PRINCIPAL CAPITAL ACCUMULATION FUND INC, 497, 1998-05-05

PRINCIPAL CAPITAL ACCUMULATION FUND INC
497, 1998-05-05

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The Principal Variable Contracts Fund, Inc. described in this prospectus is
a diversified, open-end management investment company which offers a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together the Accounts provide the following range of investment
objectives:

Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondarily
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.

Government Securities Account (formerly known as Principal Government Securities
Fund, Inc.) seeks a high level of current income, liquidity and safety of
principal. The Account seeks to achieve its objective through the purchase of
obligations issued or guaranteed by the United States Government or its
agencies, with emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). Account shares are not guaranteed by the United States
Government.

Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.

An investment in the Money Market Account is neither insured nor guaranteed
by the U.S. Government. There can be no assurance the Money Market Accounts will
be able to maintain a stable net asset value of $1.00 per share.

This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.

Additional information about the Fund has been filed with the Securities
and Exchange Commission, including documents called Statements of Additional
Information, dated May 1, 1998. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:

Principal Variable Contracts Fund, Inc.
a Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this Prospectus is May 1, 1998

TABLE OF CONTENTS

Page

Summary ............................................................... 2
Financial Highlights.................................................... 4
Investment Objectives, Policies and Restrictions........................ 6
Certain Investment Policies and Restrictions............................ 9
Manager and Sub-Adivsor ................................................10
Duties Performed by the Manager and Sub-Advisor.........................11
Managers' Comments......................................................11
Determination of Net Asset Value of Account Shares......................13
Performance Calculation.................................................13
Income Dividends, Distributions and Tax Status..........................14
Eligible Purchasers and Purchase of Shares..............................15
Shareholder Rights .....................................................15
Redemption of Shares....................................................16
Additional Information..................................................16

This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Accounts in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.

SUMMARY

The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.

The Principal Variable Contracts Fund, Inc. ("Fund") is an open-end
diversified management investment company offering multiple Accounts.

Who may purchase shares of the Accounts?

Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.

What do the Accounts offer investors?

Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.

Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries, located
in different geographical regions and/or securities which have varying
maturities. Diversification reduces investment risk.

Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.

Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See Redemption of Shares.

What are the Accounts' investment objectives?

The investment objective of the Capital Value Account is long-term capital
appreciation and its secondary investment objective is growth of investment
income. The Account seeks to achieve its investment objectives through the
purchase primarily of common stocks but the Account may invest in other
securities.

The investment objective of the Government Securities Account is to seek a
high level of current income, liquidity and safety of principal. The Account
seeks to achieve its objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates").
Account shares are not guaranteed by the United States Government.

The investment objective of the Money Market Account is to seek as high a
level of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.

There can be no assurance that the investment objectives of any of the
Accounts will be realized. See Investment Objectives, Policies and Restrictions.

Who serves as Manager for the Accounts?

Principal Management Corporation (formerly known as Princor Management
Corporation)("Manager"), a corporation organized in 1969 by Principal Mutual
Life Insurance Company, is the Manager for each of the Accounts. It is also the
dividend disbursing and transfer agent for the Fund. In order to provide
investment advisory services for the Capital Value and Government Securities
Accounts the Manager has executed sub-advisory agreements with Invista Capital
Management, Inc. ("Invista" or "Sub-Advisor"). See Manager and Sub-Advisor.

What fees and expenses apply to ownership of shares of the Accounts?

The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.

ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)

Management Other Total Operating
Account Fee Expenses Expenses
------- ---------- -------- ---------------
Capital Value Account .46% .01% .47%
Government Securities Account .50% .02% .52%
Money Market Account .50% .05% .55%

EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period: Period
(in years)

Account 1 3 5 10
------- -- --- --- ---
Capital Value Account $5 $15 $26 $59
Government Securities Account $5 $17 $29 $65
Money Market Account $6 $18 $31 $69

This Example is based on the Annual Account Operating Expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than those shown.

The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Accounts will bear directly or
indirectly. The Fee Table and Example do not reflect expenses and charges of the
Separate Accounts that invest in the Accounts. See Duties Performed by the
Manager and Sub-Advisor.

FINANCIAL HIGHLIGHTS

The following financial highlights are derived from financial statements
which, for the five years in the period ended December 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. Audited financial statements may
be obtained by shareholders, without charge, by telephoning 1-800-451-5447. See
page 6 for the Notes to Financial Highlights.
<TABLE>
<CAPTION>
For a Share Outstanding Throughout the Year Ended December 31,
--------------------------------------------------------------
(except as noted)
-----------------
CAPITAL VALUE ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c) 1988(c)
- --------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $29.84 $27.80 $23.44 $24.61 $25.19 $26.03 $23.35 $22.48 $23.63 $23.23 $27.51

Income from Investment Operations:
Net Investment Income........... .68 .57 .60 .62 .61 .31 .65 .74 .79 .77 .60

Net Realized and Unrealized
Gain (Loss) on Investments.... 7.52 5.82 6.69 (.49) 1.32 1.84 2.70 1.22 .14 1.32 (1.50)
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations 8.20 6.39 7.29 .13 1.93 2.15 3.35 1.96 .93 2.09 (.90)

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.67) (.58) (.60) (.61) (.60) (.64) (.67) (.79) (.81) (.68) (.69)

Distributions from Capital Gains (2.76) (3.77) (2.33) (.69) (1.91) (2.35) - (.30) (1.27) (1.01) (2.69)
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (3.43) (4.35) (2.93) (1.30) (2.51) (2.99) (.67) (1.09) (2.08) (1.69) (3.38)
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $34.61 $29.84 $27.80 $23.44 $24.61 $25.19 $26.03 $23.35 $22.48 $23.63 $23.23
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== =======
Total Return....................... 28.53% 23.50% 31.91% .49% 7.79% 8.81%(d) 14.53% 9.46% 3.94% 10.02% (2.67)%
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== =======
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................$285,231 $205,019 $135,640 $120,572 $128,515 $105,355 $94,596 $76,537 $74,008 $68,132 $62,696

Ratio of Expenses to
Average Net Assets............ .47% .49% .51% .51% .51% .55%(e) .54% .53% .56% .57% .60%

Ratio of Net Investment Income
to Average Net Assets......... 2.13% 2.06% 2.25% 2.36% 2.49% 2.56%(e) 2.65% 3.53% 3.56% 3.53% 2.76%

Portfolio Turnover Rate......... 23.4% 48.5% 49.2% 44.5% 25.8% 39.7%(e) 34.8% 14.0% 30.2% 23.5% 26.7%

Average Commission Rate......... $.0451 $.0426 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES
- ---------------------
ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c) 1988(c)
- ------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $10.31 $10.55 $9.38 $10.61 $10.28 $10.93 $10.24 $10.05 $10.05 $9.37 $9.47

Income from Investment Operations:
Net Investment Income........... .66 .59 .60 .76 .71 .40 .80 .80 .78 .80 .78

Net Realized and Unrealized
Gain (Loss) on Investments.... .41 (.24) 1.18 (1.24) .33 .04 .71 .24 - .34 (.09)
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations 1.07 .35 1.78 (.48) 1.04 .44 1.51 1.04 .78 1.14 .69

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.66) (.59) (.61) (.75) (.71) (.78) (.81) (.81) (.78) (.46) (.79)

Distributions from Capital Gains - - - - - - - - - - -

Excess Distributions from
Capital Gains(f) ............. - - - - - (.31) (.01) (.04) - - -
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (.66) (.59) (.61) (.75) (.71) (1.09) (.82) (.85) (.78) (.46) (.79)
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $10.72 $10.31 $10.55 $9.38 $10.61 $10.28 $10.93 $10.24 $10.05 $10.05 $9.37
====== ====== ====== ======= ====== ======== ====== ====== ====== ====== ======
Total Return....................... 10.39% 3.35% 19.07% (4.53)% 10.07% 4.10%(d) 15.34% 10.94% 8.16% 12.61% 7.69%
====== ====== ====== ======= ====== ======== ====== ====== ====== ====== ======
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................ $94,322 $85,100 $50,079 $36,121 $36,659 $31,760 $33,022 $26,021 $21,488 $15,890 $12,902

Ratio of Expenses to
Average Net Assets............ .52% .52% .55% .56% .55% .59%(e) .58% .59% .61% .63% .66%

Ratio of Net Investment Income
to Average Net Assets......... 6.37% 6.46% 6.73% 7.05% 7.07% 7.35%(e) 7.84% 8.31% 8.48% 8.68% 8.47%

Portfolio Turnover Rate......... 9.0% 8.4% 9.8% 23.2% 20.4% 34.5%(e) 38.9% 4.2% 18.7% 3.7% 2.7%

Average Commission Rate......... N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c) 1988(c)
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000

Income from Investment Operations:
Net Investment Income........... .051 .049 .054 .037 .027 .016 .046 .070 .077 .083 .064

Net Realized and Unrealized
Gain (Loss) on Investments.... - - - - - - - - - - -
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations .051 .049 .054 .037 .027 .016 .046 .070 .077 .083 .064

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.051) (.049) (.054) (.037) (.027) (.016) (.046) (.070) (.077) (.083) (.064)

Distributions from Capital Gains - - - - - - - - - - -
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (.051) (.049) (.054) (.037) (.027) (.016) (.046) (.070) (.077) (.083) (.064)
----- ----- ----- ------ ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== ======
Total Return....................... 5.04% 5.07% 5.59% 3.76% 2.69% 1.54%(d) 4.64% 7.20% 8.37% 8.59% 6.61%
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== ======
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................ $47,315 $46,244 $32,670 $29,372 $22,753 $27,680 $25,194 $26,509 $26,588 $20,707 $14,571

Ratio of Expenses to
Average Net Assets............ .55% .56% .58% .60% .60% .59%(e) .57% .56% .57% .61% .64%

Ratio of Net Investment Income
to Average Net Assets......... 5.12% 5.00% 5.32% 3.81% 2.64% 3.10%(e) 4.54% 6.94% 8.05% 8.40% 6.39%

Portfolio Turnover Rate......... N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Average Commission Rate......... N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>

Notes to Financial Highlights

(a) Effective January 1, 1998, the following Fund names were changed:
Principal Capital Accumulation Fund, Inc. became Capital Value Account
Principal Government Securities Fund, Inc. became Government Securities
Account Principal Money Market Fund, Inc. became Money Market Account

(b) Effective July 1, 1992 the Account changed its fiscal year end from June 30
to December 31. This column represents the period July 1, 1992 to December
31, 1992.

(d) Total return amounts have not been annualized.

(e) Computed on an annualized basis.

(f) Due to the timing of dividend distributions and the differences in
accounting for income and realized gains (losses) for financial statement
and federal income tax purposes, the fiscal year in which amounts are
distributed may differ from the year in which the income and realized gains
(losses) are recorded for financial statement purposes by the fund. The
differences between the income and gains distributed on a book versus tax
basis are shown in the Financial Highlights as excess distributions from
net investment income and from capital gains.

INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.

Capital Value Account

The objective of Capital Value Account is long-term capital appreciation. A
secondary objective is growth of investment income.

The Account will invest primarily in common stocks, but may invest in other
securities. In making selections for the Account's investment portfolio, the
Sub-Advisor, Invista will use an approach described broadly as that of
fundamental analysis which is discussed in the Statement of Additional
Information. To achieve the investment objective, Invista will invest in
securities that have "value" characteristics. This process is known as "value
investing." Value investing is purchasing securities of companies with above
average dividend yields and below average price to earnings (P/E) ratios.
Securities chosen for investment may include those of companies which Invista
believes can reasonably be expected to share in the growth of the nation's
economy over the long term.

