PRINCIPAL VARIABLE CONTRACTS FUND INC, 485BPOS, 1999-04-21

PRINCIPAL VARIABLE CONTRACTS FUND INC
485BPOS, 1999-04-21

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Registration No. 02-35570

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

--------

POST-EFFECTIVE AMENDMENT NO. 44 TO

FORM N-1A

REGISTRATION STATEMENT

under

THE SECURITIES ACT OF 1933

and

REGISTRATION STATEMENT

under

THE INVESTMENT COMPANY ACT OF 1940

--------

PRINCIPAL VARIABLE CONTRACTS FUND, INC.
(Exact name of Registrant as specified in Charter)

The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)

--------

Telephone Number (515) 248-3842

--------

MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JONES & BLOUCH L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805

(Name and address of agent for service)

----------

It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
X on May 1, 1999 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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<PAGE>

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ACCOUNTS OF THE FUND

Aggressive Growth Account MidCap Account
Asset Allocation Account MidCap Growth Account
Balanced Account Money Market Account
Bond Account Real Estate Account
Capital Value Account SmallCap Account
Government Securities Account SmallCap Growth Account
Growth Account SmallCap Value Account
International Account Stock Index 500 Account
International SmallCap Account Utilities Account
MicroCap Account

This Prospectus describes a mutual fund organized by Principal Life Insurance
Company. The Fund provides a choice of investment objectives through the
accounts listed above.

The date of this Prospectus is May 1, 1999.

Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary
is a criminal offense.

TABLE OF CONTENTS

ACCOUNT DESCRIPTIONS ............................................. 3
GROWTH-ORIENTED ACCOUNTS........................................... 3
INCOME-ORIENTED ACCOUNTS........................................... 4
MONEY MARKET ACCOUNT............................................... 4

Aggressive Growth Account.......................................... 6
Asset Allocation Account........................................... 8
Balanced Account................................................... 10
Bond Account....................................................... 12
Capital Value Account.............................................. 14
Government Securities Account...................................... 16
Growth Account..................................................... 18
International Account.............................................. 20
International SmallCap Account..................................... 22
MicroCap Account................................................... 24
MidCap Account..................................................... 26
MidCap Growth Account.............................................. 28
Money Market Account............................................... 30
Real Estate Account................................................ 32
SmallCap Account................................................... 34
SmallCap Growth Account............................................ 36
SmallCap Value Account............................................. 38
Stock Index 500 Account............................................ 40
Utilities Account.................................................. 42

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS.................... 44

PRICING OF ACCOUNT SHARES.......................................... 48

DIVIDENDS AND DISTRIBUTIONS........................................ 49
Growth-Oriented and Income-Oriented Accounts.................. 49
Money Market Account.......................................... 49

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE..................... 50
The Manager................................................... 50
The Sub-Advisors.............................................. 50

GENERAL INFORMATION ABOUT AN ACCOUNT............................... 53
Shareholders Rights........................................... 53
Purchase of Account Shares.................................... 54
Sale of Account Shares........................................ 54
Year 2000 Readiness Disclosure................................ 55
Financial Statements.......................................... 55

FINANCIAL HIGHLIGHTS............................................... 56
Notes to Financial Highlights................................. 64

ACCOUNT DESCRIPTIONS
The Principal Variable Contracts Fund is made up of several different Accounts.
Each Account has its own investment objective.

The Growth-Oriented Accounts (except the Balanced and Utilities Accounts that
invest in a mix of equity and debt securities) invest primarily in common
stocks. Under normal market conditions the Growth-Oriented Accounts (except
Balanced and Utilities) are fully invested in equity securities. Under unusual
circumstances, each of the Growth-Oriented Accounts may invest without limit in
cash for temporary or defensive purposes. The Accounts also maintain a portion
of their assets in cash while they are making long-term investment decisions and
to cover sell orders from shareholders.

The Income-Oriented Accounts each have a rating limitation with regard to the
quality of the securities that are held in its portfolio. The rating limitation
applies when the Account purchases a bond. If the rating on a bond changes while
the Account owns it the Account is not required to sell the bond. The Statement
of Additional Information (SAI) contains additional information about bond
ratings by Moody's Investor Services, Inc. (Moody's) and Standard & Poor's
Corporation (S&P).

In the description for each Account, you will find important information about
the Account's:

Primary investment strategy
This section summarizes how the Account intends to achieve its investment
objective. It identifies the Account's primary investment strategy (including
the type or types of securities in which the Account primarily invests) and any
policy to concentrate in securities of issuers in a particular industry or group
of industries.

Annual operating expenses
The annual operating expenses for each Account are deducted from Account assets
(stated as a percentage of Account assets) and are shown as of the end of the
most recent fiscal year. Estimates of the expenses are shown for the new
Account. The example is intended to help you compare the cost of investing in a
particular Account with the cost of investing in other mutual funds. The example
assumes you invest $10,000 in an Account for the time periods indicated. The
example also assumes that your investment has a 5% total return each year and
that the Account's operating expenses are the same as the most recent fiscal
year expenses (or estimated expenses for the new Account). Although your actual
costs may be higher or lower, based on these assumptions, your costs would be as
shown.

Principal Management Corporation (the "Manager") serves as the manager for the
Principal Variable Contracts Fund. It has signed contracts with various
Sub-Advisors under which the Sub-Advisor provides portfolio management for
certain Accounts (see Management, Organization and Capital Structure).

Sub-Advisor Account
Berger Associates ("Berger") SmallCap Growth
Dreyfus Corporation ("Dreyfus") MidCap Growth
Goldman Sachs Asset Management ("Goldman") MicroCap
Invista Capital Management, LLC ("Invista") Balanced, Capital Value,
Government Securities,
Growth, International,
International SmallCap,
MidCap, SmallCap, Stock
Index 500 and Utilities
J.P. Morgan Investment Management, Inc. ("Morgan") SmallCap Value
Morgan Stanley Asset Management ("Morgan Stanley") Aggressive Growth and
Asset Allocation

Account Performance
Included in each Account's, (except the Stock Index 500) description is a set of
tables and a bar chart. Together, these provide an indication of the risks
involved when you invest. They show changes in the Account's performance from
year to year.

One of the tables compares the Account's average annual total returns for 1, 5
and 10 years with a broad based securities market index (a broad measure of
market performance) and an average of mutual funds with a similar investment
objective and management style. The averages used are prepared by Lipper, Inc.
(an independent statistical service). The other table for each Account provides
the highest and lowest quarterly return for the Account's shares during the last
10 calendar years or a shorter period if the Account has been in existence for
less than 10 years.

An Account's past performance is not necessarily an indication of how the
Account will perform in the future.

You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Money Market Account.

NOTE:Investments in these Accounts are not deposits of a bank and are not
insured or guaranteed by the FDIC or any other government agency.

GROWTH-ORIENTED ACCOUNT

Aggressive Growth Account

The Aggressive Growth Account seeks to provide long-term capital appreciation.
It invests primarily in growth-oriented stocks of medium and large
capitalization U.S. corporations and to a limited extent, foreign corporations
that exhibit strong accelerating earnings growth. Under normal circumstances,
the Account invests at least 65% of the value of its assets in common stocks.

The Account uses a flexible investment process in pursuit of its investment
objective. In selecting stocks for the Account, the Sub-Advisor, Morgan Stanley,
concentrates on companies with consistent or rising earnings growth records and
compelling business strategies. Morgan Stanley focuses on companies with market
capitalizations of $1 billion or more and is not limited to specific market
sectors.

Morgan Stanley continually and rigorously studies company developments,
including business strategy, management focus and financial results, to identify
companies with earnings growth and business momentum. In addition, Morgan
Stanley closely monitors analysts' expectations to identify issuers that have
the potential for positive earnings surprises versus consensus expectations.
Valuation is of secondary importance and is viewed in the context of prospects
for sustainable earnings growth and the potential for positive earnings
surprises in relation to consensus expectations. The Account considers selling
securities of issuers that no longer meet Morgan Stanley criteria.

When it selects a security for the Account, Morgan Stanley emphasizes individual
security selection. Account investments are generally diversified by industry
but concentrated sector positions may result from the selection process.

The Account has a long-term investment approach. However, Morgan Stanley may
take advantage of short-term opportunities that are consistent with its
objective by selling recently purchased securities that have increased in value.
To the extent that the Account engages in short-term trading, it may have
increased transactions costs.

The Account may invest up to 25% of its assets in securities of foreign
companies. Foreign stocks carry risks that are not generally found in stocks of
U.S. companies. These include the risk that a foreign security could lose value
as a result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.

The Aggressive Growth Account is generally a suitable investment for investors
who want long-term growth. The investor must be willing to accept the risks of
investing in common stocks that may have greater risks than stocks of companies
with lower potential for earnings growth. In addition, prices of equity
securities are more volatile than prices of debt securities. The prices of
equity securities will rise and fall in response to a number of different
factors. In particular, prices of equity securities will respond to events that
affect entire financial markets or industries (changes in inflation or consumer
demand, for example) and to events that affect particular issuers (news about
the success or failure of a new product, for example). In addition, at times the
Account's market sector, mid- to large-capitalization growth-oriented equity
securities, may underperform relative to other sectors.

As the value of the stocks owned by the Account changes, the Account share price
changes. In the short term, the share price can fluctuate dramatically. As with
all mutual funds, if you sell your shares when their value is less than the
price you paid, you will lose money.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1995 44.19% for the last 5 years
1996 28.05% -----------------------------------
1997 30.86% Quarter Ended Return
1998 18.95% -----------------------------------
12/31/98 22.68%
Calendar Years Ended December 31 9/30/98 (16.05%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five
Year Years
-------- ---------
Aggressive Growth Account 18.95% 26.61%*

S&P 500 Stock Index 28.58 24.06
Lipper Growth Fund Average 22.86 19.03
-----------------------------------------------------
* Period from June 1, 1994, date first offered
to the public, through December 31, 1998.

The bar chart and tables shown above provide some indication of the risks
of investing in the Account by showing changes in the Account's
performance from year to year and by showing how the Account's average
annual returns for compare with those of a broad measure of market
performance. The example shown below assumes 1) an investment of $10,000,
2) a 5% annual return and 3) that expenses are the same as the most
recent fiscal year expenses.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.77% $80 $249 $433 $966
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.78%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since October 1998 Co-Manager, Philip W. Friedman, Managing
Director of Morgan Stanley & Co.
Incorporated and Morgan Stanley Dean Witter
Investment Management Inc. since 1997.
Director of Research, Morgan Stanley Dean
Witter & Co. since 1995. Prior thereto,
Assistant to the Controller and Chief
Financial Officer, Arthur Andersen &
Company.

Since May 1994 Co-Manager, Margaret K. Johnson, Portfolio
(Account's inception) Manager and Principal of Morgan Stanley &
Co. Incorporated since 1989 and Morgan
Stanley Dean Witter Investment Management
Inc. since 1995.

Since October 1998 Co-Manager, William S. Auslander, Portfolio
Manager and Principal of Morgan Stanley &
Co. Incorporated and Morgan Stanley Dean
Witter Investment Management Inc. Prior
thereto, equity analyst since 1995. Equity
analyst at Icahn & Co., 1986-1995.

GROWTH-ORIENTED ACCOUNT

Asset Allocation Account

The Asset Allocation Account seeks to generate a total investment return
consistent with preservation of capital. It uses a flexible investment policy to
establish a diversified global portfolio that will invest in equities and fixed
income securities. The Sub-Advisor, Morgan Stanley, will invest in equity
securities of domestic and foreign corporations that appear to be undervalued
relative to their earnings results or potential, or whose earnings growth
prospectus appear to be more attractive than the economy as a whole. In
addition, Morgan Stanley will invest in debt securities to provide income and to
moderate the overall portfolio risk. Typically Morgan Stanley will invest in
high quality fixed income securities but may invest up to 20% of the Account's
assets in high yield securities.

The securities which the Account purchases are identified as belonging to an
asset class which include:
o stocks of growth-oriented companies (companies with earnings that are
expected to grow more rapidly than the economy as a whole), both foreign
and domestic;
o stocks of value oriented companies (companies with distinctly below average
stock price to earnings ratios and stock price to book value ratios, and
higher than average dividend yields), both foreign and domestic;
o domestic real estate investment trusts;
o fixed income securities, both foreign and domestic; and
o domestic high yield fixed-income securities.

As with any security, the securities in which the Account invests have
associated risks. These include risks of:
o High yield securities. Fixed income securities that are not investment
grade are commonly referred to as junk bonds or high yield securities.
These securities offer a higher yield than other, higher rated securities,
but they carry a greater degree of risk and are considered speculative by
the major credit rating agencies.
o Foreign securities. These have risks that are not generally found in
securities of U.S. companies. For example, the risk that a foreign security
could lose value as a result of political, financial and economic events in
foreign countries. In addition, foreign securities may be subject to
securities regulators with less stringent accounting and disclosure
standards than are required of U.S. companies.
o Securities of smaller companies. Historically, small company securities
have been more volatile in price than larger company securities, especially
over the short-term. While small companies may offer greater opportunities
for capital growth than larger, more established companies, they also
involve greater risks and should be considered speculative.

Allocation among asset classes is designed to lessen overall investment risk by
diversifying the Account's assets among different types of investments in
different markets. Morgan Stanley reallocates among asset classes and eliminates
asset classes for a period of time, when in it's judgment the shift offers
better prospects of achieving the investment objective of the Account. Under
normal market conditions, abrupt shifts among asset classes will not occur.

Morgan Stanley does not allocate a specific percentage of the Account's assets
to a class. Over time, it expects the asset mix to be within the following
ranges:
o 25% to 75% in equity securities;
o 20% to 60% in debt securities; and
o 0% to 40% in money market instruments.
The allocation is based on Morgan Stanley's judgement as to the general market
and economic conditions, trends and investment yields, interest rates, and
changes in fiscal or monetary policies.

The net asset value of the Account's shares is effected by changes in the value
of the securities it owns. The prices of equity securities held by the Account
may decline in response to certain events including those directly involving
issuers of these securities, adverse conditions affecting the general economy,
or overall market declines. In the short term, stock prices can fluctuate
dramatically in response to these factors. The value of debt securities held by
the Account may be affected by factors such as changing interest rates, credit
rating, and effective maturities. When interest rates fall, the price of a bond
rises and when interest rates rise, the price declines. Lower quality and longer
maturity bonds will be subject to greater credit risk and price fluctuations
than higher quality and shorter maturity bonds. Money market instruments held by
the Account may be affected by unfavorable political, economic, or governmental
developments that could affect the repayment of principal or the payment of
interest.

The Asset Allocation Account is generally a suitable investment for investors
who are seeking a moderate risk approach towards long-term growth. As with all
mutual funds, if you sell your shares when their value is less than the price
you paid, you will lose money.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1995 20.66% for the last 5 years
1996 12.92% -----------------------------------
1997 18.19% Quarter Ended Return
1998 9.18% -----------------------------------
12/31/98 11.00%
Calendar Years Ended December 31 9/30/98 (8.16%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five
Year Years
-------- ---------
Asset Allocation Account 9.18% 13.23%*

S&P 500 Stock Index 28.58 24.06
Lipper Flexible Portfolio
Fund Average 14.16 14.54
-----------------------------------------------------
* Period from June 1, 1994, date first offered
to the public, through December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.80% $91 $284 $493 $1,096
Other Expenses........................ 0.09%
-----
Total Account Operating Expenses 0.89%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since May 1994 Co-Manager, Francine J. Bovich, Managing
(Account's inception) Director of Morgan Stanley Dean Witter
Investment Management Inc. and Morgan
Stanley & Co. Incorporated since 1997.
Principal 1993-1996.

Since October 1998 Co-Manager, Philip W. Friedman, Managing
Director of Morgan Stanley & Co.
Incorporated and Morgan Stanley Dean Witter
Investment Management Inc. since 1997.
Director of Research, Morgan Stanley Dean
Witter & Co. since 1995. Prior thereto,
Assistant to the Controller and Chief
Financial Officer, Arthur Andersen &
Company.

Since April 1996 Co-Manager, Stephen C. Sexauer, Principal of
Morgan Stanley Dean Witter Investment
Management Inc. and Morgan Stanley & Co.
Incorporated since 1989.

GROWTH-ORIENTED ACCOUNT

Balanced Account

The Balanced Account seeks to generate a total return consisting of current
income and capital appreciation. It invests primarily in common stocks and fixed
income securities. It may also invest in other equity securities, government
bonds and notes (obligations of the U.S. government or its agencies) and cash.
Though the percentages in each category are not fixed, common stocks generally
represent 40% to 70% of the Account's assets. The remainder of the Account's
assets is invested in bonds and cash.

In selecting common stocks, the Sub-Advisor, Invista, looks for companies that
have predictable earnings and which, based on growth prospects, are undervalued
in the marketplace. Invista buys stocks with the objective of long-term capital
appreciation. From time to time, Invista purchases stocks with the expectation
of price appreciation over the short term. In response to changes in economic
conditions, Invista may change the make-up of the portfolio and emphasize
different market sectors by buying and selling the portfolio's stocks.

The Account generates interest income by investing in bonds and notes. Bonds and
notes are also purchased for capital appreciation purposes when Invista thinks
that declining interest rates may increase market value. Deep discount bonds
(those which sell at a substantial discount from their face amount) may also be
purchased to generate capital appreciation. The Account may invest in bonds with
speculative characteristics but does not intend to invest more than 5% of its
assets in securities rated below BBB by S&P or Baa by Moody's. Fixed income
securities that are not investment grade are commonly referred to as junk bonds
or high yield securities. These securities offer a higher yield than other,
higher rated securities, but they carry a greater degree of risk and are
considered speculative by the major credit rating agencies.

Bond values change daily. Their prices reflect changes in interest rates, market
conditions and announcements of other economic, political or financial
information. When interest rates fall, the price of a bond rises and when
interest rates rise, the price declines.

The Balanced Account is generally a suitable investment for investors seeking
long-term growth but who are uncomfortable accepting the risks of investing
entirely in common stocks. However, as with all mutual funds, the value of the
Account's assets may rise or fall. If you sell your shares when their value is
less than the price you paid, you will lose money.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 11.56% 1994 -2.09% for the last 10 years
1990 -6.43% 1995 24.58% -----------------------------------
1991 34.36% 1996 13.13% Quarter Ended Return
1992 12.80% 1997 17.93% -----------------------------------
1993 11.06% 1998 11.91% 3/31/91 12.62%
Calendar Years Ended December 31 9/30/90 (11.70%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- --------- --------
Balanced Account 11.91% 12.74% 12.33%

S&P 500 Stock Index 28.58 24.06 19.21
Lehman Brothers
Government/Corporate
Bond Index 9.47 7.30 9.33
Lipper Balanced Fund
Average 13.48 13.93 13.04
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.57% $60 $189 $329 $738
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.59%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1993 Co-Manager, Judith A. Vogel, CFA. Portfolio
Manager of Invista Capital Management, LLC
since 1987.

Since October 1998 Co-Manager, Douglas D. Herold, CFA.
Portfolio Manager of Invista Capital
Management, LLC since 1996. Prior thereto,
Securities Analyst from 1993-1996.

Since December 1997 Co-Manager, Martin J. Schafer, Portfolio
Manager of Invista Capital Management, LLC
since 1992.

INCOME-ORIENTED ACCOUNT

Bond Account

The Bond Account seeks to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk. It invests in
fixed-income securities. Generally, the Account invests on a long-term basis but
may make short-term investments. Longer maturities typically provide better
yields but expose the Account to the possibility of changes in the values of its
securities as interest rates change. When interest rates fall, the price per
share rises, and when rates rise, the price per share declines.

Under normal circumstances, the Account invests at least 65% of its assets in:
o debt securities and taxable municipal bonds;
o rated, at purchase, in one of the top four categories by S&P or
Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
o similar Canadian, Provincial or Federal Government securities payable in
U.S. dollars; and
o securities issued or guaranteed by the U.S. Government or its agencies.

The rest of the Account's assets may be invested in securities that may be
convertible (may be exchanged for a fixed number of shares of common stock of
the same issuer) or nonconvertible including:
o domestic and foreign debt securities;
o preferred and common stock;
o foreign government securities; and
o securities rated less than the four highest grades of S&P or Moody's but
not lower BB- (S&P) or Ba3 (Moody's). Fixed income securities that are not
investment grade are commonly referred to as junk bonds or high yield
securities. These securities offer a higher yield than other, higher rated
securities, but they carry a greater degree of risk and are considered
speculative by the major credit rating agencies.

Under unusual market or economic conditions, the Account may invest up to 100%
of its assets in cash and cash equivalents. When doing so, the Account is not
investing to achieve its investment objectives.

The Bond Account is generally a suitable investment for an investor seeking
monthly dividends to produce income or to be reinvested in additional Account
shares to help achieve modest growth objectives without accepting the risks of
investing in common stocks. However, when interest rates fall, the price of a
bond rises and when interest rates rise, the price declines. In addition, the
value of the securities held by the Account may be affected by factors such as
credit rating of the entity that issued the bond and effective maturities of the
bond. Lower quality and longer maturity bonds will be subject to greater credit
risk and price fluctuations than higher quality and shorter maturity bonds. As
with all mutual funds, if you sell your shares when their value is less than the
price you paid, you will lose money.

Account Performance Information

------------------------------- ----------------------------------------
Annual Total Return Highest & lowest
------------------------------- quarterly total returns
1989 13.86% 1995 22.17% for the last 10 years
1990 5.22% 1996 2.36% ----------------------------------------
1991 16.72% 1997 10.60% Quarter Ended Return
1992 9.38% 1998 7.69% ----------------------------------------
1993 11.67% 6/30/89 8.76%
1994 -2.90% 9/30/96 (3.24%)
----------------------------------------
Calendar Years Ended December 31
---------------------------------------------
Average annual total returns
for the period ending December 31, 1998
---------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- --------- --------
Bond Account 7.69% 7.66% 9.46%

Lehman Brothers
BAA Corporate
Index 6.96 7.34 9.25
Lipper Corporate
Debt BBB Rated
Fund Average 6.25 7.00 9.19
---------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $52 $164 $285 $640
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.51%
- --------------------------------------------------------------------------------

During the fiscal year ended December 31, 1998, the average ratings of the
Account's assets based on markte value at each mont-end, were as follows (all
ratings are by Moody's):

2.08% in securities rated Aaa
2.78% in securities rated Aa
24.00% in securities rated A
64.55% in securities rated Baa
6.59% in securities rated Ba

Day-to-day Account management:
Since November 1996 Scott A. Bennett, CFA. Assistant Director - Securities
Investment of Principal Capital Management LLC since
1996. Prior thereto, Investment Manager.

GROWTH-ORIENTED ACCOUNT

Capital Value Account

The Capital Value Account seeks to provide long-term capital appreciation and
secondarily growth of investment income. It invests primarily in common stocks
and may also invest in other equity securities. To achieve its investment
objective, the Sub-Advisor, Invista, invests in securities that have "value"
characteristics. This process is known as "value investing." Value stocks tend
to have higher yields and lower price to earnings (P/E) ratios than other
stocks.

Securities chosen for investment may include those of companies that Invista
believes can be expected to share in the growth of the nation's economy over the
long term. The current price of the Account's assets reflects the activities of
the individual companies and general market and economic conditions. In the
short term, stock prices can fluctuate dramatically in response to these
factors. Because of these fluctuations, principal values and investment returns
vary.

In making selections for the Account's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps are involved in
this analysis are:

o Research. Invista researches economic prospects over the next one to two
years rather than focusing on near term expectations. This approach is
designed to provide insight into a company's real growth potential.

o Valuation. The research findings allow Invista to identify the prospects
for the major industrial, commercial and financial segments of the economy.
Invista looks at such factors as demand for products, capacity to produce,
operating costs, pricing structure, marketing techniques, adequacy of raw
materials and components, domestic and foreign competition and research
productivity. It then uses this information to judge the prospects for each
industry for the near and intermediate term.

o Ranking. Invista then ranks the companies in each industry group according
to their relative value. The greater a company's estimated worth compared
to the current market price of its stock, the more undervalued the company.
Computer models help to quantify the research findings.

o Stock selection. Invista buys and sells stocks according to the Account's
own policies using the research and valuation ranking as a basis. In
general, Invista buys stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with attractive
valuation, other factors may be taken into account such as:
o events that could cause a stock's price to rise or fall;
o anticipation of high potential reward compared to potential risk; and
o belief that a stock is temporarily mispriced because of market
overreactions.

The Capital Value Account is generally a suitable investment for investors
seeking long-term growth who are willing to accept the risks of investing in
common stocks but also prefer investing in companies that appear to be
considered undervalued relative to similar companies. As with all mutual funds,
if you sell shares when their value is less than the price you paid, you will
lose money.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 16.18% 1994 0.49% for the last 10 years
1990 -9.86% 1995 31.91% -----------------------------------
1991 38.67% 1996 23.50% Quarter Ended Return
1992 9.52% 1997 28.53% -----------------------------------
1993 7.79% 1998 13.58% 3/31/91 17.85%
Calendar Years Ended December 31 9/30/90 (17.01%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
Capital Value Account 13.58% 19.03% 15.15%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and Income
Fund Average 15.61 18.53 15.76
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.43% $45 $141 $246 $555
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.44%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since November 1996 Catherine A. Zaharis, CFA. Portfolio Manager of
Invista Capital Management, LLC since 1987.

INCOME -ORIENTED ACCOUNT

Government Securities Account

The Government Securities Account seeks a high level of current income,
liquidity and safety of principal. It invests in securities supported by:
o full faith and credit of the U.S. Government (e.g. GNMA certificates); or
o credit of a U.S. Government agency or instrumentality (e.g. bonds issued by
the Federal Home Loan Bank).
In addition, the account may invest in money market investments.

Although some of the securities the Account purchases are backed by the U.S.
government and its agencies, shares of the Account are not guaranteed. When
interest rates fall, the value of the Account's shares rises, and when rates
rise, the value declines. As with all mutual funds, if you sell your shares when
their value is less than the price you paid, you will lose money.

U.S. Government securities do not involve the degree of credit risk associated
with investments in lower quality fixed-income securities. As a result, the
yields available from U.S. Government securities are generally lower than the
yields available from many other fixed-income securities. Like other
fixed-income securities, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of the Account's securities
do not affect interest income on securities already held by the Account, but are
reflected in the Account's price per share. Since the magnitude of these
fluctuations generally is greater at times when the Account's average maturity
is longer, under certain market conditions the Account may invest in short term
investments yielding lower current income rather than investing in higher
yielding longer term securities.

GNMA Certificates are mortgage-backed securities representing an interest in a
pool of mortgage loans. Various lenders make loans that are then insured (by the
Federal Housing Administration) or loans that are guaranteed (by Veterans
Administration or Farmers Home Administration). The lender or other security
issuer creates a pool of mortgages that it submits to GNMA for approval.

The Account invests in modified pass-through GNMA Certificates. Owners of
Certificates receive all interest and principal payments owed on the mortgages
in the pool, regardless of whether or not the mortgagor has made the payment.
Timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S.
Government.

Mortgage-backed securities are subject to prepayment risk. Prepayments,
unscheduled principal payments, may result from voluntary prepayment,
refinancing or foreclosure of the underlying mortgage. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during period of rising interest rates, a reduction in
prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest and potentially increasing the volatility of the Account.

In addition, prepayments may cause losses on securities purchased at a premium
(dollar amount by which the price of the bond exceeds its face value). At times,
mortgage-backed securities may have higher than market interest rates and are
purchased at a premium. Unscheduled prepayments are made at par and cause the
Account to experience a loss of some or all of the premium.

The Government Securities Income Account is generally a suitable investment for
investors who want monthly dividends to provide income or to be reinvested in
additional Account shares to produce growth. Such investors prefer to have the
repayment of principal and interest on most of the securities in which the
Account invests to be backed by the U.S. Government or its agencies.

Account Performance Information

----------------------------- ---------------------------------------
Annual Total Returns Highest & lowest
----------------------------- quarterly total returns
1989 15.59% 1994 -4.53% for the last 10 years
1990 9.54% 1995 19.07% ---------------------------------------
1991 16.95% 1996 3.35% Quarter Ended Quarterly Return
1992 6.84% 1997 10.39% ---------------------------------------
1993 10.07% 1998 8.27% 6/30/89 8.92%
3/31/94 (3.94%)
---------------------------------------
Calendar Years Ending December 31
------------------------------------------------
Average annual total returns
for the period ending December 31, 1998
------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- --------- --------
Government Securities
Account 8.27% 7.02% 9.35%

Lehman Brothers
Mortgage Index 6.96 7.23 9.13
Lipper U.S. Mortgage
Fund Average 6.08 5.98 8.04
------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $51 $160 $280 $628
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.50%
- --------------------------------------------------------------------------------

Day-to-day Account Management:
Since May 1985 Martin J. Schafer, CFA. Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1992.

GROWTH-ORIENTED ACCOUNT

Growth Account

The Growth Account primarily invests in common stocks. It may also invest in
other equity securities. In seeking the Account's objective of capital growth,
the Sub-Advisor, Invista, uses an approach described as "fundamental analysis."
The basic steps involved in this analysis are:

o Stock selection. Invista then purchases securities of issuers that appear
to have high growth potential. Common stocks selected for the Account may
include securities of companies that:
o have a record of sales and earnings growth that exceeds the growth
rate of corporate profits of the S&P 500, or
o offer new products or new services.

These securities present greater opportunities for capital growth because of
high potential earnings growth, but may also involve greater risk than
securities that do not have the same potential. The companies may have limited
product lines, markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, these securities may change in value more than those of
larger, more established companies.

The Growth Account is generally a suitable investment for investors who want
long-term growth. Additionally, the investor must be willing to accept the risks
of investing in common stocks that may have greater risks than stocks of
companies with lower potential for earnings growth. As the value of the stocks
owned by the Account changes, the Account share price changes. In the short
term, the share price can fluctuate dramatically. As with all mutual funds, if
you sell your shares when their value is less than the price you paid, you will
lose money.

Account Performance Information

------------------------------- ----------------------------------------
Annual Total Return Highest & lowest
------------------------------- quarterly total returns
1995 25.62% for the last 5 years
1996 12.51% ----------------------------------------
1997 26.96% Quarter Ended Return
1998 21.36% ----------------------------------------
12/31/98 21.35%
9/30/98 (14.63%)
----------------------------------------
Calendar Years Ended December 31
---------------------------------------------
Average annual total returns
for the period ending December 31, 1998
---------------------------------------------
Past One Past Five
Year Years
-------- ---------
Growth Account 21.36% 19.48%*

S&P 500 Stock Index 28.58 24.06
Lipper Growth Fund Average 22.86 19.03
---------------------------------------------
* Period from May 1, 1994, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.47% $49 $154 $269 $604
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.48%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since August 1987 Michael R. Hamilton, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1987.

GROWTH-ORIENTED ACCOUNT

International Account

The International Account seeks long-term growth of capital by investing in a
portfolio of equity securities of companies established outside of the U.S. The
Account has no limitation on the percentage of assets that are invested in any
one country or denominated in any one currency. However under normal market
conditions, the Account intends to have at least 65% of its assets invested in
companies of at least three countries. One of those countries may be the U.S.
though currently the Account does not intend to invest in equity securities of
U.S. companies.

Investments may be made anywhere in the world. Primary consideration is given to
securities of corporations of Western Europe, North America and Australasia
(Australia, Japan and Far East Asia). Changes in investments are made as
prospects change for particular countries, industries or companies.

In choosing investments for the Account, the Sub-Advisor, Invista, pays
particular attention to the long-term earnings prospects of the various
companies under consideration. Invista then weighs those prospects relative to
the price of the security.

The values of the stocks owned by the Account change on a daily basis. Stock
prices reflect the activities of individual companies as well as general market
and economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities that are not generally
found in stocks of U.S. companies. These include the risk that a foreign
security could lose value as a result of political, financial and economic
events in foreign countries. In addition, foreign securities may be subject to
securities regulators with less stringent accounting and disclosure standards
than are required of U.S. companies.

The International Account is generally a suitable investment for investors who
seek long-term growth and who want to invest in non-U.S. companies. This Account
is not an appropriate investment for investors who are seeking either
preservation of capital or high current income. Suitable investors must be able
to assume the increased risks of higher price volatility and currency
fluctuations associated with investments in international stocks which trade in
non-U.S. currencies. As with all mutual funds, the value of the Account's assets
may rise or fall. If you sell your shares when their value is less than the
price you paid, you will lose money.

Under unusual market or economic conditions, the Account may invest in
securities issued by domestic or foreign corporations, governments or
governmental agencies, instrumentalities or political subdivisions. The
securities may be denominated in U.S. dollars or other currencies.

Account Performance Information

------------------------------- ----------------------------------------
Annual Total Return Highest & lowest
------------------------------- quarterly total returns
1995 14.17% for the last 5 years
1996 25.09% ----------------------------------------
1997 12.24% Quarter Ended Return
1998 9.98% ----------------------------------------
12/31/98 16.60%
9/30/98 (17.11%)
----------------------------------------
Calendar Years Ended December 31
----------------------------------------------
Average annual total returns
for the period ending December 31, 1989
----------------------------------------------
Past One Past Five
Year Years
-------- ---------
International Account 9.98% 12.09%*

Morgan Stanley Capital
International EAFE
(Europe, Australia and
Far East) Index 20.00 9.19
Lipper International Fund
Average 13.02 7.87
----------------------------------------------
* Period from May 1, 1994, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.73% $79 $246 $428 $954
Other Expenses........................ 0.04%
-----
Total Account Operating Expenses 0.77%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1994 Scott D. Opsal, CFA. Executive Vice President and
Chief Investment Officer of Invista Capital Management,
LLC since 1997. Vice President, 1986-1997.

GROWTH-ORIENTED ACCOUNT

International SmallCap Account

The International SmallCap Account seeks long-term growth of capital. It invests
in stocks of non-U.S. companies with comparatively smaller market
capitalizations. Market capitalization is defined as total current market value
of a company's outstanding common stock. Under normal market conditions, the
Account invests at least 65% of its assets in securities of companies having
market capitalizations of $1 billion or less.

Foreign stocks carry risks that are not generally found in stocks of U.S.
companies. These include the risk that a foreign security could lose value as a
result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.

Investments in companies with small market capitalizations carry their own
risks. Historically, small company securities have been more volatile in price
than larger company securities, especially over the short-term. While small
companies may offer greater opportunities for capital growth than larger, more
established companies, they also involve greater risks and should be considered
speculative.

The Account diversifies its investments geographically. There is no limitation
of the percentage of assets that may be invested in one country or denominated
in any one currency. However, under normal market circumstances, the Account
intends to have at least 65% of its assets invested in securities of companies
of at least three countries.

This Account is not an appropriate investment for investors seeking either
preservation of capital or high current income. Investors must be able to assume
the increased risks of higher price volatility and currency fluctuations
associated with investments in international stocks which trade in non-U.S.
currencies. The International SmallCap Account is generally a suitable
investment for investors seeking long-term growth who want to invest a portion
of their assets in smaller, non-U.S. companies. As with all mutual funds, the
value of the Account's assets may rise or fall. If you sell your shares when
their value is less than the price you paid, you will lose money.

Account Performance Information

- ------------------------------------------ ------------------------------------
Average annual total return Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------ for the last 3 quarters
Past One ------------------------------------
Year Quarter Ended Return
-------- ------------------------------------
12/31/98 13.68%
International SmallCap Account (10.37)%* 9/30/98 (19.31%)
------------------------------------
Morgan Stanley Capital
International EAFE (Europe,
Australia and Far East Index 20.00
Lipper International SmallCap
Fund Average 13.02
-----------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

The table shown above provides some indication of the risks of investing
in the Account by showing how the Account's average annual return
compares with those of a broad measure of market performance. The example
shown below assumes 1) an investment of $10,000, 2) a 5% annual return
and 3) that expenses are the same as the most recent fiscal year
expenses.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 1.21% $136 $425 $734 $1,613
Other Expenses........................ 0.13%
-----
Total Account Operating Expenses 1.34%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Darren K. Sleister, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1995. Prior thereto,
Securities Analyst.

GROWTH-ORIENTED ACCOUNT

MicroCap Account

The MicroCap Account seeks to achieve long-term growth of capital. Under normal
market conditions, it invests at least 65% of its total assets in equity
securities of companies with market capitalizations of $700 million or less at
the time of investment. Under normal circumstances, the Account's investment
horizon for ownership of equity securities is two to three years.

The Account invests in companies that the Sub-Advisor, Goldman, believes are
well managed niche businesses that have the potential to achieve high or
improving returns on capital and/or above average sustainable growth. Goldman
invests in companies that have value characteristics as well as those with
growth characteristics with no consistent preference between the two categories.
Growth stocks are considered to be those with potential for growth of capital
and earnings which is expected to be above average. Value stocks tend to have
higher yields and lower price to earnings (P/E) ratios than other stocks.

The Account may invest in securities of small market capitalization companies
that have experienced financial difficulties. Investments may also be made in
companies that are in the early stages of their life and that Goldman believes
have significant growth potential. Goldman believes that the companies in which
the Account may invest offer greater opportunities for growth of capital than
larger, more mature, better known companies. However, investments in such small
market capitalization companies involve special risks. Historically, small
company securities have been more volatile in price than larger company
securities, especially over the short-term. Smaller companies may also be
developing or marketing new products or services for which markets are not yet
established and may never become established. While small, unseasoned companies
may offer greater opportunities for capital growth than larger, more established
companies, they also involve greater risks and should be considered speculative.

The Account may invest up to 35% of its total assets in equity securities of
companies with market capitalizations of more than $700 million at the time of
the investment and in fixed income securities. In addition, although the Account
invests primarily in securities of domestic corporations, it may invest up to
25% of its total assets in foreign securities. These may include securities of
issuers in emerging countries and securities denominated in foreign currencies.
Foreign stocks and those denominated in foreign currencies carry risks that are
not generally found in stocks of U.S. companies. These include the risk that a
foreign security could lose value as a result of political, financial and
economic events in foreign countries. In addition, foreign securities may be
subject to securities regulators with less stringent accounting and disclosure
standards than are required of U.S. companies.

The Account may invest in real estate investment trusts (REITs) which are pooled
investment vehicles that invest in either real estate or real estate related
loans. The value of a REIT is affected by changes in the value of the underlying
property owned by the trust, quality of any credit extended and the ability of
the trust's management. REITs are also subject to risks generally associated
with investments in real estate (a more complete discussion of these risks is
found in the description of the Real Estate Account). The Account will
indirectly bear its proportionate share of any expenses, including management
fees, paid by a REIT in which it invests.

The MicroCap Account is generally a suitable investment for investors who want
longer-term growth of capital. Additionally, the investor must be willing to
accept the risks of investing in securities that may have greater risks than
stocks of companies with lower potential for growth. The Account's share price
may fluctuate more than that of funds primarily invested in stocks of mid-sized
and large companies. Occasionally, small company securities may underperform as
compared to the securities of larger companies. As the value of the stocks owned
by the Account changes, the Account's share price changes. In the short-term,
the share price can fluctuate dramatically. As with all mutual funds, if you
sell your shares when their value is less than the price you paid, you will lose
money.

Account Performance Information

- ----------------------------------------- ------------------------------------
Average annual total return Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ----------------------------------------- for the last 3 quarters
Past One ------------------------------------
Year Quarter Ended Return
-------- ------------------------------------
MicroCap Account (18.42%)* 12/31/98 15.11%
9/30/98 (26.11%)
Russell 2000 Index (2.55) ------------------------------------
Lipper Micro-Cap Fund
Average 1.36
- -----------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 1.00% $140 $437 $755 $1,657
Other Expenses........................ 0.38%
-----
Total Account Operating Expenses 1.38%*
- --------------------------------------------------------------------------------
* Manager has agreed to reimburse operating
expenses so that total Account operating
expenses will not be greater than 1.06%
for 1999.

Day-to-day Account management:
Since April 1998 Co-Manager, Paul D. Farrell, Vice President
(Account's inception) of Goldman since 1991.

Since April 1998 Co-Manager, Matthew B. McLennan, Associate
(Account's inception) of Goldman since 1995. Prior thereto,
Queensland Investment Corporation in
Australia.

Since April 1998 Co-Manager, Eileen A. Aptman, Vice President
(Account's inception) of Goldman since 1993.

GROWTH-ORIENTED ACCOUNT

MidCap Account

The MidCap Account seeks to achieve capital appreciation by investing primarily
in securities of emerging and other growth-oriented companies. Stocks that are
chosen for the Account by the Sub-Advisor, Invista, are thought to be responsive
to changes in the marketplace and have the fundamental characteristics to
support growth. The Account may invest for any period in any industry, in any
kind of growth-oriented company. Companies may range from well established, well
known to new and unseasoned. While small, unseasoned companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.

Under normal market conditions, the Account invests at least 65% of its assets
in securities of companies with market capitalizations in the $1 billion to $10
billion range. Market capitalization is defined as total current market value of
a company's outstanding common stock.

The Account may invest up to 20% of its assets in securities of foreign
companies. Foreign stocks carry risks that are not generally found in stocks of
U.S. companies. These include the risk that a foreign security could lose value
as a result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.

The values of the stocks owned by the Account change on a daily basis. The
current share price reflects the activities of individual companies and general
market and economic conditions. The Account's share price may fluctuate more
than that of funds primarily invested in stocks of large companies. Mid-sized
companies may pose greater risk due to narrow product lines, limited financial
resources, less depth in management or a limited trading market for their
stocks. In the short term, stock prices can fluctuate dramatically in response
to these factors. Because of these fluctuations, principal values and investment
returns vary. As with all mutual funds, if you sell your shares when their value
is less than the price you paid, you will lose money.

The MidCap Account is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for short-term
fluctuations in the value of their investments. It is designed for long-term
investors for a portion of their investments and is not designed for investors
seeking income or conservation of capital.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 21.84% 1994 0.78% for the last 10 years
1990 -12.50% 1995 29.01% -----------------------------------
1991 53.50% 1996 21.11% Quarter Ended Return
1992 14.94% 1997 22.75% -----------------------------------
1993 19.28% 1998 3.69% 3/31/91 25.86%
Calendar Years Ended December 31 9/30/90 (26.61%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
MidCap Account 3.69% 14.92% 16.22%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Mid-Cap Fund Average 12.16 15.18 15.83
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.61% $63 $199 $346 $774
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.62%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since December 1987 Michael R. Hamilton, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1987.

