITY*  OF BOND PORTFOLIO
                       at December 31, 1998 - Carrying/Market Value

                          A/A                                          40%
                        Baa/BBB                                        33%
                         Aa/AA                                         17%
                        Aaa/AAA                                         8%
                         Ba/BB                                          2%

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


Graph #4               DIVERSIFICATION OF EQUITY SECURITIES
                       at December 31, 1998 - Carrying/Market Value


                       (2) U.S. Banks & Insurance                      33%
                       (1) U.S. Industrial & Miscellaneous             34%
                       (2) Foreign Banks & Insurance                   10%
                       (2) U.S. Industrial & Miscellaneous              9%
                       (1) U.S. Banks & Insurance                       8%
                       (2) Foreign Industrial & Miscellaneous           3%
                       (2) Public Utilities                             3%
                       

                       (1)  Common Stock
                       (2)  Preferred Stock




                                       58
<PAGE>


INCORPORATED BY REFERENCE, PAGE 26 OF THE COMPANY'S 1998 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,  1998 and 1997,  and the  related
statements of operations,  shareholders'  equity, and cash flows for each of the
three years in the period ended December 31, 1998.  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, 1998 and 1997,  and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.




/s/ Brown Schwab Bergquist & Co.




Erie, Pennsylvania
February 16, 1999










                                       59
<PAGE>


INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                        STATEMENTS OF FINANCIAL POSITION
                        As of December 31, 1998 and 1997
<TABLE>
<CAPTION>


   ASSETS                                                                    1998                    1997      
                                                                         ------------            ------------
<S>                                                                      <C>                     <C>
Investments:
  Fixed maturities at fair value
    (amortized cost of $576,475,130
     and $535,792,641, respectively)                                     $605,523,237            $558,177,487
  Equity securities at fair value
    (cost of $124,609,940 and
    $111,786,894, respectively)                                           135,793,710             120,841,893
  Real estate                                                               1,541,445               1,624,306
  Policy loans                                                              6,013,130               5,099,671
  Real estate mortgage loans                                               10,070,394              10,049,733
  Other invested assets                                                    15,940,561               7,240,282
                                                                         ------------            ------------

          Total investments                                              $774,882,477            $703,033,372

Cash and cash equivalents                                                  44,808,427              42,287,398
Premiums receivable from policyholders                                      3,830,625               3,471,385
Reinsurance recoverable                                                       568,521                 350,837
Other receivables                                                             355,067                 182,711
Accrued investment income                                                  10,282,002              10,273,259
Deferred policy acquisition costs                                          70,916,261              64,567,085
Reserve credit for reinsurance ceded                                        5,994,390               5,041,530
Prepaid federal income taxes                                                        0                 146,984
Other assets                                                                5,967,858               3,179,302
                                                                         ------------            ------------

          Total assets                                                   $917,605,628            $832,533,863
                                                                         ============            ============
</TABLE>





                                       60
<PAGE>


INCORPORATED BY REFERENCE, PAGE 28 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      

<TABLE>
<CAPTION>


   LIABILITIES AND SHAREHOLDERS' EQUITY                                      1998                    1997      
                                                                          -----------             -----------
<S>                                                                      <C>                     <C>
LIABILITIES
  Policy liabilities and accruals:
    Future life policy benefits                                          $ 64,539,220            $ 59,413,782
    Policy and contract claims                                              1,801,030               2,049,677
    Annuity deposits                                                      524,122,492             489,444,701
    Universal life deposits                                                81,354,026              68,890,312
    Supplementary contracts not
      including life contingencies                                            607,094                 825,927
  Other policyholder funds                                                  8,166,371               6,595,330
  Federal income taxes payable                                                612,272                       0
  Deferred income taxes                                                    31,252,214              24,409,317
  Reinsurance premium due                                                     301,487                 424,745
  Accounts payable and accrued
    expenses                                                                4,215,186               2,668,688
  Note payable to Erie Indemnity Company                                   15,000,000              15,000,000
  Due to affiliate                                                          1,686,227               1,156,431
  Dividends payable                                                         1,417,500               1,275,752
                                                                         ------------            ------------

          Total liabilities                                              $735,075,119            $672,154,662
                                                                         ------------            ------------


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
  Accumulated other comprehensive income                                   26,171,727              20,435,901
  Retained earnings                                                       151,948,782             135,533,300
                                                                         ------------            ------------

          Total shareholders' equity                                     $182,530,509            $160,379,201
                                                                         ------------            ------------
          Total liabilities and
            shareholders' equity                                         $917,605,628            $832,533,863
                                                                         ============            ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>











                                       61
<PAGE>


INCORPORATED BY REFERENCE, PAGE 27 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                                         ERIE FAMILY LIFE INSURANCE COMPANY

                                              STATEMENTS OF OPERATIONS
                                    Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>

                                                       1998                    1997                   1996     
                                                   -----------             -----------             -----------
<S>                                                <C>                     <C>                     <C>
REVENUES
  Policy
    Life premiums                                  $35,732,584             $32,826,827             $29,038,797
    Group premiums                                   2,505,972               2,366,645               2,077,365
                                                   -----------             -----------             -----------

    Total policy
      revenue                                      $38,238,556             $35,193,472             $31,116,162

  Net investment income                             52,329,343              49,914,292              45,948,969
  Net realized gains on
    investments                                      4,882,586               5,201,365               4,986,897
  Other income                                         759,081                 728,269                 668,210
                                                   -----------             -----------             -----------

    Total revenues                                 $96,209,566             $91,037,398             $82,720,238

BENEFITS AND EXPENSES
  Death benefits                                   $ 8,459,035             $11,117,175             $ 9,688,242
  Interest on annuity
    deposits                                        29,869,646              27,663,157              25,108,877
  Interest on universal
    life deposits                                    4,652,656               3,922,472               3,190,951
  Surrender and other
    benefits                                           816,008                 303,318               1,047,474
  Increase in future life
    policy benefits                                  4,172,578               4,538,298               4,549,404
  Amortization of deferred
    policy acquisition
    costs                                            4,395,555               3,694,966               3,141,350
  Commissions                                        1,776,577               1,765,563               1,841,861
  General expenses                                   7,545,094               6,358,610               5,839,795
  Taxes, licenses
    and fees                                           581,353               1,470,584               1,669,597
                                                    ----------             -----------             -----------