Government Securities Account

The objective of Government Securities Account is a high level of current
income, liquidity and safety of principal.

The Account will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Account may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.

Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Account to have investment quality.

Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA Certificates are mortgage-backed securities representing
an interest in a pool of mortgage loans. Such loans are made by lenders such as
mortgage bankers, insurance companies, commercial banks and savings and loan
associations. Then, they are either insured by the Federal Housing
Administration (FHA) or they are guaranteed by the Veterans Administration (VA)
or Farmers Home Administration (FmHA). The lender or other prospective issuer
creates a specific pool of such mortgages, which it submits to GNMA for
approval. After approval, a GNMA Certificate is typically offered by the issuer
to investors through securities dealers.

GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Account intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.

Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Account. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature). Therefore, may be more or less than the face amount of
the GNMA Certificate, which reflects the aggregate principal amount of the
underlying mortgages.
As a result, the net asset value of Account shares will fluctuate as interest
rates change.

Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Account at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.

To the extent deemed appropriate by the Account's Sub-Advisor, Invista, the
Account intends to purchase GNMA Certificates directly from Principal Mutual
Life Insurance Company and other issuers as well as from securities dealers. The
Account will purchase directly from issuers only if it can obtain a price
advantage by not paying the commission or mark-up that would be required if the
Certificates were purchased from a securities dealer. The Securities and
Exchange Commission has issued an order under the Investment Company Act of 1940
that permits the Account to purchase GNMA Certificates directly from Principal
Mutual Life Insurance Company subject to certain conditions.

The FNMA and FHLMC securities in which the Account invests are very similar
to GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.

Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Account
invests are rated AAA by Standard & Poor's and Aaa by Moody's.

There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.

The Account will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the
Account's investment objective. Accordingly, the Account may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
for inclusion in its portfolio in anticipation of a decline in interest rates.

As a hedge against changes in interest rates, the Account may enter into
contracts with dealers in GNMA Certificates whereby the Account agrees to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date. The Account may enter into similar purchase
agreements with issuers of GNMA Certificates other than Principal Mutual Life
Insurance Company. The Account may also purchase optional delivery standby
commitments which give the Account the right to sell particular GNMA
Certificates at a specified price on a specified date. Failure of the other
party to such a contract or commitment to abide by the terms thereof could
result in a loss to the Account. To the extent the Account engages in delayed
delivery transactions it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for the
purpose of investment leverage or to speculate on interest rate changes.
Liability accrues to the Account at the time it becomes obligated to purchase
such securities, although delivery and payment occur at a later date. From the
time the Account becomes obligated to purchase securities on a delayed delivery
basis, the Account has all the rights and risks attendant to the ownership of a
security. At the time the Account enters into a binding obligation to purchase
such securities, Account assets of a dollar amount sufficient to make payment
for the securities to be purchased will be segregated. The availability of
liquid assets for this purpose and the effect of asset segregation on the
Account's ability to meet its current obligations, to honor requests for
redemption and to have its investment portfolio managed properly will limit the
extent to which the Account may engage in forward commitment agreements. Except
as may be imposed by these factors, there is no limit on the percent of the
Account's total assets that may be committed to transactions in such agreements.

Money Market Account

The Fund also includes an Account which invests primarily in short-term
securities, the Money Market Account. Securities in which this Account invests
may not yield as high a level of current income as securities of lower quality
and longer maturities which generally have less liquidity, greater market risk
and more fluctuation.

The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which at the time of acquisition are "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:

(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or

(2) A security that at the time of issuance was a long-term security that
has a remaining maturity of 397 calendar days or less, and whose issuer
has received from a nationally recognized statistical rating
organization a rating, with respect to a class of short-term debt
obligations (or any security within that class) that is now comparable
in priority and security with the security, in one of the two highest
rating categories for short-term debt obligations; or

(3) an unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.

The Account will not invest more than 5% of its total assets in the
following securities:

(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;

(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;

(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations.

The Account will maintain a dollar-weighted average portfolio maturity of
90 days or less.

The objective of the Money Market Account is to seek as high a level of
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.

U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.

U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.

Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.

Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.

Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.

Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.

The Account intends to hold its investments until maturity. However, it may
attempt from time to time to increase its yield by trading to take advantage of
market variations. Also, revised valuations of an issuer or redemptions may
result in sales of portfolio investments prior to maturity or at times when such
sales might otherwise not be desirable. The Account's right to borrow to
facilitate redemptions may reduce the need for such sales. It is the Account's
policy to be as fully invested as reasonably practical at all times to maximize
current income.

Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.

CERTAIN INVESTMENT POLICIES AND RESTRICTIONS

Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.

Diversification

Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring the Account to invest
no more than 55% of its total assets in securities of any one issuer, no more
than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Government Securities Account intends to invest in U.S. Treasury
securities and in securities issued by at least four U.S. Government agencies or
instrumentalities in the amounts necessary to meet those diversification
requirements at the end of each quarter of the year (or within thirty days
thereafter).

In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.

Foreign Securities

The Capital Value Account may invest up to 20% of its assets in foreign
securities. Debt securities issued in the United States pursuant to a
registration statement filed with the Securities and Exchange Commission are not
considered "foreign securities," for purposes of this investment limitation.
Investment in foreign securities presents certain risks including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. The Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.

Investment Hedges

The Government Securities Account may purchase covered spread options,
which give the Account the right to sell a security that it owns at a fixed
dollar spread or yield spread in relationship to another security that the
Account does not own, but which is used as a benchmark. In addition, the Account
may write call and put options on securities and securities indices to generate
additional income, and it may purchase and sell those kinds of options,
financial futures contracts and options on financial futures contracts in
anticipation of a decline in the value of securities owned by the Account or an
increase in the price of securities the Account plans to purchase. Financial
futures contracts are commodities contracts based on financial instruments such
as U.S. Treasury bonds or bills or on securities indices such as the S&P 500
Index. The Account will not invest more than 5% of its assets in the purchase of
covered spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. The Account will also not
invest more than 5% of its assets in initial margin and premiums on financial
futures contracts and options thereon. Risks associated with options
transactions include the risk that movements in the market prices of underlying
securities could cause the Account to lose the amount of the premium paid for an
option or to have to sell securities for less than their current market price or
purchase securities for more than their current market price, and the risk that
trading markets could become illiquid thereby precluding closing transactions.
Futures contracts have similar risks and, in addition, are subject to the risk
of imperfect correlation between changes in the prices of futures contracts and
the securities being hedged. A more complete statement of these investment
practices and their associated risks is contained in the Fund's Statement of
Additional Information.

Other Investment Practices

Each of the Accounts may enter into repurchase agreements with, and the
Government Securities Account may lend its portfolio securities to, unaffiliated
broker-dealers and other unaffiliated qualified financial institutions. These
transactions must be fully collateralized at all times, but involve some credit
risk to the Account if the other party should default on its obligations, and
the Account is delayed or prevented from recovering on the collateral. See the
Fund's Statement of Additional Information for further information regarding the
credit risks associated with repurchase agreements and the standards adopted by
the Fund's Board of Directors to deal with those risks. None of the Accounts
intends either (i) to enter into repurchase agreements that mature in more than
seven days if any such investment, together with any other illiquid securities
held by the Account, would amount to more than 10% of its total assets or (ii)
to loan securities in excess of 30% of its total assets.

The Capital Value Account may invest in warrants up to 5% of its assets, of
which 2% may be invested in warrants that are not listed on the New York or
American Stock Exchange.

As a matter of fundamental policy, each of the Accounts may borrow money
only for temporary or emergency purposes. The Capital Value Account and Money
Market Account may borrow only from banks. The Government Securities Account may
borrow only in an amount not exceeding 5% of its assets. The Capital Value
Account may borrow only in an amount not exceeding the lesser of (i) 5% of the
value of the Account's assets less liabilities other than such borrowings, or
(ii) 10% of the Account's assets taken at cost at the time the borrowing is
made. The Money Market Account may borrow only in an amount not exceeding the
lesser of (i) 5% of the value of its assets, or (ii) 10% of the value of its net
assets taken at cost at the time the borrowing is made.

The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.

MANAGER AND SUB-ADVISOR

The Manager for the Fund is Principal Management Corporation (formerly
known as Princor Management Corporation) (the "Manager"), which is an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, a mutual
life insurance company organized in 1879 under the laws of the State of Iowa.
The address of the Manager is The Principal Financial Group, Des Moines, Iowa
50392. The Manager was organized on January 10, 1969, and since that time has
managed various mutual funds sponsored by Principal Mutual Life Insurance
Company. As of December 31, 1997, the Manager served as investment advisor for
30 such funds with assets totaling approximately $5.3 billion.

The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Capital Value and
Government Securities Accounts. The Manager will reimburse Invista for the cost
of providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1997 were
approximately $26 billion. Invista's address is 1800 Hub Tower, 699 Walnut, Des
Moines, Iowa 50309.

<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
------- ----------------- ----------------------------
<S> <C> <C>

Capital Value November, 1996 Catherine A. Zaharis, CFA, (MBA degree, Drake University). Vice
President, Invista Capital Management, Inc.

Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President,
Invista (Account's inception) Capital Management, Inc.
</TABLE>

DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR

Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The Manager or Invista advises the
Accounts on investment policies and on the composition of the Accounts'
portfolios. In this connection, the Manager or Invista furnishes to the Board of
Directors a recommended investment program consistent with each Account's
investment objective and policies. The Manager is authorized, within the scope
of the approved investment program, to determine which securities are to be
bought or sold, and in what amounts.

The Fund and the Manager have filed an application with the Securities and
Exchange Commission seeking an exemptive order that would permit the Manager to
appoint a Sub-Advisor or change a subadvisory agreement without approval by
shareholders. If the SEC issues the requested order, the Fund would be able to
change Sub-Advisors or the fees paid to Sub-Advisors from time to time without
the expense and delays associated with obtaining shareholder approval of the
change. The order would not permit the Manager to appoint a Sub-Advisor that is
an affiliate of the Manager or the Fund (other than by reason of serving as
Sub-Advisor to a portfolio) (an "Affiliated Sub-Advisor") or to change a
subadvisory fee of an Affiliated Sub-Advisor without the approval of
shareholders. Currently, Invista is an Affiliated Sub-Advisor. There is no
assurance that the SEC will grant the requested ruling.

Each Account pays for certain corporate expenses incurred in its operation.
Among such expenses, the Account pays brokerage commissions on portfolio
transactions, transfer taxes and other charges and fees attributable to
investment transactions, any other local, state or federal taxes, fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Account, and the cost of meetings
of shareholders.

The investment services and certain other services referred to under the
heading "Cost of Manager's Services" in the Statements of Additional Information
are furnished to the Accounts under the terms of a Management Agreement between
the Fund and the Manager. The compensation paid by the Government Securities
Account and Money Market Account to the Manager for the year ended December 31,
1997 was equal to .50% of their respective average net assets. The compensation
paid by the Capital Value Account to the Manager for the fiscal year ended
December 31, 1997 was equal to .46% of the Account's average net assets. For the
fiscal year ended December 31, 1997, the fee paid by the Manager to the
Sub-Advisor of the Capital Value and Government Securities Accounts were .06%
and .03% respectively.Total expenses for the Accounts for the year ended
December 31, 1997 were equal to the following percentage of average net assets:
Capital Value Account, .47%; Government Securities Account, .52%; and Money
Market Account, .55%.