GROWTH-ORIENTED ACCOUNT

MidCap Growth Account

The MidCap Growth Account seeks long-term growth of capital. It invests
primarily in common stocks of medium capitalization companies, generally firms
with a market value between $1 billion and $10 billion. In the view of the
Sub-Advisor, Dreyfus, many medium sized companies:
o are in fast growing industries;
o offer superior earnings growth potential, and
o are characterized by strong balance sheets and high returns on equity.

Because companies in this market are smaller, prices of their stocks tend to be
more volatile than stocks of companies with larger capitalizations. Smaller
companies may be developing or marketing new products or services for which
markets are not yet established and may never become established. While small,
unseasoned companies may offer greater opportunities for capital growth than
larger, more established companies, they also involve greater risks and should
be considered speculative. The Account may also hold investments in large and
small capitalization companies, including emerging and cyclical growth
companies.

Common stocks are selected for the Account so that in the aggregate, the
investment characteristics and risk profile of the Account are similar to the
Standard & Poor's MidCap 400 Index (S&P MidCap). While it may maintain
investment characteristics similar to the S&P MidCap, the Account seeks to
invest in companies that in the aggregate will provide a higher total return
than the S&P MidCap. The Account is not an index fund and does not limit its
investments to the securities of issuers in the S&P MidCap.

Dreyfus uses valuation models designed to identify common stocks of companies
that have demonstrated consistent earnings momentum and delivered superior
results relative to market analyst expectations. Other considerations include
profit margins, growth in cash flow and other standard balance sheet measures.
The securities held are generally characterized by strong earnings momentum
measures and higher expected earnings per share growth.

Once such common stocks are identified, Dreyfus constructs a portfolio that in
the aggregate breakdown and risk profile resembles the S&P MidCap, but is
weighted toward the most attractive stocks. The valuation model incorporates
information about the relevant criteria as of the most recent period for which
data are available. Once ranked, the securities are categorized under the
headings "buy", "sell" or "hold". The decision to buy, sell or hold is made by
Dreyfus based primarily on output of the valuation model. However, that decision
may be modified due to subsequently available or other specific relevant
information about the security.

The MidCap Growth Account is generally a suitable investment for investors
seeking long-term growth and who are willing to accept the potential for
short-term fluctuations in the value of their investments. The Account's share
price may fluctuate more than that of funds primarily invested in stocks of
large companies. Mid-sized companies may pose greater risk due to narrow product
lines, limited financial resources, less depth in management or a limited
trading market for their stocks. The Account is designed for long term investors
for a portion of their investments and not designed for investors seeking income
or conservation of capital. As with all mutual funds, if you sell your shares
when their value is less than the price you paid, you will lose money.

"Standard & Poor's MidCap 400 Index" is a trademark of Standard & Poor's
Corporation (S&P). S&P is not affiliated with Principal Life Insurance Company
or with the Fund.

Account Performance Information

- ------------------------------------------ ------------------------------------
Average annual total return Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------ for the last 3 quarters
Past One -----------------------------------
Year Quarter Ended Return
-------- ------------------------------------
MidCap Growth Account (3.40%)* 12/31/98 22.31%
9/30/98 (16.95%)
S&P 400 MidCap Index 19.12 ------------------------------------
Lipper MidCap Fund
Average 12.16
-----------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.90% $129 $403 $697 $1,534
Other Expenses........................ 0.37%
-----
Total Account Operating Expenses 1.27%*
- --------------------------------------------------------------------------------
*Manager has agreed to reimburse operating
expenses so that total Account operating
expenses will not be greater than 0.96%
for 1999.

Day-to-day Account management:
Since April 1998 John O'Toole, CFA. Portfolio Manager of The Dreyfus
(Account's inception) Corporation and Senior Vice President of Mellon
Equity Associates LLP (an affiliate of The Dreyfus
Corporation) since 1990.

Money Market Account

The Money Market Account has an investment objective of as high a level of
current income available from investments in short-term securities as is
consistent with preservation of principal and maintenance of liquidity. It
invests its assets in a portfolio of money market instruments. The investments
are U.S. dollar denominated securities which the Manager believes present
minimal credit risks.

The Account maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Account
may sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Account shares by its shareholders; or
o upon revised valuation of the security's issuer.
The sale of a security by the Account before maturity may not be in the best
interest of the Account. The Account does have an ability to borrow money to
cover the sale of Accounts shares. The sale of portfolio securities is usually a
taxable event.

It is the policy of the Account to be as fully invested as possible to maximize
current income. Securities in which the Account invests include:
o U.S. Government securities which are issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
o U.S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U.S. Government. These are backed
either by the full faith and credit of the U.S. Government or by the credit
of the particular agency or instrumentality.
o Bank obligations consisting of:
o certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank or
o bankers acceptances which are time drafts drawn on a commercial bank,
usually in connection with international commercial transactions.
o Commercial paper that is short-term promissory notes issued by U.S. or
foreign corporations primarily to finance short-term credit needs.
o Short-term corporate debt consisting of notes, bonds or debentures which at
the time of purchase by the Account has 397 days or less remaining to
maturity.
o Repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price plus
interest at a specified rate. Generally these have a short duration (less
than a week) but may have a longer duration.
o Taxable municipal obligations that are short-term obligations issued or
guaranteed by state and municipal issuers that generate taxable income.

An investment in the Account is not insured or guaranteed by the FDIC or any
other government agency. Although the Account seeks to preserve the value of an
investment at $1.00 per share, it is possible to lose money by investing in the
Account.

The Money Market Account is generally a suitable investment for investors
seeking monthly dividends to produce income without incurring much principal
risk or for investor's short-term needs.

Account Performance Information

Annual Total Returns

1989 8.98% 1994 3.76%
1990 8.01% 1995 5.59%
1991 5.92% 1996 5.07%
1992 3.48% 1997 5.04%
1993 2.69% 1998 5.20%

The bar chart shown above provides some indication of the risks of
investing in the Account by showing changes in the Account's performance
from year to year. The example shown below assumes 1) an investment of
$10,000, 2) a 5% annual return and 3) that expenses are the same as the
most recent fiscal year expenses.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.50% $53 $167 $291 $653
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.52%
- --------------------------------------------------------------------------------

GROWTH-ORIENTED ACCOUNT

Real Estate Account

The Real Estate Account seeks to generate a high total return. It invests
primarily in equity securities of companies engaged in the real estate industry.
For purposes of the Account's investment policies, a real estate company has at
least 50% of its assets, income or profits derived from products or services
related to the real estate industry. Real estate companies include real estate
investment trusts and companies with substantial real estate holdings such as
paper, lumber, hotel and entertainment companies. Companies whose products and
services relate to the real estate industry include building supply
manufacturers, mortgage lenders and mortgage servicing companies.

The Account may invest up to 25% of its assets in securities of foreign real
estate companies. These include the risk that a foreign security could lose
value as a result of political, financial and economic events in foreign
countries. In addition, foreign securities may be subject to securities
regulators with less stringent accounting and disclosure standards than are
required of U.S. companies.

Real estate investment trusts ("REITs") are corporations or business trusts that
are effectively permitted to eliminate corporate level federal income taxes if
they meet certain requirements of the Internal Revenue Code. The Account focuses
on equity REITs. REITs are characterized as:
o equity REITs, which primarily own property and generate revenue from rental
income;
o mortgage REITs, which invest in real estate mortgages; and
o hybrid REITs, which combine the characteristics of both equity and mortgage
REITs.

Securities of real estate companies are subject to securities market risks
similar those of direct ownership of real estate. These include:
o declines in the value of real estate o risks related to general and
local economic conditions
o dependency on management skills
o heavy cash flow dependency
o possible lack of available mortgage funds
o overbuilding
o extended vacancies in properties
o increases in property taxes and operating expenses
o changes in zoning laws
o expenses incurred in the cleanup of environmental problems
o casualty or condemnation losses
o changes in interest rates

In addition to the risks listed above, equity REITs are affected by the changes
in the value of the properties owned by the trust. Mortgage REITs are affected
by the quality of the credit extended. Both equity and mortgage REITs:
o are dependent upon management skills and may not be diversified;
o are subject to cash flow dependency and defaults by borrowers; and
o could fail to qualify for tax-free pass through of income under the Code.

Because of these factors, the values of the securities held by the Account, and
in turn the net asset value of the shares of the Account, change on a daily
basis. In addition, the prices of the equity securities held by the Account may
decline in response to certain events including those directly involving issuers
of these securities, adverse conditions affecting the general economy, or
overall market declines. In the short term, share prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. When shares of the Account are
sold, they may be worth more or less than the amount paid for them.

The Real Estate Account is generally a suitable investment for investors seeking
long-term growth, who want to invest in companies engaged in the real estate
industry and who are willing to accept fluctuations in the value of their
investment.

Account Performance Information

- ------------------------------------------ ------------------------------------
Average annual total return Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------ for the last 3 quarters
Past One ------------------------------------
Year Quarter Ended Return
-------- ------------------------------------
Real Estate Account (6.56%)* 12/31/98 0.35%
9/30/98 (7.72%)
------------------------------------
Morgan Stanley REIT Index (16.90)
Lipper Real Estate
Fund Average (15.46)
-----------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.90% $102 $318 $552 $1,225
Other Expenses........................ 0.10%
-----
Total Account Operating Expenses 1.00%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Kelly D. Rush, Assistant Director of Commercial Real
(Account's inception) Estate, Principal Capital Management LLC since 1996.
Prior thereto, Senior Administrator, Investment -
Commercial Real Estate.

GROWTH-ORIENTED ACCOUNT

SmallCap Account

The SmallCap Account seeks long-term growth of capital. It invests in equity
securities of companies in the U.S. with comparatively smaller market
capitalizations. Market capitalization is defined as total current market value
of a company's outstanding common stock. Under normal market conditions, the
Account invests at least 65% of its assets in securities of companies with
market capitalizations of $1 billion or less.

In selecting securities for investment, the Sub-Advisor, Invista, looks at
stocks with value and/or growth characteristics. In managing the assets of the
Account, Invista does not have a policy of preferring one of these categories to
the other. The value orientation emphasizes buying stocks at less than their
investment value and avoiding stocks whose price has been artificially built up.
The growth orientation emphasizes buying stocks of companies whose potential for
growth of capital and earnings is expected to be above average. Selection is
based on fundamental analysis of the company relative to other companies with
the focus being on Invista's estimation of forwarding looking rates of return.

Investments in companies with smaller market capitalizations may involve greater
risks and price volatility (wide, rapid fluctuations) than investments in
larger, more mature companies. Smaller companies may be developing or marketing
new products or services for which markets are not yet established and may never
become established. While small, unseasoned companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.

The net asset value of the Account's shares is based on the values of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share price reflects the activities of individual
companies as well as general market and economic conditions. In the short term,
stock prices can fluctuate dramatically in response to these factors. The
Account's share price may fluctuate more than that of funds primarily invested
in stocks of mid-sized and large companies and may underperform as compared to
the securities of larger companies. Because of these fluctuations, principal
values and investment returns vary. As with all mutual funds, if you sell your
shares when their value is less than the price you paid, you will lose money.

The SmallCap Account is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for volatile
fluctuations in the value of their investment. This Account is designed for long
term investors for a portion of their investments. It is not designed for
investors seeking income or conservation of capital.

Account Performance Information

- ------------------------------------------- -----------------------------------
Average annual total returns Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------- for the last 3 quarters
Past One -----------------------------------
Year Quarter Ended Return
-------- -----------------------------------
SmallCap Account (20.51%)* 12/31/98 21.10%
9/30/98 (24.33%)
-----------------------------------
S&P 600 Index (1.31)
Lipper SmallCap Fund Average (0.33)
--------------------------------------
*Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.85% $100 $312 $542 $1,201
Other Expenses........................ 0.13%
-----
Total Account Operating Expenses 0.98%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Co-Manager, Mark T. Williams, Portfolio
(Account's inception) Manager of Invista Capital Management, LLC
since 1991.

Since April 1998 Co-Manager, John F. McClain, Portfolio
(Account's inception) Manager of Invista Capital Management, LLC
since 1995. Investment Officer, 1992-1995.

GROWTH-ORIENTED ACCOUNT

SmallCap Growth Account

The SmallCap Growth Account seeks long-term growth of capital. It invests
primarily in a diversified group of equity securities of small growth companies.
Generally, at the time of the Account's initial purchase of a security, the
market capitalization of the issuer is less than $1 billion. Growth companies
are generally those with sales and earnings growth that is expected to exceed
the growth rate of corporate profits of the S&P 500. Investments in companies
with small market capitalizations carry their own risks. Historically, small
company securities have been more volatile in price than larger company
securities, especially over the short-term. Smaller companies may be developing
or marketing new products or services for which markets are not yet established
and may never become established. While small companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.

Under normal market conditions, the Account invests at least 65% of its assets
in equity securities of small growth companies. The balance of the Account may
include equity securities of companies with market capitalizations in excess of
$1 billion, foreign securities, corporate fixed-income securities, government
securities and short term investments. Foreign stocks carry risks that are not
generally found in stocks of U.S. companies. These include the risk that a
foreign security could lose value as a result of political, financial and
economic events in foreign countries. In addition, foreign securities may be
subject to securities regulators with less stringent accounting and disclosure
standards than are required of U.S. companies.

In selecting securities for investment, the Sub-Advisor, Berger, places primary
emphasis on companies which it believes have favorable growth prospects. Berger
seeks to identify small growth companies that either:
o occupy a dominant position in an emerging industry, or
o have a growing market share in larger, fragmented industries.
While these companies may present above average risk, Berger believes that they
may have the potential to achieve long-term earnings growth substantially above
the earnings growth of other companies.

The net asset value of the Account's shares is based on the values of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share price reflects the activities of individual
companies and general market and economic conditions. In the short term, stock
prices can fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, if you sell your shares when their value is less than the price you paid,
you will lose money.

The SmallCap Growth Account is generally a suitable investment for investors
seeking long-term growth and who are willing to accept the potential for
volatile fluctuations in the value of their investment. The Account's share
price may fluctuate more than that of funds primarily invested in stocks of
mid-sized and large companies and may underperform as compared to the securities
of larger companies. This Account is designed for long term investors for a
portion of their investments. It is not designed for investors seeking income or
conservation of capital.

Account Performance Information

- ------------------------------------------- -----------------------------------
Average annual total return Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------- for the last 3 quarters
Past One -----------------------------------
Year Quarter Ended Return
-------- -----------------------------------
SmallCap Growth Account 2.96%* 12/31/98 27.53%
9/30/98 (18.94%)
Russell 2000 Growth Index 1.23 -----------------------------------
Lipper SmallCap Fund Average (0.33)
- -------------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 1.01% $133 $415 $718 $1,579
Other Expenses........................ 0.30%
-----
Total Account Operating Expenses 1.31%*
- --------------------------------------------------------------------------------
*Manager has agreed to reimburse operating
expenses so that total Account operating
expenses will not be greater than 1.06%
for 1999.

Day-to-day Account management:
Since November 1998 Amy K. Selner, Vice President and portfolio manager of
Berger Associates, Inc. since 1997. Senior Research
Analyst, 1996-1997. Prior thereto, Assistant Portfolio
Manager and Research Analyst with INVESCO Trust
Company, 1991-1996.

GROWTH-ORIENTED ACCOUNT

SmallCap Value Account

The SmallCap Value Account seeks long-term growth of capital. It invests
primarily in a diversified group of equity securities of small U.S. companies
with a market capitalization of less than $1 billion at the time of the initial
purchase. Under normal market conditions, the Account invests at least 65% of
its assets in equity securities of such companies. Emphasis is given to those
companies that exhibit value characteristics. These characteristics are above
average dividend yield and below average price to earnings (P/E) ratios.

The Sub-Advisor, Morgan, uses fundamental research, systematic stock valuation
and a disciplined portfolio construction process. It seeks to enhance returns
and reduce the volatility in the value of the Account relative to that of the
U.S. small company value universe, represented by the Russell 2000(R) Value
Index. Morgan continuously screens the small company universe to identify for
further analysis those companies that exhibit favorable characteristics. Such
characteristics include significant and predictable cash flow and high quality
management. Based on fundamental research and using a dividend discount model,
Morgan ranks these companies within economic sectors according to their relative
values. Morgan then selects for purchase the companies it feels to be most
attractive within each economic sector.

Under normal market conditions, the Account will have sector weightings
comparable to that of the U.S. small company value universe though it may under
or over-weight selected economic sectors. In addition, as a company moves out of
the market capitalization range of the small company universe, it generally
becomes a candidate for sale by the Account.

The Account intends to manage its investments actively to accomplish its
investment objective. Since the Account has a long-term investment perspective,
it does not intend to respond to short-term market fluctuations or to acquire
securities for the purpose of short-term trading. The Account may however take
advantage of short-term trading opportunities that are consistent with its
objective. To the extent that the Account engages in short-term trading, it may
have increased transactions costs.

As with any security, the securities in which the Account invests have
associated risks. These include risks of:
o Securities of smaller companies. Historically, small company securities
have been more volatile in price than larger company securities, especially
over the short-term. While small companies may offer greater opportunities
for capital growth than larger, more established companies, they also
involve greater risks and should be considered speculative.
o Unseasoned issuers. Smaller companies may be developing or marketing new
products or services for which markets are not yet established and may
never become established.
o Foreign securities. These have risks that are not generally found in
securities of U.S. companies. For example, the risk that a foreign security
could lose value as a result of political, financial and economic events in
foreign countries. In addition, foreign securities may be subject to
securities regulators with less stringent accounting and disclosure
standards than are required of U.S. companies.

The SmallCap Value Account is generally a suitable investment for investors
seeking long-term growth and who are willing to accept volatile fluctuations in
the value of their investment. The Account's share price may fluctuate more than
that of funds primarily invested in stocks of mid-sized and large companies and
may underperform as compared to the securities of larger companies. The Account
is not designed for investors seeking income or conservation of capital. As with
all mutual funds, if you sell your shares when their value is less than the
price you paid, you will lose money.

Account Performance Information

- ------------------------------------------- -----------------------------------
Average annual total returns Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------- for the last 3 quarters
Past One -----------------------------------
Year Quarter Ended Return
--------- -----------------------------------
SmallCap Value Account (15.06%)* 12/31/98 11.37%
9/30/98 (19.14%)
Russell 2000 Value Index (6.45) -----------------------------------
Lipper SmallCap Fund Average (0.33)
- -------------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 1.10% $159 $493 $850 $1,856
Other Expenses........................ 0.46%
-----
Total Account Operating Expenses 1.56%*
- --------------------------------------------------------------------------------
*Manager has agreed to reimburse operating
expenses so that total Account operating
expenses will not be greater than 1.16%
for 1999.

Day-to-day Account management:
Since April 1998 Co-Manager, Stephen Rich, Vice President of
(Account's inception) J.P. Morgan Investment Management, Inc.
since 1997. Prior thereto, held positions in
J.P. Morgan's structured equity and
balanced/equity groups.

Since April 1998 Co-Manager, Denise Higgins, Vice President
(Account's inception) of J.P. Morgan Investment Management, Inc.
since 1998. Balanced and equity portfolio
manager at J.P. Morgan Investment
Management, Inc., 1994-1998. Prior thereto,
portfolio manager at Lord Abbett & Company.

GROWTH-ORIENTED ACCOUNT

Stock Index 500 Account

The Stock Index 500 Account seeks long-term growth of capital. Under normal
market conditions, the Account invests at least 80% of its assets in common
stocks of companies that compose the S&P 500 Index. The Sub-Advisor, Invista,
will attempt to mirror the investment performance of the index by allocating the
Account's assets in approximately the same weightings as the S&P 500. Over the
long-term, Invista seeks a correlation between the Account, before expenses, and
that of the S&P 500. It is unlikely that a perfect correlation of 1.00 will be
achieved.

The Account is not managed according to traditional methods of "active"
investment management. Active management would include buying and selling
securities based on economic, financial and investment judgement. Instead, the
Account uses a passive investment approach. Rather than judging the merits of a
particular stock in selecting investments, Invista focuses on tracking the S&P
500.

Because of the difficulty and expense of executing relatively small stock
trades, the Account may not always be invested in the less heavily weighted S&P
500 stocks. At times, the Account's portfolio may be weighted differently from
the S&P 500, particularly if the Account has a small level of assets to invest.
In addition, the Account's ability to match the performance of the S&P 500 is
effected to some degree by the size and timing of cash flows into and out of the
Account. The Account is managed to attempt to minimize such effects.

Invista reserves the right to omit or remove any of the S&P 500 stocks from the
Account if it determines that the stock is not sufficiently liquid. In addition,
a stock might be excluded or removed from the Account if extraordinary events or
financial conditions lead Invista to believe that it should not be a part of the
Account's assets.

While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of your investment in the Account will go
up and down, which means that you could lose money. Because different types of
stocks tend to shift in and out of favor depending on market and economic
conditions, the Account's performance may sometimes be lower or higher than that
of other types of funds.

The Account uses an indexing strategy. It does not attempt to manage market
volatility, use defensive strategies or reduce the effects of any long-term
periods of poor stock performance. The correlation between Account and index
performance may be affected by the Account's expenses, changes in securities
markets, changes in the composition of the index and the timing of purchases and
sales of Account shares. The Account may invest in futures and options, which
could carry additional risks such as losses due to unanticipated market price
movements, and could also reduce the opportunity for gain.

The Stock Index 500 Account is generally a suitable investment for investors
seeking long-term growth who are willing to accept the risks of investing in
common stocks and prefer a passive rather than active management style.

* Standard & Poor's Corporation is not affiliated with Principal Variable
Contracts Fund, Inc., Invista Capital Management, LLC, or with Principal
Life Insurance Company.

Account Performance Information

The example shown below assumes 1) an investment of $10,000, 2) a 5%
annual return and 3) that expenses are the same as the most recent fiscal
year expenses.

- --------------------------------------------------------------------------------
*Estimated (Manager has agreed to reimburse
operating expenses so that total Account
operating expenses will not be greater than
0.40% for 1999.)

Day-to-day Account management:
Since April 1999 Dean Roth, Portfolio Manager of Invista Capital
(Account's inception) Management, LLC since 1993.

GROWTH-ORIENTED ACCOUNT

Utilities Account

The Utilities Account seeks to provide current income and long-term growth of
income and capital. It invests in securities issued by companies in the public
utilities industry. These companies include:
o companies engaged in the manufacture, production, generation, sale or
distribution of electric or gas energy or other types of energy, and
o companies engaged in telecommunications, including telephone, telegraph,
satellite, microwave and other communications media (but not public
broadcasting or cable television).

The Sub-Advisor, Invista, considers a company to be in the public utilities
industry if, at the time of investment, at least 50% of the company's assets,
revenues or profits are derived from one or more of those industries.

Under normal market conditions, at least 65% (and up to 100%) of the assets of
the Account are invested in equity securities and fixed-income securities in the
public utilities industry. The Account does not have any policy to concentrate
its assets in any segment of the utilities industry. The portion of Account
assets invested in equity securities and fixed-income securities varies from
time to time. When determining how to invest the Account's assets to achieve its
investment objective, Invista considers:
o changes in interest rates,
o prevailing market conditions, and
o general economic and financial conditions.

The Account invests in fixed income securities, which at the time of purchase,
are
o rated in one of the top four categories by S&P or Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.

Since the Account's investments are concentrated in the utilities industry, the
value of its shares changes in response to factors affecting those industries.
Many utility companies have been subject to risks of:
o increase in fuel and other operating costs;
o changes in interests rates on borrowings for capital improvement programs;
o changes in applicable laws and regulations;
o changes in technology which render existing plants, equipment or products
obsolete;
o effects of conservation; and
o increase in costs and delays associated with environmental regulations.

Generally, the prices charged by utilities are regulated with the intention of
protecting the public while ensuring that utility companies earn a return
sufficient to attract capital to grow and provide appropriate services. However,
due to political and regulatory factors, rate changes ordinarily occur following
a change in financing costs. This delay tends to favorably affect a utility
company's earnings and dividends when costs are decreasing but also adversely
affects earnings and dividends when costs are rising. In addition, the value of
the utility company bonds rise when interest rates fall and fall when interest
rates rise. Certain states are adopting deregulation plans. These plans
generally allow for the utility company to set the amount of their earnings
without regulatory approval.

The Utilities Account is generally a suitable investment for investors seeking
quarterly dividends for income or to be reinvested for growth. Suitable
investors are those who want to invest in companies in the utilities industry
and are willing to accept fluctuations in the value of their investment. The
share price of the Account may fluctuate more widely than the value of shares of
a fund that invests in a broader range of industries. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, if you sell your shares when their value is less than the price you paid,
you will lose money.

Account Performance Information

- ---------------------------------------- ------------------------------------
Average annual total returns Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ---------------------------------------- for the last 3 quarters
Past One ------------------------------------
Year Quarter Ended Return
-------- ------------------------------------
Utilities Account 15.36%* 12/31/98 10.65%
9/30/98 3.83%
S&P 500 Stock Index 28.58 ------------------------------------
Lipper Utilities Fund Average 18.30
- ----------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.60% $70 $221 $384 $859
Other Expenses........................ 0.09%
-----
Total Account Operating Expenses 0.69%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Catherine Zaharis, CFA. Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1987.

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.

Securities and Investment Practices
Equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.

Accounts that focus their investments in equity securities include: Aggressive
Growth, Capital Value, Growth, International, International SmallCap, MicroCap,
MidCap, MidCap Value, SmallCap, SmallCap Growth, SmallCap Value, Stock Index 500
and Utilities. The Asset Allocation and Balanced Accounts invest in a mix of
equity and fixed income securities.

Fixed income securities include bonds and other debt instruments that are used
by issuers to borrow money from investors. The issuer generally pays the
investor a fixed, variable or floating rate of interest. The amount borrowed
must be repaid at maturity. Some debt securities, such as zero coupon bonds, do
not pay current interest, but are sold at a discount from their face values.

Fixed income securities are sensitive to changes in interest rates. In general,
bond prices rise when interest rates fall and fall when interest rates rise.
Longer term bonds and zero coupon bonds are generally more sensitive to interest
rate changes.

Bond prices are also affected by the credit quality of the issuer. Investment
grade debt securities are medium and high quality securities. Some bonds may
have speculative characteristics and be particularly sensitive to economic
conditions and the financial condition of the issuers.

Accounts that focus their investments in fixed income securities include the
Bond and Government Securities Accounts.

Repurchase Agreements and Loaned Securities
Each of the Accounts may invest a portion of its assets in repurchase
agreements. Repurchase agreements typically involve the purchase of debt
securities from a financial institution such as a bank, savings and loan
association or broker-dealer. A repurchase agreement provides that the Account
sells back to the seller and that the seller repurchases the underlying
securities at a specified price on a specific date. Repurchase agreements may be
viewed as loans by an Account collateralized by the underlying securities. This
arrangement results in a fixed rate of return that is not subject to market
fluctuation while the Account holds the security. In the event of a default or
bankruptcy by a selling financial institution, the affected Account bears a risk
of loss. To minimize such risks, the Account enters into repurchase agreements
only with large, well-capitalized and well-established financial institutions.
In addition, the value of the collateral underlying the repurchase agreement is
always at least equal to the repurchase price, including accrued interest.

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.

Currency Contracts
The Accounts (except Government Securities and Money Market) may each enter into
forward currency contracts, currency futures contracts and options, and options
on currencies for hedging and other non-speculative purposes. A forward currency
contract involves a privately negotiated obligation to purchase or sell a
specific currency at a future date at a price set in the contract. An Account
will not hedge currency exposure to an extent greater than the aggregate market
value of the securities held or to be purchased by the Account (denominated or
generally quoted or currently convertible into the currency).

Hedging is a technique used in an attempt to reduce risk. If an Account's
Manager or Sub-Advisor hedges market conditions incorrectly or employs a
strategy that does not correlate well with the Account's investment, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or to increase return. These techniques may increase the volatility
of an Account and may involve a small investment of cash relative to the
magnitude of the risk assumed. In addition, these techniques could result in a
loss if the other party to the transaction does not perform as promised.
Additionally, there is the risk of governmental action through exchange controls
that would restrict the ability of the Account to deliver or receive currency.

Forward Commitments
Each of the Accounts may enter into forward commitment agreements. These
agreements call for the Account to purchase or sell a security on a future date
at a fixed price. Each of these Accounts may also enter into contracts to sell
its investments either on demand or at a specific interval.

Warrants
Each of the Accounts (except Government Securities and Money Market) may invest
up to 5% of its total assets in warrants. Up to 2% of an Account's total assets
may be invested in warrants that are not listed on either the New York or
American Stock Exchanges. For the International and International SmallCap
Accounts, the 2% limitation also applies to warrants not listed on the Toronto
Stock Exchange and Chicago Board Options Exchange.

Risks of High Yield Securities
The Asset Allocation, Balanced, and Bond Accounts may, to varying degrees,
invest in debt securities rated lower than BBB by S&P or Baa by Moody's or, if
not rated, determined to be of equivalent quality by the Manager. Such
securities are sometimes referred to as high yield or "junk bonds" and are
considered speculative.

Investment in high yield bonds involves special risks in addition to the risks
associated with investment in high rated debt securities. High yield bonds may
be regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Moreover, such securities may,
under certain circumstances, be less liquid than higher rated debt securities.

Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities. The ability of an
Account to achieve its investment objective may, to the extent of its investment
in high yield bonds, be more dependent on such creditworthiness analysis than
would be the case if the Account were investing in higher quality bonds.

High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher-grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, an Account may incur additional expenses to seek recovery.

The secondary market on which high yield bonds are traded may be less liquid
than the market for higher-grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which an Account could sell a high
yield bond and could adversely affect and cause large fluctuations in the daily
price of the Account's shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the value and
liquidity of high yield bonds, especially in a thinly traded market.

The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change ratings in a timely manner to reflect subsequent
events. If a credit rating agency changes the rating of a portfolio security
held by an Account, the Account may retain the security if the Manager thinks it
is in the best interest of shareholders.

Options
Each of the Accounts (except Capital Value and Money Market) may buy and sell
certain types of options. Each type is more fully discussed in the SAI.

Foreign Securities
Each of the following Accounts may invest in foreign securities to the indicated
percentage of its assets (debt securities issued in the United States pursuant
to a registration statement filed with the Securities and Exchange Commission
are not treated as foreign securities for purposes of these limitations.):
o Asset Allocation, International and International SmallCap Accounts - 100%;
o Aggressive Growth, MicroCap, Real Estate and SmallCap Growth Accounts -
25%;
o Bond, Capital Value, SmallCap and Utilities Accounts - 20%.
o Balanced, Growth, MidCap, MidCap Growth, SmallCap Value and Stock Index 500
Accounts - 10%.
o The Money Market Account does not invest in foreign securities other than
those that are United States dollar denominated. All principal and interest
payments for the security are payable in U.S. dollars. The interest rate,
the principal amount to be repaid and the timing of payments related to the
securities do not vary or float with the value of a foreign currency, the
rate of interest on foreign currency borrowings or with any other interest
rate or index expressed in a currency other than U.S. dollars.

Investment in foreign securities presents certain risks including: 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. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Account's investment in foreign securities
may also result in higher custodial costs and the costs associated with currency
conversions.

Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
Fund. These procedures outline the steps to be followed by the Manager and
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. The Executive Committee
of the Board of Directors oversees this process.

Securities of Smaller Companies
The Asset Allocation, International SmallCap, MicroCap, MidCap, MidCap Growth,
SmallCap, SmallCap Growth and SmallCap Value Accounts invest in securities of
companies with small- or mid-sized market capitalizations. Market capitalization
is defined as total current market value of a company's outstanding common
stock. Investments in companies with smaller market capitalizations may involve
greater risks and price volatility (wide, rapid fluctuations) than investments
in larger, more mature companies. Smaller companies may be less mature than
older companies. At this earlier stage of development, the companies may have
limited product lines, reduced market liquidity for their shares, limited
financial resources or less depth in management than larger or more established
companies. Small companies also may be less significant within their industries
and may be at a competitive disadvantage relative to their larger competitors.
While smaller companies may be subject to these additional risks, they may also
realize more substantial growth than larger or more established companies.

Unseasoned Issuers
The Accounts (except Government Securities) may invest in the securities of
unseasoned issuers. Unseasoned issuers are companies with a record of less than
three years continuous operation, including the operation of predecessors and
parents. Unseasoned issuers by their nature have only a limited operating
history that can be used for evaluating the company's growth prospects. As a
result, investment decisions for these securities may place a greater emphasis
on current or planned product lines and the reputation and experience of the
company's management and less emphasis on fundamental valuation factors than
would be the case for more mature growth companies. In addition, many unseasoned
issuers also may be small companies and involve the risks and price volatility
associated with smaller companies.

Temporary or Defensive Measures
For temporary or defensive purposes in times of unusual or adverse market
conditions, the Growth-Oriented Accounts, the Bond and Limited Term Bond
Accounts, may invest without limit in cash and cash equivalents. For this
purpose, cash equivalents include: bank certificates of deposit, bank
acceptances, repurchase agreements, commercial paper, and commercial paper
master notes which are floating rate debt instruments without a fixed maturity.
In addition, an Account may purchase U.S. Government securities, preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock.

Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount
of trading that occurs in an Account's portfolio during the year. For example, a
100% turnover rate means that on average every security in the portfolio has
been replaced once during the year.

Accounts with high turnover rates (more than 100%) often have higher transaction
costs (which are paid by the Account) and may generate short-term capital gains.
You can find the turnover rate for each Account, except for the Money Market
Account, in the Account's Financial Highlights table.

Please consider all the factors when you compare the turnover rates of different
funds. A fund with consistently higher total returns and higher turnover rates
than another fund may actually be achieving better performance precisely because
the managers are active traders. You should also be aware that the "total
return" line in the Financial Highlights section already includes portfolio
turnover costs.

PRICING OF ACCOUNT SHARES

Each Account's shares are bought and sold at the current share price. The share
price of each Account is calculated each day the New York Stock Exchange is
open. The share price is determined as of the close of business of the Exchange
(normally at 3:00 p.m. Central Time). When the Fund receives orders to buy or
sell shares, the share price used to fill the order is the next price calculated
after the order is placed.

For all Accounts, except the Money Market Account, the share price is calculated
by:
o taking the current market value of the total assets of the Account
o subtracting liabilities of the Account
o dividing the remainder by the total number of shares owned by the Account.

The securities of the Money Market Account are valued at amortized cost. The
calculation procedure is described in the Statement of Additional Information.
The Money Market Account reserves the right to determine a share price more than
once a day.

NOTES:
o If current market values are not readily available for a security, its fair
value is determined using a policy adopted by the Fund's Board of
Directors.
o An Account's securities may be traded on foreign securities markets that
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities used
in computing share price are determined at the time the foreign market
closes. Occasionally, events affecting the value of foreign securities
occur when the foreign market is closed and the New York Stock Exchange is
open. If the Manager believes the market value is materially affected, the
share price will be calculated using the policy adopted by the Fund.
o Foreign securities markets may trade on days when the New York Stock
Exchange is closed (such as customary U.S. holidays) and an Account's share
price is not calculated. As a result, the value of an Account's assets may
be significantly affected by such trading on days when you cannot purchase
or sell shares of the Fund.

DIVIDENDS AND DISTRIBUTIONS

The issuer of an equity security held by an Account may make a dividend payment.
When an Account receives a dividend, it increases the net asset value of a share
of the Account.

An Account accrues interest daily on its fixed income securities in anticipation
of an interest payment from the issuer of the security. This accrual increases
the net asset value of an Account.

The Money Market Account (or any other Account holding commercial paper)
amortizes the discount on commercial paper it owns on a daily basis. This
increases the net asset value of the Account.

NOTE:As the net asset value of a share of an Account increases, the unit value
of the corresponding division also reflects an increase. The number of
units you own in the Account are not increased.

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

The Manager
Principal Management Corporation (the "Manager") serves as the manager for the
Principal Variable Contracts Fund, Inc. In its handling of the business affairs
of the Fund, the Manager provides clerical, recordkeeping and bookkeeping
services, and keeps the financial and accounting records required for the
Accounts.

The Manager is a subsidiary of Princor Financial Services Corporation, and an
affiliate of Principal Life Insurance Company. It has managed mutual funds since
1969. As of March 31, 1999, the Funds it managed had assets of approximately
$6.2 billion. The Manager's address is Principal Financial Group, Des Moines,
Iowa 50392-0200.

The Sub-Advisors
The Manager has signed contracts with various Sub-Advisors. Under the
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account.
For these services, each Sub-Advisor is paid a fee by the Manager.

Accounts: Aggressive Growth and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management ("Morgan Stanley"), with
principal offices at 1221 Avenue of the Americas, New York, NY 10020,
provides a broad range of portfolio management services to customers in
the U.S. and abroad. As of December 31, 1998, Morgan Stanley managed
investments totaling approximately $163.4 billion as named fiduciary or
fiduciary adviser. On December 1, 1998 Morgan Stanley Asset Management
Inc. changed its name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain instances using
the name Morgan Stanley Asset Management.

Accounts: Balanced, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock Index
500, and Utilities
Sub-Advisor: Invista Capital Management, LLC
("Invista"), an indirectly wholly-owned subsidiary of Principal Life
Insurance Company and an affiliate of the Manager, was founded in 1985.
It manages investments for institutional investors, including Principal
Life. Assets under management as of December 31, 1998 were
approximately $31 billion. Invista's address is 1800 Hub Tower, 699
Walnut, Des Moines, Iowa 50309.

Account: MicroCap
Sub-Advisor: Goldman Sachs Assets Management ("Goldman"), One New York
Plaza, New York, NY 10004, is a separate operating division of Goldman,
Sachs & Co. ("Goldman Sachs"). Goldman Sachs provides a wide range of
fully discretionary investment advisory services for quantitatively
driven and actively managed U.S. and international equity portfolios,
U.S. and global fixed income portfolios, commodity and currency
products, and money market mutual funds. As of December 31, 1998,
Goldman, together with its affiliates, managed assets in excess of $195
billion.

Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation, located at 200 Park Avenue, New
York, NY 10166, was formed in 1947. The Dreyfus Corporation is a wholly
owned subsidiary of Mellon Bank, N.A., which is a wholly owned
subsidiary of Mellon Bank Corporation (Mellon). As of December 31,
1998, The Dreyfus Corporation managed or administered approximately
$118.5 billion in assets for approximately 1.7 million investor
accounts nationwide.

Account: SmallCap Growth
Sub-Advisor: Berger Associates. Berger's address is 210 University
Boulevard, Suite 900, Denver, CO 80206. It serves as investment
advisor, sub-advisor, administrator or sub-administrator to
mutual funds and institutional investors. Berger is a wholly
owned subsidiary of Kansas City Southern Industries, Inc.
("KCSI"). KCSI is a publicly traded holding company with
principal operations in rail transportation, through its
subsidiary the Kansas City Southern Railway Company, and
financial asset management businesses. Assets under management
for Berger as of December 31, 1998 were approximately $3.4
billion.

Account: SmallCap Value
Sub-Advisor: J.P. Morgan Investment Management, Inc. Morgan, with
principal offices at 522 Fifth Avenue, New York, NY 10036 is a
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated (J.P.
Morgan) a bank holding company. J.P. Morgan, through Morgan and
its other subsidiaries, offers a wide range of services to
governmental, institutional, corporate and individual customers
and acts as investment advisor to individual and institutional
clients. As of December 31, 1998, J.P. Morgan and its
subsidiaries had total combined assets under management of
approximately $300 billion.

Duties of the Manager and Sub-Advisor
The Manager or the Sub-Advisor provides the Board of Directors of the Fund a
recommended investment program. Each program must be consistent with the
Account's investment objective and policies. Within the scope of the approved
investment program, the Manager or the Sub-Advisor advises each Account on its
investment policies and determines which securities are bought and sold, and in
what amounts.

The Manager is paid a fee by each Account for its services, which includes any
fee paid to the Sub-Advisor. The fee paid by each Account (as a percentage of
the average daily net assets) for the fiscal year ended December 31, 1998 was:

Management Other Total Operating
Account Fees Expenses Expenses

Aggressive Growth 0.77% 0.01% 0.78%
Asset Allocation 0.80 0.09 0.89
Balanced 0.57 0.02 0.59
Bond 0.49 0.02 0.51
Capital Value 0.43 0.01 0.44
Government Securities 0.49 0.01 0.50
Growth 0.47 0.01 0.48
International 0.73 0.04 0.77
International SmallCap 1.21 0.13 0.34
MicroCap 1.00 0.38 1.38
MidCap 0.61 0.01 0.62
MidCap Growth 0.90 0.37 1.27
Money Market 0.50 0.02 0.52
Real Estate 0.90 0.10 1.00
SmallCap 0.85 0.13 0.98
SmallCap Growth 1.01 0.30 1.31
SmallCap Value 1.10 0.46 1.56
Utilities 0.60 0.09 0.69

The Fund and the Manager, under an order received from the SEC, are able to
change Sub-Advisors or the fees paid to a Sub-Advisor, without the expense and
delay of a shareholder meeting. However, the order will not be relied upon by an
Account until the Fund receives approval from:
o contract owners who have assets in the Account, or
o in the case of a new Account, the Account's sole initial shareholder before
the Account is available to contract owners. (Before the International
SmallCap, MicroCap, MidCap Growth, Real Estate, SmallCap Growth, SmallCap
Value, Stock Index 500 and Utilities Accounts were available to contract
owners, the initial shareholder of each of those Accounts approved their
operation in the manner described in the order.)
The order does not permit the Manager, without shareholder approval, to:
o appoint a Sub-Advisor that is an affiliate of the Manager or the Fund
(other than by reason of serving as a Sub-Advisor to an Account) (an
"affiliated Sub-Advisor"), or
o change a subadvisory fee of an affiliated Sub-Advisor.

MANAGERS' COMMENTS

Principal Management Corporation and its Sub-Advisors 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 for 1998. 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
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.