    Total benefits
      and expenses                                 $62,268,502             $60,834,143             $56,077,551
                                                   -----------             -----------             -----------

    Income from
      operations                                   $33,941,064             $30,203,255             $26,642,687

Provision for federal income
  taxes                                             11,855,585              10,642,887               8,976,437
                                                   -----------             -----------             -----------

    Net income                                     $22,085,479             $19,560,368             $17,666,250
                                                   -----------             -----------             -----------


    Net income per
      share                                        $      2.34             $      2.07             $      1.87
                                                   ===========             ===========             ===========

<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>




                                       62
<PAGE>


INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                       STATEMENTS OF SHAREHOLDERS' EQUITY
                  Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>


                                                      Total
                                                   Shareholders'         Comprehensive           Retained
                                                      Equity                 Income              Earnings       
<S>                                               <C>                   <C>                   <C>                           
Balance, January 1, 1996                           $128,905,402                                $108,134,698
Comprehensive income
  Net income                                         17,666,250          $ 17,666,250            17,666,250
  Other comprehensive loss,
    net of tax
    Unrealized holding losses
      arising during year                         (   5,974,672)        (   5,974,672)
    Less:  reclassification
      adjustment for gains
      included in net income                      (   3,241,483)        (   3,241,483)
                                                                         ------------
    Other comprehensive loss,
      net of tax                                                        (   9,216,155)
                                                                         ------------
Comprehensive income                                                     $  8,450,095
                                                                         ============
Dividends declared,
  $.50 per share                                  (   4,725,008)                              (   4,725,008)
                                                   ------------                                ------------
Balance, December 31, 1996                         $132,630,489                                $121,075,940
                                                   ------------                                ------------

Comprehensive income
  Net income                                         19,560,368          $ 19,560,368            19,560,368
  Other comprehensive income,
    net of tax
    Unrealized holding gains
      arising during year                            16,672,239            16,672,239
    Less:  reclassification
      adjustment for gains
      included in net income                      (   3,380,887)        (   3,380,887)
                                                                         ------------
    Other comprehensive income,
      net of tax                                                           13,291,352
                                                                         ------------
Comprehensive income                                                     $ 32,851,720
                                                                         ============
Dividends declared,
  $.54 per share                                  (   5,103,008)                              (   5,103,008)
                                                   ------------                                ------------
Balance, December 31, 1997                         $160,379,201                                $135,533,300
                                                   ------------                                ------------

Comprehensive income
  Net income                                         22,085,479          $ 22,085,479            22,085,479
  Other comprehensive income,
    net of tax
    Unrealized holding gains
      arising during year                             8,909,507             8,909,507
    Less:  reclassification
      adjustment for gains
      included in net income                      (   3,173,681)        (   3,173,681)
                                                                         ------------
    Other comprehensive income,
      net of tax                                                            5,735,826
                                                                         ------------
Comprehensive income                                                     $ 27,821,305
                                                                         ============
Dividends declared,
  $.60 per share                                  (   5,669,997)                              (   5,669,997)
                                                   ------------                                ------------
Balance, December 31, 1998                         $182,530,509                                $151,948,782
                                                   ============                                ============

</TABLE>



                                       63
<PAGE>
INCORPORATED BY REFERENCE, PAGE 30 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      

                       ERIE FAMILY LIFE INSURANCE COMPANY

                 STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
                  Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                   Accumulated
                                                      Other
                                                  Comprehensive             Common             Additional
                                                      Income                Stock            Paid-in Capital
<S>                                               <C>                    <C>                   <C>
Balance, January 1, 1996                           $16,360,704           $ 3,780,000           $  630,000   
Comprehensive income
  Net income                              
  Other comprehensive loss,
    net of tax
    Unrealized holding losses
      arising during year                 
    Less:  reclassification
      adjustment for gains
      included in net income              
                                          
    Other comprehensive loss,
      net of tax                                  (  9,216,155)
                                          
Comprehensive income                      
                                          
Dividends declared,
  $.50 per share                          
                                                   ------------          ------------          -----------
Balance, December 31, 1996                         $ 7,144,549           $ 3,780,000           $  630,000     
                                                   ------------          ------------          -----------

Comprehensive income
  Net income                                       
  Other comprehensive income,
    net of tax
    Unrealized holding gains
      arising during year                          
    Less:  reclassification
      adjustment for gains
      included in net income                      
                                                  
    Other comprehensive income,
      net of tax                                    13,291,352
                                                    
Comprehensive income                                
                                                    
Dividends declared,
  $.54 per share                                  
                                                   ------------          ------------          -----------
Balance, December 31, 1997                         $20,435,901           $ 3,780,000           $  630,000     
                                                   ------------          ------------          -----------

Comprehensive income
  Net income                                       
  Other comprehensive income,
    net of tax
    Unrealized holding gains
      arising during year                          
    Less:  reclassification
      adjustment for gains
      included in net income                      
                                                  
    Other comprehensive income,
      net of tax                                     5,735,826
                                                     
Comprehensive income                              
                                                  
Dividends declared,
  $.60 per share                                  
                                                   ------------          ------------          -----------
Balance, December 31, 1998                         $26,171,727           $ 3,780,000           $  630,000         
                                                   ============          ============          ===========
                                              