The Manager or Invista may purchase at their own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between the Fund, the
Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreement, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.

Among the expenses paid by each Account are its taxes (if any), brokerage
commissions on portfolio transactions, interest, custodial fees, fees and
expenses of unaffiliated directors and the cost of shareholder meetings. The
Manager is the dividend disbursing and transfer agent for the Fund and also
serves as investment advisor and dividend disbursing and transfer agent for each
of the other funds sponsored by Principal Mutual Life Insurance Company.

MANAGERS' COMMENTS

Principal Management Corporation is staffed with investment professionals
who manage each individual Account. Comments by these individuals in the
following paragraphs summarize in capsule form the general strategy and results
of each Account through 1997. The accompanying graphs display results for the
past 10 years or the life of the Account, whichever is shorter. Average Annual
Total Return figures provided for each Account in the graphs below reflect all
expenses of the Account and assume all distributions are reinvested at net asset
value. The figures do not reflect expenses of the variable life insurance
contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.

The various indices included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.

CAPITAL VALUE ACCOUNT
Catherine A. Zaharis

Total Returns *
As of December 31, 1997
- --------------------------------------------------
1 Year 5 Year 10 Year
28.53% 17.80% 15.23%

Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------

Capital S&P 500 Lipper
Year Ended Value Stock Growth & Income
December 31, Account Index Fund Average
10,000 10,000 10,000
1988 11,442 11,661 11,601
1989 13,294 15,356 14,332
1990 11,983 14,877 13,694
1991 16,617 19,412 17,676
1992 18,199 20,891 19,264
1993 19,618 22,992 21,489
1994 19,714 23,294 21,287
1995 26,004 32,037 27,847
1996 32,114 39,388 33,634
1997 41,277 52,525 42,762

Note: Past performance is not predictive of future performance.

The Capital Value Account for 1997 was impacted by certain aspects of the market
that were common in many equity mutual funds. Although it underperformed the S&P
500 Index over the latest calendar year, it was able to outperform the average
Growth & Income Fund. The Account's exposure to the financial sector was a big
plus for its performance. These types of companies continue to provide stable,
strong earnings growth which has resulted in strong stock performance for these
names.

1997 was a year of fairly high volatility in the market. After the first four
months of the year the market was quite weak as concerns and fear of higher
interest rates kept a lid on returns. The period through August was one of
rebounding stocks and strong performance in certain sectors, including
Technology. The fourth quarter brought growing fears of the Asian crisis moving
to U.S. shores, and the subsequent stock activity was indeed quite dramatic.
Those funds with major tech exposure that enjoyed the late summer period found
themselves with stocks that had major reversals of fortune. Also, the third
quarter brought concerns that some of the major consumer staple stocks would not
be able to continue strong earnings growth without revenue growth to help out.
This impacted some names that had been market leaders for several years. Account
managers continue to monitor these economic and market changes both in the U.S.
and abroad to determine when any inflection points may require changes to the
portfolio.

Important Notes:
Standard and Poor's 500 Stock Index: an unmanaged index of 500 widely held
common stocks representing industrial, financial, utility and transportation
companies listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.

Lipper Growth and Income Fund Average: this average consists of mutual funds
which combine a growth of earnings orientation and an income requirement for
level and/or rising dividends. The one year average at December 31, 1997
contained 611 mutual funds.

GOVERNMENT SECURITIES ACCOUNT
Martin J. Schafer

Total Returns *
As of December 31, 1997
- --------------------------------------------------
1 Year 5 Year 10 Year
10.39% 7.38% 9.36%

Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------

Gov't Lehman Lipper
Year Ended Securities Mortgage U.S. Mortgage
December 31, Account Index Index
10,000 10,000 10,000
1988 10,832 10,872 10,746
1989 12,521 12,552 12,098
1990 13,716 13,899 13,233
1991 16,041 16,082 15,190
1992 17,138 17,200 16,118
1993 18,865 18,376 17,319
1994 18,010 18,081 16,596
1995 21,444 21,118 19,290
1996 22,162 22,248 20,037
1997 24,464 24,359 21,756

Note: Past performance is not predictive of future performance.

Interest rates fell for most of 1997, which led to a very strong year for the
Government Securities Account. The Account outperformed both the Lehman Brothers
MBS Index as well as the Lipper U.S. Mortgage Fund Average, mostly due to its
slightly longer duration.

Managers added to results last year by identifying and selecting certain
undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in an increase in value.

Managers believe the current portfolio is well positioned for the period ahead.
The Account has a number of securities that are "seasoned" (e.g., original 30
year loans that have been outstanding for three years or more) and therefore
valued more highly in the marketplace. The majority of the securities are priced
below par, so prepayment risk is negligible. The current strategy of staying
fully invested in generic MBS pass-throughs with a mix of coupons, supplemented
with government agencies, has served the Account well and should continue going
forward.

Important Notes:

Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).

Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgage/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average at December 31, 1997 contained 59 mutual
funds.

DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES

The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange except
on days on which changes in the value of the Account's portfolio securities will
not materially affect the current net asset value of the Account's redeemable
securities, on days during which the Account receives no order for the purchase
or sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Account is determined by dividing the value of the Account's
securities plus all other assets, less all liabilities, by the number of Account
shares outstanding.

The portfolios of the Capital Value Account and Government Securities
Account are valued as follows. Securities for which market quotations are
readily available are valued using those quotations. Other securities are valued
by using market quotations, prices provided by market makers or estimates of
market values obtained from yield data and other factors relating to instruments
or securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith by the Board of Directors
of the Fund.

As previously described, the Capital Value Account may purchase foreign
securities, whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager under procedures established and regularly reviewed
by the Board of Directors. To the extent the Account invests in foreign
securities listed on foreign exchanges which trade on days on which the Account
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.

The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Statement of Additional
Information. The Money Market Account reserves the right to calculate or
estimate its net asset value more frequently than once per day if it deems it
desirable.

PERFORMANCE CALCULATION

From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Accounts' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Accounts' portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.

The Capital Value Account and Government Securities Account may advertise
their respective average annual total returns. Average annual total return for
each Account is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable value assuming the reinvestment of all dividends and
capital gains distributions at net asset value. The same assumptions are made
when computing cumulative total return by dividing the ending redeemable value
by the initial investment.

The Money Market Account may advertise its "yield" and "effective yield."
The "yield" of the Account refers to the income generated by an investment in
the Account over a seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Account is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.

The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Account is one of a series of Accounts issued by an
open-end investment company and there is no guarantee that the net asset value
or any stated rate of return will remain constant. A shareholder's investment in
the Account is not insured. Investors comparing results of the Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.

INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS

It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.

Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.

Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.

Money Market Account

The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are declared and payable daily and are automatically reinvested in
full and fractional shares of the Account at the then current net asset value
unless a shareholder requests payment in cash.

Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.

Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.

Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account in the account.

Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. The Account may endeavor to restore the net asset value
per share to $1.00 by reducing the number of outstanding shares by redeeming
proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Account. The Account may seek to achieve the same objective of restoring the net
asset value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.

The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse effect on shareholders.

ELIGIBLE PURCHASERS AND PURCHASE OF SHARES

Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.

Each Account serves as an underlying investment medium for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Mutual Life Insurance Company. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Accounts simultaneously. Although neither Principal Mutual Life Insurance
Company nor the Accounts currently foresee any such disadvantages either to
variable life insurance policy owners or to variable annuity contract owners,
the Board of Directors intends to monitor events in order to identify any
material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Account shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax law, (3) changes in the investment management of the Account, or (4)
differences in voting instructions between those given by policy owners and
those given by contract owners.

Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.

Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates. Stock
certificates will not be issued or delivered to investors. Certificates, which
can be stolen or lost, are unnecessary except for special purposes such as
collateral for a loan. Fractional interests in the Accounts' shares are
reflected to three decimal places in the statement of account.

If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.

SHAREHOLDER RIGHTS

The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote for the election of directors, selection of
independent accountants and on other matters submitted to meetings of
shareholders of the Account. Each share of an Account has equal rights with
every other share of the Account as to dividends, earnings, voting, assets and
redemption. Shares are fully paid and non-assessable, and have no preemptive or
conversion rights. Shares may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.

The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.

The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by the Board of
Directors.

Shareholder inquiries should be directed to the Fund at The Principal
Financial Group, Des Moines, Iowa 50392.

NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.

Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.

REDEMPTION OF SHARES

Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.

Each Account will redeem shares upon request. There is no charge for
redemption. A shareholder simply writes a letter to the appropriate Account
requesting redemption of any part or all of the shares. The letter must be
signed exactly as the account is registered. If payment is to be made to the
registered shareholder or joint shareholders, the Account will not require a
signature guarantee as a part of a proper endorsement; otherwise the
shareholder's signature must be guaranteed by either a commercial bank, trust
company, credit union, savings and loan association, national securities
exchange member, or by a brokerage firm. The price at which the shares are
redeemed will be the net asset value per share as next computed after the
request is received by the Account in proper and complete form. The amount
received for shares upon redemption may be more or less than the cost of such
shares depending upon the net asset value at the time of redemption.

Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Account is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.

Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.

ADDITIONAL INFORMATION

Organization: Effective January 1, 1998, certain Funds sponsored by
Principal Mutual Life Insurance Company were reorganized into a series of the
Principal Variable Contracts Fund, Inc., a corporation incorporated in the State
of Maryland on May 27, 1997. The new series adopted the assets and liabilities
of the corresponding Fund. Those Funds were incorporated in the state of
Maryland on the following dates: Capital Accumulation Fund - May 26, 1989
(effective November 1, 1989 succeeded to the business of a predecessor Fund that
had been incorporated in Delaware on February 6, 1969); Government Securities
Fund - June 7, 1985; and Money Market Fund - June 10, 1986.

Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts.
The custodian performs no managerial or policymaking functions for the Accounts.

Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.

Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of each Account for their respective present
fiscal years. Additional information about the performance of the Accounts is
contained in these Statements. Copies may be obtained free of charge from
Princor.

Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of this Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.

Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.

The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment company which offers a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together the Accounts provide the following range of investment
objectives:

Growth-Oriented Accounts
Balanced Account (formerly known as Principal Balanced Fund, Inc.) seeks to
generate a total return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.

Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondary
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.

MidCap Account (formerly known as Principal Emerging Growth Fund, Inc.) seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.

Income-Oriented Accounts

Bond Account (formerly known as Principal Bond Fund, Inc.) seeks to provide as
high a level of income as is consistent with preservation of capital and prudent
investment risk.

High Yield Account (formerly known as Principal High Yield Fund, Inc.) seeks
high current income. Capital growth is a secondary objective when consistent
with the objective of high current income. The Account seeks to achieve its
objective primarily through the purchase of high yielding, lower or non-rated
fixed income securities commonly referred to as "junk bonds." Bonds of this type
are considered to be speculative with regard to payment of interest and return
of principal. Purchasers should carefully assess the risks associated with an
investment in this Account.

Money Market Account
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.

An investment in any of the Accounts is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Account will be
able to maintain a stable net asset value of $1.00 per share.

This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.

Additional information about the Fund has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated May 1, 1998. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:

Principal Variable Contracts Fund, Inc.
A Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123

The Date of this Prospectus is May 1, 1998.