Growth-Oriented Accounts

Aggressive Growth Account
(Philip W. Friedman, Margaret K. Johnson and William S. Auslander)

- -----------------------------------------------
Total Returns *
As of December 31, 1998
1 Year Since Inception Date 6/1/94 10 Year

18.95% 26.61% --
- -----------------------------------------------

Comparison of Change in Value of $10,000 Investment in the Aggressive Growth
Account, Lipper Growth Fund Average and S&P 500 Stock Index

Standard & Poor's
Aggressive 500 Lipper
Growth Stock Growth Fund
Year Ended December 31, Account Index Average
- ----------------------- ------- ----- -------
10,000 10,000 10,000
1994 10,259 10,230 10,055
1995 14,793 14,069 13,151
1996 18,942 17,297 15,681
1997 24,788 23,066 19,649
1998 29,486 29,657 24,140

Note: Past performance is not predictive of future performance.

Since it first became available on June 1, 1994, the Aggressive Growth Account
has generated an annualized total return of 26.61% versus 26.76% for the S&P 500
and 19.03% for the Lipper Growth Fund Average. In 1998 the Account returned
18.95% versus 28.58% for the S&P 500 and 22.86% for the Lipper Growth Fund
Average.

While 1998 was a disappointing year for the portfolio, the managers were
encouraged by the fourth quarter return. For the fourth quarter the portfolio
rose 22.68% versus 21.30% for the S&P 500 and 22.61% for the Lipper Growth Fund
Average. The early part of the quarter was spent reducing cyclical and medium
capitalization exposure and adding to larger capitalization technology and
health care holdings. This strategy laid the foundation for the performance in
the quarter and positions the Account well for 1999.

But one quarter does not a year make and the return for calendar year 1998 was
clearly disappointing relative to previous periods of outperformance. While some
of the large positions performed well in 1998 (notably United Technologies,
America Online, Microsoft and Cisco) these gains were not enough to offset the
disappointing performance of positions such as Cendant and Continental Airlines,
earlier in the year.

From a macro-perspective, 1998 was certainly a year to be invested in a select
number of large capitalization growth names. For the full year, while the S&P
capitalization weighted index climbed 28.7%, the S&P equal weighted index rose
only 12.8%. Breadth increased somewhat in the fourth quarter, when the S&P 500
capitalization weighted index returned 21.3% and the S&P 500 equal weighted
index gained 17.4%.

Looking out into 1999, against a backdrop of continued low inflation, more
modest GDP growth and ongoing fears of emerging markets slowdowns (Latin
American taking over for Asia in 1999) it is easy to imagine the U.S. stock
market continuing to favor some of the same high growth, mega-cap companies
which performed so well in 1998. Clearly, the U.S. is not pumping on all
cylinders and some U.S. based companies with global exposure are somewhat
precariously positioned. The managers view this as a "glass half full"
opportunity. A number of the growth companies currently invested in either have
minimal exposure to weak international markets, or have demonstrated an ability
to withstand these pressures. The account managers believe this will be a
continued period of outperformance by high quality growth companies that can
continue to meet or beat expectations.

Asset Allocation Account
(Francine J. Bovich, Philip W. Friedman and Stephan C. Sexauer)

- ------------------------------------------------------
Total Returns *
As of December 31, 1998
1 Year Since Inception Date 6/1/94 10 Year
9.18% 13.23% --
- ------------------------------------------------------

Comparison of Change in Value of $10,000 Investment in the Asset Allocation
Account, Lipper Flexible Portfolio Fund Average and S&P 500 Stock Index

Asset Lipper Standard &
Allocation Flexible Portfolio Poor's 500
Year Ended December 31, Account Fund Average Stock Index
- ---------------------- ------- ------------ -----------
10,000 10,000 10,000
1994 10052 10230 10008
1995 12128 14069 12518.01
1996 13696 17297 14220.46
1997 16187 23066 16878.26
1998 17673 29657 19268

Note: Past performance is not predictive of future performance.

Major global market indexes finished 1998 with strong gains, overcoming a
volatile and, at times, precarious market environment. The S&P 500 Index
extended its bull market run into a fourth year, rising 28.6% in 1998. Foreign
stocks also performed well, with MSCI EAFE rising 20%, led by European markets'
euphoria over monetary union. Although bond returns were much less impressive,
the asset class showed strong and steady gains. The Lehman Aggregate Index rose
8.7% for the year.

Despite the strong numbers produced by major market indexes, capital market
strength was not experienced broadly or equally. Although EAFE posted strong
gains, most of the positive news came only from Europe, as the Pacific markets
performed poorly. Japan returned 5.0% while the MSCI Pacific ex-Japan Index
returned -5.5%. Value stocks and smaller capitalization stocks in the U.S. and
in Europe grossly underperformed growth stocks and large cap stocks. In the
U.S., the Russell 2500 Index (a mid and small cap index) rose a mere 0.4% for
the year, while in Europe, the MSCI Europe Small Cap Index rose 1.0% compared to
MSCI Europe's rise of 28.5%. Even within U.S. fixed income, performance was very
disparate between sectors, with Treasuries (+10%) outperforming corporate bonds
(+8.6%), mortgages (+6.8%) and high yield debt (+3.6%). Emerging equity markets
experienced another disappointing year, down 25.3%.

The investment environment in 1998 vacillated between periods of extreme
optimism and extreme pessimism. The first half of the year was marked primarily
by optimism, as markets bounced from the lows of the Asian financial crisis at
the end of 1997. Economic growth in the U.S. and Europe remained resilient, and
inflation was almost non-existent. European and U.S. stock markets soared to new
highs through mid-July, driven by strong economic undertones, liquidity, and
investor optimism. However, the second half of 1998 has proven to be a much more
challenging and highly volatile period. Markets came under severe pressure,
amidst a deepening of the Russian financial crisis, lower earnings expectations,
and the failure of Long Term Capital, a large U.S. based hedge fund. European
and U.S. equity markets fell as much as 20% before stabilizing at the end of
September, and credit spreads widened dramatically, as investors sought refuge
in safe-haven Treasuries.

The tide turned in early October, after two preemptive easings by the Federal
Reserve, including a surprise action in between official Fed meetings. The
ensuing global easing by central banks in Europe and Asia in a concerted effort
to inject liquidity into markets and defend the world economy against
deflationary forces helped lift equity markets strongly off their lows. By the
end of the fourth quarter, all developed markets had shown tremendous gains, led
by the Asia-Pacific (non-Japan) region, which benefited most from the easing.
Many markets finished the year near their highs, as liquidity and optimism
returned to the financial environment.

Throughout the year, the Account maintained a diversified investment strategy.
At the end of 1998, the Account was invested 37% domestic stocks, 18%
international stocks, 39% domestic bonds, 3% real estate investment trusts
("REITs"), and 3% short-term investments. The Account enjoyed positive returns
for the year of 9.2%, but failed to outperform the Lipper Flexible Portfolio
Fund Average gain of 14.2%.

On balance, the account manager's asset allocation decision to overweight
equities relative to fixed income throughout the year was positive, as equities
outperformed fixed income. Security selection within U.S. large cap equities was
the major source of underperformance. The portfolio's orientation toward
value-based, mid- and large-cap securities failed to be rewarded in the
marketplace, as risk-averse investors sought the safety and liquidity of
mega-cap companies.

Balanced Account
(Judith A. Vogel, Douglas D. Herold and Martin J. Schafer)

- --------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
11.91% 12.74% 12.33%
- --------------------------------------------

Lehman
Standard & Brothers
Poor's Lipper Government/
Balanced 500 Balanced Corporate
Year Ended December 31, Account Stock Index Fund Avg Bond Index
- ---------------------- ------- ----------- -------- ----------
10,000 10,000 10,000 10,000
1989 11,156 13,168 11,959 11,423
1990 10,438 12,758 11,893 12,369
1991 14,025 16,647 15,077 14,364
1992 15,820 17,915 16,138 15,453
1993 17,570 19,717 17,870 17,157
1994 17,203 19,976 17,420 16,555
1995 21,432 27,474 21,803 19,740
1996 24,246 33,778 24,803 20,313
1997 28,593 45,043 29,515 22,295
1998 31,999 57,915 33,494 24,406

Note: Past performance is not predictive of future performance.

Characterize the reasons as you like, but 1998 will be remembered as The Year of
the Mega-Cap Stock. Whether spurred by a flight to quality, the search for
scarce earnings growth, a market awash in liquidity, or momentum-driven
investors, large market capitalization stocks were the clear winners in the
performance game this year. The very biggest of the big, such as Microsoft,
General Electric, Intel, Lucent, and Wal-Mart drove the market cap-weighted
indices upward on the order of +28% for the year. Mid- to small-cap stocks and
companies reporting anything less than stellar sales and earnings growth
couldn't keep up with the big guys. Small cap stocks in general were actually
down by -2% in 1998. Investors paid up for size and positive earnings surprises.
Period.

In the U.S. good, fundamental reasons for the markets to advance were present,
particularly in the fourth quarter of 1998. Stronger than anticipated consumer
spending, a robust housing market, the virtual absence of inflation, and
significantly lower interest rates all rightfully powered valuations upward.
However, the huge disparity of returns between the "haves" and the "have-nots,"
as described above, could not be ignored. The "haves" were afforded prices of 40
to 60+ times earnings, P/E multiples reminiscent of the Nifty-Fifty era of the
early 1970's, while small cap stocks were at best ignored and at worst pummeled.

In the fixed income arena two influences shaped the markets. First, Russia's
debt default in the third quarter awoke investors to the fact that one could
indeed lose principal in the bond market. Almost immediately risk premiums, or
interest rate spreads vs. U.S. government bonds, expanded to very high levels as
investors clamored for the safety of U.S. Treasuries. The Federal Reserve Board,
in response to the global financial crisis and hoping to ward off a domestic
downturn, reduced interest rates three times before the end of the year. As a
result, intermediate bonds returned 8% - 10% for their owners in 1998; long
government bonds produced mid-teens type returns. Very attractive performance in
the absolute, but uninspiring relative to the 25% gains or better that large cap
growth stocks generated.

The Balanced Account produced a double-digit return of 11.9% in 1998. The
Account's strategy of holding a diversified portfolio of high quality fixed
income securities and reasonably valued common stocks was maintained.
Unfortunately the market did not recognize the merits of paying attention to
valuation and the Account's lack of exposure to the handful of mega-cap,
high-priced common stocks that moved the markets proved to be a detriment to
performance. The Balanced Account's objective is to produce both long-term
capital appreciation and current income without taking on undue risk to
principal. Looking ahead to 1999 the global economy is far from stable. It is
likely that uncertainty and market volatility will be the order of the day.
While the Balanced Account may not produce the very highest returns in this
environment, its conservative nature should prevent it from sinking to extreme
lows relative to other balanced funds. The Account's focus on credit quality
among bonds and paying reasonable prices for expected earnings in the equity
portfolio should benefit long-term shareholders.

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 shown for your information.

Capital Value Account
(Catherine A. Zaharis)

- --------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
13.58% 19.03% 15.15%
- --------------------------------------------

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

Capital S&P 500 Lipper
Value Stock Growth & Income
Year Ended December 31, Account Index Fund Average
- ----------------------- ------- ------ ------------
10,000 10,000 10,000
1989 11,618 13,168 12,354
1990 10,473 12,758 11,804
1991 14,522 16,647 15,237
1992 15,905 17,915 16,605
1993 17,145 19,717 18,523
1994 17,229 19,976 18,349
1995 22,726 27,474 24,004
1996 28,066 33,778 28,992
1997 36,074 45,043 36,861
1998 40,973 57,915 42,615

Note: Past performance is not predictive of future performance.

The Capital Value Account had an experience in 1998 very similar to other funds
in that the index was a benchmark nearly unattainable. There were several
factors that aided positive returns, but hindered the opportunity to keep pace
with the S&P 500.

The performance of the market was led by the technology sector which was
underrepresented in this value portfolio. Valuations of these companies have
reached heights that suggest that growth will be phenomenal for a very long
time. Due to the fact that very few companies in the technology sector could be
defined as "value" due to this market strength, the managers have avoided this
area.

Another interesting aspect of the markets in 1998 was the size factor. The
bigger the stock was, the better it seemed to do. Large cap indexes did much
better than mid-cap indexes which did better than those indexes representing
small cap names. Although the Account's holdings were primarily focused in the
large cap arena, some holdings were in the mid cap range as valuations continue
to get even more compelling. Although these companies did not perform well as a
whole in 1998, they did represent some excellent long term value opportunities.

The value companies the portfolio has focused on have been quite a bit different
than traditional "value" names. Although all of the new companies in the
portfolio were selling at a discount to the market at purchase, many of them had
much more traditional growth prospects. The deep cyclical and basic materials
companies have suffered from disinflation as well as a pullback in demand from
emerging markets. Due to these occurrences, managers have underweighted more
cyclical names in favor of consistent growth at a discount. This focus has
helped returns relative to other value portfolios.

The Account's focus throughout 1998 was one of quality value. That focus will be
continued into 1999 as economic and world events are closely monitored.

Growth Account
(Michael R. Hamilton)

- ---------------------------------------------------------
Total Returns *
As of December 31, 1998
1 Year Since Inception Date 5/2/94 10 Year
21.36% 19.48% --
- ---------------------------------------------------------

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

S&P
500 Lipper
Growth Stock Growth
Year Ended December 31, Account Index Fund Avgerage
10,000 10,000 10,000
1994 10,542 10,397 10,090
1995 13,243 14,299 13,197
1996 14,899 17,580 15,736
1997 18,916 23,443 19,717
1998 22,956 30,142 24,224

Note: Past performance is not predictive of future performance.

The fundamental factors that have been the foundation of this bull market helped
drive the market to new highs in 1998. The five factors are: slow but
sustainable economic growth, low inflation, low interest rates, financial
liquidity and corporate profit growth. 1998 was a year of good news on four of
the five factors. Economic growth in the U.S. was been slightly stronger than
expected, inflation continued to drop, interest rates fell and financial
liquidity increased with the Fed cutting short-term interest rates. The only
non-positive fundamental was corporate earnings which were flat, but are
expected to be positive in 1999.

The market showed a strong bias for large cap stocks over small cap stocks. The
largest two-thirds of the S&P 500 by market cap (over $20 billion) returned over
35% in 1998. In contrast, the smallest one-third of the S&P 500 by market cap
returned slightly over 12% in 1998. While one-third of the S&P 500 is in
companies under $20 billion market cap, the Account had 50% of holdings in such
companies. This size bias explains 85% of the Account's discrepancy to the S&P
500. The account managers have been relatively insensitive to what size of
market cap a company is in the security selection process and continue to
believe that investors should focus on each company's underlying business
fundamentals and valuation when selecting a stock and not on the company's size.

Sectors where the Account outperformed the S&P 500 Index include: capital goods,
communication services, consumer staples, energy, transportation, and utilities.
Sectors where the Account underperformed the S&P 500 Index include: basic
materials, consumer cyclicals, financials, healthcare and technology. While
technology holdings did very well, gaining over 61% on the year, they failed to
keep pace with the S&P 500's technology sector, which gained 73%. The Account's
large position in healthcare did well, gaining 31% on the year. While these were
great absolute returns, they were not good relative returns since the S&P 500's
healthcare sector gained over 43%.

Going forward the managers continue to find the healthcare and financial sectors
attractive. Healthcare companies are benefiting from strong demand as the
population ages and from spectacular new products that make life better. In
financials, the manager's see companies that are more prudently managing their
capital, taking advantage of deregulation and can be purchased at very
reasonable valuations. Few opportunities are found in the utility, energy and
transportation sectors and thus the Account has little to no exposure in these
sectors. As always, account managers continue to pursue companies that possess
competitive advantages, have the potential for good growth and can be purchased
at a reasonable price.

International Account
(Scott D. Opsal)

- ----------------------------------------------
Total Returns *
As of December 31, 1998
1 Year Since Inception Date 5/2/94 10 Year
- ----------------------------------------------
9.98% 12.09% --
- ----------------------------------------------

Comparison of Change in Value of $10,000 Investment in the
International Account, Lipper International Fund Average and MSCI EAFE Index

Morgan Stanley Lipper
Year Ended International Capital International International
December 31, Account EAFE Index Fund Average
----------- ------- ---------- ------------
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
1997 15,488 11,991 12,583
1998 17,034 14,389 14,221

Note: Past performance is not predictive of future performance.

The International Account's return of 9.98% in 1998 was below the EAFE Index
return of 20.00%. Most of the Account's shortfall occurred during the second
half of the year. Two investment themes dominated returns and performance during
the second half of 1998. The most significant theme was the third quarter
collapse of emerging markets, brought on by Russia's devaluation and debt
default and the simultaneous currency crisis in Brazil. These events shook
investor confidence which created a flight to quality, soaring risk premiums in
most stocks, and a slower economic growth outlook.

A secondary theme was the ongoing economic problems in Japan. Japan's economy is
in a serious recession and is undoubtedly the weakest economy of any developed
nation. Its banking crisis is far from being solved, and government policy has
created a fiscal budget deficit equal to 10% of GDP, an unheard of level for a
major economy.

These two themes influenced the positioning of the International Account. The
managers increased exposure to defensive, or lower risk stocks, and
underweighted the Japanese market. One of the main reasons for the
underperformance was the execution of moving the portfolio into a more defensive
position which was not fully effective. Several of the stocks were in low risk
businesses, but had exposure to poor performing emerging markets. The second
area of underperformance was the underweight position of the Japanese yen.
Although economic analysis of Japan proved to be right on the mark and Japan's
stock market continued to languish, the Japanese yen was very strong and
outpaced the other developed market currencies.

The Account continues to have a small weighting in the Japanese market and a
large weighting in Europe. The managers do not expect a severe recession in
Europe this year, but growth is slowing. Inflation does not appear to be a risk,
and therefore, interest rates should remain low helping to bolster stock prices.
Portfolio weightings in reasonably priced names with growth and/or defensive
characteristics will continue to be raised.

International SmallCap Account
(Darren K. Sleister)

- -------------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------------
-10.37%* -- --

- -------------------------------------------------
* - Since Inception Date 5/1/98

Comparison of Change in Value of $10,000 Investment in the International
SmallCap Account, Lipper International Small-Cap Fund Average and MSCI EAFE
Index

Lipper
International Morgan Stanley International
Year Ended SmallCap Capital International Small-Cap
December 31, Account EAFE Index Fund Average
----------- ------- ---------- ------------
10,000 10,000 10,000
1998 8,963 10,379 9,320

Note: Past performance is not predictive of future performance.

The Account's overweighting in Europe and its low exposure to Asia contributed
to its outperformance relative to its benchmark. The past year has shown the
volatility inherent with the international small cap asset class. Last fall
returns fell significantly in response to the Asian crisis and surprised many
investors who had underestimated the impact it had on other economies. The
beginning of 1998 saw a dramatic recovery in Asian areas, taking the markets to
valuations above the pre-crisis level. However, this fall the markets hovered on
the brink of collapse as several events sparked a growing global concern of the
impact these events would have on the financial markets. These events included
the Russian default on debt, whether the Latin American currencies would
devalue, the slowdown of growth in the emerging economies and the strength of
the dollar relative to the rest of the world economies, calling for a lowering
of interest rates. Resource-based countries, Australia, New Zealand and Canada,
lagged as commodity price deflation placed pressure on the macroeconomic
conditions in these countries.

Currency weakness helped U.S.-based international investors to slightly offset
the overall equity market decline. There is a question as to whether the dollar
is resuming its historic weakness or if this is a temporary adjustment. The Euro
block currencies are likely to be of Germanic influence in warding off inflation
and, as such, be strong. Even though there remains a large burden of proof,
recent movements indicate investors are beginning to price this expectation into
the Euro.

The Account managers are noticing a some stabilization of stock prices in Asia
and believe the bottom is forming in equities. Thus it is possible the Account's
exposure will increase in the Asian region. Europe has corrected to attractive
levels and the Account continues to focus on quality growth at average or below
average prices. At the margin, holdings in Canada are declining given macro
concerns and several instances of highly questionable management practices. In
short, the managers favor higher levels of cash generation and stability of
earnings over exceptional growth or deep value situations at this time.

MicroCap Account
(Paul D. Farrell, Matthew B. McLennan and Eileen A. Aptman)

- -------------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------------
-18.42%* -- --

- -------------------------------------------------
* - Since Inception Date 5/1/98

Comparison of Change in Value of $10,000 Investment in the MicroCap Account,
Lipper Micro-Cap Fund Average and Russell 200 Index

Lipper
Russell Micro-Cap
Year Ended MicroCap 200 Fund
December 31, Account Index Average
----------- ------- ---------- ------------
10,000 10,000 10,000
1998 8,158 8,806 8,468

Note: Past performance is not predictive of future performance.

Small cap stocks suffered in the volatile stock market of 1998. Prompted by
economic turmoil in Asia and Russia and a slowing U.S. manufacturing sector,
risk premiums expanded and investors overwhelmingly favored the perceived safety
and liquidity of blue-chip, large cap names within the U.S. stock market. Even
as the market stabilized and rebounded in the fourth quarter, small cap stocks
continued to lag behind their larger counterparts. The MicroCap Account declined
17.9% since its inception in April 1998. The Russell 2000 Index ("Russell 2000")
declined 11.4% during the same period. During 1998, the MicroCap Account was
broadly diversified across different industry sectors such that no one sector
unduly hurt or assisted the Account's performance relative to the Russell 2000.

The account managers believe that being both small in size and deep in value
(seeking long term capital appreciation through investment in companies that are
under valued due to investor uncertainty or obscurity) were the two factors that
most significantly impacted the performance of the MicroCap Account in 1998.
First, the market favored large capitalization securities over small
capitalization securities as investors sought liquidity and visible growth. The
S&P 500 Index ("S&P 500") returned 28.6% in 1998 while the Russell 2000 declined
2.6%. This size trend was evident even within the small cap universe as defined
by the Russell 2000. Of the 2000 companies in the Index, the largest 200
companies declined 9% while the smallest 200 declined over 20% in 1998. The
MicroCap Account is designed to invest in smaller companies and the resultant
portfolio has a median market cap below those of its peers and the Russell 2000,
which hurt performance during the year. Second, the value style of investing was
similarly out of favor in 1998. Growth style indices across all market
capitalizations outperformed in 1998: the S&P/Barra Growth Index return exceeded
the S&P/Barra Value Index return by 27.5%, and the Russell 2000 Growth Index
declined only 1.6% relative to a 9.1% decline of the Russell 2000 Value Index.

The managers remain confident in the future prospects of the MicroCap Account
for several reasons:

1. Value strategies have demonstrated strong results in small cap investing. Low
P/E and P/B strategies have been shown to outperform over the long term,
particularly in small caps. For the period from 1978 (the inception of Russell's
style indices) through 1998, the annualized return of the Russell 2000 Value
Index is 3% higher than that of the Russell 2000 Growth Index. The account
managers believe this demonstrates a disciplined approach to value investing
will reward investors over time.

2. Small cap securities are cheap versus large cap securities. The managers also
believe there is significant merit to focusing on small cap securities, as small
cap stocks reached a tremendous discount relative to larger cap issues during
the year. At year end, the Russell 2000 was valued at 19.5x 1999 earnings and
2.5x book value versus the S&P 500 value of 24.8x 1999 earnings and 4.9x book.
The account managers remain particularly enthusiastic about the long-term value
offered by the portfolio, which is priced at an even deeper discount than the
Russell 2000. It is believed that the discounted valuation of small caps will
reattract capital to the asset class and drive a return to more normal
valuations. Historically the Russell 2000 has sold at a valuation premium to the
S&P 500.

3. Small cap securities provide the most scope for value-added research. In all
market environments, the account managers perform rigorous, first-hand research
into small cap stocks trading at a discount to the market and their peers due to
obscurity or uncertainty. Account managers believe that holding between 60 to 80
stocks allows for sufficient diversification while allowing value to be added
through research. With each manager responsible for in-depth coverage of a
limited number of companies in the portfolio, managers can exploit the research
opportunity which makes small cap companies such an appealing investment
universe.

MidCap Account
(Michael R. Hamilton)

- --------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Years
- --------------------------------------------
3.69% 14.92% 16.22%
- --------------------------------------------

Comparison of Change in Value of $10,000 Investment in the MidCap Account,
Lipper Mid-Cap Fund Average and S&P 500 Stock Index

Lipper
MidCap S&P 500 Mid-Cap Fund
Year Ended December 31, Account Index Average
- ---------------------- ------- ----- -------
10,000 10,000 10,000
1989 12,184 13,168 12,710
1990 10,661 12,758 12,258
1991 16,364 16,647 18,538
1992 18,809 17,915 20,227
1993 22,436 19,717 23,201
1994 22,611 19,976 22,725
1995 29,171 27,474 30,035
1996 35,329 33,778 35,418
1997 43,368 45,043 42,370
1998 44,967 57,915 47,523

Note: Past performance is not predictive of future performance.

Stock market returns for 1998 were both volatile and divergent. Large caps
outdistanced their mid and small cap counterparts by a considerable margin as
investors gravitated to companies with assumed stable and visible earnings
streams. Also, market volatility seemed a constant during the year with large
price swings, especially occurring during the 3rd and 4th quarters. Much of this
activity was fueled by the Asian crisis that began in 1997 and investors'
concerns that growth rates and profitability of companies would be hurt as the
effects spread throughout the world. However, the U.S. economy performed quite
admirably due to low inflation, low interest rates, financial liquidity and high
consumer confidence.

The Midcap Account's performance trailed the S&P 500 Index primarily due to its
emphasis on smaller cap companies. Roughly 80% of the portfolio is invested in
companies with market capitalizations below $4 billion as compared to the Index
with only 4% invested in companies below $4 billion. The Financial, Consumer
Cyclical and Healthcare sectors were the largest contributors to
underperformance relative to the Index. The Technology sector was the primary
contributor to positive returns in the portfolio.

Looking ahead to 1999, the same factors driving the slow, sustainable growth in
the U.S. economy in 1998 appear to be very much in place. The account managers
continue to look for companies that possess competitive advantages, have the
potential for above average growth and can be purchased at a reasonable price.
The portfolio emphasizes the Technology, Financial, Consumer Cyclical and
Healthcare economic sectors. In the Technology sector, value is found in
companies that contribute to productivity enhancement. In the Financial sector,
the trend toward consolidation is allowing financial companies to manage their
capital more prudently. Attractive companies in the Consumer Cyclical sector are
those that will benefit from the low unemployment, low interest rate
environment. Finally, the Healthcare sector is a beneficiary of a growing
elderly population and the ever present desire for better healthcare.

MidCap Growth Account
(John O'Toole)

- -------------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------------
-3.40%* -- --
- -------------------------------------------------
* - Since Inception Date 5/1/98

Comparison of Change in Value of $10,000 Investment in the MidCap Growth
Account, Lipper Mid-Cap Fund Average and S&P 400 MidCap Index

MidCap Lipper S&P
Growth Mid-Cap 400 MidCap
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ ------
10,000 10,000 10,000
1998 9,660 9,814 10,538

Note: Past performance is not predictive of future performance.

The performance of the Account from inception date through December 31, 1998 was
below the performance benchmark (S&P MidCap 400 Index) and was obviously
disappointing. The primary factor negatively impacting performance was stock
selection, which was further impacted by some unique features of the performance
benchmark. Additionally, certain portfolio risk factors also contributed to the
underperformance.

The S&P MidCap 400 Index was dominated in 1998 by the performance of America
Online (AOL). At the beginning of the year, AOL was approximately 1.0% of the
benchmark, while by year end it was over 7% of the benchmark, at which time it
was moved into the S&P 500 Index. This one stock had a return of 585.64% for
1998, and thus greatly impacted the return of the Index. The account managers
did not initiate a position in AOL until midyear, and though the position was
held until the end of the year, for the most part the portfolio was either
equally weighted or underweighted to the company. Thus, the holdings of this one
name had a meaningful impact on relative performance.

In addition to these unique issues with the benchmark, the quantitative
valuation process used in the management of the Account did not perform up to
historical expectations. This problem was especially acute in September and
October, where negative stock selection impacted performance. There have been
previous time periods where the manager's process did not meet expectations, but
experience has shown that the model rebounded and allowed performance
expectations to be met.

As for portfolio risk characteristics that had a negative influence on return,
these would include the Account having a modestly smaller than benchmark market
capitalization. Even a modest position hurt performance, because 1998 was
categorized as a year where larger and mid sized companies outperformed smaller
capitalization firms. Finally, the performance was also negatively impacted by
the Account having a below benchmark price/earnings (P/E) ratio during a time
period when higher P/E stocks outperformed lower P/E issues.

In closing, the returns for the period under review were below our performance
expectations. Nonetheless, the managers remain committed to the quantitative
equity valuation process along with the fully invested and sector neutral
portfolio construction methods.

Real Estate Account
(Kelly D. Rush)

- -------------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
-6.56%* -- --

* - Since Inception Date 5/1/98
- -------------------------------------------------

Comparison of Change in Value of $10,000 Investment in the Real Estate
Account, Lipper Real Estate Fund Average and Morgan Stanley REIT Index

Lipper Morgan Stanley
Real Estate Real Estate REIT
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ ------
10,000 10,000 10,000
1998 9,344 8,250 8,677

Note: Past performance is not predictive of future performance.

The Real Estate Account began operations in May 1998. The Account invests
primarily in equity securities of companies engaged principally in the real
estate industry. The account managers have available the resources of real
estate professionals within the Principal Financial Group to identify companies
possessing the attributes considered essential for successful real estate
investing.

Real estate markets enjoyed a strong year in 1998, and real estate companies
experienced record earnings growth. While the operating environment was robust,
the prices of real estate company stocks were falling. Several factors have
contributed to the decline. The most predominant reason for the decline has been
the fear of deteriorating conditions in 1999 and beyond. For the period ended
December 31, 1998 the Real Estate Account performed slightly better than the
Morgan Stanley REIT Index and the Lipper Real Estate Fund Average because of its
underweighting in the hotel sector and overweighting in companies which have
proven to be resilient in the face of market pressure.

Declining earnings growth from the record setting levels of 1998 is inevitable.
The transition from abnormally high earnings growth to a lower sustainable
earnings growth level caused investor nervousness and price declines in 1998.
This drop provided an attractive price entry point, in the Manager's opinion,
for patient investors in search of value opportunities supported by an above
average level of current income.

SmallCap Account
(Mark T. Williams and John F. McClain)

- -------------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------------
-20.51%* -- --
- -------------------------------------------------

* - Since Inception Date 5/1/98

Comparison of Change in Value of $10,000 Investment in the SmallCap
Account, Lipper Small-Cap Fund Average and S&P 600 Index

Lipper S&P
SmallCap Small-Cap 600
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ -----
10,000 10,000 10,000
1998 7,949 8,873 8,835

Note: Past performance is not predictive of future performance.

The SmallCap Account has not yet finished its first year of operation. The
Account's inception date was May 1, 1998. In reviewing the past year, it is
apparent that May 1 was near the peak for smallcap stock performance, as
measured by several indices. The remainder of the year was volatile, especially
the second half.

The Account's strategy is to take the best that smallcap growth has to offer and
combine it in a single portfolio with the best that smallcap value stocks have
to offer. By doing so, managers hope to provide superior results when compared
to other smallcap funds.

Initially, approximately 60% of the Account's assets were invested in growth
stocks with the balance in value stocks. The original allocation of 60/40 was
still in place at year end. This allocation was chosen for two reasons. First,
the smallcap value sector has outperformed the smallcap growth sector for
several measurement periods. Account managers believe the performance balance
going forward has a good chance of being reversed, or at least not expanded
further. Second, the opportunities for superior stock selection are greater in
the growth area at this time.

Performance for small companies since the Account's inception through September
was mostly negative. The companies in the Account's portfolio did not escape
this negative return. For the year ended December 31, 1998, the SmallCap Account
was below its benchmark with a return of -20.5% (net of expenses) versus that of
the Lipper Smallcap Fund Average at -11.27%. The Account's technology holdings
were under severe pressure during June as the Asian economic problems reignited
investor concerns. The months of July through September saw continued weakness
in our technology holdings. During this same time period, the Account's holdings
in sub-prime lenders also registered negative returns. This adversely impacted
the Account's entire Financial sector return. During the fourth quarter, the
Account's technology holdings redeemed themselves with strong absolute returns.
The Account's financial holdings saw continued weakness and ended the year as
the sector with the poorest relative returns. Other sectors that contributed to
underperformance, relative to the benchmark, were Consumer Cyclicals and
Healthcare.

Looking forward, small stocks are more attractive relative to large stocks than
at any time in the last twenty-five years. This is based on trailing and
projected profits. The account managers believe this is an opportunity.

SmallCap Growth Account
(Amy K. Selner)

- -------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------
2.96%* -- --
- -------------------------------------
* - Since Inception Date 5/1/98

Comparison of Change in Value of $10,000 Investment in the SmallCap Growth
Account, Lipper Small-Cap Fund Average and Russell 2000 Growth Index

SmallCap Lipper Russell 2000
Growth Small-Cap Growth
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ -----
10,000 10,000 10,000
1998 10,296 8,873 10,123

Note: Past performance is not predictive of future performance.

This is the first annual report on the SmallCap Growth Account since its
inception of April 4, 1998. For this nine month period the fund rose 2.96 %
versus the (10.23%) loss of the Russell 2000 Growth Index, outperforming it's
index by 13.19%.

During 1998, a year marked by the Asian financial crisis which spread through
the world, small cap stocks underperformed relative to the large cap stocks as
economic uncertainty caused volatility to soar and investors preferred the
liquidity and predictability of larger caps stocks. The Russell 2000 Growth
Index ended the year gaining 1.23% while the S&P 500 gained 26.79%. The market
ended its correction on October 8 and staged an impressive rebound through the
end of the fourth quarter. Small cap technology smartly outperforming other
industry groups in this fourth quarter snapback.

In 1998 the world markets were relatively volatile while factoring in the
financial crisis in Asia, rising risks in Brazil, rekindled military hostilities
in the Middle East, and the sharp depreciation of the dollar. Certainly the 75
basis point easing by the Fed from late September to mid-November allowed for a
stiff wind at the back of this market. That wind, however, is not present today
and looking forward, the managers feel the Fed will remain neutral. The
underlying trend in real income growth remains solid, consumer spending is
strong and the labor market remains tight. Corporate profits are slowing and
growth is expected to decelerate in 1999, while inflation remains suppressed.
The account managers continue to monitor Brazil's recession and possible effects
on Mexico, and eventually the U.S.

The Account's outperformance in this volatile market stemmed from strong
bottom-up stock picking. The Account's exposure to solid technology growth
stocks advanced performance in the Account, especially in the fourth quarter.
Internet stocks were the leaders, along with semiconductor holdings. Exposure to
the internet stocks was trimmed back after their explosive move following the
October 8 low through December. The managers are focusing on the highest quality
infrastructure leaders within the Account's internet exposure. The long-term
growth prospects for the software application integration industry and holdings
of New Era of Networks and TSI International Software continue to be viewed
favorably. Fundamentals within the semiconductor sector remained strong in 1998,
particularly within the suppliers to the communications infrastructure.

Within healthcare the managers continue to focus on drug companies with strong
pipelines and reasonable valuations. Biotechnology growth prospects remain
robust and outperformed nicely during 1998. The Account continues to be
underweighted in the energy sector, which has been abysmal. Although valuations
are at cyclical lows, the stocks are trading on inventory changes and there is
further downside to earnings. The Manager will wait until supply/demand
fundamentals improve and pricing stabilizes to increase exposure.

For small caps at the end of 1998, the .78 relative multiple on the Russell 2000
versus the S&P 500, is much below the 1.03 level reached in 1990, when small
caps outperformed their large cap brothers. Although this relative valuation
point is quite bullish for small caps, absolute valuations for both indexes are
not cheap. The account managers expect the market will move sideways over the
near term, digesting the gains of the fourth quarter. The high valuations of
stocks will allow for no margin of error in earnings estimates in 1999.

SmallCap Value Account
(Stephen Rich and Denise Higgins)

- -------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
-15.06%* -- --

* - Since Inception Date 5/1/98
- -------------------------------------------

Comparison of Change in Value of $10,000 Investment in the SmallCap Value
Account, Lipper Small-Cap Fund Average and Russell 2000 Value Index

SmallCap Lipper Russell 2000
Value Small-Cap Value
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ -----
10,000 10,000 10,000
1998 8,494 8,873 8,592

Note: Past performance is not predictive of future performance.

This is an eight month review of the SmallCap Value Account as the inception of
the Account was May 1, 1998. The past eight months have been an extremely
challenging environment to manage small cap portfolios. After peaking in
mid-April, the small cap market declined over 21% from May to September. By many
estimations small cap stocks were truly in a bear market. In was not until
October, that the small cap market showed signs of recovering after sinking to a
27 month low on October 8. At that point, the Russell 2000 Value Index staged
one of its strongest rallies in recent history and finished the quarter up 9.1%.
The rally was widespread and stimulated by four events; (1) the Federal
Reserve's unexpected interest rate cut, (2) perceived cheap valuations, (3)
decent earnings prospects for small cap companies, and (4) seasonal buying
patterns of investors.

The SmallCap Value Account invests primarily in small and medium sized U.S.
companies whose market capitalizations are greater than $100 million and less
than $1.5 billion. Industry by industry, the Account's sector weights are
similar to those of the Russell 2000 Value Index. The Account can moderately
overweight or underweight industries when it believes it will benefit
performance. However, the primary source of added value is through stock
selection. J.P. Morgan has 23 industry analysts who conduct fundamental research
on over 450 companies in the small cap universe. Within each sector, stocks are
ranked using a Dividend Discount Model. The Account purchases the stocks that
are most undervalued and sells the stocks that are most overvalued. In addition,
the Account will sell stocks that have become to large to hold in a small cap
portfolio.

For the eight months ending December 31, 1998 the Account (net of fees)
marginally trailed the Russell 2000 Value index. It was during the volatile
period of May to September the Account encountered the most difficulty. During
this period, many small cap managers experienced difficulties as investors
indiscriminately sold the asset class and moved to the safety of large cap
stocks. In this environment, it did not matter if you held "good or bad" small
cap companies because they were all painted with the same brush. This actually
provided the managers with an opportunity to "upgrade" the Account with some
high quality stocks that had appeared overvalued earlier in the year. This
strategy seemed to pay off in the fourth quarter as investors re-entered the
small cap market. As a result, in the fourth quarter, the Account outperformed
the benchmark by a wide margin making up most of the ground lost earlier in the
year. The best performing sectors for the Account over this eight month period
were Basic Industry, Technology Hardware, and Reits. The worst performing
sectors included Consumer Cyclical, Capital Good, and Multi-Industry. Individual
stocks contributing the most included Universal Forest Products (+13%) and D.R.
Horton (+25%) while Mueller Industries (-40%) and Colonial Bancgroup (-32%)
detracted. Going forward, the account managers feel the portfolio is well
balanced and positioned to deal with the volatile markets while providing
consistent exposure to the small cap value market.

Given the prolonged underperformance of the small cap market and relative
valuation, the managers continue to believe that small cap stocks are attractive
absolutely and relatively to large cap stocks.

Utilities Account
(Catherine A. Zaharis)

- -------------------------------------------------
Total Returns
As of December 31, 1998
1 Year 5 Year 10 Year
15.36%* -- --

* - Since Inception Date 5/1/98
- -------------------------------------------------

Comparison of Change in Value of $10,000 Investment in the Utilities Account,
Lipper Utilities Fund Average and Dow Jones Utilities Index with Income Fund
Average

Lipper Dow Jones Utilities
Utilities Utilities Index with Income
Year Ended December 31, Account Fund Average Fund Average
---------------------- ------- ------------ ------------
10,000 10,000 10,000
1998 11,536 10,957 10,250

Note: Past performance is not predictive of future performance.

The Utilities Account enjoyed a strong year where performance was enhanced by
the strong performance of both electric and telephone companies. During the
market gyrations of the third quarter, utilities stocks led the way providing
some of the stronger sector returns for the quarter. Continuing consolidation in
this industry as a key driver of returns has also been seen.

The telephone industry has been a story of continued strong unit growth. The
usage of all aspects of telecommunications is growing and has aided relative
return. This is true for both local and long distance companies, as well as
newer entrants into this industry.

The Account's portfolio continues to focus on certain companies in both areas of
the utilities industry. The managers are looking for those companies where a
strategy has been determined to move the company forward in a competitive
environment. The managers look at the strategy, the company's strengths and
weaknesses, and determine whether the company has the strengths and skills to
reach its goals. Valuations are then looked at to determine whether these
companies can be purchased at attractive prices. The account manager's goal is
to find the winners in this new environment.

Important Notes of the Growth-Oriented Accounts:

Dow Jones Utility Index with Income: This average is a price-weighted average of
15 utility companies that are listed on the New York Stock Exchange and are
involved in the production of electrical energy.

Lehman Brothers Government/Corporate Bond Index: This index consists of publicly
issued securities from the Government Index and the Corporate Index. The
Government Index includes U.S. Treasuries and Agencies. The Corporate Index
includes U.S. Corporate and Yankee debentures and secured notes from the
Industrial, Utility, Finance, and Yankee categories.

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 currently contains 409 mutual funds.

Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average currently contains 208 funds.

Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 980 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 currently contains 768 funds.

Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 527 funds.

Lipper International Small-Cap Funds Average: This average consists of funds
which invest at least 65% of their assets in equity securities of non-United
States companies with market capitalizations less than U.S. $1 billion at the
time of purchase. The one-year average currently contains 59 funds.

Lipper Micro-Cap Fund Average: This average consists of funds which invest
primarily in companies with a market captalization of less than $300 million at
the time of purchase. The one-year average currently contains 45 funds.

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 currently contains 327 funds.

Lipper Real Estate Fund Average: This average consists of funds which invest 65%
of their equity portfolio in equity securities of domestic and foreign companies
engaged in the real estate industry. The one-year average currently contains 100
funds.

Lipper Small-Cap Fund Average: This average consists of funds which invest
primarily in companies with market capitalizations less than $1 billion at the
time of purchase. The one-year average currently contains 638 funds.