<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>




                                       64
<PAGE>


INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                           STATEMENTS OF CASH FLOWS
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                                     1998                  1997                  1996    
                                                                  -----------           -----------           -----------
<S>                                                              <C>                   <C>                   <C>   
CASH FLOWS FROM OPERATING ACTIVITIES
 Net income                                                       $22,085,479           $19,560,368           $17,666,250
 Adjustments to reconcile
  net income to net cash
  provided by operating
  activities:
   Net amortization of
    bond and mortgage
    premium                                                           451,675             1,294,213               733,881
   Amortization of deferred
    policy acquisition
    costs                                                           4,395,555             3,694,966             3,141,350
   Real estate depreciation                                            82,861                86,023                86,066
   Deferred federal
    income tax expense                                              3,754,376             1,637,944             3,597,781
   Realized gains on
    investments                                                  (  4,882,586)         (  5,201,365)         (  4,986,897)
 Increase in premiums
  receivable                                                     (    359,240)         (    497,080)         (    272,727)
 (Increase) decrease in
  other receivables                                              (    172,356)              384,505          (    312,542)
 Increase in accrued
  investment income                                              (      8,743)         (    481,164)         (    747,959)
 Policy acquisition costs
  deferred                                                       ( 10,744,731)         ( 10,235,623)         ( 10,405,486)
 (Increase) decrease in
  other assets                                                   (  2,788,553)            1,497,906          (  1,667,895)
 Increase in reinsurance
  receivables and reserve
  credits                                                        (  1,170,544)         (    979,877)         (    662,786)
 Increase in future life
  policy benefits and
  claims                                                            4,876,791             5,726,494             6,071,200
 Increase in other
  policyholder funds                                                1,571,041               832,059               524,374
 (Decrease) increase in
  reinsurance premium due                                        (    123,258)              221,547          (    157,280)
 Increase (decrease) in
  federal income taxes
  payable                                                             759,254          (    833,337)              424,882
 Increase (decrease) in
  accounts payable and
  due to affiliate                                                  2,076,293          (  1,743,670)            1,448,291
                                                                  -----------           -----------           -----------
    Net cash provided by
      operating activities                                        $19,803,314           $14,963,909           $14,480,503
                                                                  -----------           -----------           -----------







<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>




                                       65
<PAGE>


INCORPORATED BY REFERENCE, PAGE 29 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                      STATEMENTS OF CASH FLOWS - CONTINUED
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                                     1998                   1997                  1996      
                                                                 -------------          ------------           ------------
<S>                                                              <C>                   <C>                    <C>    
CASH FLOWS FROM INVESTING ACTIVITIES
 Purchase of investments:
  Fixed maturities                                               ($138,281,886)        ($ 76,210,662)         ($149,403,614)
  Equity securities                                              (  61,357,377)        (  38,955,248)         (  18,394,580)
  Mortgage loans                                                 (     159,612)        (   1,222,745)         (   2,752,196)
  Other invested assets                                          (   9,537,131)        (     856,802)         (   3,170,391)
 Sales/maturities of investments:
  Fixed maturities                                                  98,876,751            49,662,504             41,270,911
  Equity securities                                                 51,508,703            42,920,903             37,128,238
  Other invested assets                                              1,047,998               403,747                478,885
 Principal payments received
  on mortgage loans                                                    139,309               129,123              1,026,426
 Loans made to policyholders                                     (   1,549,153)        (   1,373,918)         (   1,317,369)
 Payments received on
  policy loans                                                         635,693               655,904                630,242
                                                                  ------------          ------------           ------------

    Net cash used in
     investing activities                                        ($ 58,676,705)        ($ 24,847,194)         ($ 94,503,448)
                                                                  ------------          ------------           ------------

CASH FLOWS FROM FINANCING ACTIVITIES
 Increase in annuity
  deposits and
  supplementary contracts                                        $  34,458,958          $ 38,861,367          $  45,189,708
 Increase in universal
  life deposits                                                     12,463,714            12,033,722             10,884,748
 Dividends paid to
  shareholders                                                   (   5,528,252)        (   5,008,508)        (    4,614,756)
                                                                  ------------          ------------          -------------

    Net cash provided by
     financing activities                                         $ 41,394,420          $ 45,886,581          $  51,459,700
                                                                  ------------          ------------          -------------

Net increase (decrease) in cash
 and cash equivalents                                             $  2,521,029          $ 36,003,296         ($  28,563,245)
Cash and cash equivalents at
 beginning of year                                                  42,287,398             6,284,102             34,847,347
                                                                  ------------          ------------          -------------
Cash and cash equivalents at
 end of year                                                      $ 44,808,427          $ 42,287,398          $   6,284,102
                                                                  ============          ============          =============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the
    year for:
    Interest                                                      $    967,500          $    967,500          $     971,154
    Income taxes                                                  $  7,341,952          $  9,838,280          $   4,953,774








<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
 



                                       66
<PAGE>


INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS

        All amounts are in thousands  of dollars,  except per share data.       


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  is owned  21.6% by the Erie  Indemnity  Company
                (EIC) and  52.2% by the Erie  Insurance Exchange (Exchange).

                EIC is the attorney-in-fact for the Exchange. Operating expenses
                of the Company are paid by EIC. The Company  reimburses  EIC for
                direct expenses and share of common  expenses.  The Company also
                sells a significant amount of annuities to affiliated  companies
                of the Erie Insurance Group.

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES


              Basis of presentation

                The  accompanying  financial  statements  have been  prepared in
                conformity with generally  accepted  accounting  principles that
                differ  from  statutory   accounting   practices  prescribed  or
                permitted for insurance companies by regulatory authorities.

              Reclassifications

                Certain  amounts   reported  in  the  1997  and  1996  financial
                statements  have been  reclassified  to conform  to the  current
                year's financial statement presentation.

              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.

                The  development of liabilities  for future policy  benefits for
                the Company's products requires management to make estimates and
                assumptions regarding mortality,  morbidity, lapse, expense, and
                investment  experience.  Such  estimates are primarily  based on
                historical  experience  and,  future  expectations of mortality,
                morbidity,  expense,  persistency,  and investment  assumptions.
                Actual  results could differ  materially  from those  estimates.
                Management  monitors actual experience,  and where circumstances
                warrant,  revises its  assumptions and the related future policy
                benefit estimates.