TABLE OF CONTENTS

Page

Summary ............................................................... 2
Financial Highlights.................................................... 4
Investment Objectives, Policies and Restrictions........................ 8
Certain Investment Policies and Restrictions............................14
Manager and Sub-Advisor ...............................................15
Duties Performed by the Manager and Sub-Advisor.........................16
Managers' Comments......................................................16
Determination of Net Asset Value of Account Shares......................20
Performance Calculation.................................................20
Income Dividends, Distributions and Tax Status..........................21
Eligible Purchasers and Purchase of Shares..............................22
Shareholder Rights .....................................................22
Redemption of Shares....................................................23
Additional Information..................................................24

This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Fund in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Managers.

SUMMARY

The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.

The Principal Variable Contracts Fund, Inc. ("Fund") is an incorporated,
open-end diversified management investment company offering multiple accounts.

Who may purchase shares of the Accounts?

What do the Accounts offer investors?

Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.

Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries and/or
located in different geographical regions. Diversification reduces investment
risk.

Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.

Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See Redemption of Shares.

What are the Accounts' investment objectives?

Growth-Oriented Accounts

The investment objective of Balanced Account is to seek to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of this objective. The Account intends to pursue
a flexible investment policy in seeking to achieve this investment objective.

The primary investment objective of Capital Value Account is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Account seeks to achieve its investment objectives
through the purchase primarily of common stocks, but the Account may invest in
other securities.

The investment objective of MidCap Account is to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.

Income-Oriented Accounts

The investment objective of Bond Account is to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.

The primary investment objective of High Yield Account is to seek high
current income. Capital growth is a secondary objective when consistent with the
objective of high current income. The Account will invest primarily in high
yielding, lower or non-rated fixed income securities.

Money Market Account

The investment objective of Money Market Account is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.

There can be no assurance that the investment objectives of any of the
Accounts will be realized. See Investment Objectives, Policies and Restrictions.

Who serves as Manager for the Accounts?

Principal Management Corporation (formerly known as Princor Management
Corporation)("Manager"), a corporation organized in 1969 by Principal Mutual
Life Insurance Company, is the Manager for each of the Accounts. It is also the
dividend disbursing and transfer agent for the Fund. In order to provide
investment advisory services for the Balanced Account, Capital Value Account and
MidCap Account, the Manager has executed a sub-advisory agreement with Invista
Capital Management, Inc. ("Invista" or "Sub-Advisor"). See Manager and
Sub-Advisor.

What fees and expenses apply to ownership of shares of the Accounts?

The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.

ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses
------- ---------- -------- ---------------
Balanced Account .59% .02% .61%
Bond Account .50% .02% .52%
Capital Value Account .46% .01% .47%
High Yield Account .60% .08% .68%
MidCap Account .62% .02% .64%
Money Market Account .50% .05% .55%

EXAMPLE

You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:

Period (in years)
-----------------------------------
Account 1 3 5 10
------- -- --- --- ---
Balanced Account $6 $20 $34 $76
Bond Account $5 $17 $29 $65
Capital Value Account $5 $15 $26 $59
High Yield Account $7 $22 $38 $85
MidCap Account $7 $20 $36 $80
Money Market Account $6 $18 $31 $69

This Example is based on the Annual Account Operating expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than shown.

The purpose of the above table is to assist you in understanding the
various expenses that an investor in the Accounts will bear directly or
indirectly. See Duties Performed by the Manager.

FINANCIAL HIGHLIGHTS

The following financial highlights are derived from financial statements
which, for the five years in the period ended December 31, 1997, have been
audited by Ernst & Young LLP, independent auditors, whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. Audited financial statements may
be obtained by shareholders, without charge, by telephoning 1-800-451-5447. See
page 8 for the Notes to Financial Highlights.
<TABLE>
<CAPTION>
For a Share Outstanding Throughout the Year Ended December 31,
(except as noted)
BALANCED ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c)1988(c)(d)
- ---------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............ $14.44 $13.97 $11.95 $12.77 $12.58 $12.93 $11.33 $10.79 $11.89 $11.75 $10.00

Income from Investment Operations:
Net Investment Income........... .46 .40 .45 .37 .42 .23 .47 .54 .60 .62 .27

Net Realized and Unrealized
Gain (Loss) on Investments.... 2.11 1.41 2.44 (.64) .95 .75 1.61 .59 (.48) .30 1.51
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations 2.57 1.81 2.89 (.27) 1.37 .98 2.08 1.13 .12 .92 1.78

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.45) (.40) (.45) (.37) (.42) (.47) (.48) (.57) (.63) (.55) (.03)

Distributions from Capital Gains (1.05) (.94) (.42) (.18) (.76) (.86) - (.02) (.59) (.23) -
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (1.50) (1.34) (.87) (.55) (1.18) (1.33) (.48) (.59) (1.22) (.78) (.03)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $15.51 $14.44 $13.97 $11.95 $12.77 $12.58 $12.93 $11.33 $10.79 $11.89 $11.75
====== ====== ====== ======= ====== ======== ====== ====== ====== ====== =========
Total Return....................... 17.93% 13.13% 24.58% (2.09)% 11.06% 8.00%(e) 18.78% 11.36% .87% 8.55% 17.70%(e)
====== ====== ====== ======= ====== ======== ====== ====== ====== ====== =========
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................$133,827 $93,158 $45,403 $25,043 $21,399 $18,842 $17,344 $14,555 $13,016 $12,751 $11,469

Ratio of Expenses to
Average Net Assets.............. .61% .63% .66% .69% .69% .73%(f) .72% .73% .74% .74% .80%(f)

Ratio of Net Investment Income
to Average Net Assets........... 3.26% 3.45% 4.12% 3.42% 3.30% 3.71%(f) 3.80% 5.27% 5.52% 5.55% 4.96%(f)

Portfolio Turnover Rate............ 69.7% 22.6% 25.7% 31.5% 15.8% 38.4%(f) 26.6% 27.1% 33.1% 29.3% 41.7%(f)

Average Commission Rate............ $.0394 $.0417 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
BOND ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c) 1988(c)(d)
- ------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $11.33 $11.73 $10.12 $11.16 $10.77 $11.08 $10.64 $10.72 $10.92 $10.68 $10.00

Income from Investment Operations:
Net Investment Income........... .76 .68 .62 .72 .88 .45 .91 .94 .95 1.15 .32

Net Realized and Unrealized
Gain (Loss) on Investments.... .44 (.40) 1.62 (1.04) .38 .13 .46 (.06) (.21) .17 .40
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations 1.20 .28 2.24 (.32) 1.26 .58 1.37 .88 .74 1.32 .72

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.75) (.68) (.63) (.72) (.87) (.89) (.93) (.96) (.94) (.96) (.04)

Distributions from Capital Gains - - - - - - - - - (.12) -
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (.75) (.68) (.63) (.72) (.87) (.89) (.93) (.96) (.94) (1.08) (.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $11.78 $11.33 $11.73 $10.12 $11.16 $10.77 $11.08 $10.64 $10.72 $10.92 $10.68
====== ====== ====== ======= ====== ======== ====== ====== ====== ====== ========
Total Return....................... 10.60% 2.36% 22.17% (2.90)% 11.67% 5.33%(e) 13.57% 8.94% 7.15% 13.51% 6.06%(e)
====== ====== ====== ======= ====== ======== ====== ====== ====== ====== ========
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................ $81,921 $63,387 $35,878 $17,108 $14,387 $12,790 $12,024 $10,552 $9,658 $9,007 $17,598

Ratio of Expenses to
Average Net Assets.............. .52% .53% .56% .58% .59% .62%(f) .62% .63% .64% .64% .58%(f)

Ratio of Net Investment Income
to Average Net Assets........... 6.85% 7.00% 7.28% 7.86% 7.57% 8.10%(f) 8.47% 9.17% 9.09% 9.18% 8.11%(f)

Portfolio Turnover Rate............ 7.3% 1.7% 5.9% 18.2% 14.0% 6.7%(f) 6.1% 2.7% 0.0% 12.2% 68.8%(f)

Average Commission Rate............ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
For a Share Outstanding Throughout the Year Ended December 31,
(except as noted)
CAPITAL VALUE ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c) 1988(c)
- --------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $29.84 $27.80 $23.44 $24.61 $25.19 $26.03 $23.35 $22.48 $23.63 $23.23 $27.51

Income from Investment Operations:
Net Investment Income........... .68 .57 .60 .62 .61 .31 .65 .74 .79 .77 .60

Net Realized and Unrealized
Gain (Loss) on Investments.... 7.52 5.82 6.69 (.49) 1.32 1.84 2.70 1.22 .14 1.32 (1.50)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations 8.20 6.39 7.29 .13 1.93 2.15 3.35 1.96 .93 2.09 (.90)

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.67) (.58) (.60) (.61) (.60) (.64) (.67) (.79) (.81) (.68) (.69)

Distributions from Capital Gains (2.76) (3.77) (2.33) (.69) (1.91) (2.35) - (.30) (1.27) (1.01) (2.69)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (3.43) (4.35) (2.93) (1.30) (2.51) (2.99) (.67) (1.09) (2.08) (1.69) (3.38)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $34.61 $29.84 $27.80 $23.44 $24.61 $25.19 $26.03 $23.35 $22.48 $23.63 $23.23
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== =======
Total Return....................... 28.53% 23.50% 31.91% .49% 7.79% 8.81%(e) 14.53% 9.46% 3.94% 10.02% (2.67)%
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== =======
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................$285,231 $205,019 $135,640 $120,572 $128,515 $105,355 $94,596 $76,537 $74,008 $68,132 $62,696

Ratio of Expenses to
Average Net Assets............ .47% .49% .51% .51% .51% .55%(f) .54% .53% .56% .57% .60%

Ratio of Net Investment Income
to Average Net Assets......... 2.13% 2.06% 2.25% 2.36% 2.49% 2.56%(f) 2.65% 3.53% 3.56% 3.53% 2.76%

Portfolio Turnover Rate......... 23.4% 48.5% 49.2% 44.5% 25.8% 39.7%(f) 34.8% 14.0% 30.2% 23.5% 26.7%

Average Commission Rate......... $.0451 $.0426 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>

HIGH YIELD ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c)1988(c)(d)
- ------------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $8.72 $8.39 $7.91 $8.62 $8.38 $8.93 $8.28 $8.96 $10.37 $11.01 $10.00

Income from Investment Operations:
Net Investment Income........... .76 .80 .76 .77 .80 .45 .92 .99 1.21 1.23 .67

Net Realized and Unrealized
Gain (Loss) on Investments.... .18 .30 .51 (.72) .23 (.10) .66 (.53) (1.35) (.45) .49
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations .94 1.10 1.27 .05 1.03 .35 1.58 .46 (.14) .78 1.16

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.76) (.77) (.77) (.76) (.79) (.90) (.93) (1.14) (1.22) (1.21) (.15)

Excess Distributions from
Net Investment Income(g)...... - - (.02) - - - - - - - -

Distributions from Capital Gains - - - - - - - - (.05) (.21) -
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (.76) (.77) (.79) (.76) (.79) (.90) (.93) (1.14) (1.27) (1.42) (.15)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Net Asset Value,
End of Period................... $8.90 $8.72 $8.39 $7.91 $8.62 $8.38 $8.93 $8.28 $8.96 $10.37 $11.01
====== ====== ====== ====== ====== ======== ====== ====== ======= ====== =========
Total Return....................... 10.75% 13.13% 16.08% .62% 12.31% 4.06%(e) 20.70% 6.35% (1.46)% 7.88% 11.25%(e)
====== ====== ====== ====== ====== ======== ====== ====== ======= ====== =========
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................ $15,837 $13,740 $11,830 $9,697 $9,576 $8,924 $8,556 $7,085 $6,643 $6,741 $6,703