Lipper Utilities Fund Average: This average consists of funds which invest 65%
of their equity portfolio in utility shares. The one-year average currently
contains 102 funds.

Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of more
than 900 securities which are listed on the stock exchanges of the following
countries: Australia, Austria, Belgium, Denmark, Netherlands, New Zealand,
Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the United Kingdom.

Morgan Stanley REIT Index: This is a capitalization-weighted index of the most
actively traded real estate investment trusts, and is designed to be a measure
of real estate equity performance.

Russell 200 Index: This index measures the performance of the 200 largest
companies in the Russell 1000 Index, which represents approximately 65% of the
total market capitalization of the Russell 1000 Index.

Russell 2000 Growth Index: This index measures the performance of those Russell
2000 companies with higher price-to-book ratios and lower forecasted growth
values.

Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower price-to-book ratios and lower forecasted growth values.

Standard & Poor's 500 Stock Index: This is 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.

Standard & Poor's 600 Index: This is a market-value weighted index consisting of
600 domestic stocks chosen for market size, liquidity and industry group
representation.

Standard & Poor's MidCap 400 Index: This index measures the performance of the
mid-size company segmant of the U.S. Market.

Income-Oriented Accounts:

Bond Account
(Scott A. Bennett)

- ------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 year
- ------------------------------------------
7.69% 7.66% 9.46%
- ------------------------------------------

Comparison of Change in Value of $10,000 Investment in the Bond Account, Lipper
Corporate Debt BBB Rated Fund Average and Lehman Brothers BAA Corporate Index

Lehman Lipper
Brothers Corporate Debt
Year Ended Bond BAA Corporate BBB Rated Fund
December 31, Account* Index Avgerage
----------- ------- ----- --------
10,000 10,000 10,000
1989 11,386 11,366 11,064
1990 11,980 11,966 11,698
1991 13,982 14,277 13,780
1992 15,294 15,619 14,916
1993 17,078 17,638 16,753
1994 16,583 17,074 16,006
1995 20,259 20,953 19,219
1996 20,738 21,795 19,832
1997 22,935 24,215 21,831
1998 24,698 24,525 23,195

Note: Past performance is not predictive of future performance.

The Bond Account performed well in a tough market environment during 1998. The
Account outperformed the Lehman Brothers BAA Corporate Index as well as the
Lipper Corporate BBB average because of the relatively higher credit quality
emphasis and a somewhat longer duration.

Investors demanded quality in 1998 with U.S. Treasuries being in the unusual
position of posting the highest returns in the fixed income market. Corporate
bonds underperformed Treasuries but benefited from the decline in Treasury
yields during the year, resulting in relatively high absolute returns. The
markets returned to a more normal mode in the fourth quarter as investors began
to reconsider the impact of emerging market problems, hedge-fund difficulties
and were reassured by Federal Reserve interest rate cuts.

The managers positioned the Account with a quality emphasis during the year,
adding higher rated bonds and investing predominately in U.S., safe haven
sectors (agencies, communications, and utilities). The account manager's
long-term outlook for the global economy improved during the fourth quarter, as
did the condition of the fixed income markets. The Account was an active player
in a rejuvenated new issue market and was paid well to participate in industries
the managers favored (U.S., non-commodity industries) as the market regained its
footing. Strategy going into 1999 is to return to a more normal credit quality
mix and take advantage of still historically high premium for investing in
corporate bonds.

Government Securities Account
(Martin J. Schafer)

- --------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
8.27% 7.02% 9.35%
- --------------------------------------------

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

Lehman Lipper
Government Brothers U.S. Mortgage
Securities Mortgage Fund
Year Ended December 31, Account Index Average
- ---------------------- ------- ------ -------
10,000 10,000 10,000
1989 11,559 11,535 11,258
1990 12,663 12,772 12,314
1991 14,809 14,779 14,135
1992 15,822 15,809 14,999
1993 17,416 16,891 16,116
1994 16,626 16,619 15,444
1995 19,797 19,411 17,951
1996 20,460 20,449 18,646
1997 22,585 22,390 20,245
1998 24,453 23,948 21,476

Note: Past performance is not predictive of future performance.

Interest rates declined significantly over the last twelve months, with medium
and long rates down about 1%. Bond prices, which move in the opposite direction
of interest rates, moved up, which led to another 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.

The key to 1998 was the U.S. Federal Reserve. By decisively reducing the Federal
Funds rate from 5.50% to 4.75% during the pinnacle of global risk, then holding
rates steady in December, the Fed demonstrated its commitment to maintaining
reasonable growth in the U.S. The actions of the Federal Reserve restored a
certain amount of calm and order to a very volatile and illiquid market. By
staying pat on rates in December, the Fed also signaled that the U.S. economy
was still very strong, with modest growth, low inflation and low unemployment.

Portfolio management views the economic outlook as range-bound for U.S. interest
rates. With the absolute level of interest rates being relatively low, the
managers are moving the duration of this account closer to the Lehman MBS Index
and are shortening as opportunities present themselves.

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.

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 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
currently contains 99 mutual funds.

Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 73 mutual funds.

Note: Mutual fund data from Lipper Inc.

GENERAL INFORMATION ABOUT AN ACCOUNT

Eligible Purchasers
Only certain eligible purchasers may buy shares of the Accounts. Eligible
purchasers are limited to 1) separate accounts of Principal Life Insurance
Company or of other insurance companies, 2) Principal Life Insurance Company or
any of its subsidiaries or affiliates, 3) trustees of other managers of any
qualified profit sharing, incentive or bonus plan established by Principal Life
Insurance Company or any of its subsidiaries or affiliates for employees of such
company, subsidiary or affiliate. Such trustees or managers may buy 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 purchaser.

Each Account serves as the underlying investment vehicle for variable annuity
contracts and variable life insurance policies that are funded through separate
accounts established by Principal Life. It is possible that in the future, it
may not be advantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Accounts at the same time.
Although neither Principal Life nor the Fund currently foresees any such
disadvantage, the Fund's Board of Directors monitors events in order to identify
any material conflicts between such policy owners and contract holders. Material
conflict 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 an
Account, or 4) differences in voting instructions between those given by policy
owners and those given by contract holders. Should it be necessary, the Board
would determine what action, if any, should be taken. Such action could include
the sale of Account shares by one or more of the separate accounts which could
have adverse consequences.

Shareholder Rights
The following information applies to each Account of the Principal Variable
Contracts Fund, Inc. Each Account share is eligible to 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 auditors and
other matters submitted to meetings of shareholders of the Account. Each share
has equal rights with every other share of the Account as to dividends,
earnings, voting, assets and redemption. Shares are fully paid, non-assessable
and have no preemptive or conversion rights. Shares of an Account are issued as
full or fractional shares. 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 case 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 the
authority to issue, without a shareholder vote.

The bylaws of the Fund also provide that the Fund does not need to hold an
annual meeting of shareholders unless one of the following is required to be
acted upon by shareholders under the Investment Company Act of 1940: election of
directors, approval of an investment advisory agreement, ratification of the
selection of independent auditors, and approval of the distribution agreement.
The Fund intends to hold shareholder meetings only when required by law and at
such other times when the Board of Directors deems it to be appropriate.

Shareholder inquiries should be directed to: Principal Variable Contracts Fund,
Inc., Principal Financial Group, Des Moines, Iowa 50392-0200.

Non-Cumulative Voting
The Fund's shares have non-cumulative voting rights. This means that the holders
of more than 50% if the shares voting for the election of directors of the Fund
can elect 100% of the directors if they choose to do so. In such event, the
holders of the remaining shares voting for the election of directors will not be
able to elect any directors.

Principal Life 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 in
the separate accounts. The shares are voted in accordance with instructions
received from contract holders, policy owners, participants and annuitants.
Other shares of each Account held by each separate account, including shares for
which no timely voting instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating that separate account. Shares of each of the Accounts held in the
general account of Principal Life or in the 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 Life determines, under applicable law, that an Account's
shares held in one or more separate accounts or in its general account need not
be voted according to the instructions that are received, it may vote those
Account shares in its own right.

Purchase of Account Shares
Shares are purchased from Princor Financial Services Corporation, the Fund's
principal underwriter. There are no sales charges on shares of the Accounts.
There are not restrictions on amounts to be invested in shares of the Accounts.

Shareholder accounts for each Account are maintained under an open account
system. Under this system, an account is opened and maintained for each
investor. Each investment is confirmed by sending the investor a statement of
account showing the current purchase and the total number of shares owned. The
statement of account is treated by each Account as evidence of ownership of
Account shares. Share certificates are not issued.

Sale of Account Shares
This section applies to eligible purchasers other than the separate accounts of
Principal Life and its subsidiaries.

Each Account sells its shares upon request. There is no charge for the sale. A
shareholder sends a written request to the Account requesting the sale 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
shareholder, the Account does not require a signature guarantee. If payment is
to be made to another party, the shareholder's signature(s) must be guaranteed
by a commercial bank, trust company, credit union, savings and loan association,
national securities exchange member or brokerage firm. Shares are redeemed at
the net asset value per share next computed after the required is received by
the Account in proper and complete form.

Sales proceeds are generally sent within three business days after the request
is received in proper form. However, the right to sell shares may be suspended
during any period when 1) trading on the New York Stock Exchange is restricted
as determined by the SEC or when the Exchange is closed for other than weekends
and holidays, or 2) an emergency exists, as determined by the SEC, as a result
of which i) disposal by a fund of securities owned by it is not reasonably
practicable, ii) it is not reasonably practicable for a fund to fairly determine
the value of its net assets; or iii) the SEC permits suspension for the
protection of security holders.

If payments are delayed and the instruction is not canceled by the shareholder's
written instruction, the amount of the transaction is determined as of the first
valuation date following the expiration of the permitted delay.
The transaction occurs within five days thereafter.

In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.

Restricted Transfers
Shares of each of the Accounts may be transferred to an eligible purchaser.
However, if an Account is requested to transfer shares to other than an eligible
purchaser, the Account has the right, at its election, to purchase the shares at
the net asset value next calculated after the receipt of the transfer request.
However, the Account must give written notification to the transferee(s) of the
shares of the election to buy the shares within seven days of the request.
Settlement for the shares shall be made within the seven day period.

Year 2000 Readiness Disclosure
The business operations of the Fund depend on computer systems that contain date
fields. These systems include securities transfer agent operations and
securities pricing systems. Many of these systems were constructed using a two
digit date field to represent the date. Unless these systems are changed or
modified, they may not be able to distinguish the Year 1900 from the Year 2000
(commonly referred to as the Year 2000 Problem).

When the Year 2000 arrives, the Fund's operations could be adversely affected if
the computer systems used by the Manager, the service providers and other third
parties it does business with are not Year 2000 compliant. For example, the
Accounts' portfolios and operational areas could be impacted, included
securities pricing, dividend and interest payments, shareholder account
servicing and reporting functions. In addition, an Account could experience
difficulties in transactions if foreign broker-dealers or foreign markets are
not Year 2000 compliant.

The Manager relies on public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside of the U.S.,
particularly in emerging countries, may not be required to make the same
disclosures about their readiness as are required in the U.S. It is likely that
if a company an Account invests in is adversely affected by Year 2000 problems,
the price of its securities will also be negatively impacted. A decrease in
value of one or more of an Account's securities will decrease that Account's
share price.

The Manager and affiliated service providers are working to identify their Year
2000 problems and taking steps they reasonably believe will address these
issues. This process began in 1996 with the identification of product vendors
and service providers as well as the internal systems that might be impacted.

At this time, testing of internal systems has been completed. The Manager is now
participating in a corporate-wide initiative lead by senior management
representatives of Principal Life. Currently they are engaged in regression
testing of internal programs. They are also participating in development of
contingency plans in the event that Year 2000 problems develop and/or persist on
or after January 1, 2000. The contingency plan calls for:
o identification of business risks;
o consideration of alternative approaches to critical business risks; and
o development of action plans to address problems.

Other important Year 2000 initiatives include:
o the service provider for our transfer agent system has renovated its code.
Client testing will occur in the first and second quarters of 1999. The
service provider is also participating in a securities industry wide
testing program;
o the securities pricing system we use has renovated its code and conducted
client testing in June 1998;
o Facilities Management of Principal Life has identified non-systems issues
(heat, lights, water, phone, etc.) and is working with these service
providers to ensure continuity of service; and
o the Manager and other areas of Principal Life have contacted all vendors
with which we do business to receive assurances that they are able to deal
with any Year 2000 problems. We continue to work with the vendors to
identify any areas of risk.

In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.

Financial Statements
You will receive an annual financial statement for the Fund, examined by the
Fund's independent auditors, Ernst & Young LLP. That report is a part of this
prospectus. You will also receive a semiannual financial statement that is
unaudited. The following financial highlights are based on financial statements
that were audited by Ernst & Young LLP.

<TABLE>

FINANCIAL HIGHLIGHTS

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

<CAPTION>
AGGRESSIVE GROWTH ACCOUNT(a) 1998 1997 1996 1995 1994(b)
- ------------------------- ------------------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.30 $14.52 $12.94 $10.11 $9.92
Income from Investment Operations:
Net Investment Income............................... .04 .04 .11 .13 .05
Net Realized and Unrealized Gain (Loss) on Investments 2.99 4.26 3.38 4.31 .24
Total from Investment Operations 3.03 4.30 3.49 4.44 .29
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.04) (.11) (.13) (.05)
Distributions from Capital Gains.................... (.96) (2.48) (1.80) (1.48) (.05)
Total Dividends and Distributions (1.00) (2.52) (1.91) (1.61) (.10)
Net Asset Value, End of Period......................... $18.33 $16.30 $14.52 $12.94 $10.11

Total Return........................................... 18.95% 30.86% 28.05% 44.19% 2.59%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $224,058 $149,182 $90,106 $33,643 $13,770
Ratio of Expenses to Average Net Assets............. .78% .82% .85% .90% 1.03%(d)
Ratio of Net Investment Income to Average Net Assets .22% .29% 1.05% 1.34% 1.06%(d)
Portfolio Turnover Rate............................. 155.6% 172.6% 166.9% 172.9% 105.6%(d)

ASSET ALLOCATION ACCOUNT(a) 1998 1997 1996 1995 1994(b)
- ------------------------ ------------------ ---- ---- ----
Net Asset Value, Beginning of Period................... $11.94 $11.48 $11.11 $9.79 $9.98
Income from Investment Operations:
Net Investment Income............................... .31 .30 .36 .40 .23
Net Realized and Unrealized Gain (Loss) on Investments .76 1.72 1.06 1.62 (.18)
Total from Investment Operations 1.07 2.02 1.42 2.02 .05
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.31) (.30) (.36) (.40) (.23)
Distributions from Capital Gains.................... (.40) (1.26) (.69) (.30) --
Excess Distributions from Capital Gains(e).......... -- -- -- -- (.01)
Total Dividends and Distributions (.71) (1.56) (1.05) (.70) (.24)
Net Asset Value, End of Period......................... $12.30 $11.94 $11.48 $11.11 $9.79

Total Return........................................... 9.18% 18.19% 12.92% 20.66% .52%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $84,089 $76,804 $61,631 $41,074 $28,041
Ratio of Expenses to Average Net Assets............. .89% .89% .87% .89% .95%(d)
Ratio of Net Investment Income to Average Net Assets 2.51% 2.55% 3.45% 4.07% 4.27%(d)
Portfolio Turnover Rate............................. 162.7% 131.6% 108.2% 47.1% 60.7%(d)
</TABLE>

See accompanying notes.

<TABLE>
Selected data for a share of Capital Stock outstanding throughout each
year ended December 31:

Total Return........................................... 11.91% 17.93% 13.13% 24.58% (2.09)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $198,603 $133,827 $93,158 $45,403 $25,043
Ratio of Expenses to Average Net Assets............. .59% .61% .63% .66% .69%
Ratio of Net Investment Income to Average Net Assets 3.37% 3.26% 3.45% 4.12% 3.42%
Portfolio Turnover Rate............................. 24.2% 69.7% 22.6% 25.7% 31.5%

Total Return........................................... 7.69% 10.60% 2.36% 22.17% (2.90)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $121,973 $81,921 $63,387 $35,878 $17,108
Ratio of Expenses to Average Net Assets............. .51% .52% .53% .56% .58%
Ratio of Net Investment Income to Average Net Assets 6.41% 6.85% 7.00% 7.28% 7.86%
Portfolio Turnover Rate............................. 26.7% 7.3% 1.7% 5.9% 18.2%
</TABLE>

FINANCIAL HIGHLIGHTS (Continued)

<TABLE>
PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each
year ended December 31:

Total Return........................................... 13.58% 28.53% 23.50% 31.91% .49%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $385,724 $285,231 $205,019 $135,640 $120,572
Ratio of Expenses to Average Net Assets............. .44% .47% .49% .51% .51%
Ratio of Net Investment Income to Average Net Assets 2.07% 2.13% 2.06% 2.25% 2.36%
Portfolio Turnover Rate............................. 22.0% 23.4% 48.5% 49.2% 44.5%

GOVERNMENT SECURITIES ACCOUNT(a) 1998 1997 1996 1995 1994
- ----------------------------- ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $10.72 $10.31 $10.55 $9.38 $10.61
Income from Investment Operations:
Net Investment Income............................... .60 .66 .59 .60 .76
Net Realized and Unrealized Gain (Loss) on Investments .28 .41 (.24) 1.18 (1.24)
Total from Investment Operations .88 1.07 .35 1.78 (.48)
Less Dividends from Net Investment Income.............. (.59) (.66) (.59) (.61) (.75)
Net Asset Value, End of Period......................... $11.01 $10.72 $10.31 $10.55 $9.38

Total Return........................................... 8.27% 10.39% 3.35% 19.07% (4.53)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $141,317 $94,322 $85,100 $50,079 $36,121
Ratio of Expenses to Average Net Assets............. .50% .52% .52% .55% .56%
Ratio of Net Investment Income to Average Net Assets 6.15% 6.37% 6.46% 6.73% 7.05%
Portfolio Turnover Rate............................. 11.0% 9.0% 8.4% 9.8% 23.2%
</TABLE>

See accompanying notes.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
<TABLE>

<CAPTION>
GROWTH ACCOUNT(a) 1998 1997 1996 1995 1994(f)
- -------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $17.21 $13.79 $12.43 $10.10 $9.60
Income from Investment Operations:
Net Investment Income............................... .21 .18 .16 .17 .07
Net Realized and Unrealized Gain (Loss) on Investments 3.45 3.53 1.39 2.42 .51
Total from Investment Operations 3.66 3.71 1.55 2.59 .58
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.21) (.18) (.16) (.17) (.08)
Distributions from Capital Gains.................... (.20) (.10) (.03) (.09) --
Excess Distributions from Capital Gains(e).......... -- (.01) -- -- --
Total Dividends and Distributions (.41) (.29) (.19) (.26) (.08)
Net Asset Value, End of Period......................... $20.46 $17.21 $13.79 $12.43 $10.10

Total Return........................................... 21.36% 26.96% 12.51% 25.62% 5.42%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $259,828 $168,160 $99,612 $42,708 $13,086
Ratio of Expenses to Average Net Assets............. .48% .50% .52% .58% .75%(d)
Ratio of Net Investment Income to Average Net Assets 1.25% 1.34% 1.61% 2.08% 2.39%(d)
Portfolio Turnover Rate............................. 9.0% 15.4% 2.0% 6.9% 0.9%(d)

INTERNATIONAL ACCOUNT(a) 1998 1997 1996 1995 1994(f)
- --------------------- ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $13.90 $13.02 $10.72 $9.56 $9.94
Income from Investment Operations:
Net Investment Income............................... .26 .23 .22 .19 .03
Net Realized and Unrealized Gain (Loss) on Investments 1.11 1.35 2.46 1.16 (.33)
Total from Investment Operations 1.37 1.58 2.68 1.35 (.30)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.25) (.23) (.22) (.18) (.05)
Excess Distributions from Net Investment Income(e).. -- -- -- -- (.02)
Distributions from Capital Gains.................... (.51) (.47) (.16) (.01) (.01)
Total Dividends and Distributions (.76) (.70) (.38) (.19) (.08)
Net Asset Value, End of Period......................... $14.51 $13.90 $13.02 $10.72 $9.56

Total Return........................................... 9.98% 12.24% 25.09% 14.17% (3.37)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $153,588 $125,289 $71,682 $30,566 $13,746
Ratio of Expenses to Average Net Assets............. .77% .87% .90% .95% 1.24%(d)
Ratio of Net Investment Income to Average Net Assets 1.80% 1.92% 2.28% 2.26% 1.31%(d)
Portfolio Turnover Rate............................. 33.9% 22.7% 12.5% 15.6% 14.4%(d)
</TABLE>

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

INTERNATIONAL SMALLCAP ACCOUNT 1998(g)
- ------------------------------ ----
Net Asset Value, Beginning of Period................... $9.97
Income from Investment Operations:
Net Investment Income............................... .01
Net Realized and Unrealized Gain (Loss) on Investments (.95)
Total from Investment Operations (.94)
Less Dividends from Net Investment Income.............. (.03)
Net Asset Value, End of Period......................... $9.00

Total Return........................................... (10.37)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $13,075
Ratio of Expenses to Average Net Assets............. 1.34%(d)
Ratio of Net Investment Income to Average Net Assets .24%(d)
Portfolio Turnover Rate............................. 60.3%(d)

MICROCAP ACCOUNT 1998(g)
- ---------------- ----
Net Asset Value, Beginning of Period................... $10.04
Income from Investment Operations:
Net Investment Income............................... .03
Net Realized and Unrealized Gain (Loss) on Investments 1.86)
Total from Investment Operations (1.83)
Less Dividends from Net Investment Income.............. (.04)
Net Asset Value, End of Period......................... $8.17

Total Return........................................... (18.42)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $5,384
Ratio of Expenses to Average Net Assets............. 1.38%(d)
Ratio of Net Investment Income to Average Net Assets 0.57%(d)
Portfolio Turnover Rate............................. 55.3%(d)

See accompanying notes.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

<TABLE>

<CAPTION>
MIDCAP ACCOUNT(a) 1998 1997 1996 1995 1994
- -------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $35.47 $29.74 $25.33 $19.97 $20.79
Income from Investment Operations:
Net Investment Income............................... .22 .24 .22 .22 .14
Net Realized and Unrealized Gain (Loss) on Investments .94 6.48 5.07 5.57 .03
Total from Investment Operations 1.16 6.72 5.29 5.79 .17
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.22) (.23) (.22) (.22) (.14)
Distributions from Capital Gains.................... (2.04) (.76) (.66) (.21) (.85)
Total Dividends and Distributions (2.26) (.99) (.88) (.43) (.99)
Net Asset Value, End of Period......................... $34.37 $35.47 $29.74 $25.33 $19.97

Total Return........................................... 3.69% 22.75% 21.11% 29.01% .78%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $259,470 $224,630 $137,161 $58,520 $23,912
Ratio of Expenses to Average Net Assets............. .62% .64% .66% .70% .74%
Ratio of Net Investment Income to Average Net Assets .63% .79% 1.07% 1.23% 1.15%
Portfolio Turnover Rate............................. 26.9% 7.8% 8.8% 13.1% 12.0%
</TABLE>

MIDCAP GROWTH ACCOUNT 1998(g)
- --------------------- ----
Net Asset Value, Beginning of Period................... $9.94
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.01)
Net Realized and Unrealized Gain (Loss) on Investments (.28)
Total from Investment Operations (.29)
Net Asset Value, End of Period......................... $9.65

Total Return........................................... (3.40%)(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $8,534
Ratio of Expenses to Average Net Assets............. 1.27%(d)
Ratio of Net Investment Income to Average Net Assets (.14)%(d)
Portfolio Turnover Rate............................. 91.9%(d)

FINANCIAL HIGHLIGHTS (Continued)

<TABLE>
PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

<CAPTION>
MONEY MARKET ACCOUNT(a) 1998 1997 1996 1995 1994
- -------------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income............................... .051 .051 .049 .054 .037
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
Total from Investment Operations .051 .051 .049 .054 .037
Less Dividends from Net Investment Income.............. (.051) (.051) (.049) (.054) (.037)
Net Asset Value, End of Period......................... $1.000 $1.000 $1.000 $1.000 $1.000

Total Return........................................... 5.20% 5.04% 5.07% 5.59% 3.76%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $83,263 $47,315 $46,244 $32,670 $29,372
Ratio of Expenses to Average Net Assets............. .52% .55% .56% .58% .60%
Ratio of Net Investment Income to Average Net Assets 5.06% 5.12% 5.00% 5.32% 3.81%
</TABLE>

REAL ESTATE ACCOUNT 1998(g)
- ------------------- ----
Net Asset Value, Beginning of Period................... $10.01
Income from Investment Operations:
Net Investment Income............................... .32
Net Realized and Unrealized Gain (Loss) on Investments (.97)
Total from Investment Operations (.65)
Less Dividends from Net Investment Income.............. (.29)
Net Asset Value, End of Period......................... $9.07

Total Return........................................... (6.56)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $10,909
Ratio of Expenses to Average Net Assets............. 1.00%(d)
Ratio of Net Investment Income to Average Net Assets 5.40%(d)
Portfolio Turnover Rate............................. 5.6%(d)

SMALLCAP ACCOUNT 1998(g)
- ---------------- ----
Net Asset Value, Beginning of Period................... $10.27
Income from Investment Operations:
Net Investment Income............................... --
Net Realized and Unrealized Gain (Loss) on Investments (2.06)
Total from Investment Operations (2.06)
Net Asset Value, End of Period......................... $8.21

Total Return........................................... (20.51)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $12,094
Ratio of Expenses to Average Net Assets............. .98%(d)
Ratio of Net Investment Income to Average Net Assets (.05)%(d)
Portfolio Turnover Rate............................. 45.2%(d)

See accompanying notes.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

SMALLCAP GROWTH ACCOUNT 1998(g)
- ----------------------- ----
Net Asset Value, Beginning of Period................... $9.84
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.04)
Net Realized and Unrealized Gain (Loss) on Investments .30
Total from Investment Operations .26
Net Asset Value, End of Period......................... $10.10

Total Return........................................... 2.96%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $8,463
Ratio of Expenses to Average Net Assets............. 1.31%(d)
Ratio of Net Investment Income to Average Net Assets (.80)%(d)
Portfolio Turnover Rate............................. 166.5%(d)

SMALLCAP VALUE ACCOUNT 1998(g)
- ---------------------- ----
Net Asset Value, Beginning of Period................... $9.84
Income from Investment Operations:
Net Investment Income............................... .03
Net Realized and Unrealized Gain (Loss) on Investments (1.50)
Total from Investment Operations (1.47)
Less Dividends from Net Investment Income.............. (.03)
Net Asset Value, End of Period......................... $8.34

Total Return........................................... (15.06)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,895
Ratio of Expenses to Average Net Assets............. 1.56%(d)
Ratio of Net Investment Income to Average Net Assets .73%(d)
Portfolio Turnover Rate............................. 53.4%(d)

UTILITIES ACCOUNT 1998(g)
- ----------------- ----
Net Asset Value, Beginning of Period................... $9.61
Income from Investment Operations:
Net Investment Income............................... .15
Net Realized and Unrealized Gain (Loss) on Investments 1.35
Total from Investment Operations 1.50
Less Dividends from Net Investment Income.............. (.18)
Net Asset Value, End of Period......................... $10.93

Total Return........................................... 15.36%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $18,298
Ratio of Expenses to Average Net Assets............. .69%(d)
Ratio of Net Investment Income to Average Net Assets 2.93%(d)
Portfolio Turnover Rate............................. 9.5%(d)

FINANCIAL HIGHLIGHTS (Continued)

Notes to Financial Highlights

(a) Effective January 1, 1998 the following mutual funds were reorganized into
the Principal Variable Contracts Fund, Inc. as follows:

Former Fund Name Current Account Name
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal World Fund, Inc. International Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Money Market Fund, Inc. Money Market Account

(b) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
the Aggressive Growth Account and $.01 per share for the Asset Allocation
Account for the period from the initial purchase of shares on May 23, 1994
through May 31, 1994, was recognized, none of which was distributed to the
sole shareholder, Principal Life Insurance Company, during the period.
Additionally, the Aggressive Growth Account and the Asset Allocation
Account incurred unrealized losses on investments of $.09 and $.03 per
share, respectively, during the initial interim period. This represented
activities of each account prior to the initial public offering of account
shares.

(d) Computed on an annualized basis.

(e) Dividends and distributions which exceed net investment income and net
realized gains for financial reporting purposes but not for tax purposes
are reported as dividends in excess of net investment income or
distributions in excess of net realized gains on investments. To the extent
distributions exceed current and accumulated earnings and profits for
federal income tax purposes, they are reported as tax return of capital
distributions.

(f) Period from May 1, 1994, date shares first offered to the public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
the Growth Account and $.04 per share for the International Account for the
period from the initial purchase of shares on March 23, 1994 through April
30, 1994, was recognized, none of which was distributed to the sole
shareholder, Principal Life Insurance Company, during the period.
Additionally, the Growth Account and the International Account incurred
unrealized losses on investments of $.41 and $.10 per share, respectively,
during the initial interim period. This represented activities of each
account prior to the initial public offering of account shares.

(g) Period from May 1, 1998, date shares first offered to the public, through
December 31, 1998. Per share net investment income and realized and
unrealized gains (losses) for the period from the initial purchase of
shares through April 30, 1998, were recognized as follows, none of which
was distributed to the sole shareholder, Principal Life Insurance Company,
during the period. This represents activities of each account prior to the
initial public offering.

Date Net Per Share Realized
Operations Investment and Unrealized
Account Commenced Income Gains (Losses)

International SmallCap Account April 16, 1998 $.02 $(.05)
MicroCap Account April 9, 1998 .01 .03
MidCap Growth Account April 23, 1998 .01 (.07)
Real Estate Account April 23, 1998 .01 --
SmallCap Account April 9, 1998 -- .27
SmallCap Growth Account April 2, 1998 -- (.16)
SmallCap Value Account April 16, 1998 .01 (.17)
Utilities Account April 2, 1998 .04 (.43)

Additional information about the Fund is available in the Statement of
Additional Information dated May 1, 1999 and which is part of this prospectus.
Information about the Fund's investments is also available in the Fund's annual
and semi-annual reports to shareholders. In the Fund's annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Statement of Additional Information and annual and semi-annual reports can be
obtained free of charge by writing or telephoning Princor Financial Services
Corporation, P.O. Box 10423, Des Moines, IA 50306.
Telephone 1-800-451-5447.

Information about the Fund can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 800-SEC-0330. Reports and other information about the Fund are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.

The U.S. Government does not insure or guarantee an investment in the Fund.

Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, nor are shares of the Fund federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.

Principal Variable Contracts Fund, Inc. SEC File 811-01944

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ACCOUNTS OF THE FUND

Blue Chip Account
Bond Account
Capital Value Account
International Account
LargeCap Growth Account
MidCap Account
MidCap Growth Account
MidCap Value Account
Money Market Account
SmallCap Account
SmallCap Growth Account
Stock Index 500 Account

This Prospectus describes a mutual fund organized by Principal Life Insurance
Company. The Fund provides a choice of investment objectives through the
accounts listed above.

The date of this Prospectus is May 1, 1999.

TABLE OF CONTENTS

ACCOUNT DESCRIPTIONS .................................................. 4
Annual operating expenses.......................................... 4
Principal investment strategy...................................... 4
Day-to-day Account management...................................... 4
Account Performance................................................ 5

Blue Chip Account.................................................. 6
Bond Account....................................................... 8
Capital Value Account.............................................. 10
International Account.............................................. 12
LargeCap Growth Account............................................ 14
MidCap Account..................................................... 16
MidCap Growth Account.............................................. 18
MidCap Value Account............................................... 20
Money Market Account............................................... 22
SmallCap Account................................................... 24
SmallCap Growth Account............................................ 26
Stock Index 500 Account............................................ 28

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS......................... 30

PRICING OF ACCOUNT SHARES............................................... 34

DIVIDENDS AND DISTRIBUTIONS............................................. 35
Growth-Oriented and Income-Oriented Accounts....................... 35
Money Market Account............................................... 35

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE.......................... 36
The Manager........................................................ 36
The Sub-Advisors................................................... 36

GENERAL INFORMATION ABOUT AN ACCOUNT.................................... 38
Shareholders Rights................................................ 38
Purchase of Account Shares......................................... 39
Sale of Account Shares............................................. 39
Year 2000 Readiness Disclosure..................................... 40
Financial Statements............................................... 41

FINANCIAL HIGHLIGHTS.................................................... 42
Notes to Financial Highlights...................................... 46

ACCOUNT DESCRIPTIONS

The Principal Variable Contracts Fund is made up of several different Accounts.
Each Account has its own investment objective.

In the description for each Account, you will find important information about
the Account's:

Annual operating expenses
The annual operating expenses for each Account are deducted from Account assets
(stated as a percentage of Account assets) and are shown as of the end of the
most recent fiscal year. Estimates of the expenses are shown for the new
Accounts. The example is intended to help you compare the cost of investing in a
particular Account with the cost of investing in other mutual funds. The example
assumes you invest $10,000 in an Account for the time periods indicated. The
example also assumes that your investment has a 5% total return each year and
that the Account's operating expenses are the same as the most recent fiscal
year expenses (or estimated expenses for a new Account). Although your actual
costs may be higher or lower, based on these assumptions, your costs would be as
shown.

Principal investment strategy
This section summarizes how the Account intends to achieve its investment
objective. It identifies the Account's principal investment strategy (including
the type or types of securities in which the Account invests) and any policy to
concentrate in securities of issuers in a particular industry or group of
industries.

Day-to-day Account management
The people who manage the assets of each Account are listed with each Account.
Backed by their staffs of experienced securities analysts, they provide the
Accounts with professional investment management.

Principal Management Corporation serves as the manager for the Principal
Variable Contracts Fund. It has signed contracts with various Sub-Advisors under
which the Sub-Advisor provides portfolio management for certain Accounts (see
Management, Organization and Capital Structure).

Sub-Advisor Account
Berger ..Associates ("Berger") SmallCap Growth
Dreyfus Corporation ("Dreyfus") MidCap Growth
Invista Capital Management, LLC Blue Chip, Capital Value, International,
("Invista") MidCap, SmallCap, and Stock Index 500
Janus Capital Corporation ("Janus") LargeCap Growth
Neuberger Berman Management Inc. MidCap Value
.........("Neuberger Berman")

Account Performance
Included in most Account descriptions is a set of tables and a bar chart. As
certain Accounts have not been offered before, no historical information is
available for those Accounts. If historical data is available, the bar chart is
included to provide you with an indication of the risks involved when you
invest. The chart shows changes in the Account's performance from year to year.
As Account shares are sold without a sales charge, the performance reflected in
the chart does not include a sales charge.

If historical information is available for the Account, a table is also included
that compares the Account's average annual total returns for 1, 5 and 10 years
with a broad based securities market index and an average of mutual funds with a
similar investment objective and management style. If the Account has not been
in existence for 10 years, the information provided covers the life of the
Account. The averages used are prepared by Lipper, Inc. (an independent
statistical service). Another table for each Account provides the highest and
lowest quarterly return for that Account's shares during the last 10 years or a
shorter period if the Account has been in existence for less than 10 years.

An Account's past performance is not necessarily an indication of how the
Account will perform in the future.

You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Money Market Account.

Note: Investments in the Accounts are not deposits of a bank and are not insured
or guaranteed by the FDIC or any other government agency.

GROWTH-ORIENTED ACCOUNT

Blue Chip Account

The Blue Chip Account seeks to achieve growth of capital and growth of income.
It invests primarily in common stocks of well-capitalized, established
companies. The Sub-Advisor, Invista, selects the companies it believes to have
the potential for growth of capital, earnings and dividends. Under normal market
conditions, the Account invests at least 65% (and may invest up to 100%) of its
assets in blue chip companies. Blue chip companies are easily identified by:
o size (market capitalization of at least $1 billion)
o good industry position
o established history of earnings and dividends
o superior management structure
o easy access to credit

In addition, the large market of publicly held shares for these companies and
their generally high trading volume results in a relatively high degree of
liquidity for these stocks.

Invista may invest up to 35% of Account assets in equity securities, other than
common stocks, issued by blue chip companies and in equity securities of
companies that do not fit the blue chip definition. It may also invest up to 5%
of Account assets in securities of unseasoned issuers. Unseasoned issuers may be
developing or marketing new products or services for which markets are not yet
established and may never become established. While small, unseasoned companies
may offer greater opportunities for capital growth than larger, more established
companies, they also involve greater risks and should be considered speculative.

Up to 20% of Account assets may be invested in foreign securities. The issuers
of the foreign securities do not have to meet the criteria for blue chip
companies. Foreign stocks carry risks that are not generally found in stocks of
U.S. companies. These include the risk that a foreign security could lose value
as a result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.

While stocks have historically been a leading choice of long-term investors,
they do fluctuate in price. The value of the stocks owned by the Account changes
on a daily basis. The current price reflects the activities of individual
companies and general market and economic conditions. In the short-term, stock
prices can fluctuate dramatically in response to these factors. As a result, the
value of your investment in the Account will go up and down. If you sell your
shares when their value is less than the price you paid, you will lose money.
Because different types of stocks tend to shift in and out of favor depending on
market and economic conditions, the Account's performance may sometimes be lower
or higher than that of other types of funds.

The Blue Chip Account is generally a suitable investment for investors seeking
long-term growth who are willing to accept the risks of investing in common
stocks but who prefer investing in larger, established companies.

Account Performance Information

The example shown below assumes 1) an investment of $10,000, 2) a 5% annual
return and 3) that expenses are the same as the most recent fiscal year
expenses.

- --------------------------------------------------------------------------------
Fund Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees...................... 0.60% $92 $288 N/A N/A
Other Expenses....................... 0.30%
-----
Total Account Operating Expenses 0.90%*

* Estimated
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since May 1999 Mark T. Williams, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1991.

INCOME-ORIENTED ACCOUNT

Bond Account

The Bond Account seeks to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk. It invests in
fixed-income securities. Generally, the Account invests on a long-term basis but
may make short-term investments. Longer maturities typically provide better
yields but expose the Account to the possibility of changes in the values of its
securities as interest rates change. Generally, when interest rates fall, the
price per share rises, and when rates rise, the price per share declines.

The Bond Account has a rating limitation with regard to the quality of the bonds
that are held in its portfolio. The rating limitation applies when the Account
purchases a bond. If the rating on a bond changes while the Account owns it, the
Account is not required to sell the bond. The Statement of Additional
Information ("SAI") contains additional information about bond ratings by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P").

Under normal circumstances, the Account invests at least 65% of its assets in:
o debt securities and taxable municipal bonds;
o rated, at purchase, in one of the top four categories by S&P or Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
o similar Canadian, Provincial or Federal Government securities payable in
U.S. dollars; and
o securities issued or guaranteed by the U.S. Government or its agencies.

Account Performance Information

Lehman Brothers
BAA Corporate
Index 6.96 7.34 9.25
Lipper Corporate
Debt BBB Rated
Fund Average 6.25 7.00 9.19
---------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $52 $164 $285 $640
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.51%
- --------------------------------------------------------------------------------

During the fiscal year ended December 31, 1998, the average ratings of the
Account's assets based on markte value at each mont-end, were as follows (all
ratings are by Moody's):

2.08% in securities rated Aaa
2.78% in securities rated Aa
24.00% in securities rated A
64.55% in securities rated Baa
6.59% in securities rated Ba

Day-to-day Account management:
Since November 1996 Scott A. Bennett, CFA. Assistant Director - Securities
Investment of Principal Capital Management LLC since
1996. Prior thereto, Investment Manager.

GROWTH-ORIENTED ACCOUNT

Capital Value Account

In making selections for the Account's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps are involved in
this analysis are:

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 16.18% 1994 0.49% for the last 10 years
1990 -9.86% 1995 31.91% -----------------------------------
1991 38.67% 1996 23.50% Quarter Ended Return
1992 9.52% 1997 28.53% -----------------------------------
1993 7.79% 1998 13.58% 3/31/91 17.85%
Calendar Years Ended December 31 9/30/90 (17.01%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
Capital Value Account 13.58% 19.03% 15.15%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and Income
Fund Average 15.61 18.53 15.76
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.43% $45 $141 $246 $555
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.44%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since November 1996 Catherine A. Zaharis, CFA. Portfolio Manager of
Invista Capital Management, LLC since 1987.

GROWTH-ORIENTED ACCOUNT

International Account

The International Account seeks to provide long-term growth of capital by
investing in a portfolio of equity securities of companies domiciled in any of
the nations of the world. The Account has no limitation on the percentage of
assets that are invested in any one country or denominated in any one currency.
However under normal market conditions, the Account intends to have at least 65%
of its assets invested in companies of at least three countries. One of those
countries may be the U.S. though currently the Account does not intend to invest
in equity securities of U.S. companies.

Account Performance Information

------------------------------- ----------------------------------------
Annual Total Return Highest & lowest
------------------------------- quarterly total returns
1995 14.17% for the last 5 years
1996 25.09% ----------------------------------------
1997 12.24% Quarter Ended Return
1998 9.98% ----------------------------------------
12/31/98 16.60%
9/30/98 (17.11%)
----------------------------------------
Calendar Years Ended December 31
----------------------------------------------
Average annual total returns
for the period ending December 31, 1989
----------------------------------------------
Past One Past Five
Year Years
-------- ---------
International Account 9.98% 12.09%*

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.73% $79 $246 $428 $954
Other Expenses........................ 0.04%
-----
Total Account Operating Expenses 0.77%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1994 Scott D. Opsal, CFA. Executive Vice President and
Chief Investment Officer of Invista Capital Management,
LLC since 1997. Vice President, 1986-1997.

GROWTH-ORIENTED ACCOUNT

LargeCap Growth Account

The LargeCap Growth Account seeks long-term growth of capital. It primarily
invests in stocks of growth-oriented companies. Under normal market conditions,
the Account invests at least 65% of its total assets in common stocks of growth
companies with a large market capitalization, generally greater than $10 billion
measured at the time of investment. The Sub-Advisor, Janus, selects stocks for
the Account's portfolio when it believes that the market environment favors
investment in those securities. Common stock investments are selected in
industries and companies that Janus believes are experiencing favorable demand
for their products and services or are operating in a favorable environment from
a competitive and regulatory standpoint.