                                       67
<PAGE>


INCORPORATED BY REFERENCE, PAGE 31 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

              Investments

                 Fixed   maturities   and  marketable   equity   securities  are
                 classified as  available-for-sale.  Equity  securities  consist
                 primarily of common and  nonredeemable  preferred  stocks while
                 fixed  maturities   consist  of  bonds,  notes  and  redeemable
                 preferred  stock.  Available-for-sale  securities are stated at
                 fair value,  with the unrealized gains and losses,  net of tax,
                 reported as a separate  component of  comprehensive  income and
                 shareholders'  equity.  There are no  securities  classified as
                 "trading" securities or "held-to-maturity" securities.

                 Realized  gains and losses on sales of  investments,  including
                 losses from declines in value of specific securities determined
                 by management  to be  other-than-temporary,  are  recognized in
                 income on the  specific  identification  method.  Interest  and
                 dividend income is recorded as earned.

                 Mortgage loans on commercial real estate are recorded at unpaid
                 balances,  adjusted for amortization of premium or discount.  A
                 valuation  allowance  would be provided for  impairment  in net
                 realizable value based on periodic valuations.

                 Other invested assets (primarily investments in real estate and
                 security  limited  partnerships)  are recorded under the equity
                 method of accounting.

              Financial instruments

                Fair values of available-for-sale securities are based on quoted
                market  prices,  where  available,  or  dealer  quotations.  The
                carrying value of short-term financial instruments  approximates
                fair  value  because  of  the   short-term   maturity  of  these
                instruments.  The carrying value of receivables  and liabilities
                arising in the ordinary  course of business  approximates  their
                fair values.

              Cash equivalents

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

              Recognition of premium revenues and losses

                Premiums on traditional life insurance contracts are reported as
                earned revenue when due. Reserves for future policy benefits are
                established  as premiums  are  earned.  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.


              Deferred policy acquisition costs

                The costs of acquiring new business, principally commissions and
                certain costs of issuing policies,  including underwriting costs
                and  medical  examinations,  all of  which  vary  with  and  are
                primarily  related to the production of new business,  have been
                deferred. For traditional life



                                       68
<PAGE>


INCORPORATED BY REFERENCE, PAGES 31 AND 32 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                 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 as 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.

                 Deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>

                                                                     1998                  1997                 1996     
                                                                    -------               -------               -------
                         <S>                                       <C>                   <C>                   <C>   
                         Balance at
                          beginning
                          of year                                   $64,567               $58,026               $50,762
                         Additions                                   10,745                10,236                10,405
                         Amortization                              (  4,396)             (  3,695)             (  3,141)
                                                                    -------               -------               -------

                         Balance at end
                          of year                                   $70,916               $64,567               $58,026
                                                                    =======               =======               =======
</TABLE>

              Insurance liabilities

                 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.
                 Interest  rate  assumptions  for  non-interest  sensitive  life
                 insurance  range from 3.5% to 4% on policies issued in 1980 and
                 prior  years  and 6% to 7.25% on  policies  issued  in 1981 and
                 subsequent  years.  Mortality and  withdrawal  assumptions  are
                 based on tables typically used in the industry.

                 Annuities are credited with varying  interest rates  determined
                 at the discretion of the Company  subject to certain  minimums.
                 During 1998,  annuity deposits earned interest at rates ranging
                 from 5% to 6%.  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.

              Liability for guaranty fund assessments

                 The Company  may be  required,  under the  solvency or guaranty
                 laws of the  various  states  in which it is  licensed,  to pay
                 assessments up to prescribed limits to fund policyholder losses
                 or liabilities of insolvent insurance companies. Certain states
                 permit these assessments, or a portion thereof, to be recovered
                 as an offset to future premium taxes.




                                       69
<PAGE>


INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  Assessments   are   recognized   when  they  are   imposed  or
                  information  indicates it is probable one will be imposed, and
                  an event obligating the Company has occurred and the amount is
                  reasonably estimated. When the assessment is subject to credit
                  against future premium taxes and judged to be recoverable,  it
                  may be capitalized  and amortized on a basis  consistent  with
                  the credits to be realized  under  applicable  state law.  The
                  Company's  estimated  liability  for  guaranty  fund and other
                  assessments  at  December  31,  1998 and 1997  totaled $14 and
                  $214, respectively.

              Reinsurance

                 The  Statements of Operations  are reflected net of reinsurance
                 activities.  Gross  revenue and benefits and expenses  incurred
                 are  reduced  for  amounts   expected  to  be  recovered  under
                 reinsurance agreements.  Reinsurance  transactions are recorded
                 "gross" on the Statements of Financial Position.

              Income taxes

                 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 taxes are provided on a liability method
                 whereby  deferred  tax assets  are  recognized  for  deductible
                 temporary   differences   and  deferred  tax   liabilities  are
                 recognized  for taxable  temporary  differences.  Deferred  tax
                 assets and  liabilities are adjusted for the effects of changes
                 in tax laws and rates on the date of enactment.

              Software development costs

                  In March of 1998, the American  Institute of Certified  Public
                  Accountants   issued   Statement   of  Position   (SOP)  98-1,
                  "Accounting  for the Costs of Computer  Software  Developed or
                  Obtained  for  Internal  Use." This SOP  provided  guidance on
                  accounting  for the costs of computer  software  developed  or
                  obtained for internal use. The Company adopted this SOP in the
                  first quarter of 1998.  Software  development  costs  totaling
                  $1,002  or  $0.11  per  share  in 1998  were  capitalized  and
                  included in other  assets.  These costs will be amortized on a
                  straight-line basis over the expected life of the product when
                  the software is ready for its intended use.

              Year 2000 costs

                  Costs   related  to  Year  2000   programming,   testing   and
                  contingency planning are charged to operations as incurred.