Ratio of Expenses to
Average Net Assets.............. .68% .70% .73% .73% .74% .77%(f) .77% .82% .83% .95% .78%(f)

Ratio of Net Investment Income
to Average Net Assets........... 8.50% 9.21% 9.09% 9.02% 8.80% 10.33%(f) 11.00% 12.58% 13.07% 11.89% 11.71%(f)

Portfolio Turnover Rate............ 32.0% 32.0% 35.1% 30.6% 28.7% 20.6%(f) 31.3% 6.4% 24.2% 27.8% 58.2%(f)

Average Commission Rate............ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
For a Share Outstanding Throughout the Year Ended December 31,
(except as noted)

MIDCAP ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c)1988(c)(d)
- -------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $29.74 $25.33 $19.97 $20.79 $18.91 $15.97 $13.93 $14.25 $13.35 $12.85 $10.00

Income from Investment Operations:
Net Investment Income........... .24 .22 .22 .14 .17 .10 .21 .20 .24 .16 .05

Net Realized and Unrealized
Gain (Loss) on Investments.... 6.48 5.07 5.57 .03 3.47 3.09 2.04 .50 .87 1.35 2.83
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations 6.72 5.29 5.79 .17 3.64 3.19 2.25 .70 1.11 1.51 2.88

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.23) (.22) (.22) (.14) (.17) (.21) (.21) (.23) (.20) (.11) (.03)

Distributions from Capital Gains (.76) (.66) (.21) (.85) (1.59) (.04) - (.79) (.01) (.90) -
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (.99) (.88) (.43) (.99) (1.76) (.25) (.21) (1.02) (.21) (1.01) (.03)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $35.47 $29.74 $25.33 $19.97 $20.79 $18.91 $15.97 $13.93 $14.25 $13.35 $12.85
====== ====== ====== ====== ====== ========= ====== ====== ======= ====== =========
Total Return....................... 22.75% 21.11% 29.01% .78% 19.28% 20.12%(e) 16.19% 5.72% 8.32% 13.08% 28.72%(e)
====== ====== ====== ====== ====== ========= ====== ====== ======= ====== =========
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................$224,630 $137,161 $58,520 $23,912 $12,188 $9,693 $7,829 $6,579 $6,067 $5,509 $4,857

Ratio of Expenses to
Average Net Assets.............. .64% .66% .70% .74% .78% .81%(f) .82% .89% .88% .90% .94%(f)

Ratio of Net Investment Income
to Average Net Assets........... .79% 1.07% 1.23% 1.15% .89% 1.24%(f) 1.33% 1.70% 1.74% 1.31% .64%(f)

Portfolio Turnover Rate............ 7.8% 8.8% 13.1% 12.0% 22.4% 8.6%(f) 10.1% 11.1% 17.9% 21.4% 4.6%(f)

Average Commission Rate............ $.0371 $.0379 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
MONEY MARKET ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c) 1988(c)
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000

Income from Investment Operations:
Net Investment Income........... .051 .049 .054 .037 .027 .016 .046 .070 .077 .083 .064

Net Realized and Unrealized
Gain (Loss) on Investments.... - - - - - - - - - - -
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from Investment Operations .051 .049 .054 .037 .027 .016 .046 .070 .077 .083 .064

Less Dividends and Distributions:
Dividends from
Net Investment Income......... (.051) (.049) (.054) (.037) (.027) (.016) (.046) (.070) (.077) (.083) (.064)

Distributions from Capital Gains - - - - - - - - - - -
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Dividends and Distributions (.051) (.049) (.054) (.037) (.027) (.016) (.046) (.070) (.077) (.083) (.064)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value,
End of Period................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== ======
Total Return....................... 5.04% 5.07% 5.59% 3.76% 2.69% 1.54%(e) 4.64% 7.20% 8.37% 8.59% 6.61%
====== ====== ====== ====== ====== ======== ====== ====== ====== ====== ======
Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)................ $47,315 $46,244 $32,670 $29,372 $22,753 $27,680 $25,194 $26,509 $26,588 $20,707 $14,571

Ratio of Expenses to
Average Net Assets.............. .55% .56% .58% .60% .60% .59%(f) .57% .56% .57% .61% .64%

Ratio of Net Investment Income
to Average Net Assets........... 5.12% 5.00% 5.32% 3.81% 2.64% 3.10%(f) 4.54% 6.94% 8.05% 8.40% 6.39%

Portfolio Turnover Rate............ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Average Commission Rate............ N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>

Notes to Financial Highlights

(a) Effective January 1, 1998, the following Fund names were changed:
Principal Balanced Fund, Inc. became Balanced Account
Principal Bond Fund, Inc. became Bond Account
Principal Capital Accumulation Fund, Inc. became Capital Value Account
Principal Emerging Growth Fund, Inc. became MidCap Account
Principal High Yield Fund, Inc. became High Yield Account
Principal Money Market Fund, Inc. became Money Market Account

(b) Effective July 1, 1992 the Account changed its fiscal year end from June 30
to December 31. This column represents the period July 1, 1992 to December
31, 1992.

(d) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Account's sole stockholder, Principal Mutual Life
Insurance Company. This represented activity of the Account prior to the
initial offering of shares to eligible purchasers.

(e) Total return amounts have not been annualized.

(f) Computed on an annualized basis.

(g) Due to the timing of dividend distributions and the differences in
accounting for income and realized gains (losses) for financial statement
and federal income tax purposes, the fiscal year in which amounts are
distributed may differ from the year in which the income and realized gains
(losses) are recorded for financial statement purposes by the fund. The
differences between the income and gains distributed on a book versus tax
basis are shown in the Financial Highlights as excess distributions from
net investment income and from capital gains.

INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS

The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.

GROWTH-ORIENTED ACCOUNTS

The Fund includes two Accounts which seek capital appreciation through
investments in equity securities (Capital Value Account and MidCap Account) and
one Account which seeks a total investment return including both capital
appreciation and income through investments in equity and debt securities
(Balanced Account). These three Accounts are collectively referred to as the
Growth-Oriented Accounts.

The Growth-Oriented Accounts may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Capital Value and MidCap Accounts will
seek to be fully invested under normal conditions in equity securities. When in
the opinion of the Manager current market or economic conditions warrant, a
Growth-Oriented Account may for temporary defensive purposes place all or a
portion of its assets in cash, on which the Account would earn no income, cash
equivalents, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper, commercial paper master notes which are floating
rate debt instruments without a fixed maturity, United States Government
securities, and preferred stocks and debt securities, whether or not convertible
into or carrying rights for common stock. A Growth-Oriented Account may also
maintain reasonable amounts in cash or short-term debt securities for daily cash
management purposes or pending selection of particular long-term investments.

Balanced Account

The investment objective of the Balanced Account is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.

In seeking to achieve the investment objective, the Account invests
primarily in growth and income-oriented common stocks (including securities
convertible into common stocks), corporate bonds and debentures and short-term
money market instruments. The Account may also invest in other equity
securities, and in debt securities issued or guaranteed by the United States
Government and its agencies or instrumentalities. The Account seeks to generate
real (inflation plus) growth during favorable investment periods and may
emphasize income and capital preservation strategies during uncertain investment
periods. The Manager will seek to minimize declines in the net asset value per
share. However, there is no guarantee that the Manager will be successful in
achieving this goal.

The portions of the Account's total assets invested in equity securities,
debt securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.

In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.

To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Account may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.

The short-term money market investments in which the Account may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Account will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of one billion dollars.

The United States government securities in which the Account may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.

Capital Value Account

The primary objective of the Capital Value Account is long-term capital
appreciation. A secondary objective is growth of investment income.

The Account will invest primarily in common stocks, but it may invest in
other securities. In making selections for the Account's investment portfolio,
the Sub-Advisor, Invista, will use an approach described broadly as that of
fundamental analysis, which is discussed in the Statement of Additional
Information. To achieve the investment objective, Invista will invest in
securities that have "value" characteristics. This process is known as "value
investing." Value investing is purchasing securities of companies with above
average dividend yields and below average price to earnings (P/E) ratios.
Securities chosen for investment may include those of companies which the
Invista believes can reasonably be expected to share in the growth of the
nation's economy over the long term.

MidCap Account

The objective of the MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the
Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the MidCap Account may invest, for any period of time, in
any industry, in any kind of growth-oriented company, whether new and unseasoned
or well known and established. Under normal market conditions, the Account will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Account may invest
up to 10% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see Certain
Policies and Restrictions - Foreign Securities.

There can be, of course, no assurance that the Account will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Account invests, the Account believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Account as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Account will not be seeking current income, investors should not view a
purchase of Account shares as a complete investment program.

INCOME-ORIENTED ACCOUNTS

The Fund currently includes two Accounts which seek a high level of income
through investments in fixed-income securities (Bond Account and High Yield
Account) collectively referred to as the "Income-Oriented Accounts." An
investment in any of the Income-Oriented Accounts involves market risks
associated with movements in interest rates. The market value of the Accounts'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Accounts' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Account's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Account's portfolio. The Statement of Additional Information contains
descriptions of ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P").

Bond Account

The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.

In seeking to achieve the investment objective, the Account will
predominantly invest in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Account may make short-term
investments from time to time as deemed prudent by the Manager. Longer
maturities typically provide better yields but will subject the Account to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.

Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Account to
have investment quality. Under unusual market or economic conditions, the
Account may for temporary defense purposes invest up to 100% of its assets in
cash or cash equivalents.

High Yield Account

The High Yield Account's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Account is designed for investors willing
to assume additional risk in return for above average income.

In seeking to attain the Account's objective of high current income, the
Account invests primarily in high yielding, lower or non-rated (high risk)
fixed-income securities, commonly known as "junk bonds," constituting a
diversified portfolio which the Account Manager believes does not involve undue
risk to income or principal. Normally, at least 80% of the Account's assets will
be invested in debt securities, convertible securities (both debt and preferred
stock) or preferred stocks that are consistent with its primary investment
objective of high current income. The Account's remaining assets may be held in
cash or cash equivalents, or invested in common stocks and other equity
securities when these types of investments are consistent with the objective of
high current income.

The Account seeks to invest its assets in securities rated Ba1 or lower by
Moody's Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or in unrated securities which the Account's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Account will not invest in securities rated Caa or lower by Moody's and CCC
or lower by S&P.

The rating services' descriptions of securities rating categories in which
the Account may normally invest are as follows:

Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

The higher-yielding, lower-rated securities in which the High Yield Account
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.

Investors should recognize that the market for higher yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Account and the
ability of the issuers of the securities held by it to pay principal and
interest. A default by an issuer may result in the Account incurring additional
expenses to seek recovery of the amounts due it.

Some of the securities in which the Account invests contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Account would have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Account's net asset value per share.

Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the High
Yield Account and should be prepared to maintain their investment during periods
of adverse market conditions.
Investors should not rely on the Account for their short-term financial needs.