Janus uses a bottom-up approach in building the portfolio.This approach seeks to
identify individual companies with earnings growth potential that may not be
recognized by the market at large. Although themes may emerge in the Account,
securities are generally selected without regard to any defined industry sector
or other similarly defined selection procedure.

It is the policy of the Account to purchase and hold securities for capital
growth. If Janus is satisfied with the performance of a security and anticipates
continued appreciation, the Account will generally retain the security. However,
changes in the Account are made if Janus believes they are advisable. This may
occur if a security reaches a price objective or if a change is warranted by
developments that were not foreseen at the time of the decision to buy the
security. Since investment decisions generally are made without reference to the
length of time the Account has held a security, a significant number of
short-term transactions may result. To a limited extent, the Account may also
purchase a security in anticipation of relatively short-term price gain. To the
extent that the Account engages in short-term trading, it may have increased
transaction costs.

Although Janus expects that under normal market conditions the assets of the
Account will be invested in common stocks, it may also invest in other
securities when Janus perceives an opportunity for capital growth from such
securities or to receive a return on idle cash. These may include: U.S.
Government obligations, corporate bonds and debentures, high grade commercial
paper, preferred stocks, convertible securities, warrants or other securities of
U.S. issuers. Pursuant to an exemptive order that Janus has received from the
SEC, the Account may also invest in money market funds managed by Janus as a
means of receiving a return on idle cash. The Account's cash position may
increase when Janus is unable to locate investment opportunities that it
believes have desirable risk/reward characteristics.

The Account may invest up to 5% of its assets in high-yield/high-risk bonds.
Such securities are sometimes referred to as "junk bonds" and are considered
speculative. These securities offer a higher yield than other, higher rated
securities, but they carry a greater degree of risk and are considered
speculative by the major credit rating agencies. The Account may also invest up
to 25% of its assets in securities of foreign companies. Foreign stocks carry
risks that are not generally found in stocks of U.S. companies. These include
the risk that a foreign security could lose value as a result of political,
financial and economic events in foreign countries. In addition, foreign
securities may be subject securities regulators with less stringent accounting
and disclosure standards than are required of U.S. companies.

The LargeCap Growth Account is designed for long-term investors for a portion of
their investments. It is not designed for investors seeking income or
conservation of capital.

Account Performance Information

The example shown below assumes 1) an investment of $10,000, 2) a 5%
annual return and 3) that expenses are the same as the most recent fiscal
year expenses.

Day-to-day Account management:
Since April 1999 E. Marc Pinto, Vice President Janus Capital
(Account's inception) Corporation since 1994. Prior to that, Mr. Pinto was
employed by a family firm and as an Associate in the
Investment Banking Division of Goldman Sachs.

GROWTH-ORIENTED ACCOUNT

MidCap Account

The MidCap Account seeks to achieve capital appreciation by investing primarily
in securities of emerging and other growth-oriented companies. It primarily
invests in stocks of growth-oriented companies. Stocks that are chosen for the
Account by the Sub-Advisor, Invista, are thought to be responsive to changes in
the marketplace and have the fundamental characteristics to support growth. The
Account may invest for any period in any industry, in any kind of
growth-oriented company. Companies may range from well established, well known
to new and unseasoned. While small, unseasoned companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.

The MidCap Account is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for short-term
fluctuations in the value of their investments. The Account is designed for
long-term investors for a portion of their investments and not designed for
investors seeking income or conservation of capital.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 21.84% 1994 0.78% for the last 10 years
1990 -12.50% 1995 29.01% -----------------------------------
1991 53.50% 1996 21.11% Quarter Ended Return
1992 14.94% 1997 22.75% -----------------------------------
1993 19.28% 1998 3.69% 3/31/91 25.86%
Calendar Years Ended December 31 9/30/90 (26.61%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
MidCap Account 3.69% 14.92% 16.22%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Mid-Cap Fund Average 12.16 15.18 15.83
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.61% $63 $199 $346 $774
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.62%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since December 1987 Michael R. Hamilton, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1987.

GROWTH-ORIENTED ACCOUNT

MidCap Growth Account

"Standard & Poor's MidCap 400 Index" is a trademark of Standard & Poor's
Corporation (S&P). S&P is not affiliated with Principal Life Insurance Company
or with the Fund.

Account Performance Information

- ------------------------------------------ ------------------------------------
Average annual total return Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------ for the last 3 quarters
Past One -----------------------------------
Year Quarter Ended Return
-------- ------------------------------------
MidCap Growth Account (3.40%)* 12/31/98 22.31%
9/30/98 (16.95%)
S&P 400 MidCap Index 19.12 ------------------------------------
Lipper MidCap Fund
Average 12.16
-----------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.90% $129 $403 $697 $1,534
Other Expenses........................ 0.37%
-----
Total Account Operating Expenses 1.27%*
- --------------------------------------------------------------------------------
*Manager has agreed to reimburse operating
expenses so that total Account operating
expenses will not be greater than 0.96%
for 1999.

GROWTH-ORIENTED ACCOUNT

MidCap Value Account

The MidCap Value Account seeks long-term growth of capital by investing
primarily in equity securities of companies with value characteristics and
market capitalizations in the $1 billion to $10 billion range.

Under normal market conditions, the Account invests at least 65% of its total
assets in common stocks of companies with a medium market capitalization.
Companies may range from the well established and well known to the new and
unseasoned. While small, unseasoned companies may offer greater opportunities
for capital growth than larger, more established companies, they also involve
greater risks and should be considered speculative. Smaller companies may also
be developing or marketing new products or services for which markets are not
yet established and may never become established.

The stocks are selected using a value-oriented investment approach by the
Sub-Advisor, Neuberger Berman Management Inc. Neuberger Berman identifies value
stocks in several ways. One of the most common identifiers is a low
price-to-earnings ratio (stocks selling at multiples of earnings per share that
are lower than that of the market as a whole). Other criteria are high dividend
yield, a strong balance sheet and financial position, a recent company
restructuring with the potential to realize hidden values, strong management and
low price-to-book value (net value of the company's assets). Neuberger Berman
also looks for companies with consistent cash flow, a sound track record through
all phases of the market cycle, a strong position relative to competitors, a
high level of management stock ownership and a recent sharp stock price decline
that appears to result from a short-term market overreaction to negative news.
Neuberger Berman believes that, over time, securities that are undervalued are
more likely to appreciate in price and are subject to less risk of price decline
than securities whose market prices have already reached their perceived
economic value.

This approach also involves selling portfolio securities when Neuberger Berman
believes they have reached their potential, when the securities fail to perform
as expected or when other opportunities appear more attractive. It is
anticipated that the annual portfolio turnover rate may be greater than 100%.
Turnover rates in excess of 100% generally result in higher transaction costs
and a possible increase in short-term capital gains (or losses).

The net asset value of the Account's shares is based on the value of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share price reflects the activities of individual
companies and general market and economic conditions. In the short term, stock
prices can fluctuate dramatically in response to these factors. The Account's
share price may fluctuate more than that of funds primarily invested in stocks
of large companies. Mid-sized companies may pose greater risk due to narrow
product lines, limited financial resources, less depth in management or a
limited trading market for their stocks. Because of these fluctuations,
principal values and investment returns vary. As with all mutual funds, if you
sell your shares when their value is less than the price you paid, you will lose
money.

Neuberger Berman also may invest in foreign securities. Foreign securities carry
risks that are not generally found in securities of U.S. companies. These
include the risk that a foreign security could lose value as a result of
political, financial and economic events in foreign countries. In addition,
foreign securities may be subject to securities regulators with less stringent
accounting and disclosure standards than are required of U.S. companies.

The MidCap Value Account is generally a suitable investment for investors
seeking long-term growth and who are willing to accept short-term fluctuations
in the value of their investments. It is designed for long term investors for a
portion of their investments and not designed for investors seeking income or
conservation of capital.

Account Performance Information

The example shown below assumes 1) an investment of $10,000, 2) a 5%
annual return and 3) that expenses are the same as the most recent fiscal
year expenses.

Total Account Operating Expenses 1.35%*

Day-to-day Account management:
Since April 1999 Co-Manager, Michael M. Kassen, Portfolio
(Account's inception) Manager, Neuberger Berman Management, Inc.,
since 1990.

Since April 1999 Co-Manager, Robert I. Gendelman, Portfolio
(Account's inception) Manager, Neuberger Berman Management, Inc.,
since 1994.

Since April 1999 Co-Manager, S. Basu Mullick, Portfolio
(Account's inception) Manager, Neuberger Berman Management, Inc.,
since 1998. Prior thereto, Portfolio
Manager, Ark Asset Management Co, Inc. from
1993-1998.

Money Market Account

The Money Market Account has an investment objective of as high a level of
current income available from investments in short-term securities as is
considered consistent with preservation of principal and maintenance of
liquidity. It invests its assets in a portfolio of money market instruments. The
investments are U.S. dollar denominated securities which the Manager believes
present minimal credit risks.

The Money Market Account is generally a suitable investment for investors
seeking to invest without incurring much principal risk or for short-term needs.

Account Performance Information

Annual Total Returns

1989 8.98% 1994 3.76%
1990 8.01% 1995 5.59%
1991 5.92% 1996 5.07%
1992 3.48% 1997 5.04%
1993 2.69% 1998 5.20%

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.50% $53 $167 $291 $653
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.52%
- --------------------------------------------------------------------------------

GROWTH-ORIENTED ACCOUNT

SmallCap Account

Account Performance Information

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.85% $100 $312 $542 $1,201
Other Expenses........................ 0.13%
-----
Total Account Operating Expenses 0.98%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Co-Manager, Mark T. Williams, Portfolio
(Account's inception) Manager of Invista Capital Management, LLC
since 1991.

Since April 1998 Co-Manager, John F. McClain, Portfolio
(Account's inception) Manager of Invista Capital Management, LLC
since 1995. Investment Officer, 1992-1995.

GROWTH-ORIENTED ACCOUNT

SmallCap Growth Account

The SmallCap Growth Account seeks long-term growth of capital. It invests
primarily in a diversified group of equity securities of small growth companies.
Generally, at the time of the Account's initial purchase of a security, the
market capitalization of the issuer is less than $1 billion. Growth companies
are generally those with sales and earnings growth that is expected to exceed
the growth rate of corporate profits of the S&P 500 Index. Investments in
companies with small market capitalizations carry their own risks. Historically,
small company securities have been more volatile in price than larger company
securities, especially over the short-term. Smaller companies may be developing
or marketing new products or services for which markets are not yet established
and may never become established. While small companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.

In selecting securities for investment, the Sub-Advisor, Berger, places primary
emphasis on companies which it believes have favorable growth prospects. Berger
seeks to identify small growth companies that either:
o occupy a dominant position in an emerging industry, or
o has a growing market share in larger, fragmented industries.
While these companies may present above average risk, Berger believes that they
may have the potential to achieve long-term earnings growth substantially above
the earnings growth of other companies.

The net asset value of the Account's shares is based on the values of the
securities it holds. The value of the stocks owned by the Account changes on a
daily basis. The current share price reflects the activities of individual
companies and general market and economic conditions. In the short term, stock
prices can fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, if you sell your shares when their value is less than the price you paid,
you will lose money.

Account Performance Information

- ------------------------------------------- -----------------------------------
Average annual total return Highest & lowest
for the period ending December 31, 1998 quarterly total returns
- ------------------------------------------- for the last 3 quarters
Past One -----------------------------------
Year Quarter Ended Return
-------- -----------------------------------
SmallCap Growth Account 2.96%* 12/31/98 27.53%
9/30/98 (18.94%)
Russell 2000 Growth Index 1.23 -----------------------------------
Lipper SmallCap Fund Average (0.33)
- -------------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 1.01% $133 $415 $718 $1,579
Other Expenses........................ 0.30%
-----
Total Account Operating Expenses 1.31%*
- --------------------------------------------------------------------------------
*Manager has agreed to reimburse operating
expenses so that total Account operating
expenses will not be greater than 1.06%
for 1999.

GROWTH-ORIENTED ACCOUNT

Stock Index 500 Account

The Stock Index 500 Account seeks long-term growth of capital. Under normal
market conditions, it invests at least 80% of its assets in common stocks of
companies that compose the S&P 500 Index. The Sub-Advisor, Invista, will attempt
to mirror the investment performance of the index by allocating the Account's
assets in approximately the same weightings as the S&P 500. Over the long-term,
Invista seeks a correlation between the Account, before expenses, and that of
the S&P 500. It is unlikely that a perfect correlation of 1.00 will be achieved.

* Standard & Poor's Corporation is not affiliated with Principal Variable
Contracts Fund, Inc., Invista Capital Management, LLC, or with Principal
Life Insurance Company.

Account Performance Information

The example shown below assumes 1) an investment of $10,000, 2) a 5%
annual return and 3) that expenses are the same as the most recent fiscal
year expenses.

Day-to-day Account management:
Since April 1999 Dean Roth, Portfolio Manager of Invista Capital
(Account's inception) Management, LLC since 1993.

<PAGE>

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.

The Growth-Oriented Accounts invest primarily in common stocks. Under normal
market conditions, the Blue Chip, Capital Value, International, and MidCap
Accounts are fully invested in equity securities. Under unusual circumstances,
each of the Growth-Oriented Accounts may invest without limit in cash for
temporary or defensive purposes. The Accounts also maintain a portion of their
assets in cash while they are making long-term investment decisions and to cover
sell orders from shareholders.

The Bond Account invests primarily in fixed income securities. Fixed income
securities include bonds and other debt instruments that are used by issuers to
borrow money from investors. The issuer generally pays the investor a fixed,
variable or floating rate of interest. The amount borrowed must be repaid at
maturity. Some fixed income securities, such as zero coupon bonds, do not pay
current interest, but are sold at a discount from their face values.

Fixed income securities are sensitive to changes in interest rates. In general,
their prices rise when interest rates fall and fall when interest rates rise.
Longer term bonds and zero coupon bonds are generally more sensitive to interest
rate changes.

Bond prices are also affected by the credit quality of the issuer. Investment
grade fixed income securities are medium and high quality securities. Some bonds
may have speculative characteristics and be particularly sensitive to economic
conditions and the financial condition of the issuers.

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.

Currency Contracts
The Accounts (except Money Market) may each enter into forward currency
contracts, currency futures contracts and options, and options on currencies. A
forward currency contract involves a privately negotiated obligation to purchase
or sell a specific currency at a future date at a price set in the contract. An
Account will not hedge currency exposure to an extent greater than the aggregate
market value of the securities held or to be purchased by the Account
(denominated in or exposed to or generally quoted or currently convertible into
the currency).

Hedging is a technique that may be used in an attempt to reduce risk. If an
Account's Manager or Sub-Advisor hedges market conditions incorrectly or employs
a strategy that does not correlate well with the Account's investment, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or to increase return. These techniques may increase the volatility
of an Account and may involve a small investment of cash relative to the
magnitude of the risk assumed. In addition, these techniques could result in a
loss if the other party to the transaction does not perform as promised.
Additionally, there is the risk of governmental action through exchange controls
that would restrict the ability of the Account to deliver or receive currency.

Warrants
Each of the Accounts (except Money Market) may invest up to 5% of its total
assets in warrants. A warrant is a certificate granting its owner the right to
purchase securities from the issuer at a specified price, normally higher than
the purchase current market price.

Risks of High Yield Securities
The Bond Account and MidCap Value Account (up to 15% of its net assets) and the
LargeCap Growth Account may invest in fixed income securities rated lower than
BBB by S&P or Baa by Moody's or, if not rated, determined to be of equivalent
quality by the Manager or Sub-Advisor. Such securities are sometimes referred to
as high yield or "junk bonds" and are considered speculative.

The Money Market Account does not invest in foreign securities other than those
that are United States dollar denominated. All principal and interest payments
for the security are payable in U.S. dollars. The interest rate, the principal
amount to be repaid and the timing of payments related to the securities do not
vary or float with the value of a foreign currency, the rate of interest on
foreign currency borrowings or with any other interest rate or index expressed
in a currency other than U.S. dollars.

Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
Fund. These procedures outline the steps to be followed by the Manager and/or
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. The Executive Committee
of the Board of Directors oversees this process.

Options
Each of the Accounts (except Capital Value and money Market) may buy and sell
certain types of options. Each type is more fully discussed in the SAI.

Futures
Each Account may buy and sell financial futures contracts and options on those
contracts. Financial futures contracts are commodities contracts based on
financial instruments such as U.S. Treasury bonds or bills, foreign currencies,
or on securities indices such as the S&P 500 Index. Futures contracts, options
on futures contracts and the commodity exchanges on which they are traded are
regulated by the Commodity Futures Trading Commission ("CFTC"). By buying and
selling futures contracts and related options, an Account seeks to hedge against
a decline in securities owned by the Account or an increase in the price of
securities which the Account plans to purchase. An Account may also buy and sell
futures contracts and related options to maintain cash reserves while simulating
full investment in equity securities and to keep substantially all of its assets
exposed to the market.

Securities of Smaller Companies
The MidCap, MidCap Growth, MidCap Value, SmallCap and SmallCap Growth Accounts
invest in securities of companies with small- or mid-sized market
capitalizations. The LargeCap Growth Account may also, to a limited degree,
invest in securities of smaller companies. Market capitalization is defined as
total current market value of a company's outstanding common stock. Investments
in companies with smaller market capitalizations may involve greater risks and
price volatility (wide, rapid fluctuations) than investments in larger, more
mature companies. Smaller companies may be less mature than older companies. At
this earlier stage of development, the companies may have limited product lines,
reduced market liquidity for their shares, limited financial resources or less
depth in management than larger or more established companies. Small companies
also may be less significant within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.

Unseasoned Issuers
The Accounts may invest in the securities of unseasoned issuers. Unseasoned
issuers are companies with a record of less than three years continuous
operation, including the operation of predecessors and parents. Unseasoned
issuers by their nature have only a limited operating history that can be used
for evaluating the company's growth prospects. As a result, investment decisions
for these securities may place a greater emphasis on current or planned product
lines and the reputation and experience of the company's management and less
emphasis on fundamental valuation factors than would be the case for more mature
growth companies. In addition, many unseasoned issuers also may be small
companies and involve the risks and price volatility associated with smaller
companies.

Temporary or Defensive Measures
For temporary or defensive purposes in times of unusual or adverse market
conditions, the Accounts may invest without limit in cash and cash equivalents.
For this purpose, cash equivalents include: bank certificates of deposit, bank
acceptances, repurchase agreements, commercial paper, and commercial paper
master notes which are floating rate debt instruments without a fixed maturity.
In addition, an Account may purchase U.S. Government securities, preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. The LargeCap Growth Account may invest in money market funds
sponsored by Janus.

PRICING OF ACCOUNT SHARES

For all Accounts, except the Money Market Account, the share price is calculated
by:
o taking the current market value of the total assets of the Account
o subtracting liabilities of the Account, and
o dividing the remainder by the total number of shares owned by the
Account.

NOTES:
o If current market values are not readily available for a security, its fair
value is determined using a policy adopted by the Fund's Board of
Directors.

o An Account's securities may be traded on foreign securities markets that
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities used
in computing share price are determined at the time the foreign market
closes. Occasionally, events affecting the value of foreign securities
occur when the foreign market is closed and the New York Stock Exchange is
open. If the Manager believes the market value is materially affected, the
share price will be calculated using the policy adopted by the Fund.

o Foreign securities markets may trade on days when the New York Stock
Exchange is closed (such as customary U.S. holidays) and an Account's share
price is not calculated. As a result, the value of an Account's assets may
be significantly affected by such trading on days when you cannot purchase
or sell shares of the Fund.

DIVIDENDS AND DISTRIBUTIONS

The issuer of an equity security held by an Account may make a dividend payment.
When an Account receives a dividend, it increases the net asset value of a share
of the Account.

An Account accrues interest daily on its fixed income securities in anticipation
of an interest payment from the issuer of the security. This accrual increases
the net asset value of an Account.

The Money Market Account (or any other Account holding commercial paper)
amortizes the discount on commercial paper it owns on a daily basis. This
increases the net asset value of the Account.

NOTE:As the net asset value of a share of an Account increases, the unit value
of the corresponding division also reflects an increase. The number of
units you own in the Account are not increased.

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

The Manager is a subsidiary of Princor Financial Services Corporation and an
affiliate of Principal Life Insurance Company. It has managed mutual funds since
1969. As of March 31, 1999, the Funds it managed had assets of approximately
$6.2 billion. The Manager's address is Principal Financial Group, Des Moines,
Iowa 50392-0200.

The Sub-Advisors
The Manager has signed contracts with various Sub-Advisors. Under the
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account. For
these services, each Sub-Advisor is paid a fee by the Manager.

Accounts: Blue Chip, Capital Value, International, MidCap, SmallCap and Stock
Index 500
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly
wholly-owned subsidiary of Principal Life Insurance Company and an
affiliate of the Manager, was founded in 1985. It manages investments for
institutional investors, including Principal Life. Assets under management
as of December 31, 1998 were approximately $31 billion. Invista's address
is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.

Account: LargeCap Growth
Sub-Advisor: Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver CO
80206-4928, was formed in 1970. Kansas City Southern Industries, Inc. owns
approximately 82% of the outstanding voting stock of Janus, most of which
it acquired in 1984. As of February 1, 1999, Janus managed or administered
over $120 billion in assets.

Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation, located at 200 Park Avenue, New York,
NY 10166, was formed in 1947. The Dreyfus Corporation is a
wholly-owned subsidiary of Mellon Bank, N.A., which is a
wholly-owned subsidiary of Mellon Bank Corporation (Mellon). As
of December 31, 1998 the Dreyfus Corporation managed or
administered approximately $118.5 billion in assets for
approximately 1.7 million investor accounts nationwide.

Account: MidCap Value
Sub-Advisor: Neuberger Berman Management Inc. ("Neuberger Berman") is an
affiliate of Neuberger Berman, LLC. Neuberger Berman LLC is
located at 605 Third Avenue, 2nd Floor, New York, NY 10158-0180.
Together with Neuberger Berman, the firms manage more than $49
billion in total assets (as of September 30, 1998) and continue
an asset management history that began in 1939.

Account: SmallCap Growth
Sub-Advisor: Berger Associates, Inc. Berger's address is 210 University
Boulevard, Suite 900, Denver CO 80206. It serves as investment advisor,
sub-advisor, administrator or sub-administrator to mutual funds and
institutional investors. Berger is a wholly-owned subsidiary of Kansas City
Southern Industries, Inc. (KCSI). KCSI is a publicly traded holding company
with principal operations in rail transportation, through its subsidiary
The Kansas City Southern Railway Company, and financial asset management
businesses. Assets under management for Berger as of December 31, 1998 were
approximately $3.4 billion.

Management Other Total Operating
Account Fees Expenses Expenses

Bond 0.49% 0.02% 0.51%
Capital Value 0.43 0.01 0.44
International 0.73 0.04 0.77
MidCap 0.61 0.01 0.62
MidCap Growth 0.90 0.37 1.27
Money Market 0.50 0.02 0.52
SmallCap 0.85 0.13 0.98
SmallCap Growth 1.01 0.30 1.31

The Fund and the Manager, under an order received from the SEC, are able to
change Sub-Advisors or the fees paid to a Sub-Advisor without the expense and
delay of a shareholder meeting. However, the order will not be relied upon by an
Account until the Fund receives approval from:
o contract owners who have assets in the Account, or
o in the case of a new Account, the Account's sole initial shareholder before
the Account is available to contract owners. (Before the Blue Chip,
LargeCap Growth, MidCap Growth, MidCap Value, SmallCap Growth and Stock
Index 500 Accounts were available to contractowners, the initial
shareholder of each of those Accounts approved their operation in the
manner described in the order.)

The order does not allow the Manager, without shareholder approval, to:
o appoint a Sub-Advisor that is an affiliate of the Manager or the Fund
(other than by reason of serving as Sub-Advisor to an Account) (an
"affiliated Sub-Advisor"), or
o change a subadvisory fee of an affiliated Sub-Advisor.

MANAGERS' COMMENTS

Growth-Oriented Accounts

Capital Value Account
(Catherine A. Zaharis)

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

Capital S&P 500 Lipper
Value Stock Growth & Income
Year Ended December 31, Account Index Fund Average
---------------------- ------- ------ ------------
10,000 10,000 10,000
1989 11,618 13,168 12,354
1990 10,473 12,758 11,804
1991 14,522 16,647 15,237
1992 15,905 17,915 16,605
1993 17,145 19,717 18,523
1994 17,229 19,976 18,349
1995 22,726 27,474 24,004
1996 28,066 33,778 28,992
1997 36,074 45,043 36,861
1998 40,973 57,915 42,615

Note: Past performance is not predictive of future performance.

The Account's focus throughout 1998 was one of quality value. That focus will be
continued into 1999 as economic and world events are closely monitored.

International Account
(Scott D. Opsal)

Comparison of Change in Value of $10,000 Investment in the
International Account, EAFE and Lipper International Fund Average

Morgan Stanley Lipper
Year Ended International EAFE International
December 31, Account Index Index
----------- ------ ----- ------
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
1997 15,488 11,991 12,583
1998 17,034 14,389 14,221

Note: Past performance is not predictive of future performance.

MidCap Account
(Michael R. Hamilton)

Comparison of Change in Value of $10,000 Investment in the MidCap
Account, Lipper Mid Cap Fund Average and S&P 500 Stock Index

Lipper
MidCap S&P 500 Mid-Cap Fund
Year Ended December 31, Account Index Average
- ---------------------- ------- ------ -------
10,000 10,000 10,000
1989 12,184 13,168 12,710
1990 10,661 12,758 12,258
1991 16,364 16,647 18,538
1992 18,809 17,915 20,227
1993 22,436 19,717 23,201
1994 22,611 19,976 22,725
1995 29,171 27,474 30,035
1996 35,329 33,778 35,418
1997 43,368 45,043 42,370
1998 44,967 57,915 47,523

Note: Past performance is not predictive of future performance.

MidCap Growth Account
(John O'Toole)

Comparison of Change in Value of $10,000 Investment in the MidCap Growth
Account, Lipper Mid-Cap Fund Average and S&P 400 MidCap Index

MidCap Lipper S&P
Growth Mid-Cap 400 MidCap
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ ------
10,000 10,000 10,000
1998 9,660 9,814 10,538

Note: Past performance is not predictive of future performance.

SmallCap Account
(Mark T. Williams and John F. McClain)

Comparison of Change in Value of $10,000 Investment in the SmallCap
Account, Lipper Small-Cap Fund Average and S&P 600 Index

Lipper S&P
SmallCap Small-Cap 600
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ ------
10,000 10,000 10,000
1998 7,949 8,873 8,835

Note: Past performance is not predictive of future performance.

SmallCap Growth Account
(Amy K. Selner)

Comparison of Change in Value of $10,000 Investment in the SmallCap Growth
Account, Lipper Small-Cap Fund Average and Russell 2000 Growth Index

SmallCap Lipper Russell 2000
Growth Small-Cap Growth
Year Ended December 31, Account Fund Average Index
---------------------- ------- ------------ -------
10,000 10,000 10,000
1998 10,296 8,873 10,123

Note: Past performance is not predictive of future performance.

Important Notes of the Growth-Oriented Accounts:

Russell 2000 Growth Index: This index measures the performance of those Russell
2000 companies with higher price-to-book ratios and lower forecasted growth
values.

Standard & Poor's 600 Index: This is a market-value weighted index consisting of
600 domestic stocks chosen for market size, liquidity and industry group
representation.

Standard & Poor's MidCap 400 Index: This index measures the performance of the
mid-size company segmant of the U.S. Market.

Income-Oriented Accounts:

Bond Account
(Scott A. Bennett)

Comparison of Change in Value of $10,000 Investment in the Bond Account, Lipper
Corporate Debt BBB Rated Fund Average and Lehman Brothers BAA Corporate Index

Lehman Lipper
Brothers Corporate Debt
Year Ended Bond BAA Corporate BBB Rated Fund
December 31, Account* Index Average
----------- ------- ------ --------
10,000 10,000 10,000
1989 11,386 11,366 11,064
1990 11,980 11,966 11,698
1991 13,982 14,277 13,780
1992 15,294 15,619 14,916
1993 17,078 17,638 16,753
1994 16,583 17,074 16,006
1995 20,259 20,953 19,219
1996 20,738 21,795 19,832
1997 22,935 24,215 21,831
1998 24,698 24,525 23,195

Note: Past performance is not predictive of future performance.

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.

Note: Mutual fund data from Lipper Inc.

GENERAL INFORMATION ABOUT AN ACCOUNT

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

Shareholder inquiries should be directed to: Principal Variable Contracts Fund,
Inc., Principal Financial Group, Des Moines, Iowa 50392-0200.

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

Sale of Account Shares
This section applies to eligible purchasers other than the separate accounts of
Principal Life and its subsidiaries.

In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.

Other important Year 2000 initiatives include:
o the service provider for the transfer agent system has renovated its code.
Client testing will occur in the first and second quarters of 1999. The
service provider is also participating in a securities industry wide
testing program;
o the securities pricing system has renovated its code and conducted client
testing in June 1998; o Facilities Management of Principal Life has
identified non-systems issues (heat, lights, water, phone, etc.) and is
working with these service providers to ensure continuity of service; and
o the Manager and other areas of Principal Life have contacted all vendors
with which they do business to receive assurances that they are able to
deal with any Year 2000 problems and continue to work with the vendors to
identify any areas of risk.

In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.

FINANCIAL HIGHLIGHTS

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
<TABLE>
<CAPTION>

BOND ACCOUNT(a) 1998 1997 1996 1995 1994
- ------------ ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $11.78 $11.33 $11.73 $10.12 $11.16
Income from Investment Operations:
Net Investment Income............................... .66 .76 .68 .62 .72
Net Realized and Unrealized Gain (Loss) on Investments .25 .44 (.40) 1.62 (1.04)

Total from Investment Operations .91 1.20 .28 2.24 (.32)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.66) (.75) (.68) (.63) (.72)
Excess Distributions from Capital Gains(b).......... (.01) -- -- -- --
Total Dividends and Distributions (.67) (.75) (.68) (.63) (.72)
Net Asset Value, End of Period......................... $12.02 $11.78 $11.33 $11.73 $10.12
Total Return........................................... 7.69% 10.60% 2.36% 22.17% (2.90)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $121,973 $81,921 $63,387 $35,878 $17,108
Ratio of Expenses to Average Net Assets............. .51% .52% .53% .56% .58%
Ratio of Net Investment Income to Average Net Assets 6.41% 6.85% 7.00% 7.28% 7.86%
Portfolio Turnover Rate............................. 26.7% 7.3% 1.7% 5.9% 18.2%

CAPITAL VALUE ACCOUNT(a) 1998 1997 1996 1995 1994
- --------------------- ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $34.61 $29.84 $27.80 $23.44 $24.61
Income from Investment Operations:
Net Investment Income............................... .71 .68 .57 .60 .62
Net Realized and Unrealized Gain (Loss) on Investments 3.94 7.52 5.82 6.69 (.49)
Total from Investment Operations 4.65 8.20 6.39 7.29 .13
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.71) (.67) (.58) (.60) (.61)
Distributions from Capital Gains.................... (1.36) (2.76) (3.77) (2.33) (.69)
Total Dividends and Distributions (2.07) (3.43) (4.35) (2.93) (1.30)
Net Asset Value, End of Period......................... $37.19 $34.61 $29.84 $27.80 $23.44
Total Return........................................... 13.58% 28.53% 23.50% 31.91% .49%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $385,724 $285,231 $205,019 $135,640 $120,572
Ratio of Expenses to Average Net Assets............. .44% .47% .49% .51% .51%
Ratio of Net Investment Income to Average Net Assets 2.07% 2.13% 2.06% 2.25% 2.36%
Portfolio Turnover Rate............................. 22.0% 23.4% 48.5% 49.2% 44.5%
</TABLE>

See accompanying notes.
<TABLE>

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
<CAPTION>

INTERNATIONAL ACCOUNT(a) 1998 1997 1996 1995 1994(c)
- --------------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $13.90 $13.02 $10.72 $9.56 $9.94
Income from Investment Operations:
Net Investment Income............................... .26 .23 .22 .19 .03
Net Realized and Unrealized Gain (Loss) on Investments 1.11 1.35 2.46 1.16 (.33)
Total from Investment Operations 1.37 1.58 2.68 1.35 (.30)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.25) (.23) (.22) (.18) (.05)
Excess Distributions from Net Investment Income(b).. -- -- -- -- (.02)
Distributions from Capital Gains.................... (.51) (.47) (.16) (.01) (.01)
Total Dividends and Distributions (.76) (.70) (.38) (.19) (.08)
Net Asset Value, End of Period......................... $14.51 $13.90 $13.02 $10.72 $9.56
Total Return........................................... 9.98% 12.24% 25.09% 14.17% (3.37)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $153,588 $125,289 $71,682 $30,566 $13,746
Ratio of Expenses to Average Net Assets............. .77% .87% .90% .95% 1.24%(e)
Ratio of Net Investment Income to Average Net Assets 1.80% 1.92% 2.28% 2.26% 1.31%(e)
Portfolio Turnover Rate............................. 33.9% 22.7% 12.5% 15.6% 14.4%(e)

MIDCAP ACCOUNT(a) 1998 1997 1996 1995 1994
- -------------- ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $35.47 $29.74 $25.33 $19.97 $20.79
Income from Investment Operations:
Net Investment Income............................... .22 .24 .22 .22 .14
Net Realized and Unrealized Gain (Loss) on Investments .94 6.48 5.07 5.57 .03
Total from Investment Operations 1.16 6.72 5.29 5.79 .17
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.22) (.23) (.22) (.22) (.14)
Distributions from Capital Gains.................... (2.04) (.76) (.66) (.21) (.85)
Total Dividends and Distributions (2.26) (.99) (.88) (.43) (.99)
Net Asset Value, End of Period......................... $34.37 $35.47 $29.74 $25.33 $19.97
Total Return........................................... 3.69% 22.75% 21.11% 29.01% .78%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $259,470 $224,630 $137,161 $58,520 $23,912
Ratio of Expenses to Average Net Assets............. .62% .64% .66% .70% .74%
Ratio of Net Investment Income to Average Net Assets .63% .79% 1.07% 1.23% 1.15%
Portfolio Turnover Rate............................. 26.9% 7.8% 8.8% 13.1% 12.0%
</TABLE>

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

MIDCAP GROWTH ACCOUNT 1998(f)
- --------------------- ----
Net Asset Value, Beginning of Period................... $9.94
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.01)
Net Realized and Unrealized Gain (Loss) on Investments (.28)

Total from Investment Operations (.29)

Net Asset Value, End of Period......................... $9.65

Total Return........................................... (3.40%)(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $8,534
Ratio of Expenses to Average Net Assets............. 1.27%(e)
Ratio of Net Investment Income to Average Net Assets (.14)%(e)
Portfolio Turnover Rate............................. 91.9%(e)

MONEY MARKET ACCOUNT(a) 1998 1997 1996 1995 1994
- -------------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income............................... .051 .051 .049 .054 .037
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
Total from Investment Operations .051 .051 .049 .054 .037
Less Dividends from Net Investment Income.............. (.051) (.051) (.049) (.054) (.037)

Net Asset Value, End of Period......................... $1.000 $1.000 $1.000 $1.000 $1.000

See accompanying notes.

Selected data for a share of Capital Stock outstanding throughout the periods
ended December 31 (except as noted):

SMALLCAP ACCOUNT 1998(f)
- ---------------- ----
Net Asset Value, Beginning of Period................... $10.27
Income from Investment Operations:
Net Investment Income............................... --
Net Realized and Unrealized Gain (Loss) on Investments (2.06)

Total from Investment Operations (2.06)

Net Asset Value, End of Period......................... $8.21

Total Return........................................... (20.51)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $12,094
Ratio of Expenses to Average Net Assets............. .98%(e)
Ratio of Net Investment Income to Average Net Assets (.05)%(e)
Portfolio Turnover Rate............................. 45.2%(e)

SMALLCAP GROWTH ACCOUNT 1998(f)
- ----------------------- ----
Net Asset Value, Beginning of Period................... $9.84
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.04)
Net Realized and Unrealized Gain (Loss) on Investments .30

Total from Investment Operations .26

Net Asset Value, End of Period......................... $10.10

Total Return........................................... 2.96%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $8,463
Ratio of Expenses to Average Net Assets............. 1.31%(e)
Ratio of Net Investment Income to Average Net Assets (.80)%(e)
Portfolio Turnover Rate............................. 166.5%(e)

FINANCIAL HIGHLIGHTS (Continued)

Notes to Financial Highlights

(a) Effective January 1, 1998 the following mutual funds were reorganized into
the Principal Variable Contracts Fund, Inc. as follows:

Former Fund Name Current Account Name
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal World Fund, Inc. International Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Money Market Fund, Inc. Money Market Account

(b) Dividends and distributions which exceed net investment income and net
realized gains for financial reporting purposes but not for tax purposes
are reported as dividends in excess of net investment income or
distributions in excess of net realized gains on investments. To the extent
distributions exceed current and accumulated earnings and profits for
federal income tax purposes, they are reported as tax return of capital
distributions.

(c) Period from May 1, 1994, date shares first offered to the public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
the Growth Account and $.04 per share for the International Account for the
period from the initial purchase of shares on March 23, 1994 through April
30, 1994, was recognized, none of which was distributed to the sole
shareholder, Principal Life Insurance Company, during the period.
Additionally, the Growth Account and the International Account incurred
unrealized losses on investments of $.41 and $.10 per share, respectively,
during the initial interim period. This represented activities of each
account prior to the initial public offering of account shares.

(d) Total return amounts have not been annualized.

(e) Computed on an annualized basis.

(f) Period from May 1, 1998, date shares first offered to the public, through
December 31, 1998. Per share net investment income and realized and
unrealized gains (losses) for the period from the initial purchase of
shares through April 30, 1998, were recognized as follows, none of which
was distributed to the sole shareholder, Principal Life Insurance Company,
during the period. This represents activities of each account prior to the
initial public offering.

Date Net Per Share Realized
Operations Investment and Unrealized
Account Commenced Income Gains (Losses)

MidCap Growth Account April 23, 1998 .01 (.07)
SmallCap Account April 9, 1998 -- .27
SmallCap Growth Account April 2, 1998 -- (.16)

The U.S. Government does not insure or guarantee an investment in the Fund.

Principal Variable Contracts Fund, Inc. SEC File 811-01944

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ACCOUNTS OF THE FUND

Balanced Account
Bond Account
Capital Value Account
High Yield Account
MidCap Account
Money Market Account

This Prospectus describes a mutual fund organized by Principal Life Insurance
Company. The Fund provides a choice of investment objectives through the
accounts listed above.

The date of this Prospectus is May 1, 1999.

TABLE OF CONTENTS

ACCOUNT DESCRIPTIONS ........................................... 3

Balanced Account............................................ 6
Bond Account................................................ 8
Capital Value Account....................................... 10
High Yield Account.......................................... 12
MidCap Account.............................................. 14
Money Market Account........................................ 16

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS.................. 18

PRICING OF ACCOUNT SHARES........................................ 22

DIVIDENDS AND DISTRIBUTIONS...................................... 23
Growth-Oriented and Income-Oriented Accounts................ 23
Money Market Account........................................ 23

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE................... 24
The Manager................................................. 24
The Sub-Advisors............................................ 24

GENERAL INFORMATION ABOUT AN ACCOUNT............................. 26
Shareholders Rights......................................... 26
Purchase of Account Shares.................................. 27
Sale of Account Shares...................................... 27
Year 2000 Readiness Disclosure.............................. 28
Financial Statements........................................ 29

FINANCIAL HIGHLIGHTS............................................. 30
Notes to Financial Highlights............................... 33

ACCOUNT DESCRIPTIONS

The Principal Variable Contracts Fund is made up of several different Accounts.
Each Account has its own investment objective.

The Balanced Account invests in a mix of equity and debt securities while the
Capital Value and MidCap Accounts invest primarily in common stocks. Under
normal market conditions the Capital Value and MidCap Accounts are fully
invested in equity securities. Under unusual circumstances, the Balanced,
Capital Value and MidCap Accounts each may invest without limit in cash for
temporary or defensive purposes. When doing so, the Account is not investing to
achieve its investment objective. The Accounts also maintain a portion of their
assets in cash while they are making long-term investment decisions and to cover
sell orders from shareholders.

The Bond and High Yield Accounts each has a rating limitation with regard to the
quality of the bonds that are held in its portfolio. The rating limitation
applies when the Account purchases a bond. If the rating on a bond changes while
the Account owns it the Account is not required to sell the bond. The SAI
contains additional information about bond ratings by Moody's Investor Services,
Inc. (Moody's) and Standard & Poor's Corporation (S&P).

In the description for each Account, you will find important information about
the Account's:

Annual operating expenses
The annual operating expenses for each Account are deducted from Account assets
(stated as a percentage of Account assets) and are shown as of the end of the
most recent fiscal year. The examples are intended to help you compare the cost
of investing in a particular Account with the cost of investing in other mutual
funds. The examples assume you invest $10,000 in an Account for the time periods
indicated. The examples also assume that your investment has a 5% total return
each year and that the Account's operating expenses are the same as the most
recent fiscal year expenses. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be as shown.

Day-to-day Account management
The investment professionals who manage the assets of each Account are listed
with each Account. Backed by their staffs of experienced securities analysts,
they provide the Accounts with professional investment management. Principal
Management Corporation serves as the manager for the Principal Variable
Contracts Fund. It has signed a sub-advisory agreement with Invista Capital
Management, LLC ("Invista") under which Invista provides portfolio management
for the Balanced, Capital Value and MidCap Accounts.

Account Performance
Included in each Account's description is a set of tables and a bar chart.
Together, these provide an indication of the risks involved when you invest. The
bar chart shows changes in the Account's performance from year to year.

An Account's past performance is not necessarily an indication of how the
Account will perform in the future.