              Comprehensive income

                  The  Company  adopted  the  provisions  of  the  Statement  of
                  Financial  Accounting  Standards  (FAS)  No.  130,  "Reporting
                  Comprehensive  Income,"  in  1998.   Comprehensive  income  is
                  defined as any change in equity  from  transactions  and other
                  events  originating from nonowner  sources.  The Company began
                  displaying  comprehensive  income in the first quarter of 1998
                  and has  displayed  accumulated  comprehensive  income  in the
                  Statements of Shareholders' Equity at December 31, 1998. Prior
                  year amounts have been restated to reflect this change.






                                       70
<PAGE>


INCORPORATED BY REFERENCE, PAGE 32 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


              Disclosure about segments of an enterprise

                 In June 1997, the Financial  Accounting  Standards Board issued
                 SFAS No. 131,  "Disclosures about Segments of an Enterprise and
                 Related  Information."  SFAS No.  131  requires  a  company  to
                 utilize  a   "management   approach"   to   reporting   segment
                 information.  The Company currently reports segment information
                 consistent with that of internal management reporting and, as a
                 result,  the  adoption of this  standard  has little  effect on
                 current presentation of financial statement information.

              Earnings per share

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

NOTE 3.  INVESTMENTS

                Net  investment  income  consists of the following for the years
                ended December 31:
<TABLE>
<CAPTION>

                                                                     1998                  1997                 1996     
                                                                    -------               -------              -------
                <S>                                                 <C>                   <C>                  <C>    
                Fixed maturities                                    $42,068               $39,466              $35,300
                Equity securities                                     8,120                 8,942               10,168
                Other                                                 3,668                 2,919                1,879
                                                                    -------               -------              -------
 
                Total investment income                             $53,856               $51,327              $47,347
                Investment expense                                    1,527                 1,413                1,398
                                                                    -------               -------              -------

                Net investment income                               $52,329               $49,914              $45,949
                                                                    =======               =======              =======
</TABLE>

                Realized gains and losses on investments reflected in operations
                were as follows for the years ended December 31:
<TABLE>
<CAPTION>

                                                                     1998                  1997                 1996     
                                                                    ------                ------               ------
                <S>                                                 <C>                   <C>                  <C>   
                Realized gains:
                  Fixed maturities                                  $1,936                $1,264               $  778
                  Equity securities                                  3,657                 4,466                4,911
                  Other, net                                           180                     0                    0
                                                                    ------                ------               ------

                  Total gains                                       $5,773                $5,730               $5,689
                                                                    ------                ------               ------

                Realized losses:
                  Fixed maturities                                  $  207                $  353               $  326
                  Equity securities                                    683                   176                  376
                                                                    ------                ------               ------

                  Total losses                                      $  890                $  529               $  702
                                                                    ------                ------               ------

                  Net realized gains on
                    investments                                     $4,883                $5,201               $4,987
                                                                    ======                ======               ======
</TABLE>




                                       71
<PAGE>


INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 3.  INVESTMENTS (CONTINUED)

              The  following  tables  summarize  the  cost and  market  value of
              securities  at December  31,  1998 and 1997 based on current  year
              classifications.
<TABLE>
<CAPTION>


                                                             Gross              Gross
                                        Amortized          Unrealized         Unrealized         Estimated
                                          Cost               Gains              Losses           Fair Value  
December 31, 1998
<S>                                      <C>                <C>                <C>                <C>
Fixed Maturities:
U. S. treasuries and                     $ 20,431           $ 1,360            $    27            $ 21,764
 government agencies
States and political
 subdivisions                               2,056               107                  0               2,163
Special revenue                            11,065               783                  0              11,848
Public utilities                           70,265             3,731                455              73,541
U. S. banks, trusts
 and insurance companies                  113,543             8,531              1,086             120,988
U. S. industrial
 and miscellaneous                        331,432            17,019              1,202             347,249
Foreign governments-
 agency                                     2,990                 0                308               2,682
Foreign industrial
 and miscellaneous                         24,693               908                313              25,288
                                          -------           -------            -------             -------

Total fixed
 maturities                              $576,475           $32,439            $ 3,391            $605,523
                                         ========           =======            =======            ========


Equity Securities:
Common stock:
 U. S. banks, trusts
  and insurance companies                $  7,254           $ 4,523            $   172            $ 11,605
 U. S. industrial and
  miscellaneous                            40,574            11,751              6,615              45,710
Non-redeemable
 preferred stock:
 Public utilities                           4,000                40                  0               4,040
 U. S. banks, trusts and
  insurance companies                      43,057             1,864                151              44,770
 U. S. industrial and
  miscellaneous                            12,951               216                529              12,638
 Foreign banks, trusts
  and insurance
  companies                                12,874               441                384              12,931
 Foreign industrial
  and miscellaneous                         3,900               200                  0               4,100
                                         --------           -------            -------            --------

Total equity
 securities                              $124,610           $19,035            $ 7,851            $135,794
                                         ========           =======            =======            ========
Total available-for-sale
 securities                              $701,085           $51,474            $11,242            $741,317
                                         ========           =======            =======            ========
</TABLE>




                                       72
<PAGE>


INCORPORATED BY REFERENCE, PAGE 33 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 3.  INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>

                                                             Gross              Gross
                                         Amortized        Unrealized         Unrealized          Estimated
                                            Cost             Gains             Losses            Fair Value  
December 31, 1997
<S>                                      <C>                <C>                <C>                <C>
Fixed Maturities:
U. S. treasuries and
 government agencies                     $ 31,787           $ 1,271            $  302             $ 32,756
States and political
 subdivisions                               2,058               155                 0                2,213
Special revenue                            14,210             1,106                 0               15,316
Public utilities                           80,491             3,097               842               82,746
U. S. banks, trusts and
 insurance companies                       99,820             6,051               287              105,584
U. S. industrial and
 miscellaneous                            285,565            12,661               636              297,590
Foreign governments-
 agency                                     2,988                 0               641                2,347
Foreign banks, trusts
 and insurance
 companies                                  5,000                99                 0                5,099
Foreign industrial
  and miscellaneous                        13,874               652                 0               14,526
                                         --------           -------            ------             --------