The Account seeks to minimize the risks of investing in lower-rated
securities through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Account
invests primarily in securities in the lower rating categories, the achievement
of the Account's goals is more dependent on the Manager's ability than would be
the case if the Account were investing in securities in the higher rating
categories. Although the Account's Manager considers security ratings when
making investment decisions, it performs its own investment analysis and does
not rely principally on the ratings assigned by the rating services. There are
risks in applying credit ratings as a method for evaluating high yield
securities. For example, credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield securities, and
credit rating agencies may fail to make timely changes in credit ratings to
reflect subsequent events. The Manager's analysis includes traditional security
analysis considerations such as the issuer's experience and managerial strength,
changing financial condition, borrowing requirements or debt maturity schedules,
and its responsiveness to changes in business conditions and interest rates. It
also considers relative values based on anticipated cash flow, interest or
dividend coverage, asset coverage and earnings prospects. In addition, the
Manager analyzes general business conditions and other factors such as
anticipated changes in economic activity and interest rates, the availability of
new investment opportunities, and the economic outlook for specific industries.
The Manager continuously monitors the issuers of portfolio securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments and to assure the securities' liquidity
so the Account can meet redemption requests. During the year ended December 31,
1997 the percentage of the Account's portfolio securities invested in the
various ratings established by Moody's, based upon the weighted average ratings
of the portfolio, was as follows:

Moody's Rating Portfolio Percentage
-------------- --------------------
Baa .87%
Ba 31.92%
B 67.13%
C .08%

The above percentage for B rated securities included unrated securities in
the amount of .79% which has been determined by the Manager to be of comparable
quality.

There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Account's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Account's assets. In implementing these
"defensive" strategies, the Account may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Account considers consistent with such
strategy. The yield to maturity on these securities would generally be lower
than the yield to maturity on lower-rated fixed-income securities. It is
impossible to predict when, or for how long, such alternative strategies will be
utilized.

The Account's Manager buys and sells securities for the Account principally
in response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Account may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.

MONEY MARKET ACCOUNT

The Fund also includes an Account which invests primarily in short-term
securities, Money Market Account. Securities in which the Money Market Account
will invest may not yield as high a level of current income as securities of low
quality and longer maturities which generally have less liquidity, greater
market risk and more fluctuation.

The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:

(3) An unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.

The Account will not invest more than 5% of its total assets in the
following securities:

(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;

(3) Securities which are unrated but are determined by the board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Account
will maintain a dollar-weighted average portfolio maturity of 90 days
or less.

The objective of Money Market Account is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing its assets
in a portfolio of money market instruments. These money market instruments are
U.S. Government Securities, U.S. Government Agency Securities, Bank Obligations,
Commercial Paper, Short-term Corporate Debt and Repurchase Agreements, which are
described briefly below and in more detail in the Statement of Additional
Information.

U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.

Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.

Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.

The Account intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Account's right to borrow to facilitate redemptions may reduce
the need for such sales. It is the Account's policy to be as fully invested as
reasonably practical at all times to maximize current income.

A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Account invests.
The rate of return and the net asset value will be affected by such other
factors as sales of portfolio securities prior to maturity and the Account's
operating expenses.

CERTAIN INVESTMENT POLICIES AND RESTRICTIONS

Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.

Diversification

Foreign Securities

Each of the following Accounts has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Bond, Capital Value and High Yield - 20%; Balanced and MidCap - 10%.
Debt securities issued in the United States pursuant to a registration statement
filed with the Securities and Exchange Commission are not considered "foreign
securities" for purposes of this investment limitation. Investment in foreign
securities presents certain risks including those resulting from fluctuations in
currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers. Moreover, securities of many foreign issuers may
be less liquid and their prices more volatile than those of comparable domestic
issuers. In addition, transactions in foreign securities may be subject to
higher costs, and the time for settlement of transactions in foreign securities
may be longer than the settlement period for domestic issuers. An Account's
investment in foreign securities may also result in higher custodial costs and
the costs associated with currency conversions.

Repurchase Agreements

Each of the Accounts, may enter into repurchase agreements with, and each
of the Accounts, except the Capital Value and Money Market Accounts, may lend
its portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Account if the
other party should default on its obligations, and the Account is delayed or
prevented from recovering on the collateral. See the Fund's Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the Board of
Directors to deal with those risks. None of the Accounts intend either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Account,
would amount to more than 10% of its total assets or (ii) to loan securities in
excess of 30% of its total assets.

Forward Commitments

From time to time, each of the Accounts may enter into forward commitment
agreements which call for the Account to purchase or sell a security on a future
date and at a price fixed at the time the Account enters into the agreement.
Each of these Accounts may also acquire rights to sell its investments to other
parties, either on demand or at specific intervals.

Warrants

Each of the Accounts, except the Money Market Account, may invest in
warrants up to 5% of its assets, of which not more than 2% may be invested in
warrants that are not listed on the New York or American Stock Exchange.

Borrowing

As a matter of fundamental policy, each Account may borrow money only for
temporary or emergency purposes. The Balanced, Bond, Capital Value, High Yield
and Money Market Accounts may borrow only from banks. Further, each may borrow
only in an amount not exceeding 5% of its assets, except the Capital Value
Account which may borrow only in an amount not exceeding the lesser of (i) 5% of
the value of its assets less liabilities other than such borrowings, or (ii) 10%
of its assets taken at cost at the time the borrowing is made, and the Money
Market Account which may borrow only in an amount not exceeding the lesser of
(i) 5% of the value of its assets, or (ii) 10% of the value of its net assets
taken at cost at the time the borrowing is made.

Options

The Balanced, Bond, High Yield and MidCap Accounts may purchase covered
spread options, which would give the Account the right to sell a security that
it owns at a fixed dollar spread or yield spread in relationship to another
security that the Account does not own, but which is used as a benchmark. These
same Accounts may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Accounts may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.

MANAGER AND SUB-ADVISOR

The Manager for the Fund is Principal Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1997, the Manager served as
investment advisor for 30 such funds with assets totaling approximately $5.3
billion.

The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value
and MidCap Accounts. The Manager will reimburse Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1997 were
approximately $26 billion. Invista's address is 1800 Hub Tower, 699 Walnut, Des
Moines, Iowa 50309.

<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
------- ----------------- ----------------------------
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice
President, Invista Capital Management, Inc. Co-Manager since December, 1997:
Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Capital Management, Inc.

Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.

Capital Value November, 1996 Catherine A. Zaharis, CFA, (MBA degree, Drake University). Vice President,
Invista Capital Management, Inc.

High Yield December, 1987 James K. Hovey, CFA (MBA degree University of Iowa). Director - Investment
(Account's inception) Securities, Principal Mutual Life Insurance Company.

MidCap December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President, Invista
(Account's inception) Capital Management, Inc.
</TABLE>

DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR

Under Maryland law, the business and affairs of each of the Accounts are
managed under the direction of the Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the
Accounts under the terms of a Management Agreement between the Fund and the
Manager, and for the Balanced, Capital Value and MidCap Accounts, a Sub-Advisory
Agreement between the Manager and Invista. The Manager, or Invista, advises the
Accounts on investment policies and on the composition of the Accounts'
portfolios. In this connection, the Manager, or Invista, furnishes to the Board
of Directors of the Fund a recommended investment program consistent with the
Account's investment objective and policies. The Manager, or Invista, is
authorized, within the scope of the approved investment program, to determine
which securities are to be bought or sold, and in what amounts.

The compensation paid by each Account to the Manager for the fiscal year
ended December 31, 1997 was, on an annual basis, equal to the following
percentage of average net assets:
Total
Manager's Annualized
Account Fee Expenses
------- --------- ----------
Balanced Account .59% .61%
Bond Account .50% .52%
Capital Value Account .46% .47%
High Yield Account .60% .68%
MidCap Account .62% .64%
Money Market Account .50% .55%

The Manager, or Invista, may purchase at its own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between the Fund, the
Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.

The Accounts may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for the Fund.

The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.

MANAGERS' COMMENTS

Principal Management Corporation and Invista are staffed with investment
professionals who manage each individual Account. Comments by these individuals
in the following paragraphs summarize in capsule form the general strategy and
results of each Account through 1997. The accompanying charts display results
for the past 10 years or the life of the Account, whichever is shorter. Average
Annual Total Return figures provided for each Account in the graphs below
reflect all expenses of the Account and assume all distributions are reinvested
at net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.

The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.

Growth-Oriented Accounts

Balanced Account
(Judith A. Vogel)

Total Returns *
As of December 31, 1997
---------------------------------------------------
1 Year 5 Year 10 Year
17.93% 12.57% 12.96%

Comparison of Change in Value of $10,000 Investment in the
Balanced Account, S&P 500, Lehman Brothers Government/Corporate
Bond Index and Lipper Balanced Fund Average
---------------------------------------------------------------
Lipper Lehman
Year Ended Balanced S&P 500 Mid Cap Govt Corp
December 31, Account Index Index Bond Index
10,000 10,000 10,000 10,000
1988 11,830 11,661 11,229 10,759
1989 13,198 15,356 13,429 12,290
1990 12,348 14,877 13,355 13,309
1991 16,592 19,412 16,930 15,455
1992 18,716 20,891 18,122 16,626
1993 20,786 22,992 20,066 18,464
1994 20,351 23,294 19,561 17,816
1995 25,355 32,037 24,482 21,246
1996 28,684 39,388 27,851 21,861
1997 33,826 52,525 33,143 23,993

Note: Past performance is not predictive of future performance.

1997 might best be described as a year of many moods in the financial markets.
The first half of the year was characterized by strength in the economy, low
inflation and phenomenal stock market results. The 25 largest companies in the
S&P 500 produced the best performance results among equity investments, making
the benchmark index a tough challenge for equity managers to beat. In 1997 the
Account had a return of 17.93% versus 19.00% for the Lipper Balanced Fund
Average, 9.75% for the Lehman Brothers Government/Corporate Bond Index and
33.35% for the S&P 500. Suffering from the impact of higher interest rates after
the Fed raised overnight bank lending rates in March, bond market returns were
much less robust. During the late summer and fall of the year concerns over
potential fallout from the Asian currency and market collapses caused a flight
to safety among U.S. Treasury bonds. Interest rates declined and, as investors
shunned large, multi-national companies having exposure to Asian economies in
favor of domestic common stocks, small caps registered double-digit quarterly
gains. In the final three months of the year the economy continued its upward
trend with no signs of developing inflationary pressures. Bond yields dipped
below 6% at the end of the year while a fresh round of earnings concerns kept
stock valuations from expanding further. All in all it was a very favorable
year. The U.S. stock market experienced an unprecedented third consecutive year
of annual returns in excess of 20%, and the bond market produced attractive
results approximating 10% as well.

With an asset mix of 60% equities and 40% fixed income, the Balanced Account
participated in the strong financial markets of 1997 producing a 17.9% return
which was well above long-run average results. The Account's strategy of holding
a diversified portfolio of high quality fixed income securities and reasonably
valued common stocks was maintained. The Account's objective is to produce both
capital appreciation and current income without taking on undue risk to
principal. Managers expect 1998 to be challenging as investors wrestle with an
aging economic expansion, strong global competition, high stock market
valuations and potential earnings disappointments. This Account's focus on
credit quality among bonds and a value orientation in the equity portfolio
should benefit long-term shareholders of the Balanced Account.

There is no independent market index against which to measure returns of
balanced portfolios, however, the S&P 500 Stock Index and the Lehman
Government/Corporate Bond Index are included in the accompanying graph for your
information.

Capital Value Account
(Catherine A. Zaharis)

Total Returns *
As of December 31, 1997
- --------------------------------------------------
1 Year 5 Year 10 Year
28.53% 17.80% 15.23%

Note: Past performance is not predictive of future performance.