You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Money Market Account.

Investments in these Accounts are not deposits of a bank and are not insured or
guaranteed by the FDIC or any other government agency.

GROWTH-ORIENTED ACCOUNT

Balanced Account

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 11.56% 1994 -2.09% for the last 10 years
1990 -6.43% 1995 24.58% -----------------------------------
1991 34.36% 1996 13.13% Quarter Ended Return
1992 12.80% 1997 17.93% -----------------------------------
1993 11.06% 1998 11.91% 3/31/91 12.62%
Calendar Years Ended December 31 9/30/90 (11.70%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- --------- --------
Balanced Account 11.91% 12.74% 12.33%

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.57% $60 $189 $329 $738
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.59%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1993 Co-Manager, Judith A. Vogel, CFA. Portfolio
Manager of Invista Capital Management, LLC
since 1987.

Since October 1998 Co-Manager, Douglas D. Herold, CFA.
Portfolio Manager of Invista Capital
Management, LLC since 1996. Prior thereto,
Securities Analyst from 1993-1996.

Since December 1997 Co-Manager, Martin J. Schafer, Portfolio
Manager of Invista Capital Management, LLC
since 1992.

INCOME-ORIENTED ACCOUNT

Bond Account

Account Performance Information

Lehman Brothers
BAA Corporate
Index 6.96 7.34 9.25
Lipper Corporate
Debt BBB Rated
Fund Average 6.25 7.00 9.19
---------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $52 $164 $285 $640
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.51%
- --------------------------------------------------------------------------------

During the fiscal year ended December 31, 1998, the average ratings of the
Account's assets based on markte value at each mont-end, were as follows (all
ratings are by Moody's):

2.08% in securities rated Aaa
2.78% in securities rated Aa
24.00% in securities rated A
64.55% in securities rated Baa
6.59% in securities rated Ba

Day-to-day Account management:
Since November 1996 Scott A. Bennett, CFA. Assistant Director - Securities
Investment of Principal Capital Management LLC since
1996. Prior thereto, Investment Manager.

GROWTH-ORIENTED ACCOUNT

Capital Value Account

In making selections for the Account's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps are involved in
this analysis are:

o Stock selection. Invista buys and sells stocks according to the Account's
own policies using the research and valuation ranking as a basis. In
general, Invista buys stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with attractive
valuation, other factors may be taken into account such as: o events that
could cause a stock's price to rise or fall; o anticipation of high
potential reward compared to potential risk; and o belief that a stock is
temporarily mispriced because of market overreactions.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 16.18% 1994 0.49% for the last 10 years
1990 -9.86% 1995 31.91% -----------------------------------
1991 38.67% 1996 23.50% Quarter Ended Return
1992 9.52% 1997 28.53% -----------------------------------
1993 7.79% 1998 13.58% 3/31/91 17.85%
Calendar Years Ended December 31 9/30/90 (17.01%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
Capital Value Account 13.58% 19.03% 15.15%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and Income
Fund Average 15.61 18.53 15.76
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.43% $45 $141 $246 $555
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.44%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since November 1996 Catherine A. Zaharis, CFA. Portfolio Manager of
Invista Capital Management, LLC since 1987.

INCOME-ORIENTED ACCOUNT

High Yield Account

The High Yield Account seeks a high current income. It invests in high yield,
lower or unrated fixed income securities commonly known as "junk bonds". The
Account invests its assets in securities rated Ba1 or lower by Moody's or BB+ or
lower by S&P. The Account may also invest in unrated securities that the Manager
believes to be of comparable quality. These securities are considered to be
speculative with respect to the issuer's ability to pay interest and repay
principal. The Account does not invest in securities rated below Caa (Moody's)
or below CCC (S&P) at the time of purchase. The SAI contains descriptions of the
securities rating categories.

Investors assume special risks when investing in the Account. Compared to higher
rated securities, lower rated securities may:
o have a more volatile market value, generally reflecting specific events
affecting the issuer;
o be subject to greater risk of loss of income and principal (issuers are
generally not as financially secure);
o have a lower volume of trading, making it more difficult to value or sell
the security;
o and be more susceptible to a change in value or liquidity based on adverse
publicity and investor perception, whether or not based on factual
analysis.

The market for higher-yielding, lower rated securities has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
these securities. This could cause financial stress to the issuer negatively
affecting the issuer's ability to pay principal and interest. This may also
negatively affect the value of the Account's securities. In addition, if an
issuer defaults the Account may have additional expenses if it tries to recover
the amounts due it.

Some securities the Account buys have call provisions. A call provision allows
the issuer of the security to redeem it before its maturity date. If a bond is
called in a declining interest rate market, the Account would have to replace it
with a lower yielding security. This results in a decreased return for
investors. In addition, in a rising interest rate market, a higher yielding
security's value decreases. This is reflected in a lower share price for the
Account.

The Account tries to minimize the risks of investing in lower rated securities
by diversification, investment analysis and attention to current developments in
interest rates and economics conditions. Although the Account's Manager
considers securities ratings when making investment decisions, it performs its
own investment analysis. This analysis includes traditional security analysis
considerations such as: experience and managerial strength changing financial
condition borrowing requirements or debt maturity schedules responsiveness to
changes in business conditions relative value based on anticipated cash flow
earnings prospects

The Manager continuously monitors the issuers of the Account's securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. It also monitors each security to
assure the security's liquidity so the Account can meet requests for sales of
Account shares.

For defensive purposes, the Account may invest in other securities. During
periods of adverse market conditions, the Account may invest in all types of
money market instruments, higher rated fixed income securities or any other
fixed income securities consistent with the temporary defensive strategy. The
yield to maturity on these securities is generally lower than the yield to
maturity on lower rated fixed income securities.

The High Yield Account is generally a suitable investment for investors seeking
monthly divided to provide income or to be reinvested in Account shares for
growth. However, it is suitable only for that portion of the investor's
investments for which the investor is willing to accept potentially greater
risk. Investors should carefully consider their ability to assume the risks of
this Account before making an investment. Investors should be prepared to
maintain their investment in the Account during periods of adverse market
conditions. This Account should not be relied on to meet short-term financial
needs. As with all mutual funds, if you sell your shares when their value is
less than the price you paid, you will lose money.

Account Performance Information

------------------------------- ----------------------------------------
Annual Total Return Highest & lowest
------------------------------- quarterly total returns
1989 2.11% 1994 0.62% for the last 10 years
1990 -7.70% 1995 16.08% ----------------------------------------
1991 27.29% 1996 13.13% Quarter Ended Return
1992 14.58% 1997 10.75% ----------------------------------------
1993 12.31% 1998 -0.56% 3/31/91 9.96%
9/30/98 (6.31%)
----------------------------------------
Calendar Years Ended December 31
------------------------------------------------
Average annual total returns
for the period ending December 31, 1998
------------------------------------------------
Past One Past Five Past Ten
Year Years Years

High Yield Account (0.56%) 7.79% 8.43%

Lehman Brothers High
Yield Composite
Bond Index 1.87 8.57 10.55
Lipper High Current
Yield Fund Average (0.44) 7.42 9.40
------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.60% $69 $218 $379 $847
Other Expenses........................ 0.08%
-----
Total Account Operating Expenses 0.68%
- --------------------------------------------------------------------------------

During the fiscal year ended December 31, 1998, the average ratings of the
Account's assets based on market value at each month-end, were as
follows (all ratings are by Moody's):

35.61% in securities rated Ba
62.06% in securities rated B
2.28% in securities rated C
0.05% in securities rated Ca

The above percentages for B and C rated securities include unrated securities in
the 3.46% and 0.07%, respectively, which the Manager considers to be of
comparable quality.

Day-to-day Account management:
Since April 1998 Mark P. Denkinger, CFA. Assistant Director - Securities
Investment of Principal Capital Management LLC since
1998. Prior thereto, Investment Manager.

GROWTH-ORIENTED ACCOUNT

MidCap Account

The net asset value of the Account's shares is based on the value of the
securities it holds. The values of the stocks owned by the Account change on a
daily basis. The current share price reflects the activities of individual
companies and general market and economic conditions. In the short term, stock
prices can fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. As with all mutual
funds, if you sell your shares when their value is less than the price you paid,
you will lose money.

The MidCap Account is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for short-term
fluctuations in the value of their investments. The Account's share price may
fluctuate more than that of funds primarily invested in stocks of large
companies. Mid-sized companies may pose greater risk due to narrow product
lines, limited financial resources, less depth in management or a limited
trading market for their stocks. The Account is designed for long-term investors
for a portion of their investments and not designed for investors seeking income
or conservation of capital.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 21.84% 1994 0.78% for the last 10 years
1990 -12.50% 1995 29.01% -----------------------------------
1991 53.50% 1996 21.11% Quarter Ended Return
1992 14.94% 1997 22.75% -----------------------------------
1993 19.28% 1998 3.69% 3/31/91 25.86%
Calendar Years Ended December 31 9/30/90 (26.61%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
MidCap Account 3.69% 14.92% 16.22%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Mid-Cap Fund Average 12.16 15.18 15.83
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.61% $63 $199 $346 $774
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.62%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since December 1987 Michael R. Hamilton, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1987.

Money Market Account

It is the policy of the Account to be as fully invested as possible to
maximize current income. Securities in which the Account invests include:
o U.S. Government securities which are issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
o U.S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U.S. Government. These are backed
either by the full faith and credit of the U.S. Government or by the credit
of the particular agency or instrumentality.
o Bank obligations consisting of:
o certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank or
o bankers acceptances which are time drafts drawn on a commercial bank,
usually in connection with international commercial transactions.
o Commercial paper that is short-term promissory notes issued by U.S. or
foreign corporations primarily to finance short-term credit needs.
o Short-term corporate debt consisting of notes, bonds or debentures which at
the time of purchase by the Account has 397 days or less remaining to
maturity.
o Repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price plus
interest at a specified rate. Generally these have a short duration (less
than a week) but may have a longer duration.
o Taxable municipal obligations that are short-term obligations issued or
guaranteed by state and municipal issuers that generate taxable income.

The Money Market Account is generally a suitable investment for investors
seeking monthly dividends to produce income without incurring much principal
risk or for investor's short-term needs.

Account Performance Information

Annual Total Returns

1989 8.98% 1994 3.76%
1990 8.01% 1995 5.59%
1991 5.92% 1996 5.07%
1992 3.48% 1997 5.04%
1993 2.69% 1998 5.20%

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.50% $53 $167 $291 $653
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.52%
- --------------------------------------------------------------------------------

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.

Fixed-income securities include bonds and other debt instruments that are used
by issuers to borrow money from investors. The issuer generally pays the
investor a fixed, variable or floating rate of interest. The amount borrowed
must be repaid at maturity. Some fixed-income securities, such as zero coupon
bonds, do not pay current interest, but are sold at a discount from their face
values.

Fixed-income securities are sensitive to changes in interest rates. In general,
bond prices rise when interest rates fall and fall when interest rates rise.
Longer term bonds and zero coupon bonds are generally more sensitive to interest
rate changes.

Note:The Capital Value and MidCap Accounts invest primarily in equity
securities. The Balanced Account invests in a mix of equity and debt
securities. The Bond Account invests primarily in debt securities.

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.

Currency Contracts
The Accounts (except Money Market) may each enter into forward currency
contracts, currency futures contracts and options, and options on currencies for
hedging and other non-speculative purposes. A forward currency contract involves
a privately negotiated obligation to purchase or sell a specific currency at a
future date at a price set in the contract. An Account will not hedge currency
exposure to an extent greater than the aggregate market value of the securities
held or to be purchased by the Account (denominated or generally quoted or
currently convertible into the currency).

Warrants
Each of the Accounts (except Money Market) may invest up to 5% of its total
assets in warrants. Up to 2% of an Account's total assets may be invested in
warrants that are not listed on either the New York or American Stock Exchanges.

Risks of High Yield Securities
The Balanced, Bond, and High Yield Accounts may, to varying degrees, invest in
debt securities rated lower than BBB by S&P or Baa by Moody's or, if not rated,
determined to be of equivalent quality by the Manager. Such securities are
sometimes referred to as high yield or "junk bonds" and are considered
speculative.

Options
Each of the Accounts (except Capital Value and Money Market) may buy and sell
certain types of options. Each type is more fully discussed in the SAI.

Foreign Securities
Each of the following Accounts may invest in foreign securities to the indicated
percentage of its assets (debt securities issued in the United States pursuant
to a registration statement filed with the Securities and Exchange Commission
are not treated as foreign securities for purposes of these limitations.):
o Bond, Capital Value and High Yield Accounts - 20%.
o Balanced and MidCap Accounts - 10%.
o The Money Market Account does not invest in foreign securities other than
those that are United States dollar denominated. All principal and interest
payments for the security are payable in U.S. dollars. The interest rate,
the principal amount to be repaid and the timing of payments related to the
securities do not vary or float with the value of a foreign currency, the
rate of interest on foreign currency borrowings or with any other interest
rate or index expressed in a currency other than U.S. dollars.

Securities of Smaller Companies
The MidCap Account invests in securities of companies with small- or mid-sized
market capitalizations. Market capitalization is defined as total current market
value of a company's outstanding common stock. Investments in companies with
smaller market capitalizations may involve greater risks and price volatility
(wide, rapid fluctuations) than investments in larger, more mature companies.
Smaller companies may be less mature than older companies. At this earlier stage
of development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.

PRICING OF ACCOUNT SHARES

DIVIDENDS AND DISTRIBUTIONS

The issuer of an equity security held by an Account may make a dividend payment.
When an Account receives a dividend, it increases the net asset value of a share
of the Account.

An Account accrues interest daily on its fixed income securities in anticipation
of an interest payment from the issuer of the security. This accrual increases
the net asset value of an Account.

The Money Market Account (or any other Account holding commercial paper)
amortizes the discount on commercial paper it owns on a daily basis. This
increases the net asset value of the Account.

NOTE:As the net asset value of a share of an Account increases, the unit value
of the corresponding division also reflects an increase. The number of
units you own in the Account are not increased.

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

Accounts: Balanced, Capital Value and MidCap
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly
wholly-owned subsidiary of Principal Life Insurance Company
and an affiliate of the Manager was founded in 1985. It
manages investments for institutional investors, including
Principal Life. Assets under management as of December 31,
1998 were approximately $31 billion. Invista's address is
1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.

Management Other Total Operating
Account Fees Expenses Expenses
Balanced 0.57% 0.02% 0.59%
Bond 0.49 0.02 0.51
Capital Value 0.43 0.01 0.44
High Yield 0.60 0.08 0.68
MidCap 0.61 0.01 0.62
Money Market 0.50 0.02 0.52

The Fund and the Manager, under an order received from the SEC, are able to
change Sub-Advisors or the fees paid to a Sub-Advisor, without the expense and
delay of a shareholder meeting. However, the order will not be relied upon by an
Account until the Fund receives approval from:
o contract owners who have assets in the Account, or
o in the case of a new Account, the Account's sole initial shareholder before
the Account is available to contract owners.
The order does not permit the Manager, without shareholder approval, to:
o appoint a Sub-Advisor that is an affiliate of the Manager or the Fund
(other than by reason of serving as a Sub-Advisor to an Account)(an
"affiliated Sub-Advisor"), or
o change a sub-advisory fee of an affiliated Sub-Advisor.

MANAGERS' COMMENTS

Growth-Oriented Accounts

Balanced Account
(Judith A. Vogel, Douglas D. Herold and Martin J. Schafer)

- --------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
11.91% 12.74% 12.33%
- --------------------------------------------

Note: Past performance is not predictive of future performance.

Capital Value Account
(Catherine A. Zaharis)

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

Note: Past performance is not predictive of future performance.

The Account's focus throughout 1998 was one of quality value. That focus will be
continued into 1999 as economic and world events are closely monitored.

MidCap Account
(Michael R. Hamilton)

Comparison of Change in Value of $10,000 Investment in the MidCap Account,
Lipper Mid-Cap Fund Average and S&P 500 Stock Index

Note: Past performance is not predictive of future performance.

Important Notes of the Growth-Oriented Accounts:

Income-Oriented Accounts:

Bond Account
(Scott A. Bennett)

Comparison of Change in Value of $10,000 Investment in the Bond Account, Lipper
Corporate Debt BBB Rated Fund Average and Lehman Brothers BAA Corporate Index

Note: Past performance is not predictive of future performance.

High Yield Account
(Mark P. Denkinger)

- ------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
-0.56% 7.79% 8.43%
- ------------------------------------------

Comparison of Change in Value of $10,000 Investment in the High Yield Account,
Lipper High Current Yield Fund Average and Lehman Brothers High Yield Index

High Lehman Lipper
Year Ended Yield High Yield High Current
December 31, Account Index Yield Average
10,000 10,000 10,000
1989 10,211 10,083 9,948
1990 9,425 9,116 8,903
1991 11,997 13,327 12,281
1992 13,747 15,426 14,474
1993 15,439 18,067 17,260
1994 15,535 17,880 16,599
1995 18,034 21,308 19,334
1996 20,401 23,727 21,977
1997 22,593 26,754 24,826
1998 22,466 27,254 24,716

Note: Past performance is not predictive of future performance.

Although economic conditions in the U.S. showed no signs of a slowdown,
continual problems around the world put significant pressure on the high yield
market. The High Yield Account posted a total return of -.56% for the year,
slightly trailing the Lipper High Current Yield Fund Average of -.44% and the
Lehman Brothers High Yield Index return of 1.87%. The relative underperformance
was driven by large negative returns from several bonds that experienced
financial difficulties during the fourth quarter. Continual problems in Asia
combined with problems in Russia and Latin America led investors to Treasuries.
This flight to quality impacted all fixed income asset classes but none more
than high yield. Spreads on high yield debt widened significantly, as investors
required a higher risk/return for lower quality or less liquid issues.

The high yield market was very active again in 1998. New issuance set another
record in 1998 with approximately $141 billion of new deals brought to market.
The high yield market grew to $580 billion at year-end as more and more
participants entered the market. Historically low default rates moved slightly
higher in 1998, but are still well below historical averages. Net inflows into
mutual funds were nearly $20 billion again in 1998, as the market continued to
attract investors.

The High Yield Account maintains a BB- average quality. Approximately 93% of the
portfolio is comprised of BB and B bonds. This is a relatively conservative risk
position compared to other funds in the high yield market. The Account is well
diversified with 47 bonds of various sectors. The managers are currently
overweighting the Telecom and Media sectors due to their domestic, non-cyclical
characteristics. They continue a disciplined approach to security selection in
both the primary and secondary market. With the significant widening of spreads
during the 4th quarter of 1998, high yield offers attractive total return
prospects. A low correlation with both interest rates and equity markets make
high yield an effective tool for enhancing 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.

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 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 currently contains 246 mutual funds.

Note: Mutual fund data from Lipper Inc.

GENERAL INFORMATION ABOUT AN ACCOUNT

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

Shareholder inquiries should be directed to: Principal Variable Contracts Fund,
Inc., Principal Financial Group, Des Moines, Iowa 50392-0200.

Sale of Account Shares
This section applies to eligible purchasers other than the separate accounts of
Principal Life and its subsidiaries.

In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.

In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.

FINANCIAL HIGHLIGHTS

PRINCIPAL VARIABLE CONTRACTS FUND, INC.
<TABLE>

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

<CAPTION>
BALANCED ACCOUNT(a) 1998 1997 1996 1995 1994
- ---------------- ----------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.51 $14.44 $13.97 $11.95 $12.77
Income from Investment Operations:
Net Investment Income............................... .49 .46 .40 .45 .37
Net Realized and Unrealized Gain (Loss) on Investments 1.33 2.11 1.41 2.44 (.64)
Total from Investment Operations 1.82 2.57 1.81 2.89 (.27)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.49) (.45) (.40) (.45) (.37)
Distributions from Capital Gains.................... (.59) (1.05) (.94) (.42) (.18)
Total Dividends and Distributions (1.08) (1.50) (1.34) (.87) (.55)
Net Asset Value, End of Period......................... $16.25 $15.51 $14.44 $13.97 $11.95
Total Return........................................... 11.91% 17.93% 13.13% 24.58% (2.09)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $198,603 $133,827 $93,158 $45,403 $25,043
Ratio of Expenses to Average Net Assets............. .59% .61% .63% .66% .69%
Ratio of Net Investment Income to Average Net Assets 3.37% 3.26% 3.45% 4.12% 3.42%
Portfolio Turnover Rate............................. 24.2% 69.7% 22.6% 25.7% 31.5%

BOND ACCOUNT(a) 1998 1997 1996 1995 1994
- ------------ ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $11.78 $11.33 $11.73 $10.12 $11.16
Income from Investment Operations:
Net Investment Income............................... .66 .76 .68 .62 .72
Net Realized and Unrealized Gain (Loss) on Investments .25 .44 (.40) 1.62 (1.04)
Total from Investment Operations .91 1.20 .28 2.24 (.32)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.66) (.75) (.68) (.63) (.72)
Excess Distributions from Capital Gains(b).......... (.01) -- -- -- --
Total Dividends and Distributions (.67) (.75) (.68) (.63) (.72)
Net Asset Value, End of Period......................... $12.02 $11.78 $11.33 $11.73 $10.12
Total Return........................................... 7.69% 10.60% 2.36% 22.17% (2.90)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $121,973 $81,921 $63,387 $35,878 $17,108
Ratio of Expenses to Average Net Assets............. .51% .52% .53% .56% .58%
Ratio of Net Investment Income to Average Net Assets 6.41% 6.85% 7.00% 7.28% 7.86%
Portfolio Turnover Rate............................. 26.7% 7.3% 1.7% 5.9% 18.2%
</TABLE>

See accompanying notes.
<TABLE>
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

<CAPTION>
CAPITAL VALUE ACCOUNT(a) 1998 1997 1996 1995 1994
- --------------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $34.61 $29.84 $27.80 $23.44 $24.61
Income from Investment Operations:
Net Investment Income............................... .71 .68 .57 .60 .62
Net Realized and Unrealized Gain (Loss) on Investments 3.94 7.52 5.82 6.69 (.49)
Total from Investment Operations 4.65 8.20 6.39 7.29 .13
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.71) (.67) (.58) (.60) (.61)
Distributions from Capital Gains.................... (1.36) (2.76) (3.77) (2.33) (.69)
Total Dividends and Distributions (2.07) (3.43) (4.35) (2.93) (1.30)
Net Asset Value, End of Period......................... $37.19 $34.61 $29.84 $27.80 $23.44
Total Return........................................... 13.58% 28.53% 23.50% 31.91% .49%
Net Assets, End of Period (in thousands)............ $385,724 $285,231 $205,019 $135,640 $120,572
Ratio of Expenses to Average Net Assets............. .44% .47% .49% .51% .51%
Ratio of Net Investment Income to Average Net Assets 2.07% 2.13% 2.06% 2.25% 2.36%
Portfolio Turnover Rate............................. 22.0% 23.4% 48.5% 49.2% 44.5%

HIGH YIELD ACCOUNT(a) 1998 1997 1996 1995 1994
- ------------------ ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $8.90 $8.72 $8.39 $7.91 $8.62
Income from Investment Operations:
Net Investment Income............................... .80 .76 .80 .76 .77
Net Realized and Unrealized Gain (Loss) on Investments (.85) .18 .30 .51 (.72)
Total from Investment Operations (.05) .94 1.10 1.27 .05
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.79) (.76) (.77) (.77) (.76)
Excess Distributions from Net Investment Income(b).. -- -- -- (.02) --
Total Dividends and Distributions (.79) (.76) (.77) (.79) (.76)

Net Asset Value, End of Period......................... $8.06 $8.90 $8.72 $8.39 $7.91

Total Return........................................... (.56)% 10.75% 13.13% 16.08% .62%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $14,043 $15,837 $13,740 $11,830 $9,697
Ratio of Expenses to Average Net Assets............. .68% .68% .70% .73% .73%
Ratio of Net Investment Income to Average Net Assets 8.68% 8.50% 9.21% 9.09% 9.02%
Portfolio Turnover Rate............................. 87.8% 32.0% 32.0% 35.1% 30.6%
</TABLE>

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL VARIABLE CONTRACTS FUND, INC.
<TABLE>

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

MONEY MARKET ACCOUNT(a) 1998 1997 1996 1995 1994
- -------------------- ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income............................... .051 .051 .049 .054 .037
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
Total from Investment Operations .051 .051 .049 .054 .037
Less Dividends from Net Investment Income.............. (.051) (.051) (.049) (.054) (.037)
Net Asset Value, End of Period......................... $1.000 $1.000 $1.000 $1.000 $1.000

See accompanying notes.
Notes to Financial Highlights

(a) Effective January 1, 1998 the following mutual funds were reorganized into
the Principal Variable Contracts Fund, Inc. as follows:

Former Fund Name Current Account Name
- --------------------------------------------------------------------------------
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal High Yield Fund, Inc. High Yield Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Money Market Fund, Inc. Money Market Account

The U.S. Government does not insure or guarantee an investment in the Fund.

Principal Variable Contracts Fund, Inc. SEC File 811-01944

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ACCOUNTS OF THE FUND

Balanced Account
Bond Account
Capital Value Account
Government Securities Account
Growth Account
International Account
MidCap Account
Money Market Account

This Prospectus describes a mutual fund organized by Principal Life Insurance
Company. The Fund provides a choice of investment objectives through the
accounts listed above.

The date of this Prospectus is May 1, 1999.

TABLE OF CONTENTS

ACCOUNT DESCRIPTIONS ......................................... 4
Primary investment strategy............................... 4
Annual operating expenses................................. 4
Day-to-day Account management............................. 5
Account Performance....................................... 5

Balanced Account.......................................... 6
Bond Account.............................................. 8
Capital Value Account.................................... 10
Government Securities Account............................. 12
Growth Account............................................ 14
International Account..................................... 16
MidCap Account............................................ 18
Money Market Account...................................... 20

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS................ 22

PRICING OF ACCOUNT SHARES...................................... 26

DIVIDENDS AND DISTRIBUTIONS.................................... 27
Growth-Oriented and Income-Oriented Accounts.............. 27
Money Market Account...................................... 27

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE................. 28
The Manager............................................... 28
The Sub-Advisors.......................................... 28

GENERAL INFORMATION ABOUT AN ACCOUNT........................... 30
Shareholders Rights....................................... 30
Purchase of Account Shares................................ 31
Sale of Account Shares.................................... 31
Year 2000 Readiness Disclosure............................ 32
Financial Statements...................................... 33

FINANCIAL HIGHLIGHTS........................................... 34
Notes to Financial Highlights............................. 38

ACCOUNT DESCRIPTIONS
The Principal Variable Contracts Fund is made up of several different Accounts.
Each Account has its own investment objective.

The Growth-Oriented Accounts (except the Balanced Account that invests in a mix
of equity and debt securities) invest primarily in common stocks. Under normal
market conditions the Growth-Oriented Funds (except Balanced) are fully invested
in equity securities. Under unusual circumstances, each of the Growth-Oriented
Accounts may invest without limit in cash for temporary or defensive purposes.
When doing so, the Account is not investing to achieve its investment objective.
The Accounts also maintain a portion of their assets in cash while they are
making long-term investment decisions and to cover sell orders from
shareholders.

The Bond Account has a rating limitation with regard to the quality of the bonds
that are held in its portfolio. The rating limitation applies when the Account
purchases a bond. If the rating on a bond changes while the Account owns it, the
Account is not required to sell the bond. The SAI contains additional
information about bond ratings by Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Corporation (S&P).

In the description for each Account, you will find important information about
the Account's:

Annual operating expenses
The annual operating expenses for each Account are deducted from Account assets
(stated as a percentage of Account assets) and are shown as of the end of the
most recent fiscal year. The examples are intended to help you compare the cost
of investing in a particular Account with the cost of investing in other mutual
funds. The examples assume you invest $10,000 in an Account for the time periods
indicated. The examples also assume that your investment has a 5% total return
each year and that the Account's operating expenses are the same as the most
recent fiscal year expenses. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be as shown.

Principal Management Corporation (the "Manager") serves as the manager for the
Principal Variable Contracts Fund. It has signed a sub-advisory agreement with
Invista Capital Management, LLC ("Invista") under which Invista provides
portfolio management for the Balanced, Capital Value, Government Securities, and
MidCap Accounts (see Management, Organization and Capital Structure).

Account Performance
Included in each Account's description is a set of tables and a bar chart.
Together, these provide an indication of the risks involved when you invest.

The bar chart shows changes in the Account's performance from year to year.

An Account's past performance is not necessarily an indication of how the
Account will perform in the future.

You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Money Market Account.

Investments in these Accounts are not deposits of a bank and are not insured or
guaranteed by the FDIC or any other government agency.

GROWTH-ORIENTED ACCOUNT

Balanced Account

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 11.56% 1994 -2.09% for the last 10 years
1990 -6.43% 1995 24.58% -----------------------------------
1991 34.36% 1996 13.13% Quarter Ended Return
1992 12.80% 1997 17.93% -----------------------------------
1993 11.06% 1998 11.91% 3/31/91 12.62%
Calendar Years Ended December 31 9/30/90 (11.70%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- --------- --------
Balanced Account 11.91% 12.74% 12.33%

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.57% $60 $189 $329 $738
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.59%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1993 Co-Manager, Judith A. Vogel, CFA. Portfolio
Manager of Invista Capital Management, LLC
since 1987.

Since October 1998 Co-Manager, Douglas D. Herold, CFA.
Portfolio Manager of Invista Capital
Management, LLC since 1996. Prior thereto,
Securities Analyst from 1993-1996.

Since December 1997 Co-Manager, Martin J. Schafer, Portfolio
Manager of Invista Capital Management, LLC
since 1992.

INCOME-ORIENTED ACCOUNT

Bond Account

The Bond Account seeks to provide as high a level of income as is consistent
with presentation of capital and prudent investment risk. It invests in
fixed-income securities. Generally, the Account invests on a long-term basis but
may make short-term investments. Longer maturities typically provide better
yields but expose the Account to the possibility of changes in the values of its
securities as interest rates change. When interest rates fall, the price per
share rises, and when rates rise, the price per share declines.

Account Performance Information

Lehman Brothers
BAA Corporate
Index 6.96 7.34 9.25
Lipper Corporate
Debt BBB Rated
Fund Average 6.25 7.00 9.19
---------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $52 $164 $285 $640
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.51%
- --------------------------------------------------------------------------------

During the fiscal year ended December 31, 1998, the average ratings of the
Account's assets based on markte value at each mont-end, were as follows (all
ratings are by Moody's):

2.08% in securities rated Aaa
2.78% in securities rated Aa
24.00% in securities rated A
64.55% in securities rated Baa
6.59% in securities rated Ba

Day-to-day Account management:
Since November 1996 Scott A. Bennett, CFA. Assistant Director - Securities
Investment of Principal Capital Management LLC since
1996. Prior thereto, Investment Manager.

GROWTH-ORIENTED ACCOUNT

Capital Value Account

In making selections for the Account's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps are involved in
this analysis are:

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 16.18% 1994 0.49% for the last 10 years
1990 -9.86% 1995 31.91% -----------------------------------
1991 38.67% 1996 23.50% Quarter Ended Return
1992 9.52% 1997 28.53% -----------------------------------
1993 7.79% 1998 13.58% 3/31/91 17.85%
Calendar Years Ended December 31 9/30/90 (17.01%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
Capital Value Account 13.58% 19.03% 15.15%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and Income
Fund Average 15.61 18.53 15.76
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.43% $45 $141 $246 $555
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.44%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since November 1996 Catherine A. Zaharis, CFA. Portfolio Manager of
Invista Capital Management, LLC since 1987.

INCOME-ORIENTED ACCOUNT

Government Securities Account

The Government Securities Account seeks a high level of current income,
liquidity and safety of principal. It invests in securities supported by:
o full faith and credit of the U.S. Government (e.g. GNMA certificates); or
o credit of a U.S. Government agency or instrumentality (e.g. bonds issued by
the Federal Home Loan Bank).
The Account may also invest in money market instruments.

Account Performance Information

Lehman Brothers
Mortgage Index 6.96 7.23 9.13
Lipper U.S. Mortgage
Fund Average 6.08 5.98 8.04
------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $51 $160 $280 $628
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.50%
- --------------------------------------------------------------------------------

Day-to-day Account Management:
Since May 1985 Martin J. Schafer, CFA. Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1992.

GROWTH-ORIENTED ACCOUNT

Growth Account

Account Performance Information

------------------------------- ----------------------------------------
Annual Total Return Highest & lowest
------------------------------- quarterly total returns
1995 25.62% for the last 5 years
1996 12.51% ----------------------------------------
1997 26.96% Quarter Ended Return
1998 21.36% ----------------------------------------
12/31/98 21.35%
9/30/98 (14.63%)
----------------------------------------
Calendar Years Ended December 31
---------------------------------------------
Average annual total returns
for the period ending December 31, 1998
---------------------------------------------
Past One Past Five
Year Years
-------- ---------
Growth Account 21.36% 19.48%*

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.47% $49 $154 $269 $604
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.48%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since August 1987 Michael R. Hamilton, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1987.

GROWTH-ORIENTED ACCOUNT

International Account

Account Performance Information

------------------------------- ----------------------------------------
Annual Total Return Highest & lowest
------------------------------- quarterly total returns
1995 14.17% for the last 5 years
1996 25.09% ----------------------------------------
1997 12.24% Quarter Ended Return
1998 9.98% ----------------------------------------
12/31/98 16.60%
9/30/98 (17.11%)
----------------------------------------
Calendar Years Ended December 31
----------------------------------------------
Average annual total returns
for the period ending December 31, 1989
----------------------------------------------
Past One Past Five
Year Years
-------- ---------
International Account 9.98% 12.09%*

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.73% $79 $246 $428 $954
Other Expenses........................ 0.04%
-----
Total Account Operating Expenses 0.77%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1994 Scott D. Opsal, CFA. Executive Vice President and
Chief Investment Officer of Invista Capital Management,
LLC since 1997. Vice President, 1986-1997.

GROWTH-ORIENTED ACCOUNT

MidCap Account

The MidCap Account is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for short-term
fluctuations in the value of their investments. It is designed for long-term
investors for a portion of their investments and is not designed for investors
seeking income or conservation of capital.

Account Performance Information

---------------------------------- -----------------------------------
Annual Total Returns Highest & lowest
---------------------------------- quarterly total returns
1989 21.84% 1994 0.78% for the last 10 years
1990 -12.50% 1995 29.01% -----------------------------------
1991 53.50% 1996 21.11% Quarter Ended Return
1992 14.94% 1997 22.75% -----------------------------------
1993 19.28% 1998 3.69% 3/31/91 25.86%
Calendar Years Ended December 31 9/30/90 (26.61%)
-----------------------------------
-----------------------------------------------------
Average annual total return
for the period ending December 31, 1998
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
MidCap Account 3.69% 14.92% 16.22%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Mid-Cap Fund Average 12.16 15.18 15.83
-----------------------------------------------------

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.61% $63 $199 $346 $774
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.62%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since December 1987 Michael R. Hamilton, Portfolio Manager of Invista
(Account's inception) Capital Management, LLC since 1987.

Money Market Account

The Account maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Account
may sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Account shares by its shareholders; or o
upon revised valuation of the security's issuer.
The sale of a security by the Account before maturity may not be in the best
interest of the Account. The Account does have an ability to borrow money to
cover the sale of Accounts shares. The sale of portfolio securities is usually a
taxable event.

The Money Market Account is generally a suitable investment for investors
seeking monthly dividends to produce income without incurring much principal
risk or for investor's short-term needs.

Account Performance Information

Annual Total Returns

1989 8.98% 1994 3.76%
1990 8.01% 1995 5.59%
1991 5.92% 1996 5.07%
1992 3.48% 1997 5.04%
1993 2.69% 1998 5.20%

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.50% $53 $167 $291 $653
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.52%
- --------------------------------------------------------------------------------

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.

Note:The Capital Value, Growth, International and MidCap Accounts invest
primarily in equity securities. The Balanced Account invests in a mix of
equity and debt securities. The Bond and Government Securities Accounts
invest primarily in debt securities.

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.

Risks of High Yield Securities
The Balanced and Bond Accounts may, to varying degrees, invest in debt
securities rated lower than BBB by S&P or Baa by Moody's or, if not rated,
determined to be of equivalent quality by the Manager. Such securities are
sometimes referred to as high yield or "junk bonds" and are considered
speculative.

Options
Each of the Accounts (except Capital Value and Money Market) may buy and sell
certain types of options. Each type is more fully discussed in the SAI.

Foreign Securities
Each of the following Accounts may invest in foreign securities to the indicated
percentage of its assets (debt securities issued in the United States pursuant
to a registration statement filed with the Securities and Exchange Commission
are not treated as foreign securities for purposes of these limitations.):
o International - 100%;
o Bond and Capital Value Accounts - 20%.
o Balanced, Growth and MidCap Accounts - 10%.
o The Money Market Account does not invest in foreign securities other than
those that are United States dollar denominated. All principal and interest
payments for the security are payable in U.S. dollars. The interest rate,
the principal amount to be repaid and the timing of payments related to the
securities do not vary or float with the value of a foreign currency, the
rate of interest on foreign currency borrowings or with any other interest
rate or index expressed in a currency other than U.S. dollars.

Temporary or Defensive Measures
For temporary or defensive purposes in times of unusual or adverse market
conditions, the Growth-Oriented Accounts and Bond Account, may invest without
limit in cash and cash equivalents. For this purpose, cash equivalents include:
bank certificates of deposit, bank acceptances, repurchase agreements,
commercial paper, and commercial paper master notes which are floating rate debt
instruments without a fixed maturity. In addition, an Account may purchase U.S.
Government securities, preferred stocks and debt securities, whether or not
convertible into or carrying rights for common stock.

PRICING OF ACCOUNT SHARES

DIVIDENDS AND DISTRIBUTIONS

The issuer of an equity security held by an Account may make a dividend payment.
When an Account receives a dividend, it increases the net asset value of a share
of the Account.

An Account accrues interest daily on its fixed income securities in anticipation
of an interest payment from the issuer of the security. This accrual increases
the net asset value of an Account.

The Money Market Account (or any other Account holding commercial paper)
amortizes the discount on commercial paper it owns on a daily basis. This
increases the net asset value of the Account.

NOTE:As the net asset value of a share of an Account increases, the unit value
of the corresponding division also reflects an increase. The number of
units you own in the Account are not increased.

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

Accounts: Balanced, Capital Value, Government Securities, Growth,
International and MidCap
Sub-Advisor: Invista Capital Management, LLC ("Invista"), an indirectly
wholly-owned subsidiary of Principal Life Insurance Company and an
affiliate of the Manager, was founded in 1985. It manages investments
for institutional investors, including Principal Life. Assets under
management as of December 31, 1998 were approximately $31 billion.
Invista's address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.

Management Other Total Operating
Account Fees Expenses Expenses

Balanced 0.57 0.02 0.59
Bond 0.49 0.02 0.51
Capital Value 0.43 0.01 0.44
Government Securities 0.49 0.01 0.50
Growth 0.47 0.01 0.48
International 0.73 0.04 0.77
MidCap 0.61 0.01 0.62
Money Market 0.50 0.02 0.52

The Fund and the Manager, under an order received from the SEC, are able to
change Sub-Advisors or the fees paid to a Sub-Advisor, without the expense and
delay of a shareholder meeting. However, the order will not be relied upon by an
Account until the Fund receives approval from:
o contract owners who have assets in the Account, or
o in the case of a new Account, the Account's sole initial shareholder before
the Account is available to contract owners.
The order does not permit the Manager, without shareholder approval, to:
o appoint a Sub-Advisor that is an affiliate of the Manager or the Fund
(other than by reason of serving as a Sub-Advisor to an Account)(an
"affiliated Sub-Advisor"), or
o change a subadvisory fee of an affiliated Sub-Advisor.

MANAGERS' COMMENTS

Growth-Oriented Accounts

Balanced Account
(Judith A. Vogel, Douglas D. Herold and Martin J. Schafer)

- --------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
11.91% 12.74% 12.33%
- --------------------------------------------

Note: Past performance is not predictive of future performance.

Capital Value Account
(Catherine A. Zaharis)

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

Note: Past performance is not predictive of future performance.

The Account's focus throughout 1998 was one of quality value. That focus will be
continued into 1999 as economic and world events are closely monitored.

Growth Account
(Michael R. Hamilton)

- -----------------------------------------------
Total Returns *
As of December 31, 1998
1 Year Since Inception Date 6/1/94 10 Year

18.95% 26.61% --
- -----------------------------------------------

Comparison of Change in Value of $10,000 Investment in the Aggressive Growth
Account, Lipper Growth Fund Average and S&P 500 Stock Index

Note: Past performance is not predictive of future performance.

International Account
(Scott D. Opsal)

Comparison of Change in Value of $10,000 Investment in the
International Account, Lipper International Fund Average and MSCI EAFE Index

Note: Past performance is not predictive of future performance.

MidCap Account
(Michael R. Hamilton)

Comparison of Change in Value of $10,000 Investment in the MidCap Account,
Lipper Mid-Cap Fund Average and S&P 500 Stock Index

Note: Past performance is not predictive of future performance.

Important Notes of the Growth-Oriented Accounts:

Income-Oriented Accounts:

Bond Account
(Scott A. Bennett)

Comparison of Change in Value of $10,000 Investment in the Bond Account, Lipper
Corporate Debt BBB Rated Fund Average and Lehman Brothers BAA Corporate Index

Note: Past performance is not predictive of future performance.

Government Securities Account
(Martin J. Schafer)

- --------------------------------------------
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
8.27% 7.02% 9.35%
- --------------------------------------------

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

Note: Past performance is not predictive of future performance.

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.

Note: Mutual fund data from Lipper Inc.

GENERAL INFORMATION ABOUT AN ACCOUNT

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

Shareholder inquiries should be directed to: Principal Variable Contracts Fund,
Inc., Principal Financial Group, Des Moines, Iowa 50392-0200.

Sale of Account Shares
This section applies to eligible purchasers other than the separate accounts of
Principal Life and its subsidiaries.

In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.

In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.

FINANCIAL HIGHLIGHTS

<TABLE>
PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

See accompanying notes.