Total fixed
  maturities                             $535,793           $25,092            $2,708             $558,177
                                         ========           =======            ======             ========

Equity Securities:
Common stock:
  U. S. banks, trusts
    and insurance
    companies                            $    731           $   209            $    0             $    940
  U. S. industrial and
    miscellaneous                          27,648             3,116             3,364               27,400

Non-redeemable
  preferred stock:
  Public utilities                          4,000                50                 0                4,050
  U. S. banks, trusts
    and insurance
    companies                              55,302             7,003               122               62,183
  U. S. industrial and
    miscellaneous                          12,441             1,815                15               14,241
  Foreign banks, trusts
    and insurance
    companies                               7,765               365               162                7,968
  Foreign industrial
    and miscellaneous                       3,900               160                 0                4,060
                                         --------           -------            ------             --------

Total equity
  securities                             $111,787           $12,718            $3,663             $120,842
                                         ========           =======            ======             ========
Total available-for-sale
  securities                             $647,580           $37,810            $6,371             $679,019
                                         ========           =======            ======             ========
</TABLE>





                                       73
<PAGE>


INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 3.  INVESTMENTS (CONTINUED)

                The  following is a summary of fixed  maturities at December 31,
                1998, by remaining term to contractual maturity:
<TABLE>
<CAPTION>

                                                                                     Amortized        Estimated
                                                                                        Cost          Fair Value  
                  <S>                                                                 <C>              <C>
                  Due in one year or less                                             $ 10,003         $ 10,024
                  Due after one year through five years                                137,651          139,668
                  Due after five years through ten years                               118,948          121,958
                  Due after ten years                                                  309,873          333,873
                                                                                      --------         --------

                                                                                      $576,475         $605,523
                                                                                      ========         ========
</TABLE>

                Bonds having a fair value of $2,056 at December 31, 1998 were on
                deposit with various regulatory  authorities as required by law.
                Fixed  maturities  (bonds)  having a fair  value of  $6,993  are
                pledged as  collateral  on a $10,000 line of credit with a bank.
                There were no borrowings outstanding on the line during December
                31, 1998 and 1997.

                Net unrealized  gains and losses on investments  are credited to
                or charged directly to other  comprehensive  income. At December
                31, 1998,  net  unrealized  gains on  investment  securities  of
                $26,172 consisted of $51,506 in unrealized gains less $11,242 in
                unrealized losses and deferred taxes of $14,092.

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

                                                                     1998                  1997                  1996     
                                                                    ------                -------               ------
                <S>                                                <C>                   <C>                  <C>
                Equity securities                                   $2,129                $ 3,966              $ 4,528
                Fixed maturities                                     6,664                 16,482             ( 18,707)
                Other invested assets                                   31                      0                    0
                Deferred federal
                  income taxes                                     ( 3,088)              (  7,157)               4,963
                                                                    ------                -------               ------

                  Increase (decrease)
                    in unrealized
                    gains                                           $5,736                $13,291              ($9,216)
                                                                    ======                =======               ======
</TABLE>







                                       74
<PAGE>


INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          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>

                                                                     1998                  1997                  1996     
                                                                    ------                -------               ------
                <S>                                                <C>                   <C>                   <C>
                Balance at January 1                                $2,050                $ 1,703               $  897
                Less reinsurance
                  recoverables                                     (   163)              (    133)             (   136)
                Less unpaid matured
                  endowments                                             0                      0              (    16)
                                                                    ------                -------               ------

                Net balance at January 1                            $1,887                $ 1,570               $  745

                Total death claims
                  incurred                                           8,459                 11,117                9,688
                Total death claims paid,
                  net of reinsurance
                  recoveries                                         8,994                 10,800                8,863
                                                                    ------                -------               ------

                Net balance at
                  December 31                                       $1,352                $ 1,887               $1,570
                Plus reinsurance
                  recoverables                                         449                    163                  133
                                                                    ------                -------               ------

                Balance at December 31                              $1,801                $ 2,050               $1,703
                                                                    ======                =======               ======
</TABLE>




                                       75
<PAGE>
INCORPORATED BY REFERENCE, PAGE 34 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      

                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 5.         LIFE PREMIUMS AND ANNUAL ANNUITY & UNIVERSAL LIFE DEPOSITS

                Premiums on life insurance contracts and deposits on annuity and
                universal life contracts are summarized as follows:
<TABLE>
<CAPTION>
                                                                     1998                  1997                  1996     
                                                                    -------               -------               -------
                      <S>                                           <C>                   <C>                   <C>
                      Life insurance
                        premiums:
                           First year                               $ 6,763               $ 6,861               $ 6,506
                           Renewal                                   28,970                25,966                22,533
                                                                    -------               -------               -------

                                                                    $35,733               $32,827               $29,039
                                                                    =======               =======               =======

                         Annuity & universal
                           life deposits, net
                           of loading:
                           First year
                             and single                             $50,820               $50,675               $50,651
                           Renewal                                   16,600                18,365                17,065
                                                                    -------               -------               -------

                                                                    $67,420               $69,040               $67,716
                                                                    =======               =======               =======
</TABLE>

                Annuity deposits in 1998, 1997 and 1996 included $6,413,  $1,992
                and  $4,894,  respectively,  of  deposits  on annuity  contracts
                purchased  by the  Erie  Insurance  Group  Retirement  Plan  for
                Employees.  Structured  settlement  annuities sold to affiliated
                property and  casualty  companies  of the Erie  Insurance  Group
                totaled  $17,883,  $17,781 and $13,505,  in 1998, 1997 and 1996,
                respectively.