MidCap Account
(Michael R. Hamilton)

Total Returns *
As of December 31, 1997
---------------------------------------------------
1 Year 5 Year 10 Years
22.75% 18.18% 18.29%

Comparison of Change in Value of $10,000 Investment
in the MidCap Account, S&P 500 and Lipper Mid Cap Fund Average
--------------------------------------------------------------
Lipper
Year Ended MidCap S&P 500 MID CAP
December 31, Account Index Index
10,000 10,000 10,000
1988 12,371 11,661 11,476
1989 15,073 15,356 14,586
1990 13,189 14,877 14,067
1991 20,244 19,412 21,275
1992 23,268 20,891 23,213
1993 27,755 22,992 26,625
1994 27,971 23,294 26,079
1995 36,086 32,037 34,469
1996 43,704 39,388 40,646
1997 53,649 52,525 48,624

Note: Past performance is not predictive of future performance.

Small company stocks suffered during the third quarter 1997 as investors chose
to avoid them in favor of large cap stocks given the Asian problems that
surfaced at the start of the quarter. This was a reversal from the prior
quarter. Once the magnitude of the Asian problems was assumed, its effects could
be anticipated. The largest 25 companies in the S&P 500 produced the best
performance results among equity investments, making the benchmark index a
challenge for equity managers to beat. The Account and the Lipper Average
trailed the S&P 500 Index because of their emphasis on small cap stocks.

As of now little impact is assumed on global economic growth. The withdrawal of
capital from many troubled markets and their implementation of more austere
measures in the troubled countries have lessened the threat of cheap imports
swamping the U.S. economy. Small cap stocks are once again on investors growth
stock shopping lists.

Account managers feel that even if Asia remains in a different mode, growth in
the United States will not be greatly affected and growth in Europe and South
America could offset the Asian slowdown. Still, it is prudent to stick with
those companies and industries with more visible growth in revenues and more
stable earnings. Financial stocks continue to benefit from consolidation and
expense control. Healthcare should benefit from the aging baby boomers as they
continue active lifestyles. Technology is one of the main factors enabling
companies to improve efficiency and requires continual investment to stay
competitive. The portfolio is well positioned to take advantage of these
opportunities.

Important Notes of the Growth-Oriented Accounts:

Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.

Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average at December 31, 1997 contained 350 mutual funds.

Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average contained 611 funds on December
31, 1997.

Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average contained 249 funds on December 31,
1997.

Income-Oriented Accounts

Bond Account
(Scott A. Bennett)

Total Returns *
As of December 31, 1997
- --------------------------------------------------------------
1 Year 5 Year 10 Years
10.60% 8.44% 9.62%

Comparison of Change in Value of $10,000 Investment in the Bond Account, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
- -------------------------------------------------------------------------------
Lehman Lipper
Year Ended Bond BAA BBB
December 31, Account Index Avg
10,000 10,000 10,000
1988 10,927 10,923 10,900
1989 12,441 12,463 12,060
1990 13,090 13,343 12,751
1991 15,278 15,814 15,020
1992 16,711 17,187 16,258
1993 18,660 19,300 18,261
1994 18,120 18,360 17,447
1995 22,136 22,533 20,948
1996 22,659 23,439 21,616
1997 25,060 26,040 23,795

Note: Past performance is not predictive of future performance.

1997 was a year of high absolute levels of return for the fixed income market.
The Bond Account's total return for the year was 10.6%. This high level of
return was driven by the decline in Treasury yields through the final
three-quarters of the year on continued confidence that inflation would remain
low. The financial crisis in Asia in the fourth quarter also accelerated the
decline in Treasury yields as investors increased their purchases of Treasuries,
seeking a safe haven.

Although the Asian crisis was positive from a perspective of pushing down
interest rates, it increased the risk premium (spread) demanded by investors to
own corporate bonds as compared to owning Treasury bonds. The higher premium was
demanded on the threat of lower corporate profits because of Asia's influence on
the world's markets. Certain industries were hit harder than others, including
commodity industries, the technology sector, and construction industries such as
heavy equipment manufacturers. All of these factors influenced the 1997 returns
of the Bond Account. The Account's significant diversification by industry and
issuer helped it to avoid significant downside risk from the Asian crisis.

The Bond Account continues to outperform the Lipper Corporate Debt Fund
BBB-Rated Average and lag the Lehman BAA Corporate Index, which benefits from
the lack of fees. The long-term outperformance relative to the average BBB fund
is credited to remaining well diversified, fully invested and not guessing
interest rates.

High Yield Account
(James K. Hovey)

Total Returns *
As of December 31, 1997
---------------------------------------------------
1 Year 5 Year 10 Years
10.75% 10.45% 9.87%

Comparison of Change in Value of $10,000 Investment in the High Yield Account,
Lehman Brothers High Yield Index and Lipper High Current Yield Fund Average
------------------------------------------------------------------------------
High Lehman Lipper
Year Ended Yield High Yield Narrow
December 31, Account Index Index
10,000 10,000 10,000
1988 11,340 11,253 11,298
1989 11,579 11,347 11,239
1990 10,688 10,259 10,059
1991 13,605 14,985 13,876
1992 15,589 17,346 16,352
1993 17,508 20,314 19,500
1994 17,617 20,108 18,753
1995 20,450 23,971 21,844
1996 23,135 26,692 24,830
1997 25,621 30,097 28,048

Note: Past performance is not predictive of future performance.

The high yield market continued its strong performance in 1997. The High Yield
Account posted a total return of 10.75% for the year using its correlation to
both interest rates and the equity market to its advantage. This performance
trailed both the Lehman Brothers High Yield Index return of 12.76% and the
Lipper High Current Yield Fund Average of 12.96%. The relative underperformance
was driven by the Account's overexposure to Asia. The Account owned three
Indonesian bonds and one Philippine bond that were adversely impacted in the
fourth quarter. After seeing spreads narrow for the first three-quarters of the
year, spreads widened substantially in the fourth quarter as the financial
problems throughout Asia developed. This fourth quarter setback was more than
offset by other factors impacting the high yield market.

The high yield market was very active again in 1997. More participants were
involved in the market both as purchasers and issuers. New issuance set a record
in 1997 with approximately $120 billion of new deals brought to market. This new
issue volume combined with historically low default rates, low inflation and a
strong economy has continued to make the high yield market attractive for
purchasers. Net inflows into mutual funds were over $21 billion in 1997. This in
spite of a market where many fixed income counterparts were seeing net outflows.

The High Yield Account maintains a B+ average quality comprised of BB and B
bonds. This is a relatively conservative risk position compared to other funds
in the high yield market. At the end of 1997 the Account was well diversified
among 63 bonds of various sectors. Managers continue with a bottoms-up approach
to security selection in both the primary and secondary market. The High Yield
Account continues to demonstrate how it is a worthwhile asset class that can
enhance overall portfolio diversification and returns.

Important Notes of the Income-Oriented Accounts:

Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.

Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average on
December 31, 1997 contained 102 mutual funds.

Lehman Brothers High Yield Index: an unmanaged index of all publicly issued
fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or lower with
at least $100 million outstanding and one-year or more to maturity.

Lipper High Current Yield Fund Average: this average consists of mutual funds
investing in high (relative) current yield fixed income securities with no
quality or maturity restrictions. The mutual funds tend to invest in lower grade
debt issues. The one year average on December 31, 1997 contained 181 mutual
funds.

Note: Mutual fund data from Lipper Analytical Services, Inc.

DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES

The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Account's portfolio
securities will not materially affect the current net asset value of the
Account's redeemable securities, on days during which an Account receives no
order for the purchase or sale of its redeemable securities and no tender of
such a security for redemption, and on customary national business holidays. The
net asset value per share of each Account is determined by dividing the value of
the Account's securities plus all other assets, less all liabilities, by the
number of Account shares outstanding.

Growth-Oriented and Income-Oriented Accounts

The following valuation information applies to the Growth-Oriented and
Income-Oriented Accounts. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.

As previously described, some of the Accounts may purchase foreign
securities whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager under procedures established and regularly reviewed
by the Board of Directors. To the extent the Account invests in foreign
securities listed on foreign exchanges which trade on days on which the Account
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.

Money Market Account

The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Fund's Statement of Additional
Information.

PERFORMANCE CALCULATION

Average Annual Total Return

Each Account may advertise its respective average annual total return.
Average annual total return for each Account is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices.

Yield and Effective Yield

From time to time the Money Market Account may advertise its respective
yield and effective yield. The yield of the Account refers to the income
generated by an investment in the Account over a seven-day period. This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Account is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed reinvestment.

The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. There is no guarantee that the net asset value or any stated
rate of return will remain constant. A shareholder's investment in the Account
is not insured. Investors comparing results of the Account with investment
results and yields from other sources such as banks or savings and loan
associations should understand these distinctions. Historical and comparative
yield information may, from time to time, be presented by the Account.

INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS

Money Market Account

The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are payable daily and are automatically reinvested in full and
fractional shares of the Account at the then current net asset value unless a
shareholder requests payment in cash.

Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Account may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investing in the Account. The Account may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors.

ELIGIBLE PURCHASERS AND PURCHASE OF SHARES

Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Account reserves the right to broaden or limit the designation of Eligible
Purchasers.

The Balanced, Bond, Capital Value, MidCap and Money Market Accounts each
serve as an underlying investment medium for variable annuity contracts and
variable life insurance policies that are funded in separate accounts
established by Principal Mutual Life Insurance Company. It is conceivable that
in the future it may be disadvantageous for variable life insurance separate
accounts and variable annuity separate accounts to invest in the Accounts
simultaneously. Although neither Principal Mutual Life Insurance Company nor the
Accounts currently foresee any such disadvantages either to variable life
insurance policy owners or to variable annuity contract owners, the Board of
Directors intends to monitor events in order to identify any material conflicts
between such policy owners and contract owners and to determine what action, if
any, should be taken in response thereto. Such action could include the sale of
Account shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax law, (3) changes in the
investment management of the Account, or (4) differences in voting instructions
between those given by policy owners and those given by contract owners.

Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates. Stock
certificates will not be issued or delivered to investors. Certificates, which
can be stolen or lost, are unnecessary except for special purposes such as
collateral for a loan. Fractional interests in the Account's shares are
reflected to three decimal places in the statement of account.

SHAREHOLDER RIGHTS

The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote on the election of directors, selection of
independent accountants and other matters submitted to meetings of shareholders
of the Account. Each share has equal rights with every other share as to
dividends, earnings, voting, assets and redemption. Shares are fully paid and
non-assessable, and have no preemptive or conversion rights. Shares may be
issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Accounts may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.

The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.

Shareholder inquiries should be directed to the Principal Variable
Contracts Fund, Inc. at The Principal Financial Group, Des Moines, Iowa 50392.

REDEMPTION OF SHARES

Each Account will redeem its shares upon request. There is no charge for
redemption. A shareholder simply writes a letter to the appropriate Account
requesting redemption of any part or all of the shares. The letter must be
signed exactly as the account is registered. If payment is to be made to the
registered shareholder or joint shareholders, the Account will not require a
signature guarantee as a part of a proper endorsement; otherwise the
shareholder's signature must be guaranteed by either a commercial bank, trust
company, credit union, savings and loan association, national securities
exchange member, or by a brokerage firm. The price at which the shares are
redeemed will be the net asset value per share as next computed after the
request is received by the Account in proper and complete form. The amount
received for shares upon redemption may be more or less than the cost of such
shares depending upon the net asset value at the time of redemption.