<TABLE>
Selected data for a share of Capital Stock outstanding throughout each
year ended December 31:

FINANCIAL HIGHLIGHTS

<TABLE>
PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):

<CAPTION>
GROWTH ACCOUNT(a) 1998 1997 1996 1995 1994(c)
- -------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $17.21 $13.79 $12.43 $10.10 $9.60
Income from Investment Operations:
Net Investment Income............................... .21 .18 .16 .17 .07
Net Realized and Unrealized Gain (Loss) on Investments 3.45 3.53 1.39 2.42 .51
Total from Investment Operations 3.66 3.71 1.55 2.59 .58
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.21) (.18) (.16) (.17) (.08)
Distributions from Capital Gains.................... (.20) (.10) (.03) (.09) --
Excess Distributions from Capital Gains(b).......... -- (.01) -- -- --
Total Dividends and Distributions (.41) (.29) (.19) (.26) (.08)
Net Asset Value, End of Period......................... $20.46 $17.21 $13.79 $12.43 $10.10

Total Return........................................... 21.36% 26.96% 12.51% 25.62% 5.42%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $259,828 $168,160 $99,612 $42,708 $13,086
Ratio of Expenses to Average Net Assets............. .48% .50% .52% .58% .75%(e)
Ratio of Net Investment Income to Average Net Assets 1.25% 1.34% 1.61% 2.08% 2.39%(e)
Portfolio Turnover Rate............................. 9.0% 15.4% 2.0% 6.9% 0.9%(e)

INTERNATIONAL ACCOUNT(a) 1998 1997 1996 1995 1994(c)
- --------------------- ----------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $13.90 $13.02 $10.72 $9.56 $9.94
Income from Investment Operations:
Net Investment Income............................... .26 .23 .22 .19 .03
Net Realized and Unrealized Gain (Loss) on Investments 1.11 1.35 2.46 1.16 (.33)
Total from Investment Operations 1.37 1.58 2.68 1.35 (.30)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.25) (.23) (.22) (.18) (.05)
Excess Distributions from Net Investment Income(b).. -- -- -- -- (.02)
Distributions from Capital Gains.................... (.51) (.47) (.16) (.01) (.01)
Total Dividends and Distributions (.76) (.70) (.38) (.19) (.08)
Net Asset Value, End of Period......................... $14.51 $13.90 $13.02 $10.72 $9.56

Total Return........................................... 9.98% 12.24% 25.09% 14.17% (3.37)%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $153,588 $125,289 $71,682 $30,566 $13,746
Ratio of Expenses to Average Net Assets............. .77% .87% .90% .95% 1.24%(e)
Ratio of Net Investment Income to Average Net Assets 1.80% 1.92% 2.28% 2.26% 1.31%(e)
Portfolio Turnover Rate............................. 33.9% 22.7% 12.5% 15.6% 14.4%(e)
</TABLE>

See accompanying notes.

<TABLE>
Selected data for a share of Capital Stock outstanding throughout each
year ended December 31:

Notes to Financial Highlights

(a) Effective January 1, 1998 the following mutual funds were reorganized into
the Principal Variable Contracts Fund, Inc. as follows:

Former Fund Name Current Account Name
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal World Fund, Inc. International Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Money Market Fund, Inc. Money Market Account

(d) Total return amounts have not been annualized.

(e) Computed on an annualized basis.

The U.S. Government does not insure or guarantee an investment in the Fund.

Principal Variable Contracts Fund, Inc. SEC File 811-01944

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ACCOUNTS OF THE FUND

This Prospectus describes a mutual fund organized by Principal Life
Insurance Company. The Fund provides a choice of investment objectives through
the accounts listed above.

The date of this Prospectus is _____________.

Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.

ACCOUNT DESCRIPTIONS
The Principal Variable Contracts Fund is made up of several different Accounts.
Each Account has its own investment objective. Nineteen of the Account are
available through the Principal Variable Annuity: The accounts and investment
objectives are:

GROWTH-ORIENTED ACCOUNTS

Aggressive Growth - seeks long-term growth of 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 - seeks a total investment return consistent with the
preservation of capital.

Balanced - seeks a total return consisting of current income and capital
appreciation while assuming reasonable risks in furtherance of the investment
objective.

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

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

International SmallCap - seeks long-term growth of capital by investing
primarily in equity securities of non-United States companies with comparatively
smaller market capitalizations.

MicroCap - seeks long-term growth of capital by investing primarily in value and
growth oriented companies with small market capitalizations, generally less than
$700 million.

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

MidCap Growth - seeks long-term growth of capital. The Account attempts 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 - seeks to generate a high total return by investing primarily in
equity securities of companies principally engaged in the real estate industry.

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

SmallCap Growth - seeks long-term growth of capital. The Account attempts to
achieve its objective by investing primarily in equity securities of small
growth companies with market capitalizations of less than $1 billion at the time
of the initial purchase.

SmallCap Value - seeks long-term growth of capital by investing primarily in
equity securities of small companies with value characteristics and market
capitalizations of less than $1 billion.

Stock Index 500 - seeks long-term growth of capital. The Account attempts to
mirror the investment results of the Standard & Poor's 500 Stock Index.

Utilities - seeks to provide current income and long-term growth of income and
capital by investing primarily in equity and fixed income securities of
companies in the public utilities industry.

The Growth-Oriented Accounts (except the Balanced and Utilities Accounts that
invest in a mix of equity and debt securities) invest primarily in common
stocks. Under normal market conditions the Growth-Oriented Funds (except
Balanced and Utilities) are fully invested in equity securities. Under unusual
circumstances, each of the Growth-Oriented Accounts may invest without limit in
cash for temporary defensive purposes (see Temporary Defensive Measures). When
doing so, the Account is not investing to achieve its investment objective. The
Accounts also maintain a portion of their assets in cash while they are making
long-term investment decisions and to cover sell orders from shareholders.

INCOME-ORIENTED ACCOUNT

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

Government Securities - seeks a high level of income, liquidity and safety of
principal 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 Income-Oriented Accounts have a rating limitation with regard to the quality
of the bonds that are held in its portfolio. The rating limitation applies when
the Account purchases a bond. If the rating on a bond changes while the Account
owns it, the Account is not required to sell the bond. The SAI contains
additional information about bond ratings by Moody's Investors Service, Inc.
("Moody's") and S&P.

MONEY MARKET ACCOUNT

Money Market - has the investment objective of high level of income through
investments in short-term securities.

In the description for each Account, you will find important information about
the Account's:

Annual operating expenses
The annual operating expenses for each Account are deducted from Account assets
(stated as a percentage of Account assets) and are shown as of the end of the
most recent fiscal year. Estimates of the expenses are shown for the new
Account. The example is intended to help you compare the cost of investing in a
particular account with the cost of investing in other mutual funds. The example
assumes you invest $10,000 in an Account for the time periods indicated. The
example also assumes that your investment has a 5% return each year and that the
Account's operating expenses are the same as the most recent fiscal year
expenses (or estimated expenses for the new Account). Although your actual costs
may be higher or lower, based on these assumptions, your costs would be as
shown.

Principal Management Corporation serves as the manager for the Principal Mutual
Funds. It has signed contracts with various Sub-Advisors under which the
Sub-Advisor provides portfolio management for the certain Accounts (see
Management, Organization and Capital Structure).
Sub-Advisor Account
Berger Associates ("Berger") SmallCap Growth
Dreyfus Corporation ("Dreyfus") MidCap Growth
Goldman Sachs Asset Management ("GSAM") MicroCap
Invista Capital Management, LLC Balanced, Capital Value,
("Invista") Government Securities,
Growth, International,
International SmallCap,
MidCap, SmallCap, Stock
Index 500, and Utilities
J.P. Morgan Investment Management, Inc. SmallCap Value
("Morgan")
Morgan Stanley Asset
Management Inc. ("MSAM") Aggressive Growth and Asset
Allocation

Account Performance
Included in each Account's description is a set of tables and a bar chart.
Together, these provide an indication of the risks involved when you invest.

The bar chart shows changes in the Account's performance from year to year.

One of the tables compares the Account's average annual returns for 1, 5 and 10
years with a broad based securities market index (a broad measure of market
performance) and an average of mutual funds with a similar investment objective
and management style. The averages used are prepared by Lipper, Inc. (an
independent statistical service). The table shows how the Account's performance
compares with the returns of an index and with funds having similar investment
objectives. The other table for each Account provides the highest and lowest
quarterly return for that Account's shares during the last 10 calendar years.

An Account's past performance is not necessarily an indication of how the
Account will perform in the future.

You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Money Market Account.

Investments in these Accounts are not deposits of a bank and are not insured or
guaranteed by the FDIC or any other government agency.

GROWTH-ORIENTED ACCOUNT

Aggressive Growth Account

The Aggressive Growth Account seeks 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.

---------------------------------- -----------------------------------
Annual Total Returns Total Returns
---------------------------------- highest & lowest quarterly returns
for the last 5 years
-----------------------------------
Bar Chart Quarter Ended Return
-----------------------------------
0/00/00 00.00%
Calendar Years Ended December 31 0/00/00 (00.00%)
-----------------------------------
-----------------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-----------------------------------------------------
Past One Past Five
Year Years
-------- ---------
Aggressive Growth Account 18.95% 26.61%*

The year to date return as of December 31, 1998 is 18.95%.

Day-to-day Account management:
Since October 1998 Phil Friedman, Managing Director of Morgan Stanley
Dean Witter & Co. since 1990.

Since April 1994 Margaret Johnson, CFA. Portfolio Manager Morgan
Stanley Dean investment management since 1984.

The Aggressive Growth Account invests primarily in growth-oriented stocks of
medium and large capitalization U.S. corporations and to a limited extent,
foreign corporations that exhibit strong accelerating earnings growth. Under
normal circumstances, the Account invests at least 65% of the value of its
assets in common stocks.

The Account uses a flexible investment process in pursuit of its investment
objective. In selecting stocks for the Account, the Sub-Advisor, MSAM,
concentrates on companies with consistent or rising earnings growth records and
compelling business strategies. MSAM focuses on companies with market
capitalizations of $1 billion or more and is not limited to specific market
sectors.

MSAM continually and rigorously studies company developments, including business
strategy, management focus and financial results, to identify companies with
earnings growth and business momentum. In addition, MSAM closely monitors
analysts' expectations to identify issuers that have the potential for positive
earnings surprises versus consensus expectations. Valuation is of secondary
importance and is viewed in the context of propects for sustainable earnings
growth and the potential for positive earnings surprises in relation to
consensus expectations. The Portfolio considers selling securities of issuers
that no longer meet MSAM criteria.

When it selects a security for the Account, MSAM emphasizes individual security
selection. Account investments are generally diversified by industry but
concentrated sector positions may result from the selection process.

The Account has a long-term investment approach. However, MSAM may take
advantage of short-term opportunities that are consistent with its objective by
selling recently purchased securities that have increased in value (see
Portfolio Turnover).

The Account may invest up to 25% of its assets in securities of foreign
companies. See Foreign Securities for a description of the unique risks
associated with foreign securities.

The Aggressive Growth Account is generally a suitable investment for investors
who want long-term growth. Additionally, the investor must be willing to accept
the risks of investing in common stocks that may have greater risks than stocks
of companies with lower potential for earnings growth. As the value of the
stocks owned by the Account changes, the Account share price changes. In the
short term, the share price can fluctuate dramatically. When shares of the
Account are sold, they may be worth more or less than the amount paid for them.

GROWTH-ORIENTED ACCOUNT

Asset Allocation Account

The Asset Allocation Account seeks 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.

The year to date return as of December 31, 1998 is 9.18%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.80% $91 $284 $493 $1,096
Other Expenses........................ 0.09%
-----
Total Account Operating Expenses 0.89%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1994 Francine J. Bovich, Principal of Morgan Stanley Asset
Management, Inc. and Morgan Stanley & Co.
Incorporated since 1993.

Since October 1998 Phil Friedman, Managing Director of Morgan Stanley
Dean Witter & Co. since 1990.

Since April 1996 Stephan C. Sexauer, Principal of Morgan Stanley Asset
Management, Inc. and Morgan Stanley & Co.
Incorporated since 1989.

The Asset Allocation Account uses a flexible investment policy to establish a
diversivied global portfolio that will invest in equities and fixed income
securities. The Sub-Advisor will invest in equity securities of domestic and
foreign corporations that appear to be undervalued relative to their earnings
results or potential, or whose earnings growth prospectus appear to be more
attractive than the economy as a whole. In addition, the Sub-Advisor, MSAM, will
invest in debt securities to provide income and to moderate the overall
portfolio risk. Typically the Sub-Advisor will invest in high quality fixed
income securities but may invest up to 20% of the Account's assets in high yield
securities (see Risks of High Yield Securities).

The securities which the Account purchases are identified as belonging to an
asset class which include:
stocks of growth-oriented companies, both foreign and domestic;
Growth stocks are generally defined as stocks of companies with
earnings that are expected to grow more rapidly than the economy as a
whole.
stocks of value oriented companies, both foreign and domestic;
Value stocks are generally defined as stocks of companies with
distinctly below average stock price to earnings ratios and stock
price to book value ratios, and higher than average dividend yields.
domestic real estate investment trusts;
fixed income securities, both foreign and domestic; and domestic high
yield fixed-income securities.

Please review the sections of this prospectus which discuss the risks involved
with any investment in foreign securities (see Foreign Securities) and with
investments in companies with small market capitalizations (see Securities of
Smaller Companies).

Allocation among asset classes is designed to lessen overall investment risk by
diversifying the Account's assets among different types of investments in
different markets. MSAM reallocates among asset classes and eliminates asset
classes for a period of time, when in it's judgment the shift offers better
prospects of achieving the investment objective of the Account. Under normal
market conditions, abrupt shifts among asset classes will not occur.

MSAM does not allocate a specific percentage of the Account's assets to a class.
Over time, it expects the asset mix to be within the following ranges:
25% to 75% in equity securities; 20% to 60% in debt securities; and 0% to
40% in money market instruments.
The allocation is based on MSAM's judgement as to the general market and
economic conditions, trends and investment yields, interest rates, and changes
in fiscal or monetary policies.

The value of the stocks owned by the Account changes on a daily basis. Stock
prices reflect the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors. Bond values also change daily. Their prices
reflect changes in interest rates, market conditions and announcements of other
economic, political or financial information. Generally, when interest rates
fall, the price of a bond rises and when interest rates rise, the price
declines. Because the values of the Account's assets may rise or fall, when
shares of the Account are sold they may be worth more or less than the amount
paid for them.

The Asset Allocation Account is generally a suitable investment for investors
who are seeking a moderate risk approach towards long-term growth.

GROWTH-ORIENTED ACCOUNT

Balanced Account

The Balanced Account seeks to generate a total return consisting of current
income and capital appreciation while assuming reasonable risks in furtherance
of the investment objective.

---------------------------------- -----------------------------------
Annual Total Returns Total Returns
---------------------------------- highest & lowest quarterly returns
for the last 10 years
-----------------------------------
Bar Chart Quarter Ended Return
-----------------------------------
0/00/00 00.00%
Calendar Years Ended December 31 0/00/00 (00.00%)
-----------------------------------
-----------------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- --------- --------
Balanced Account 11.91% 12.74% 12.33%

S&P 500 Stock Index 28.58 24.06 19.21
Lehman Brothers
Government/Corporate
Bond Index 8.42 6.60 8.52
Lipper Balanced Fund
Average 13.48 13.93 13.04
-----------------------------------------------------

The year to date return as of December 31, 1998 is 11.91%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.57% $60 $189 $329 $738
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.59%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1993 Judith A. Vogel, CFA. Portfolio Manager of Invista
Capital Management, LLC since 1987.

Since October 1998 Douglas D. Herold, CFA. Portfolio Manager of Invista
Capital Management, LLC since 1998. Invista Capital
Management, LLC since 1993.

Since December 1997 Martin J. Schafer, Portfolio Manager of Invista
Capital Management, LLC since 1992.

The Balanced Account invests primarily in common stocks and corporate bonds. It
may also invest in other equity securities, government bonds and notes
(obligations of the U.S. government or its agencies) and cash. Though the
percentages in each category are not fixed, common stocks generally represent
40% to 70% of the Account's assets. The remainder of the Account's assets is
invested in bonds and cash.

Bond values change daily. Their prices reflect changes in interest rates, market
conditions and announcements of other economic, political or financial
information. Generally, when interest rates fall, the price of a bond rises and
when interest rates rise, the price declines.

Because the values of the Account's assets may rise or fall, when shares of the
Account are sold they may be worth more or less than the amount paid for them.

The Balanced Account is generally a suitable investment for investors seeking
long-term growth but who are uncomfortable accepting the risks of investing
entirely in common stocks.

INCOME-ORIENTED ACCOUNT

Bond Account

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

Lehman Brothers
BAA Corporate
Index 6.96 7.34 9.25
Lipper Corporate
Debt BBB Rated
Fund Average 6.25 7.00 9.19
---------------------------------------------

The year to date return as of December 31, 1998 is 7.69%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $52 $164 $285 $640
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.51%
- --------------------------------------------------------------------------------

During the fiscal year ended December 31, 1998, based on the dollar-weighted
average ratings of the Account's portfolio at the end of each month in the
fiscal year, net assets of the Account were invested in securities rated as
follows (all ratings are by Moody's):
0.24% in securities rated Aaa
1.29% in securities rated Aa
17.32% in securities rated A
72.48% in securities rated Baa
8.67% in securities rated Ba

Day-to-day Account management:
Since November 1996 Scott A. Bennett, CFA. Assistant Director - Securities
Investment of Principal Life Insurance Company since
1996. Prior thereto, Investment Manager.

The Bond Account invests in fixed-income securities. Generally, the Account
invests on a long-term basis but may make short-term investments. Longer
maturities typically provide better yields but expose the Account to the
possibility of changes in the values of its securities as interest rates change.
Generally, when interest rates fall, the price per share rises, and when rates
rise, the price per share declines.

Under normal circumstances, the Account invests at least 65% of its assets in:
debt securities and taxable municipal bonds;
rated, at purchase, in one of the top four categories by S&P
or Moody's, or if not rated, in the Manager's opinion are of
comparable quality.
similar Canadian, Provincial or Federal Government securities payable
in U.S. dollars; and
securities issued or guaranteed by the U.S. Government or its agencies.

Under unusual market or economic conditions, the Account may invest up to 100%
of its assets in cash and cash equivalents (see Temporary Defensive Measures).

GROWTH-ORIENTED ACCOUNT

Capital Value Account

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

---------------------------------- -----------------------------------
Annual Total Returns Total Returns
---------------------------------- highest & lowest quarterly returns
for the last 10 years
-----------------------------------
Bar Chart Quarter Ended Return
-----------------------------------
mm/dd/yy 00.00%
Calendar Years Ended December 31 mm/dd/yy (00.00%)
-----------------------------------
-----------------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
Capital Value Account 13.58% 19.03% 15.15%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and Income
Fund Average 15.61 18.53 15.76
-----------------------------------------------------

The year to date return as of December 31, 1998 is 13.58%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.43% $45 $141 $246 $555
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.44%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since November 1996 Catherine A. Zaharis, CFA. Portfolio Manager of
Invista Capital Management, LLC since 1987.

The Capital Value Account invests primarily in common stocks. It may also invest
in other equity securities. To achieve its investment objective, the
Sub-Advisor, Invista, invests in securities that have "value" characteristics.
This process is known as "value investing." Value stocks tend to have higher
yields and lower price to earnings (P/E) ratios than other stocks.

In making selections for the Account's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps are involved in
this analysis are:

Research. Invista researches economic prospects over the next one to two
years rather than focusing on near term expectations. This approach is
designed to provide insight into a company's real growth potential.

Valuation. The research findings allow Invista to identify the prospects
for the major industrial, commercial and financial segments of the economy.
Invista looks at such factors as demand for products, capacity to produce,
operating costs, pricing structure, marketing techniques, adequacy of raw
materials and components, domestic and foreign competition and research
productivity. It then uses this information to judge the prospects for each
industry for the near and intermediate term.

Ranking. Invista then ranks the companies in each industry group according
to their relative value. The greater a company's estimated worth compared
to the current market price of its stock, the more undervalued the company.
Computer models help to quantify the research findings.

Stock selection. Invista buys and sells stocks according to the Account's
own policies using the research and valuation ranking as a basis. In
general, Invista buys stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with attractive
valuation, other factors may be taken into account such as:
events that could cause a stock's price to rise or fall; anticipation
of high potential reward compared to potential risk; and belief that a
stock is temporarily mispriced because of market overreactions.

The Capital Value Account is generally a suitable investment for investors
seeking long-term growth who are willing to accept the risks of investing in
common stocks but also prefer investing in companies that appear to be
considered undervalued relative to similar companies. When shares of the Account
are sold, they may be worth more or less than the amount paid for them.

INCOME-ORIENTED ACCOUNT

Government Securities Account

The Government Securities Account 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
Associations Certificates. Account shares are not guaranteed by the United
States government.

----------------------------- ---------------------------------------
Annual Total Returns Total Returns
----------------------------- highest and lowest quarterly returns
for the last 10 years
Bar Chart ---------------------------------------
Quarter Ended Quarterly Return
---------------------------------------
mm/dd/yy 00.00%
mm/dd/yy (00.00%)
---------------------------------------

------------------------------------------------
Average annual total returns
(for the period ending December 31, 1998)
------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- --------- --------
Government Securities
Account 8.27% 7.02% 9.35%
Calendar Years Ending December 31
Lehman Brothers
Mortgage Index 6.96 7.23 9.13
Lipper U.S. Mortgage
Fund Average 6.08 5.98 8.04
------------------------------------------------

The year to date return as of December 31, 1998 is 8.27%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.49% $51 $160 $280 $628
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.50%
- --------------------------------------------------------------------------------

Day-to-day Account Management:
Since May 1985 Martin J. Schafer, CFA. Portfolio Manager of Invista
Capital Management, LLC since 1992.

The Government Securities Income Account invests in U. S. Government securities,
which include obligations issued or guaranteed by the U. S. Government or its
agencies or instrumentalities. The Account may invest in securities supported
by:
full faith and credit of the U. S. Government (e.g. GNMA certificates); or
credit of the instrumentality (e.g. bonds issued by the Federal Home Loan
Bank).

Although some of the securities the Account purchases are backed by the U.S.
government and its agencies, shares of the Account are not guaranteed.
Generally, when interest rates fall, the value of the Account's shares rises,
and when rates rise, the value declines. Because of the fluctuation in values of
the Account's shares, when sold, shares of the Account may be worth more or less
than the amount paid for them.

U.S. Government securities do not involve the degree of credit risk associated
with investments in lower quality fixed-income securities. As a result, the
yields available from U.S. Government securities are generally lower than the
yields available from many other fixed-income securities. Like other
fixed-income securities, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of the Account's securities
do not effect interest income on securities already held by the Account, but are
reflected in the Account's price per share. Since the magnitude of these
fluctuation generally are greater at times when the Account's average maturity
is longer, under certain market conditions the Account may invest in short term
investments yielding lower current income rather than investing in higher
yielding longer term securities.

GNMA Certificates are mortgage-backed securities representing an interest in a
pool of mortgage loans. Various lenders make the loans that are then insured (by
the Federal Housing Administration) or loans that are guaranteed (by Veterans
Administration or Farmers Home Administration). The lender or other security
issuer creates a pool of mortgages that it submits to GNMA for approval.

GROWTH-ORIENTED ACCOUNT

Growth Account

The Growth Account seeks growth of capital through the purchase primarily of
common stocks, but the Account may invest in other securities.

---------------------------------------------
Average annual total returns
(for the period ending December 31, 1989)
---------------------------------------------
Past One Past Five
Year Years
-------- ---------
Growth Account 21.36% 19.48%*
Calendar Years Ended December 31
S&P 500 Stock Index 28.58 24.06
Lipper Growth Fund Average 22.86 19.03
---------------------------------------------
* Period from May 1, 1994, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is 21.36%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.47% $49 $154 $269 $604
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.48%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since August 1987 Michael R. Hamilton, Portfolio Manager of Invista
Capital Management, LLC since 1987.

Research. Invista researches economic prospects over the next one to
two years rather than focusing on near term expectations. This approach
is designed to provide insight into a company's real growth potential.

Valuation. The research findings allow Invista to identify the
prospects for the major industrial, commercial and financial segments
of the economy. Invista looks at such factors as demand for products,
capacity to produce, operating costs, pricing structure, marketing
techniques, adequacy of raw materials and components, domestic and
foreign competition and research productivity. It then uses this
information to judge the prospects for each industry for the near and
intermediate term.

Stock selection. Invista then purchases securities of issuers that
appear to have high growth potential. Common stocks selected for the
Account may include securities of companies that:
have a record of sales and earnings growth that exceeds the
growth rate of corporate profits of the S&P 500, or offer new
products or new services.

The Growth Account is generally a suitable investment for investors who want
long-term growth. Additionally, the investor must be willing to accept the risks
of investing in common stocks that may have greater risks than stocks of
companies with lower potential for earnings growth. As the value of the stocks
owned by the Account changes, the Account share price changes. In the short
term, the share price can fluctuate dramatically. When shares of the Account are
sold, they may be worth more or less than the amount paid for them.

GROWTH-ORIENTED ACCOUNT

International Account

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

------------------------------- ----------------------------------------
Annual Total Return Total Return
------------------------------- highest & lowest quarterly returns
for the last 5 years
----------------------------------------
Bar Chart Quarter Ended Return
----------------------------------------
mm/dd/yy 00.00%
mm/dd/yy (00.00%)
----------------------------------------
Calendar Years Ended December 31
----------------------------------------------
Average annual total returns
(for the period ending December 31, 1989)
----------------------------------------------
Past One Past Five
Year Years
-------- ---------
International Account 9.98% 12.09%*

The year to date return as of December 31, 1998 is 9.98%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.73% $79 $246 $428 $954
Other Expenses........................ 0.04%
-----
Total Account Operating Expenses 0.77%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1994 Scott D. Opsal, CFA. Chief Investment Officer of
Invista Capital Management, LLC since 1997.
Vice President, 1986-1997.

The International Account invests in common stocks of companies established
outside of the U. S. The Account has no limitation on the percentage of assets
that are invested in any one country or denominated in any one currency. However
under normal market conditions, the Account intends to have at least 65% of its
assets invested in companies of at least three countries. One of those countries
may be the U. S. though currently the Account does not intend to invest in
equity securities of U. S. companies.

The values of the stocks owned by the Account change on a daily basis. Stock
prices reflect the activities of individual companies as well as general market
and economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities (see Foreign
Securities). Because the values of the Account's assets may rise or fall, when
shares of the Account are sold they may be worth more or less than the amount
paid for them.

The International Account is generally a suitable investment for investors who
seek long-term growth and who want to investment in non-U.S. companies. This
Account is not an appropriate investment for investors who are seeking either
preservation of capital or high current income. Suitable investors must be able
to assume the increased risks of higher price volatility and currency
fluctuations associated with investments in international stocks which trade in
non-U.S. currencies.

GROWTH-ORIENTED ACCOUNT

International SmallCap Account

The 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.

-------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-------------------------------------------
Past One
Year
--------

International SmallCap Account (10.37)%*
Calendar Years Ended December 31
______________________ 00.00
Lipper International SmallCap
Fund Average 13.02
------------------------------------------
* Periodfrom May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is (10.37)%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 1.21% $136 $425 $734 $1,613
Other Expenses........................ 0.13%
-----
Total Account Operating Expenses 1.34%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Darren K. Sleister, Portfolio Manager of Invista Capital
Management, LLC since 1995. Prior thereto, Securities
Analyst.

The International SmallCap Account invests in stocks of non-U.S. companies with
comparatively smaller market capitalizations. Market capitalization is defined
as total current market value of a company's outstanding common stock. Under
normal market conditions, the Account invests at least 65% of its assets in
securities of companies having market capitalizations of $1 billion or less.
Please review the sections of this prospectus which discuss the risks involved
with any investment in foreign securities (see Foreign Securities) and with
investments in companies with small market capitalizations (see Securities of
Smaller Companies).

The International SmallCap Account is generally a suitable investment for
investors seeking long-term growth who want to invest a portion of their assets
in smaller, non-U.S. companies. Because the values of the Account's assets may
rise or fall, when shares of the Account are sold they may be worth more or less
than the amount paid for them.

GROWTH-ORIENTED ACCOUNT

MicroCap Account

The 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.

-------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-------------------------------------------
Past One
Year
--------
MicroCap Account (18.42)%*
Calendar Years Ended December 31
______________________ 00.00
____________________
______________________ 00.00
Lipper Micro Cap Fund
Average 00.00
-------------------------------------------
* Periodfrom May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is (18.42)%.

* Manager has agreed to cap expenses so that total Account operating
expenses will be ____% for 1999.
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Paul D. Farrell, Vice President of GSAM since 1991.

Matthew B. McLennan, Associate of GSAM since 1995. Prior
thereto, Queensland Investment Corporation in Australia.

Eileen A. Aptman, Vice President of GSAM since 1993.

Under normal market conditions, the MicroCap Account invests at least 65% of its
total assets in equity securities of companies with market capitalizations of
$700 million of less at the time of investment. Under normal circumstances, the
Account's investment horizon for ownership of equity securities is two to three
years.

The Account invests in companies that the Sub-Advisor, GSAM, believes are well
managed niche businesses that have the potential to achieve high or improving
returns on capital and/or above average sustainable growth. GSAM invests in
companies that have value characteristics as well as those with growth
characteristics with no consistent preference between the two categories. Growth
stocks are considered to be those with potential for growth of capital and
earnings which is expected to be above average. Value stocks tend to have higher
yields and lower price to earnings (P/E) ratios than other stocks.

The Account may invest in securities of small market capitalization companies
that may have experienced financial difficulties. Investments may also be made
in companies that are in the early stages of their life and that GSAM believes
have significant growth potential. GSAM believes that the companies in which the
Account may invest offer greater opportunities for growth of capital than
larger, more mature, better known companies. However, investments in such small
market capitalization companies involve special risks. For a more thorough
discussion of the risks of investing in small companies, please review the
sections of this prospectus which discuss the risks of investing in companies
with small market capitalizations (see Securities of Smaller Companies) and the
risks of investing in companies with limited operating history (see Unseasoned
Issuers).

GROWTH-ORIENTED ACCOUNT

MidCap Account

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

---------------------------------- -----------------------------------
Annual Total Returns Total Returns
---------------------------------- highest & lowest quarterly returns
for the last 10 years
-----------------------------------
Bar Chart Quarter Ended Return
-----------------------------------
mm/dd/yy 00.00%
Calendar Years Ended December 31 mm/dd/yy (00.00%)
-----------------------------------
-----------------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-----------------------------------------------------
Past One Past Five Past Ten
Year Years Years
-------- -------- --------
MidCap Account 3.69% 14.92% 16.22%

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Mid-Cap Fund Average 12.16 15.18 15.83
-----------------------------------------------------

The year to date return as of December 31, 1998 is 3.69%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.61% $63 $199 $346 $774
Other Expenses........................ 0.01%
-----
Total Account Operating Expenses 0.62%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since December 1987 Michael R. Hamilton, Portfolio Manager of Invista
Capital Management, LLC since 1987.

The MidCap Account primarily invests in stocks of growth-oriented companies.
Stocks that are chosen for the Account by the Sub-Advisor, Invista, are thought
to be responsive to changes in the marketplace and have the fundamental
characteristics to support growth. The Account may invest for any period in any
industry, in any kind of growth-oriented company. Companies may range from well
established, well known to new and unseasoned (see Unseasoned Issuers).

The Account may invest up to 20% of its assets in securities of foreign
companies. See Foreign Securities for a description of the unique risks
associated with foreign securities.

The values of the stocks owned by the Account change on a daily basis. The
current share price reflects the activities of individual companies and general
market and economic conditions. In the short term, stock prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. When shares of the Account are
sold, they may be worth more or less than the amount paid for them.

The MidCap Account is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for short-term
fluctuations in the value of their investments. The Account is an aggressive
capital appreciation fund. It is designed for long-term investors for a portion
of their investments and not designed for investors seeking income or
conservation of capital.

GROWTH-ORIENTED ACCOUNT

MidCap Growth Account

The 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.

-------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-------------------------------------------
Past One
Year
--------
MidCap Growth Account (3.40)%*
Calendar Years Ended December 31
______________________ 00.00
Lipper MidCap Growth
Fund Average 00.00
------------------------------------------
* Periodfrom May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is (3.40)%.

* Manager has agreed to cap expenses so that total Account operating
expenses will be ____% for 1999.
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 John O'Toole, CFA. Portfolio Manager of The Dreyfus
Corporation and Senior Vice President of Mellon Equity
Associates LLP since 1990.

The MidCap Growth Account invests primarily in common stocks of medium
capitalization companies, generally firms with a market value between $1 billion
and $10 billion. In the view of the Sub-Advisor, Dreyfus, many medium sized
companies:
are in fast growing industries;
offer superior earnings growth potential, and
are characterized by strong balance sheets and high returns on equity.

Because companies in this market are smaller, prices of their stocks tend to be
more volatile than stocks of companies with larger capitalizations. The Account
may also hold investments in large and small capitalization companies, including
emerging and cyclical growth companies. For a discussion of the risks of
investing in small companies, please review the sections of this prospectus
which discuss the risks of investing in companies with small market
capitalizations (see Securities of Smaller Companies) and the risks of investing
in companies with limited operating history (see Unseasoned Issuers).

Once such common stocks are identified, Dreyfus constructs a portfolio, that in
the aggregate breakdown and risk profile resembles the S&P MidCap, but is
weighted toward the most attractive stocks. The valuation model incorporates
information about the relevant criteria as of the most recent period for which
data are available. Once ranked, the securities are categorized under the
headings "buy", "sell" or "hold". The decision to buy, sell or hold is made by
Dreyfus based primarily on output of the valuation model. However, that decision
may be modified due to subsequently available or other specific relevant
information about the security.

The MidCap Growth Account is generally a suitable investment for investors
seeking long-term growth and who are willing to accept the potential for
short-term fluctuations in the value of their investments. It is designed for
long term investors for a portion of their investments and not designed for
investors seeking income or conservation of capital.

"Standard & Poor's MidCap 400 Index" is a trademark of Standard & Poor's
Corporation (S&P). S&P is not affiliated with Principal Life Insurance Company
or with the Fund.

MONEY MARKET ACCOUNT

Money Market Account

The Money Market Account seeks a high 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.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.50% $53 $167 $291 $653
Other Expenses........................ 0.02%
-----
Total Account Operating Expenses 0.52%
- --------------------------------------------------------------------------------

The Money Market Account invests its assets in a portfolio of money market
instruments. The investments are U. S. dollar denominated securities which the
Manager believes present minimal credit risks. At the time the Account purchases
each security, it is an "eligible security" as defined in the regulations issued
under the Investment Company Act of 1940.

The Account maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Account
may sell a security before it matures:
to take advantage of market variations;
to generate cash to cover sales of Account shares by its shareholders;
or upon revised valuation of the security's issuer.
The sale of a security by the Account before maturity may not be in the best
interest of the Account. The Account does have an ability to borrow money to
cover the sale of Accounts shares. The sale of portfolio securities is usually a
taxable event.

It is the policy of the Account to be as fully invested as possible to maximize
current income. Securities in which the Account invests include:
U.S. Government securities which are issued or guaranteed by the U. S.
Government, including treasury bills, notes and bonds.
U. S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U. S. Government. These are
backed either by the full faith and credit of the U. S. Government or
by the credit of the particular agency or instrumentality.

Bank obligations consisting of:
certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank or
bankers acceptances which are time drafts drawn on a
commercial bank, usually in connection with international
commercial transactions.
Commercial paper that is short-term promissory notes issued by U. S. or
foreign corporations primarily to finance
short-term credit needs.
Short-term corporate debt consisting of notes, bonds or debentures
which at the time of purchase by the Account has 397 days or less
remaining to maturity.
Repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price
plus interest at a specified rate. Generally these have a short
duration (less than a week) but may have a longer duration.
Taxable municipal obligations that are short-term obligations issued
or guaranteed by state and municipal issuers that generate taxable
income.

The Money Market Account is generally a suitable investment for investors
seeking monthly dividends to produce income without incurring much principal
risk or for investor's short-term needs.

GROWTH-ORIENTED ACCOUNT

Real Estate Account

The 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.

----------------------------- ------------------------------------
Annual Total Returns Total Returns
------------------------------ highest & lowest quarterly returns
for the last 3 quarters
Bar Chart ------------------------------------
Quarter Ended Return
------------------------------------
0/0/00 00.00%
0/00/00 (00.00%)
------------------------------------
Calendar Years Ended December 31
-------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-------------------------------------------
Past One
Year
--------
Real Estate Account (6.56)%*

______________________ 00.00
Lipper Real Estate
Fund Average (15.46)
------------------------------------------
* Periodfrom May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is (6.56)%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.90% $102 $318 $552 $1,225
Other Expenses........................ 0.10%
-----
Total Account Operating Expenses 1.00%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Kelly D. Rush, Assistant Director of Commercial Real
Estate, Principal Life Insurance Company since 1996.
Prior thereto, Senior Administrator, Investment -
Commercial Real Estate.

The Real Estate Account invests primarily in equity securities of companies
engaged in the real estate industry. For purposes of the Account's investment
policies, a real estate company has at least 50% of its assets, income or
profits derived from products or services related to the real estate industry.
Real estate companies include real estate investment trusts and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. Companies whose products and services relate to the real estate
industry include building supply manufacturers, mortgage lenders and mortgage
servicing companies. The Account may invest up to 25% of its assets in
securities of foreign real estate companies. See Foreign Securities for a
description of the unique risks associated with foreign securities.

Real estate investment trusts ("REITs") are corporations or business trusts that
are effectively permitted to eliminate corporate level federal income taxes if
they meet certain requirements of the Internal Revenue Code. The Account focuses
on equity REITs.
REITs are characterized as:
equity REITs, which primarily own property and generate revenue from
rental income; mortgage REITs, which invest in real estate mortgages;
and hybrid REITs, which combine the characteristics of both equity and
mortgage REITs.

Securities of real estate companies are subject to securities market risks as
well as risks similar those of direct ownership of real estate. These include:
declines in the value of real estate risks related to general and local economic
conditions dependency on management skills heavy cash flow dependency possible
lack of available mortgage funds overbuilding extended vacancies in properties
increases in property taxes and operating expenses changes in zoning laws
expenses incurred in the cleanup of environmental problems casualty or
condemnation losses changes in interest rates

In addition to the risks listed above, equity REITs are affected by the changes
in the value of the properties owned by the trust. Mortgage REITs are affected
by the quality of the credit extended. Both equity and mortgage REITs:
are dependent upon management skills and may not be diversified; are
subject to cash flow dependency and defaults by borrowers; and could
fail to qualify for tax-free pass through of income under the Code.

Because of these factors, the values of the Account's assets change on a daily
basis. The current share price reflects the activities of individual companies
and general market and economic conditions. In the short term, share prices can
fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. When shares of the
Account are sold, they may be worth more or less than the amount paid for them.

GROWTH-ORIENTED ACCOUNT

SmallCap Account

The 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.

Calendar Years Ended December 31
______________________ 00.00
Lipper SmallCap Fund Average (0.33)
---------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is (20.51)%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.85% $100 $312 $542 $1,201
Other Expenses........................ 0.13%
-----
Total Account Operating Expenses 0.98%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Mark T. Williams, Portfolio Manager of Invista Capital
Management, LLC since 1995. Investment Officer,
1992-1995.

John F. McClain, Portfolio Manager of Invista Capital
Management, LLC since 1995. Investment Officer,
1992-1995.

The SmallCap Account invests in equity securities of companies in the U.S. with
comparatively smaller market capitalizations. Market capitalization is defined
as total current market value of a company's outstanding common stock. Under
normal market conditions, the Account invests at least 65% of its assets in
securities of companies with market capitalizations of $1 billion or less.

Investments in companies with smaller market capitalizations may involve greater
risks and price volatility (wide, rapid fluctuations) than investments in
larger, more mature companies. For a more thorough discussion of the risks of
investing in small companies, please review the sections of this prospectus
which discuss the risks of investing in companies with small market
capitalizations (see Securities of Smaller Companies) and the risks of investing
in companies with limited operating history (see Unseasoned Issuers).

The value of the stocks owned by the Account changes on a daily basis. The
current share price reflects the activities of individual companies as well as
general market and economic conditions. In the short term, stock prices can
fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. When shares of the
Account are sold, they may be worth more or less than the amount paid for them.

GROWTH-ORIENTED ACCOUNT

SmallCap Growth Account

The 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 capitalizations of less than $1 billion.

-------------------------------------------
Average annual total return
(for the period ending December 31, 1998)
-------------------------------------------
Past One
Year
--------
SmallCap Growth Account 2.96%*
Calendar Years Ended December 31
______________________ 00.00
Lipper SmallCap Fund Average (0.33)
-------------------------------------------
* Periodfrom May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is 2.96%.

* Manager has agreed to cap expenses so that total Account operating
expenses will be ____% for 1999.
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since November 1998 Amy Selner, _____________ of Berger Associates, Inc.
since _____. Prior thereto, --------------------.

The SmallCap Growth Account invests primarily in a diversified group of equity
securities of small growth companies. Generally, at the time of the Account's
initial purchase of a security, the market capitalization of the issuer is less
than $1 billion. Growth companies are generally those with sales and earnings
growth that is expected to exceed the growth rate of corporate profits of the
S&P 500. They may also include companies that offer new products or new services
(see Securities of Smaller Companies and Unseasoned Issuers).

In selecting securities for investment, the Sub-Advisor, Berger, places primary
emphasis on companies which it believes have favorable growth prospects. Berger
seeks to identify small growth companies that either:
occupy a dominant position in an emerging industry, or growing market
share in larger, fragmented industries.
While these companies may present above average risk, Berger believes that they
may have the potential to achieve long-term earnings growth substantially above
the earnings growth of other companies.

The value of the stocks owned by the Account changes on a daily basis. The
current share price reflects the activities of individual companies and general
market and economic conditions. In the short term, stock prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. When shares of the Account are
sold, they may be worth more or less than the amount paid for them.