NOTE 6.         FEDERAL INCOME TAXES

                The provision for federal income taxes consists of the following
                for the years ended December 31:
<TABLE>
<CAPTION>
                                                                     1998                  1997                  1996     
                                                                    -------               -------               ------
                <S>                                                 <C>                   <C>                   <C>
                Current                                             $ 8,101               $ 9,005               $ 5,378
                Deferred                                              3,755                 1,638                 3,598
                                                                    -------               -------               -------

                                                                    $11,856               $10,643               $ 8,976
                                                                    =======               =======               =======
</TABLE>

                A reconciliation  of the provision for income taxes with amounts
                determined by applying the statutory federal income tax rates to
                pre-tax income is as follows:
<TABLE>
<CAPTION>
                                                                     1998                  1997                  1996     
                                                                    -------               -------               ------
                <S>                                                <C>                   <C>                   <C>
                Federal income taxes
                  at statutory rates                                $11,879               $10,571               $9,325
                Dividends received
                  deduction and
                  tax-exempt interest                              (    182)             (    299)             (   772)
                Other                                                   159                   371                  423
                                                                    -------               -------               ------

                Provision for federal
                  income taxes                                      $11,856               $10,643               $8,976
                                                                    =======               =======               ======
</TABLE>


                                       76
<PAGE>

INCORPORATED BY REFERENCE, PAGES 34 AND 35 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 6.         FEDERAL INCOME TAXES (CONTINUED)

                Temporary  differences  between the financial statement carrying
                amounts and tax bases of assets and liabilities  which give rise
                to deferred tax liabilities are as follows:
<TABLE>
<CAPTION>

                                                                          December 31,
                                                                     1998              1997     
                                                                    -------           -------
                <S>                                                <C>               <C>                  
                Deferred policy acquisition costs                   $21,523           $19,563
                Liability for future life and
                  annuity policy benefits                          (  6,117)         (  7,218)
                Unrealized gains                                     14,092            11,004
                Other                                                 1,754             1,060
                                                                    -------           -------

                         Deferred income tax liability              $31,252           $24,409
                                                                    =======           =======
</TABLE>


                A  reconciliation   of  the  provision  for  income  taxes  with
                comprehensive income reported in the Statements of Shareholders'
                Equity is as follows:
<TABLE>
<CAPTION>

                                                                     1998                 1997                   1996     
                                                                    -------              -------                -------
                <S>                                                <C>                  <C>                    <C>
                Unrealized gains (losses) on
                  securities:
                  Unrealized holding gains
                     (losses) arising during
                     year                                           $13,707              $25,649               ($ 9,192)
                  Less:  reclassification
                    adjustment for gains
                    included in net income                            4,883                5,201                  4,987
                                                                    -------               ------                -------
                    Net unrealized holding gains
                      (losses) arising during
                      year                                          $ 8,824              $20,448               ($14,179)
                                                                    -------              -------                -------
                Income tax (expense) benefit
                  related to unrealized gains
                  (losses)                                         ($ 3,088)            ($ 7,157)               $ 4,963
                                                                    -------              -------                -------
                Other comprehensive income
                  (loss), net of tax                                $ 5,736               $13,291              ($ 9,216)
                                                                    =======               =======               ========
</TABLE>



NOTE 7.         RELATED PARTY TRANSACTIONS

                Expense reimbursements

                   Operating  expenses of the Company are paid by EIC and common
                   expenses are allocated.  Reimbursements  are made to EIC on a
                   monthly  basis.  The amount of these  reimbursements  for the
                   Company  totaled  $14,305,  $13,038 and $10,095 in 1998, 1997
                   and 1996, respectively.

                   The Employees of the Company  participate  in the pension and
                   other  Employee  benefit plans of EIC. The benefits are based
                   on years of service and salary.  Pension  costs are funded by
                   EIC in amounts  sufficient  to at least  meet  ERISA  minimum
                   funding   requirements.   Pension  and  other  benefit  costs
                   reimbursed by the Company to EIC equaled $181,  $183 and $167
                   in 1998, 1997 and 1996, respectively.

                                       77
<PAGE>


INCORPORATED BY REFERENCE, PAGE 35 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 7.         RELATED PARTY TRANSACTIONS (CONTINUED)


                Annuities purchased by affiliates

                   The Erie  Insurance  Group  affiliated  property and 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  $41,834  and  $33,672  at  December  31,  1998 and 1997,
                   respectively.  The reserves  held for  structured  settlement
                   annuities  sold  to  the  affiliated  property  and  casualty
                   insurance  companies  equal $128,382 and $111,219 at December
                   31, 1998 and 1997, respectively. See also Note 5.

                Note payable to EIC

                   The $15,000 note payable to EIC bears an annual interest rate
                   of 6.45% and all  payments of interest  and  principal of the
                   note may be  repaid  only out of  unassigned  surplus  of the
                   Company,  subject  to  prior  approval  of  the  Pennsylvania
                   Insurance  Commissioner.  Interest  on the  surplus  note  is
                   scheduled to be paid semi-annually.  The note will be payable
                   on demand on or after  December  31,  2005.  During  1998 and
                   1997,  the Company paid interest to EIC totaling $968 in each
                   year.

                Property and Equipment

                   The Company  owns certain real estate which it leases to EIC.
                   The real estate is recorded net of  accumulated  depreciation
                   of  $1,279  and  $1,196  at  December   31,  1998  and  1997,
                   respectively.  Rentals  paid to the Company  under this lease
                   agreement totaled $343 in 1998 and $423 in 1997 and 1996.
                   Future minimum rentals under this agreement are as follows:


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

                   1999                                                  $  303
                   2000                                                     309
                   2001                                                     312
                   2002                                                     318
                   2003                                                     321
                   Thereafter                                             1,450
                   --------------------------------------- ---------------------
                   Total                                                $ 3,013
                   ======================================= =====================










                                       78
<PAGE>


INCORPORATED BY REFERENCE, PAGES 35 AND 36 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS



NOTE 7.  RELATED PARTY TRANSACTIONS (CONTINUED)


                 EIC  purchases  certain  software and  equipment for use by the
                 Company.  Depreciation  and applicable  interest are charged to
                 the Company  throughout the estimated  useful life of the asset
                 and  included in general  expenses.  Depreciation  and interest
                 charged the Company in 1998 and 1997 amounted to $384 and $369,
                 respectively.