ADDITIONAL INFORMATION

Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.

Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of the Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C., from the Commission upon payment of the prescribed
fees.

Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.

The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment company offering a variety of
Accounts. Together, the Accounts provide the following range of investment
objectives:

Growth-Oriented Accounts

Aggressive Growth Account
Asset Allocation Account
Balanced Account
Capital Value Account
Growth Account
International Account
International SmallCap Account
MicroCap Account
MidCap Account
MidCap Growth Account
Real Estate Account
SmallCap Account
SmallCap Growth Account
SmallCap Value Account
Utilities Account

Income-Oriented Accounts

Bond Account
Government Securities Account

Money Market Accounts

Money Market Account

An investment in the Money Market fund is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Funds will be
able to maintain a stable net asset value of $1.00 per share.

This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.

Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123

The Date of this Prospectus is May 1, 1998.

TABLE OF CONTENTS
Page
Summary ................................................. 2
Financial Highlights...................................... 4
Investment Objectives, Policies and Restrictions.......... 10
Certain Investment Policies and Restrictions.............. 19
Manager and Sub-Advisors ................................ 21
Duties Performed by the Manager and Sub-Advisors.......... 23
Managers' Comments........................................ 24
Determination of Net Asset Value of Account Shares........ 30
Performance Calculation................................... 30
Income Dividends, Distributions and Tax Status............ 31
Eligible Purchasers and Purchase of Shares................ 31
Shareholder Rights ....................................... 32
Redemption of Shares...................................... 32
Additional Information.................................... 33

This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, shares of the Account in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.

SUMMARY

The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.

The Principal Variable Contracts Fund, Inc. is an open-end diversified
management investment company offering multiple accounts.

Who may purchase shares of the Accounts?

What does the Fund offer investors?

Professional Investment Management: Experienced securities analysts provide each
Account with professional investment management.

Diversification: Each Account will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.

Economies of Scale: Pooling individual shareholder's investments in any of the
Accounts creates administrative efficiencies.

Redeemability: Upon request each Account will redeem its shares and promptly pay
the investor the current net asset value of the shares redeemed. See "Redemption
of Shares."

What are the Accounts' investment objectives?

Growth-Oriented Accounts
Aggressive Growth Account -- to provide long-term capital appreciation by
investing primarily in growth-oriented common stocks of medium and large
capitalization U.S. corporations and, to a limited extent, foreign corporations.

Asset Allocation Account -- to generate a total investment return consistent
with the preservation of capital. The Account intends to pursue a flexible
investment policy in seeking to achieve this investment objective.

Balanced Account -- to generate a total return consisting of current income and
capital appreciation while assuming reasonable risks in furtherance of this
objective.

Capital Value Account --to provide long-term capital appreciation and
secondarily is growth of investment income. The Account seeks to achieve its
investment objectives through the purchase primarily of common stocks, but the
Account may invest in other securities.

Growth Account -- to seek growth of capital. The Account seeks to achieve its
objective through the purchase primarily of common stocks, but the Account may
invest in other securities.

International Account -- to seek long-term growth of capital by investing in a
portfolio of equity securities domiciled in any of the nations of the world.

International SmallCap Account -- seeks long-term growth of capital. The Account
will attempt to achieve its objective by investing primarily in equity
securities of non-United States companies with comparatively smaller market
capitalizations.

MicroCap Account -- seeks long-term growth of capital. The Account will attempt
to achieve its objective by investing primarily in value and growth oriented
companies with small market capitalizations, generally less than $700 million.

MidCap Account -- to achieve capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.

MidCap Growth Account -- seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in growth stocks of
companies with market capitalizations in the $1 billion to $10 billion range.

Real Estate Account -- seeks to generate a high total return. The Account will
attempt to achieve its objective by investing primarily in equity securities of
companies principally engaged in the real estate industry.

SmallCap Account -- seeks long-term growth of capital. The Account will attempt
to achieve its objective by investing primarily in equity securities of both
growth and value oriented companies with comparatively smaller market
capitalizations.

SmallCap Growth Account -- seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in equity securities of
small growth companies with market capitalization of less than $1 billion.

SmallCap Value Account -- seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in equity securities of
small companies with value characteristics and market capitalizations of less
than $1 billion.

Utilities Account -- seeks to provide current income and long-term growth of
income and capital. The Account will attempt to achieve its objective by
investing primarily in equity and fixed-income securities of companies in the
public utilities industry.

Income-Oriented Accounts
Bond Account -- to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.

Government Securities Account -- to seek a high level of current income,
liquidity and safety of principal. The Account seeks to achieve its objective
through the purchase of obligations issued or guaranteed by the United States
Government or its agencies, with emphasis on Government National Mortgage
Association Certificates ("GNMA Certificates"). Account shares are not
guaranteed by the United States Government.

Money Market Account
Money Market Account -- to seek as high a level of current income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing all of its assets in a portfolio of
money market instruments.

There can be no assurance that the investment objectives of any of the Accounts
will be realized. See Investment Objectives, Policies and Restrictions.

Who serves as Manager for the Accounts?

Principal Management Corporation ("Manager"), a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the
Accounts. It is also the dividend disbursing and transfer agent for the Fund. In
order to provide investment advisory services for certain Accounts the Manager
has executed sub-advisory agreements with Invista Capital Management, Inc.
("Invista") (Balanced, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap and Utilities Accounts),
Morgan Stanley Asset Management Inc. ("MSAM") (Aggressive Growth and Asset
Allocation Accounts), Berger Associates, Inc. ("Berger") (SmallCap Growth
Account), Dreyfus Corporation ("Dreyfus") (MidCap Growth Account), Goldman Sachs
Asset Management ("GSAM") (MicroCap Account) and J.P. Morgan Investment
Management, Inc. ("J.P. Morgan Investment") (SmallCap Value Account").
Subsequent references to these corporations may be as "Sub-Advisor". See Manager
and Sub-Advisors.

What fees and expenses apply to ownership of shares of the Accounts?

The following table depicts fees and expenses applicable to the purchase and
ownership of shares of each of the Accounts.

ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses

Aggressive Growth .80% .02% .82%
Asset Allocation .80 .09 .89
Balanced .59 .02 .61
Bond .50 .02 .52
Capital Value .46 .01 .47
Government Securities .50 .02 .52
Growth .49 .01 .50
International .74 .13 .87
International SmallCap 1.20 .06 1.26*
MicroCap 1.00 .06 1.06*
MidCap .62 .02 .64
MidCap Growth .90 .06 .96*
Money Market .50 .05 .55
Real Estate .90 .06 .96*
SmallCap .85 .06 .91*
SmallCap Growth 1.00 .06 1.06*
SmallCap Value 1.10 .06 1.16*
Utilities .60 .06 .66*
*Estimated Expenses

EXAMPLE You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period: Period
(in years) Account 1 3 5 10

Aggressive Growth $8 $26 $46 $101
Asset Allocation $9 $28 $49 $110
Balanced $6 $20 $34 $76
Bond $5 $17 $29 $65
Capital Value $5 $15 $26 $59
Government Securities $5 $17 $29 $65
Growth $5 $16 $28 $63
International $9 $28 $48 $107
International SmallCap $13 $40 N/A N/A
MicroCap $11 $34 N/A N/A
MidCap $7 $20 $36 $80
MidCap Growth $10 $31 N/A N/A
Money Market $6 $18 $31 $69
Real Estate $10 $31 N/A N/A
SmallCap $9 $29 N/A N/A
SmallCap Growth $11 $34 N/A N/A
SmallCap Value $12 $37 N/A N/A
Utilities $7 $21 N/A N/A

This Example is based on the Annual Account Operating expenses for each Account
described above. Please remember that the Example should not be considered a
representation of past or future expenses and that actual expenses may be
greater or less than shown.

The purpose of the above table is to assist you in understanding the various
expenses that an investor in the Accounts will bear directly or indirectly. See
Duties Performed by the Manager and Sub-Advisors.

FINANCIAL HIGHLIGHTS

For a Share Outstanding Throughout the Year Ended December 31,
(except as noted)
AGGRESSIVE GROWTH ACCOUNT(a) 1997 1996 1995 1994(b)
- ------------------------- ---- ---- ---- ----
Net Asset Value,
Beginning of Period.................... $14.52 $12.94 $10.11 $9.92

Income from Investment Operations:
Net Investment Income.................. .04 .11 .13 .05

Net Realized and Unrealized
Gain (Loss) on Investments........... 4.26 3.38 4.31 .24

Total from Investment Operations 4.30 3.49 4.44 .29

Less Dividends and Distributions:
Dividends from
Net Investment Income................ (.04) (.11) (.13) (.05)

Distributions from Capital Gains....... (2.48) (1.80) (1.48) (.05)

Total Dividends and Distributions (2.52) (1.91) (1.61) (.10)

Net Asset Value,
End of Period.......................... $16.30 $14.52 $12.94 $10.11

Total Return.............................. 30.86% 28.05% 44.19% 2.59%(c)

Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)....................... $149,182 $90,106 $33,643 $13,770

Ratio of Expenses to
Average Net Assets................... .82% .85% .90% 1.03%(d)

Ratio of Net Investment Income
to Average Net Assets................ .29% 1.05% 1.34% 1.06%(d)

Portfolio Turnover Rate................ 172.6% 166.9% 172.9% 105.6%(d)

Average Commission Rate................ $.0571 $.0541 N/A N/A

ASSET ALLOCATION ACCOUNT(a) 1997 1996 1995 1994(b)
- ------------------------ ---- ---- ---- ------
Net Asset Value,
Beginning of Period.................... $11.48 $11.11 $9.79 $9.98

Income from Investment Operations:
Net Investment Income.................. .30 .36 .40 .23

Net Realized and Unrealized
Gain (Loss) on Investments........... 1.72 1.06 1.62 (.18)

Total from Investment Operations 2.02 1.42 2.02 .05

Less Dividends and Distributions:
Dividends from
Net Investment Income................ (.30) (.36) (.40) (.23)

Distributions from Capital Gains....... (1.26) (.69) (.30) -

Excess Distributions from Capital Gains(e) - - - (.01)

Total Dividends and Distributions (1.56) (1.05) (.70) (.24)

Net Asset Value,
End of Period.......................... $11.94 $11.48 $11.11 $9.79

Total Return.............................. 18.19% 12.92% 20.66% .52%(c)

Ratio/Supplemental Data:
Net Assets, End of Period
(in thousands)....................... $76,804 $61,631 $41,074 $28,041

Ratio of Expenses to
Average Net Assets................... .89% .87% .89% .95%(d)

Ratio of Net Investment Income
to Average Net Assets................ 2.55% 3.45% 4.07% 4.27%(d)

Portfolio Turnover Rate................ 131.6% 108.2% 47.1% 60.7%(d)

Average Commission Rate................ $.0569 $.0497 N/A N/A

<TABLE>
<CAPTION>
For a Share Outstanding Throughout the Year Ended December 31,
(except as noted)
BALANCED ACCOUNT(a) 1997 1996 1995 1994 1993 1992(b) 1992(c) 1991(c) 1990(c) 1989(c)1988(c)(d)
- ---------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period............ $14.44 $13.97 $11.95 $12.77 $12.58 $12.93 $11.33 $10.79 $11.89 $11.75 $10.00