NOTE 8.  REINSURANCE

                The Company  cedes  insurance to other  insurers and  reinsurers
                under  individual  risk  contracts.   Reinsurance   arrangements
                mitigate losses arising from large risks.

                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>

                                                                     1998                  1997                  1996     
                                                                    ------                ------                ------
                <S>                                                 <C>                   <C>                   <C>
                Policy revenue                                      $4,054                $3,761                $3,635

                Death benefits                                       1,490                 1,319                 1,846

                Future life policy
                  benefits                                             953                   842                   716

                Commissions                                          1,654                 1,462                 1,368
</TABLE>

                The Company has an insignificant  amount of assumed  reinsurance
                activity.

NOTE 9.         STATUTORY INFORMATION

                The Company  prepares  its  statutory  financial  statements  in
                accordance   with   accounting   practices   prescribed  by  the
                Pennsylvania Insurance Department. Accounting principles used to
                prepare  statutory  financial  statements  differ from financial
                statements   prepared  on  the  basis  of   generally   accepted
                accounting principles.




                                       79
<PAGE>

INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 9.         STATUTORY INFORMATION (CONTINUED)


                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, 1998, 1997 and 1996,
                follows:
<TABLE>
<CAPTION>

                                                                     1998                  1997                  1996     
                                                                    -------               -------               -------
                <S>                                                <C>                   <C>                   <C>
                Statutory net income                                $13,787               $12,924               $12,637

                Reconciling items:
                  Policy liabilities
                    and accruals                                      2,344                 1,024                 1,327
                  Deferred policy
                    acquisition costs,
                    net of amortization                               6,349                 6,540                 7,264
                  Investment valuation
                    differences                                       2,360                 1,015                   837
                  Deferred taxes                                   (  3,754)             (  1,638)             (  3,598)
                  Capitalized salaries and
                    benefits                                          1,541                     0                     0
                  Other                                            (    542)             (    305)             (    801)
                                                                    -------               -------               -------

                GAAP net income                                     $22,085               $19,560               $17,666
                                                                    =======               =======               =======
</TABLE>

                A  reconciliation   of   shareholders'   equity  as  filed  with
                regulatory  authorities to shareholders'  equity reported in the
                accompanying  financial  statements  as of December 31, 1998 and
                1997, follows:
<TABLE>
<CAPTION>

                                                                     1998                  1997      
                                                                    -------               -------
                  <S>                                              <C>                   <C>    
                  Statutory shareholders' equity                    $ 85,907               $79,651

                  Reconciling items:
                   Asset valuation and interest
                     maintenance reserves                             37,324                25,578
                   Investment valuation differences                   30,745                30,209
                   Deferred policy acquisition costs                  70,916                64,567
                   Surplus note                                    (  15,000)            (  15,000)
                   Policy liabilities and accruals                     6,447                 3,444
                   Deferred taxes                                  (  31,252)            (  24,409)
                   Deferred and uncollected
                     premiums                                      (   4,807)            (   4,236)
                   Capitalized salaries and benefits                   1,541                     0
                   Other                                                 710                   575
                                                                     -------               -------

                  GAAP shareholders' equity                         $182,531              $160,379
                                                                    ========              ========
</TABLE>

                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 the  greater  of: (a) 10
                percent of its  statutory  surplus as regards  policyholders  as
                shown  on  its  last   annual   statement   on  file   with  the
                commissioner,  or (b) the net income as reported  for the period
                covered by such annual statement, but shall not include pro rata
                distribution  of any  class  of the  insurer's  own  securities.
                Accordingly,  the maximum  dividend  payout which may be made in
                1999  without  prior  Pennsylvania   Commissioner   approval  is
                $13,787. Dividends to shareholders totaled $5,670 in 1998.


                                       80
<PAGE>


INCORPORATED BY REFERENCE, PAGE 36 OF THE COMPANY'S 1998 ANNUAL
 REPORT TO SHAREHOLDERS                      


                       ERIE FAMILY LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 10.          QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

                  The following summaries of operations for the four quarters of
                  1998 and 1997 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>
1998

Total policy revenue                      $ 8,981          $ 9,833          $ 9,494          $ 9,931
Net investment income                      12,790           12,996           12,575           13,968
Net realized gains
  on investments                            1,836              866              775            1,406
Other income                                  164              226              238              131
                                          -------          -------          -------          -------

  Total revenues                          $23,771          $23,921          $23,082          $25,436
                                          =======          =======          =======          =======

Income from
  operations                              $10,017          $ 8,617          $ 5,910          $ 9,397

Provision for federal
  income taxes                              3,519            3,053            2,247            3,037
                                          -------          -------          -------          -------

  Net income                              $ 6,498          $ 5,564          $ 3,663          $ 6,360
                                          =======          =======          =======          =======

  Net income
    per share                             $  0.69          $  0.59          $  0.39          $  0.67
                                          =======          =======          =======          =======

Comprehensive income (loss)               $ 8,754          $ 7,877         ($ 2,464)         $13,654 
                                          =======          =======          =======          =======
 

1997

Total policy revenue                      $ 8,468          $ 8,814          $ 8,661          $ 9,250
Net investment income                      12,401           12,211           12,419           12,883
Net realized gains
  on investments                              622              746            2,508            1,326
Other income                                  140              186              190              212
                                          -------          -------          -------          -------

  Total revenues                          $21,631          $21,957          $23,778          $23,671
                                          =======          =======          =======          =======

Income from
  operations                              $ 6,586          $ 6,997          $ 9,058          $ 7,562

Provision for federal
  income taxes                              2,185            2,384            3,531            2,543
                                          -------          -------          -------          -------

  Net income                              $ 4,401          $ 4,613          $ 5,527          $ 5,019
                                          =======          =======          =======          =======

  Net income
    per share                             $  0.47          $  0.49          $  0.58          $  0.53
                                          =======          =======          =======          =======

Comprehensive income (loss)              ($ 5,748)         $15,107          $15,701          $ 7,792
                                          =======          =======          =======          =======
</TABLE>

                                       81