GROWTH-ORIENTED ACCOUNT

SmallCap Value Account

The 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 caracteristics and market capitalizations of less
than $1 billion.

--------------------------------------------
Average annual total returns
(for the period ending December 31, 1989)
--------------------------------------------
Past One
Year
---------
SmallCap Value Account (15.06)%*
Calendar Years Ended December 31
______________________ 00.00
Lipper SmallCap Fund Average (0.33)
--------------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is (15.06)%.

* Manager has agreed to cap expenses so that total Account operating
expenses will be ____% for 1999.
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Stephen Rich, Vice President of J.P. Morgan Investment
Management, Inc. since 1997. Prior thereto, held
positions in J.P. Morgan's structured equity and
balanced/equity groups.

Denise Higgins, Vice President of J.P. Morgan Investment
Management, Inc. since 1998. Balanced and equity
portfolio manager at J.P. Morgan Investment Management,
Inc., 1994 - 1998. Prior thereto, portfolio manager at
Lord Abbett & Company.

The SmallCap Value Account invests primarily in a diversified group of equity
securities of small U.S. companies with a market capitalization of less than $1
billion at the time of the initial purchase. Under normal market conditions, the
Account invests at least 65% of its assets in equity securities of such
companies. Emphasis is given to those companies that exhibit value
characteristics. These characteristics are above average dividend yield and
below average price to earnings (P/E) ratios.

The Sub-Advisor, Morgan, uses fundamental research, systematic stock valuation
and a disciplined portfolio construction process. It seeks to enhance returns
and reduce the volatility in the value of the Account relative to that of the
U.S. small company value universe, represented by the Russell 2000(R) Value
Index. Morgan continuously screens the small company universe to identify for
further analysis those companies that exhibit favorable characteristics. Such
characteristics include: significant and predictable cash flow and high quality
management. Based on fundamental research and using a dividend discount model,
Morgan ranks these companies within economic sectors according to their relative
values. Morgan then selects for purchase the companies it feels to be most
attractive within each economic sector.

Under normal market conditions, the Account will have sector weightings
comparable to that of the U.S. small company value universe though it may under
or over-weight selected economic sectors. In addition as a company moves out of
the market capitalization range of the small company universe, it generally
becomes a candidate for sale by the Account.

For a discussion of the risks of investing in small companies, please review the
sections of this prospectus which discuss the risks of investing in companies
with small market capitalizations (see Securities of Smaller Companies) and the
risks of investing in companies with limited operating history (see Unseasoned
Issuers). See Foreign Securities for a description of the unique risks
associated with foreign securities.

GROWTH-ORIENTED ACCOUNT

Stock Index 500 Account

The Stock Index 500 Account seeks long-term growth of capital. The Account
attempts to mirror the investment results of the Standard & Poor's 500 Stock
Index.

* Estimated (Manager has agreed to cap expenses so that the total Account
operating expenses will be 0.40% for 1999.)
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since ______ (Account's inception) Dean Roth, Portfolio Manager of Invista
Capital Management, LLC since _______.
Prior thereto, _______________________.

Under normal market conditions, the Stock Index 500 Account invests at least 80%
of its assets in common stocks of companies that compose the S&P 500. The
Sub-Advisor, Invista, will attempt to mirror the investment performance of the
index by allocating the Account's assets in approximately the same weightings as
the S&P 500. Over the long-term, Invista seeks a correlation between the
Account, before expenses, and that of the S&P 500. It is unlikely that a perfect
correlation of 1.00 will be achieved.

The value of the stocks owned by the Account changes on a daily basis. The
current price reflects the activities of individual companies and general market
and economic conditions. In the short term, stock prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. When shares of the Account are
sold, they may be worth more or less than the amount paid for them.

* Standard & Poor's Corporation is not affiliated with Principal Variable
Contracts Fund, Inc., Invista Capital Management, LLC, or with Principal Life
Insurance Company.

GROWTH-ORIENTED ACCOUNT

Utilities Account

The 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.

---------------------------- ------------------------------------
Annual Total Returns Total Returns
----------------------------- highest & lowest quarterly returns
for the last 3 quarters
Bar Chart ------------------------------------
Quarter Ended Return
------------------------------------
0/0/00 00.00%
0/00/00 (00.00%)
------------------------------------

-----------------------------------------
Average annual total returns
(for the period ending December 31, 1998)
-----------------------------------------
Calendar Years Ended December 31 Past One
Year
--------
Utilities Account 15.36%*

_______________ 00.00
Lipper Utilities Fund Average 18.30
-----------------------------------------
* Period from May 1, 1998, date first
offered to the public, through
December 31, 1998.

The year to date return as of December 31, 1998 is 15.36%.

- --------------------------------------------------------------------------------
Account Operating Expenses Examples
- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Management Fees....................... 0.60% $70 $221 $384 $859
Other Expenses........................ 0.09%
-----
Total Account Operating Expenses 0.69%
- --------------------------------------------------------------------------------

Day-to-day Account management:
Since April 1998 Catherine Zaharis, Portfolio Manager of Invista
Capital Management, LLC since 1987.

The Utilities Account invests in securities issued by companies in the
public utilities industry. These companies include: companies engaged
in the manufacture, production, generation, sale or distribution of
electric or gas energy or other
types of energy, and
companies engaged in telecommunications, including telephone,
telegraph, satellite, microwave and other communications media (but not
public broadcasting or cable television).
The Sub-Advisor, Invista, considers a company to be in the public utilities
industry if, at the time of investment, at least 50% of the company's assets,
revenues or profits are derived from one or more of those industries.

Under normal market conditions, at least 65% (and up to 100%) of the assets of
the Account are invested in equity securities and fixed-income securities in the
public utilities industry. The Account does not have any policy to concentrate
its assets in any segment of the utilities industry. The portion of Account
assets invested in equity securities and fixed-income securities varies from
time to time. When determining how to invest the Account's assets to achieve its
investment objective, Invista considers:
changes in interest rates, prevailing market conditions, and general
economic and financial conditions.

The Account invests in fixed income securities, which at the time of
purchase, are rated in one of the top four categories by S&P or
Moody's, or if not rated, in the Manager's opinion are of comparable
quality.

Since the Account's investments are concentrated in the utilities industry, the
value of its shares changes in response to factors affecting those industries.
Many utility companies have been subject to risks of:
increase in fuel and other operating costs;
changes in interests rates on borrowings for capital improvement
programs; changes in applicable laws and regulations; changes in
technology which render existing plants, equipment or products
obsolete; effects of conservation; and increase in costs and delays
associated with environmental regulations.

Certain states are adopting deregulation plans. These plans generally allow for
the utility company to set the amount of their earnings without regulatory
approval.

The Utilities Account is generally a suitable investment for investors seeking
quarterly dividends for income or to be reinvested for growth. Suitable
investors are those who want to invest in companies in the utilities industry
and are willing to accept fluctuations in the value of their investment. The
share price of the Account may fluctuate more widely than the value of shares of
a fund that invests in a broader range of industries. Because of these
fluctuations, principal values and investment returns vary. When shares of the
Account are sold, they may be worth more or less than the amount paid for them.

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.

Debt securities include bonds and other debt instruments that are used by
issuers to borrow money from investors. The issuer generally pays the investor a
fixed, variable or floating rate of interest. The amount borrowed must be repaid
at maturity. Some debt securities, such as zero coupon bonds, do not pay current
interest, but are sold at a discount from their face values.

Debt securities are sensitive to changes in interest rates. In general, bond
prices rise when interest rates fall and fall when interest rates rise. Longer
term bonds and zero coupon bonds are generally more sensitive to interest rate
changes.

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.

Options
Each of the Accounts (except Capital Value and Money Market) may buy and sell
certain types of options. Each type is more fully discussed in the SAI.

Foreign Securities
Each of the following Accounts may invest in foreign securities to the indicated
percentage of its assets (debt securities issued in the United States pursuant
to a registration statement filed with the Securities and Exchange Commission
are not treated as foreign securities for purposes of these limitations.):
Asset Allocation, International and International SmallCap Accounts -
100%; Aggressive Growth, MicroCap, Real Estate and SmallCap Growth
Accounts - 25%; Bond, Capital Value, SmallCap and Utilities Accounts -
20%. Balanced, Growth, MidCap, MidCap Growth, SmallCap Value and Stock
Index 500 Accounts - 10%. The Money Market Account does not invest in
foreign securities other
than those that are United States dollar denominated. All principal and
interest payments for the security are payable in U.S. dollars. The
interest rate, the principal amount to be repaid and the timing of
payments related to the securities do not vary or float with the value of
a foreign currency, the rate of interest on foreign currency borrowings
or with any other interest rate or index expressed in a currency other
than U.S. dollars.

Investment in foreign securities presents certain risks including:
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.
In addition, there may be reduced availability of public information concerning
issuers compared to domestic issuers. Foreign issuers are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements that apply to domestic issuers.
Transactions in foreign securities may be subject to higher costs. Each
Account's investment in foreign securities may also result in higher custodial
costs and the costs associated with currency conversions.

Securities of many foreign issuers may be less liquid and their prices
more volatile than those of comparable domestic issuers. Foreign securities
markets, particularly those in emerging market countries, are known to
experience long delays between the trade and settlement dates of securities
purchased and sold. Such delays may result in a lack of liquidity and greater
volatility in the price of securities on those markets. As a result of these
factors, the Boards of Directors of the Funds have adopted Daily Pricing and
Valuation Procedures for the Funds. These procedures outline the steps to be
followed by the Manager and Sub-Advisor to establish a reliable market or fair
value if a reliable market value is not available through normal market
quotations. The Executive Committee of the Boards of Directors oversees this
process.

Securities of Smaller Companies
The Asset Allocation, International SmallCap, MicroCap, MidCap, MidCap
Growth, SmallCap, SmallCap Growth and SmallCap Value Accounts invest in
securities of companies with small- or mid-sized market capitalizations. Market
capitalization is defined as total current market value of a company's
outstanding common stock. Investments in companies with smaller market
capitalizations may involve greater risks and price volatility (wide, rapid
fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than older companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.

Unseasoned Issuers
The Accounts (except Government Securities) may invest in the
securities of unseasoned issuers. Unseasoned issuers are companies with a record
of less than three years continuous operation, including the operation of
predecessors and parents. Unseasoned issuers by their nature have only a limited
operating history that can be used for evaluating the company's growth
prospects. As a result, investment decisions for these securities may place a
greater emphasis on current or planned product lines and the reputation and
experience of the company's management and less emphasis on fundamental
valuation factors than would be the case for more mature growth companies. In
addition, many unseasoned issuers also may be small companies and involve the
risks and price volatility associated with smaller companies.

Temporary Defensive Measures
For temporary defensive purposes in times of unusual or adverse market
conditions, the Growth-Oriented Accounts and the Bond Account, may invest
without limit in cash and cash equivalents. For this purpose, cash equivalents
include: bank certificates of deposit, bank acceptances, repurchase agreements,
commercial paper, and commercial paper master notes which are floating rate debt
instruments without a fixed maturity. In addition, an Account may purchase U.S.
Government securities, preferred stocks and debt securities, whether or not
convertible into or carrying rights for common stock.

Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring
the amount of trading that occurs in an Account's portfolio during the year. For
example, a 100% turnover rate means that on average every security in the
portfolio has been replaced once during the year.

Accounts with high turnover rates (more than 100%) often have higher
transaction costs (which are paid by the Account) and may generate short-term
capital gains (on which you pay taxes even if you don't sell any of your shares
during the year). You can find the turnover rate for each Account, except for
the Money Market Account, in the Account's Financial Highlights table.

Please consider all the factors when you compare the turnover rates of
different funds. A fund with consistently higher total returns and higher
turnover rates than another fund may actually be achieving better performance
precisely because the managers are active traders. You should also be aware that
the "total return" line in the Financial Highlights section already includes
portfolio turnover costs.

PRICING OF ACCOUNT SHARES

Each Account's shares are bought and sold at the current share price. The
share price of each Account is calculated each day the New York Stock Exchange
is open. The share price is determined at the close of business of the Exchange
(normally at 3:00 p.m. Central Time). When Princor receives orders to buy or
sell shares, the share price used to fill the order is the next price calculated
after the order is placed.

For all Accounts, except the Money Market Account, the share price is
calculated by: taking the current market value of the total assets of the
Account subtracting liabilities of the Account dividing the remainder by
the total number of shares owned by the Account.

The securities of the Money Market Account are valued at amortized cost.
The calculation procedure is described in the Statement of Additional
Information. The Money Market Account reserves the right to determine a share
price more than once a day.

NOTES:
If current market values are not readily available for a security, its
fair value is determined using a policy adopted by the Fund's Board of
Directors.
An Account's securities may be traded on foreign securities markets that
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities used
in computing share price are determined at the time the foreign market
closes. Occasionally, events affecting the value of foreign securities
occur when the foreign market is closed and the New York Stock Exchange is
open. If the Manager believes the market value is materially affected, the
share price will be calculated using the policy adopted by the Fund.
Foreign securities markets may trade on days when the New York Stock
Exchange is closed (such as customary U.S. holidays) and an Account's share
price is not calculated. As a result, the value of an Account's assets may
be significantly affected by such trading on days when you cannot purchase
or sell shares of the Fund.

DIVIDENDS AND DISTRIBUTIONS

Growth-Oriented and Income-Oriented Accounts
Investments owned by each of the Accounts may make payments of dividends and or
distributions of capital gains. Each of the Accounts has a policy to distribute
substantially all of the net dividend income and net capital gains that it
receives. Except for the Money Market Account, these payments will be made
annually.

When an Account receives a dividend or capital gain distribution, it increases
the net asset value of a share of the Account as of the date the payment is
recorded. As the net asset value of a share of an Account increases, the unit
value of the corresponding division also reflects an increase. The number of
units you own in the Account are not increased because of the dividend or
capital gain distribution.

Money Market Account
The Money Market Account declares dividends of all its daily net investment
income each day its shares are priced. The dividends are paid daily and are
automatically reinvested back into additional share of the Fund. You may ask to
have your dividends paid to you monthly in cash.

Under normal circumstances, the Account intends to hold portfolio securities
until maturity and value them at amortized cost. Therefore, the Account does not
expect any capital gains or losses. Should there be any gain, it could result in
an increase in dividends. A capital loss could result in a dividend decrease.

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

The Manager is a subsidiary of Principal Life Insurance Company. It has managed
mutual funds since 1969. As of December 31, 1998, the Funds it managed had
assets of approximately $5.9 billion. The Manager's address is Principal
Financial Group, Des Moines, Iowa 50392-0200.

The Sub-Advisors
The Manager has signed contracts with various Sub-Advisors. Under the
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account. For
these services, each Sub-Advisor is paid a fee by the Manager.

Accounts: Aggressive Growth and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management Inc.("MSAM"). MSAM,

with principal offices at 1221 Avenue of the Americas, New York,
NY 10020, provides a broad range of portfolio management services
to customers in the U.S. and abroad. As of December 31, 1998,
MSAM managed investments totaling approximately $163.4 billion as
named fiduciary or fiduciary adviser. On December 1, 1998 Morgan
Stanley Asset Management Inc. changed its name to Morgan Stanley
Dean Witter Investment Management Inc. but continues to do
business in certain instances using using the name Morgan Stanley
Asset Management.

Accounts: Balanced, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock
Index 500, and Utilities
Sub-Advisor: Invista Capital Management, LLC
("Invista"), an indirectly wholly-owned subsidiary of Principal
Life Insurance Company and an affiliate of the Manger was founded
in 1985. It manages investments for institutional investors,
including Principal Life. Assets under management as of December
31, 1998 were approximately $31 billion. Invista's address is
1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.

Account: MicroCap
Sub-Advisor: Goldman Sachs Assets Management ("GSAM"), One New York
Plaza, New York, NY 10004, is a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"). Goldman Sachs provides a
wide range of fully discretionary investment advisory services
for quantitatively driven and actively managed U.S. and
international equity portfolios, U.S. and global fixed income
portfolios, commodity and currency products, and money market
mutual funds. As of December 31, 1998, GSAM, together with its
affiliates, managed assets in excess of $________ billion.

Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation, located at 200 Park Avenue, New
York, NY 10166, was formed in 1947. The Dreyfus Corporation is a
wholly owned subsidiary of Mellon Bank, N.A., which is a wholly
owned subsidiary of Mellon Bank Corporation (Mellon). As of
_____________, The Dreyfus Corporation managed or administered
approximately $______ billion in assets for approximately _____
million investor accounts nationwide.

Account: SmallCap Growth
Sub-Advisor: Berger Associates, Inc. Berger's address is 210 University
Boulevard, Suite 900, Denver CO 80206. It serves as investment
advisor, sub-advisor, administrator or sub-administrator to
mutual funds and institutional investors. Berger is a wholly
owned subsidiary of Kansas City Southern Industries, Inc. (KCSI).
KCSI is a publicly traded holding company with principal
operations in rail transportation, through its subsidiary The
Kansas City Southern Railway Company, and financial asset
management businesses. Assets under management for Berger as of
December 31, 1998 were approximately $3.4 billion.

Management Other Total Operating
Account Fees Expenses Expenses
- ------- ---- -------- --------
Aggressive Growth 0.77% 0.01% 0.78%
Asset Allocation 0.80 0.09 0.89
Balanced 0.57 0.02 0.59
Bond 0.49 0.02 0.51
Capital Value 0.43 0.01 0.44
Government Securities 0.49 0.01 0.50
Growth 0.47 0.01 0.48
International 0.73 0.04 0.77
International SmallCap 1.21 0.13 0.34
MicroCap 1.00 0.38 1.38
MidCap 0.61 0.01 0.62
MidCap Growth 0.90 0.37 1.27
Money Market 0.50 0.02 0.52
Real Estate 0.90 0.10 1.00
SmallCap 0.85 0.13 0.98
SmallCap Growth 1.01 0.30 1.31
SmallCap Value 1.10 0.46 1.56
Utilities 0.60 0.09 0.69

Account Manager Comments

(This section will be filed by amendment)

GENERAL INFORMATION ABOUT AN ACCOUNT

Each Account serves as the underlying investment vehicle for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Life. It is possible that in the future, it
may not be advantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Accounts at the same time.
Although neither Principal Life nor the Fund currently foresees any such
disadvantage, the Fund's Board of Directors monitors events in order to identify
any material conflicts between such policy owners and contract holders. Material
conflict 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 an
Account, or 4) differences in voting instructions between those given by policy
owners and those given by contract holders. Should it be necessary, the Board
would determine what action, if any, should be taken. Such action could include
the sale of Account shares by one or more of the separate accounts which could
have adverse consequences.

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

Shareholder inquiries should be directed to: Principal Variable Contracts Fund,
Inc., Principal Financial Group, Des Moines, Iowa 50392-0200.

Principal Life 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 in
the separate accounts. The shares are voted in accordance with instructions
received from contract holders, policy owners, participants and annuitants.
Other shares of each Account held by each separate account, including shares for
which no timely voting instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating that separate account. Shares of each of the Accounts held in the
general account of Principal Life or in the unregistered separate accounts are
voted in proportion to the instructions that are received with respect to
contracts and policies participated in its registered and unregistered separate
accounts. If Principal Life determines, under applicable law, that an Account's
shares held in one or more separate accounts or in its general account need not
be voted according to the instructions that are received, it may vote those
Account shares in its own right.

Sale of Account Shares
This section applies to eligible purchasers other than the separate accounts of
Principal Life and its subsidiaries.

If payments are delayed and the instruction is not canceled by the shareholder's
written instruction, the amount of the transaction is determined the first
valuation date following the expiration of the permitted delay. The transaction
is made within five days thereafter.

In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.

In addition, the Manager and affiliated service providers are working to
identify their Year 2000 problems and taking steps they reasonably believe will
address these issues. This process began in 1996 with the identification of
product vendors and service providers as well as the internal systems that might
be impacted.

At this time, testing of internal systems has been completed. The Manager is now
participating in a corporate-wide initiative lead by senior management
representatives of Principal Life. Currently they are engaged in regression
testing of internal programs. They are also participating in development of
contingency plans in the event that Year 2000 problems develop and/or persist on
or after January 1, 2000. This plan is scheduled to be completed by March 19,
1999. The contingency plan calls for:
identification of business risks;
consideration of alternative approaches to critical business risks; and
development of action plans to address problems.

Other important Year 2000 initiatives include:
the service provider for our transfer agent system has renovated its code.
Client testing will occur in the first and second quarters of 1999. The
service provider is also participating in a securities industry wide
testing program that is scheduled to be completed by the end of April 1999;
the securities pricing system we use has renovated its code and conducted
client testing in June 1998; Facilities Management of Principal Life has
identified non-systems issues
(heat, lights, water, phone, etc.) and is working with these service
providers to ensure continuity of service; and
the Manager and other areas of Principal Life have contacted all vendors
with which we do business to receive assurances that they are able to deal
with any Year 2000 problems. We continue to work with the vendors to
identify any areas of risk.

In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.

Financial Statements
You will receive an annual financial statement for the Funds, examined by the
Funds' independent auditors, Ernst & Young LLP. That report is a part of this
prospectus. You will also receive a semiannual financial statement that is
unaudited. The following financial highlights are based on financial statements
that were audited by Ernst & Young LLP.

FINANCIAL HIGHLIGHTS

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

Selected data for a share of Capital Stock outstanding throughout each year
ended December 31 (except as noted):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>

AGGRESSIVE GROWTH ACCOUNT(a) 1998 1997 1996 1995 1994(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $16.30 $14.52 $12.94 $10.11 $9.92
Income from Investment Operations:
Net Investment Income............................... .04 .04 .11 .13 .05
Net Realized and Unrealized Gain (Loss) on Investments 2.99 4.26 3.38 4.31 .24

Total from Investment Operations 3.03 4.30 3.49 4.44 .29
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.04) (.11) (.13) (.05)
Distributions from Capital Gains.................... (.96) (2.48) (1.80) (1.48) (.05)
-----------------------------------------------------------------

Total Dividends and Distributions (1.00) (2.52) (1.91) (1.61) (.10)
------------------------------------------------------------------

Net Asset Value, End of Period......................... $18.33 $16.30 $14.52 $12.94 $10.11
==================================================================

ASSET ALLOCATION ACCOUNT(a) 1998 1997 1996 1995 1994(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $11.94 $11.48 $11.11 $9.79 $9.98
Income from Investment Operations:
Net Investment Income............................... .31 .30 .36 .40 .23
Net Realized and Unrealized Gain (Loss) on Investments .76 1.72 1.06 1.62 (.18)
-----------------------------------------------------------------

Total from Investment Operations 1.07 2.02 1.42 2.02 .05
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.31) (.30) (.36) (.40) (.23)
Distributions from Capital Gains.................... (.40) (1.26) (.69) (.30) --
Excess Distributions from Capital Gains(e).......... -- -- -- -- (.01)

Total Dividends and Distributions (.71) (1.56) (1.05) (.70) (.24)
-----------------------------------------------------------------

Net Asset Value, End of Period......................... $12.30 $11.94 $11.48 $11.11 $9.79
==================================================================

See accompanying notes.
</TABLE>

BALANCED ACCOUNT(a) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $15.51 $14.44 $13.97 $11.95 $12.77
Income from Investment Operations:
Net Investment Income............................... .49 .46 .40 .45 .37
Net Realized and Unrealized Gain (Loss) on Investments 1.33 2.11 1.41 2.44 (.64)

Total from Investment Operations 1.82 2.57 1.81 2.89 (.27)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.49) (.45) (.40) (.45) (.37)
Distributions from Capital Gains.................... (.59) (1.05) (.94) (.42) (.18)
----------------------------------------------------------

Total Dividends and Distributions (1.08) (1.50) (1.34) (.87) (.55)
-----------------------------------------------------------

Net Asset Value, End of Period......................... $16.25 $15.51 $14.44 $13.97 $11.95
===========================================================

BOND ACCOUNT(a) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $11.78 $11.33 $11.73 $10.12 $11.16
Income from Investment Operations:
Net Investment Income............................... .66 .76 .68 .62 .72
Net Realized and Unrealized Gain (Loss)on Investments .25 .44 (.40) 1.62 (1.04)
---------------------------------------------------------

Total Dividends and Distributions (.67) (.75) (.68) (.63) (.72)
----------------------------------------------------------

Net Asset Value, End of Period......................... $12.02 $11.78 $11.33 $11.73 $10.12
===========================================================

CAPITAL VALUE ACCOUNT(a) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $34.61 $29.84 $27.80 $23.44 $24.61
Income from Investment Operations:
Net Investment Income............................... .71 .68 .57 .60 .62
Net Realized and Unrealized Gain (Loss)on Investments 3.94 7.52 5.82 6.69 (.49)

Total from Investment Operations 4.65 8.20 6.39 7.29 .13
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.71) (.67) (.58) (.60) (.61)
Distributions from Capital Gains.................... (1.36) (2.76) (3.77) (2.33) (.69)
-----------------------------------------------------------

Total Dividends and Distributions (2.07) (3.43) (4.35) (2.93) (1.30)
-----------------------------------------------------------

Net Asset Value, End of Period......................... $37.19 $34.61 $29.84 $27.80 $23.44
===========================================================

GOVERNMENT SECURITIES ACCOUNT(a) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $10.72 $10.31 $10.55 $9.38 $10.61
Income from Investment Operations:
Net Investment Income............................... .60 .66 .59 .60 .76
Net Realized and Unrealized Gain (Loss)on Investments .28 .41 (.24) 1.18 (1.24)

Total from Investment Operations .88 1.07 .35 1.78 (.48)

Less Dividends from Net Investment Income.............. (.59) (.66) (.59) (.61) (.75)
-----------------------------------------------------------

Net Asset Value, End of Period......................... $11.01 $10.72 $10.31 $10.55 $9.38
===========================================================

See accompanying notes.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
GROWTH ACCOUNT(a) 1998 1997 1996 1995 1994(f)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $17.21 $13.79 $12.43 $10.10 $9.60
Income from Investment Operations:
Net Investment Income............................... .21 .18 .16 .17 .07
Net Realized and Unrealized Gain (Loss)on Investments 3.45 3.53 1.39 2.42 .51
----------------------------------------------------------

Total from Investment Operations 3.66 3.71 1.55 2.59 .58
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.21) (.18) (.16) (.17) (.08)
Distributions from Capital Gains.................... (.20) (.10) (.03) (.09) --
Excess Distributions from Capital Gains(e).......... -- (.01) -- -- --
-------------------------------------------------------

Total Dividends and Distributions (.41) (.29) (.19) (.26) (.08)
----------------------------------------------------------

Net Asset Value, End of Period......................... $20.46 $17.21 $13.79 $12.43 $10.10
===========================================================

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
INTERNATIONAL ACCOUNT(a) 1998 1997 1996 1995 1994(f)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $13.90 $13.02 $10.72 $9.56 $9.94
Income from Investment Operations:
Net Investment Income............................... .26 .23 .22 .19 .03
Net Realized and Unrealized Gain (Loss)on Investments 1.11 1.35 2.46 1.16 (.33)
----------------------------------------------------------

Total from Investment Operations 1.37 1.58 2.68 1.35 (.30)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.25) (.23) (.22) (.18) (.05)
Excess Distributions from Net Investment Income(e).. -- -- -- -- (.02)
Distributions from Capital Gains.................... (.51) (.47) (.16) (.01) (.01)
----------------------------------------------------------

Total Dividends and Distributions (.76) (.70) (.38) (.19) (.08)
----------------------------------------------------------

Net Asset Value, End of Period......................... $14.51 $13.90 $13.02 $10.72 $9.56
===========================================================

INTERNATIONAL SMALLCAP ACCOUNT 1998(g)
- -------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $9.97
Income from Investment Operations:
Net Investment Income............................... .01
Net Realized and Unrealized Gain (Loss) on Investments (.95)
-----

Total from Investment Operations (.94)
Less Dividends from Net Investment Income.............. (.03)
-----

Net Asset Value, End of Period......................... $9.00
=====

See accompanying notes.

MICROCAP ACCOUNT 1998(g)
- -------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $10.04
Income from Investment Operations:
Net Investment Income............................... .03
Net Realized and Unrealized Gain (Loss) on Investments (1.86)
------

Total from Investment Operations (1.83)
Less Dividends from Net Investment Income.............. (.04)
-----

Net Asset Value, End of Period......................... $8.17
=====

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
MIDCAP ACCOUNT(a) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $35.47 $29.74 $25.33 $19.97 $20.79
Income from Investment Operations:
Net Investment Income............................... .22 .24 .22 .22 .14
Net Realized and Unrealized Gain (Loss)on Investments .94 6.48 5.07 5.57 .03
---------------------------------------------------------

Total from Investment Operations 1.16 6.72 5.29 5.79 .17
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.22) (.23) (.22) (.22) (.14)
Distributions from Capital Gains.................... (2.04) (.76) (.66) (.21) (.85)
-----------------------------------------------------------
Total Dividends and Distributions (2.26) (.99) (.88) (.43) (.99)
-----------------------------------------------------------

Net Asset Value, End of Period......................... $34.37 $35.47 $29.74 $25.33 $19.97
===========================================================

MIDCAP GROWTH ACCOUNT 1998(g)
- -------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $9.94
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.01)
Net Realized and Unrealized Gain (Loss) on Investments (.28)
-----
Total from Investment Operations (.29)
Net Asset Value, End of Period $9.65
=====

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
MONEY MARKET ACCOUNT(a) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income............................... .051 .051 .049 .054 .037
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
-------------- ----------------------------------------

Total from Investment Operations .051 .051 .049 .054 .037
Less Dividends from Net Investment Income.............. (.051) (.051) (.049) (.054) (.037)
-----------------------------------------------------------

Net Asset Value, End of Period......................... $1.000 $1.000 $1.000 $1.000 $1.000
===========================================================
Total Return 5.20% 5.04% 5.07% 5.59% 3.76%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $83,263 $47,315 $46,244 $32,670 $29,372
Ratio of Expenses to Average Net Assets............. .52% .55% .56% .58% .60%
Ratio of Net Investment Income to Average Net Assets 5.06% 5.12% 5.00% 5.32% 3.81%
</TABLE>

REAL ESTATE ACCOUNT 1998(g)
- -------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $10.01
Income from Investment Operations:
Net Investment Income............................... .32
Net Realized and Unrealized Gain (Loss) on Investments (.97)
-----

Total from Investment Operations (.65)
Less Dividends from Net Investment Income.............. (.29)
-----
Net Asset Value, End of Period......................... $9.07
=====

See accompanying notes.

SMALLCAP ACCOUNT 1998(g)
- -------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $10.27
Income from Investment Operations:
Net Investment Income............................... --
Net Realized and Unrealized Gain (Loss) on Investments (2.06)
------
Total from Investment Operations (2.06)
Net Asset Value, End of Period......................... $8.21
=====

Net Asset Value, End of Period......................... $10.10
======

SMALLCAP VALUE ACCOUNT 1998(g)
- -------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $9.84
Income from Investment Operations:
Net Investment Income............................... .03
Net Realized and Unrealized Gain (Loss) on Investments (1.50)
------

Total from Investment Operations (1.47)
Less Dividends from Net Investment Income.............. (.03)
-----

Net Asset Value, End of Period......................... $8.34
=====

UTILITIES ACCOUNT 1998(g)
- -------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $9.61
Income from Investment Operations:
Net Investment Income............................... .15
Net Realized and Unrealized Gain (Loss) on Investments 1.35
----

Total from Investment Operations 1.50
Less Dividends from Net Investment Income.............. (.18)
-----
Net Asset Value, End of Period......................... $10.93
======
Total Return........................................... 15.36%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $18,298
Ratio of Expenses to Average Net Assets............. .69%(d)
Ratio of Net Investment Income to Average Net Assets 2.93%(d)
Portfolio Turnover Rate............................. 9.5%(d)

Notes to Financial Highlights

(a) Effective January 1, 1998 the following mutual funds were reorganized into
the Principal Variable Contracts Fund, Inc. as follows:

Former Fund Name Current Account Name
- --------------------------------------------------------------------------------
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal World Fund, Inc. International Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Money Market Fund, Inc. Money Market Account

(d) Computed on an annualized basis.

<TABLE>
<CAPTION>
Date Net Per Share Realized
Operations Investment and Unrealized
Account Commenced Income Gains (Losses)
<S> <C> <C> <C>
International SmallCap Account April 16, 1998 $.02 $(.05)
MicroCap Account April 9, 1998 .01 .03
MidCap Growth Account April 23, 1998 .01 (.07)
Real Estate Account April 23, 1998 .01 --
SmallCap Account April 9, 1998 -- .27
SmallCap Growth Account April 2, 1998 -- (.16)
SmallCap Value Account April 16, 1998 .01 (.17)
Utilities Account April 2, 1998 .04 (.43)

</TABLE>

Additional information about the Fund is available in the Statement of
Additional Information dated ____________ and which is part of this prospectus.
Information about the Fund's investments is also available in the Fund's annual
and semi-annual reports to shareholders. In the Fund's annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Statement of Additional Information and annual and semi-annual reports can be
obtained free of charge by writing or telephoning Princor Financial Services
Corporation, P.O. Box 10423, Des Moines, IA 50306. Telephone 1-800-451-5447.

The U.S. Government does not insure or guarantee an investment in the Fund.

Principal Variable Contracts Fund, Inc. SEC File 811-01944

Part B

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

STATEMENT OF ADDITIONAL INFORMATION

dated May 1, 1999

This Statement of Additional Information is not a prospectus but is a
part of the prospectus for the Fund. The most recent Fund prospectus,
dated May 1, 1999, and shareholder report are available without charge.
Please call 1-800-247-4123 to request a copy.

Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123

TABLE OF CONTENTS

Investment Policies and Restrictions of the Accounts.....................
Growth-Oriented Accounts............................................
Income-Oriented Accounts............................................
Money Market Account................................................

Account Investments......................................................

Directors and Officers of the Fund.......................................

Manager and Sub-Advisors.................................................

Cost of Manager's Service................................................

Brokerage on Purchases and Sales of Securities...........................

Determination of Net Asset Value of Account Shares.......................

Performance Calculation..................................................

Tax Status...............................................................

General Information and History..........................................

Financial Statements.....................................................

Appendix A...............................................................

INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND

The following information is about the Principal Variable Contracts Fund, Inc.
which is an incorporated, diversified, open-end management investment company,
commonly called a mutual fund. It supplements the information provided in the
Prospectus under the caption CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS.
The Fund offers multiple Accounts.

There are three categories of Accounts: Growth-Oriented Accounts, which include
Accounts seeking:
o primarily capital appreciation through investments in equity securities
(Aggressive Growth, Blue Chip, Capital Value, Growth, LargeCap Growth,
MicroCap, MidCap, MidCap Growth, MidCap Value, SmallCap, SmallCap Growth
and SmallCap Value);
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Asset Allocation and
Balanced);
o long-term growth of capital primarily through investments in equity
securities of corporations located outside of the U.S. (International and
International SmallCap);
o long-term growth of income and capital through investment in equity
securities of real estate companies (Real Estate);
o to approximate the performance of the Standard & Poor's 500 Composite Stock
Price Index (Stock Index 500); and
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities).

Income-Oriented Accounts, which include Accounts seeking primarily a high level
of income through investments in debt securities (Bond, Government Securities
and High Yield).

Money Market Account, which seeks primarily a high level of income through
investments in short-term debt securities.

In seeking to achieve its investment objective, each Account has adopted as
matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of:
o 67% of the Account's shares present or represented at a shareholders'
meeting at which the holders of more than 50% of such shares are present or
represented by proxy; or
o more than 50% of the outstanding shares of the Account.

Similar shareholder approval is required to change the investment objective of
each of the Accounts. The following discussion provides for each Account:
o a statement of its investment objective;
o a description of its investment restrictions that are matters of
fundamental policy; and
o a description of any investment restrictions it may have adopted that are
not matters of fundamental policy and may be changed without shareholder
approval.

For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security. Any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service does not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectus or the Statement of
Additional Information is not fundamental and may be changed by the Fund's Board
of Directors.

GROWTH-ORIENTED ACCOUNTS

Investment Objectives

o Aggressive Growth Account seeks 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.
o Asset Allocation Account seeks to generate a total investment return
consistent with the preservation of capital.
o Balanced Account seeks to generate a total investment return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
o Blue Chip Account seeks to achieve growth of capital and income. The
Account attempts to achieve its objective by investing primarily in common
stocks of well capitalized, established companies.
o Capital Value Account 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.
o Growth Account seeks growth of capital through the purchase primarily of
common stocks, but the Account may invest in other securities.
o International Account seeks long-term growth of capital by investing in a
portfolio of equity securities of companies domiciled in any of the nations
of the world.
o 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.
o LargeCap Growth seeks long-term growth of capital. The Account attempts to
achieve its objective by investing primarily in growth stocks of companies
with market capitalizations over $10 billion measured at the time of
investment.
o 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.
o MidCap Account seeks to achieve capital appreciation by investing primarily
in securities of emerging and other growth-oriented companies.
o 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.
o MidCap Value seeks long-term growth of capital. The Account attempts to
achieve its objective by investing primarily in equity securities of
companies with value characteristics and market capitalizations in the $1
billion to $10 billion range.
o 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.
o 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.
o 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 at the time of initial purchase.
o 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.
o Stock Index 500 seeks long-term growth of capital. The Account attempts to
mirror the investment results of the Standard & Poor's 500 Stock Index.
o 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.

Investment Restrictions

Aggressive Growth Account, Asset Allocation Account, Balanced Account, Growth
Account, International Account and MidCap Account.

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Aggressive Growth,
Asset Allocation, Balanced, Growth, International and MidCap Accounts each may
not:

(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.

(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.

(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such
contracts.

(4) Invest in real estate, although it may invest in securities that
are secured by real estate and securities of issuers that invest
or deal in real estate.

(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing. The Balanced Account may borrow only
from banks.

(6) Make loans, except that the Account may (i) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend
its portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.

(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities)
except that this limitation shall apply only with respect to 75%
of the total assets of the Aggressive Growth Account, Asset
Allocation Account, Growth Account and International Account; or
purchase more than 10% of the outstanding voting securities of any
one issuer.

(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.

(9) Concentrate its investments in any particular industry or
industries, except that the Account may invest not more than 25%
of the value of its total assets in a single industry.

(10) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the securities
sold that equals or exceeds the securities sold short) or purchase
any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the
purchase of securities on margin.

(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in
securities of issuers that invest in or sponsor such programs.

Each of these Accounts has also adopted the following restrictions that are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Account's present policy to:

(1) Invest more than 15% of its total assets in securities not
readily marketable and in repurchase agreements maturing in more
than seven days. The value of any options purchased in the
Over-the-Counter market, including all covered spread options and
the assets used as cover for any options written in the
Over-the-Counter market are included as part of this 15%
limitation.

(2) Purchase warrants in excess of 5% of its total assets, of which
2% may be invested in warrants that are not listed on the New
York or American Stock Exchange. The 2% limitation for the
International Account does not apply to warrants listed on the
Toronto Stock Exchange or the Chicago Board Options Exchange.

(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors)
if such purchase would cause the value of the Account's
investments in all such issuers to exceed 5% of the value of its
total assets.

(4) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.

(5) Invest in companies for the purpose of exercising control or
management.

(6) Invest more than 10% (25% for the Aggressive Growth Account) of
its total assets in securities of foreign issuers. This
restriction does not pertain to the International Account or the
Asset Allocation Account.

(7) Invest more than 5% of its total assets in the purchase of
covered spread options and the purchase of put and call options
on securities, securities indices and financial futures
contracts. Options on financial futures contracts and options on
securities indices will be used solely for hedging purposes, not
for speculation.

(8) Invest more than 5% of its assets in initial margin and premiums
on financial futures contracts and options on such contracts.

(9) Invest in arbitrage transactions.

(10) Invest in real estate limited partnership interests.

The Balanced and MidCap Accounts each have also adopted the following
restrictions that are not fundamental policies and may be changed without
shareholder approval. It is contrary to each such Account's present policy to:

(1) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the
Account's total assets would be invested in such securities.

The Aggressive Growth, Asset Allocation, Growth and International Accounts have
also adopted the following restriction that is not a fundamental policy and may
be changed without shareholder approval. It is contrary to each such Account's
present policy to:

(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation or plan of reorganization, and the Account
may purchase securities of closed-end investment companies in the
open market where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved.

Capital Value Account

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Capital Value Account
may not:

(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in any one
industry.

(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in
the securities of any one issuer (except U.S. Government
securities).

(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the voting securities, or any other class of
securities of the issuer, to be held by the Account.

(4) Underwrite securities of other issuers, except that the Account
may acquire portfolio securities under circumstances where if
sold the Account might be deemed an underwriter for purposes of
the Securities Act of 1933.

(5) Purchase securities of any company with a record of less than
three years' continuous operation (including that of
predecessors) if the purchase would cause the value of the
Account's aggregate investments in all such companies to exceed
5% of the Account's total assets.

(6) Engage in the purchase and sale of illiquid interests in real
estate. For this purpose, readily marketable interests in real
estate investment trusts are not interests in real estate.

(7) Engage in the purchase and sale of commodities or commodity
contracts.

(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of one percent (0.5%) of the
securities of the issuer together own beneficially more than 5%
of such securities.

(9) Purchase securities on margin, except it may obtain such
short-term credits as are necessary for the clearance of
transactions. The Account will not issue or acquire put and call
options.

(10) Invest in companies for the purpose of exercising control or
management.

(11) Invest more than 5% of its assets at the time of purchase in
rights and warrants (other than those that have been acquired in
units or attached to other securities).

(12)Invest more than 20% of its total assets in securities of foreign
issuers.

In addition:

(13)TheAccount may make loans through the purchase in private
offerings of debentures or other evidences of indebtedness of
types customarily purchased by institutional investors.

(14)TheAccount does not propose to borrow money except for temporary
or emergency purposes from banks in an amount not to exceed 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 such borrowing is
made. The Account may not pledge, mortgage, or hypothecate its
assets (at value) to an extent greater than 15% of the gross
assets taken at cost.

(15)It is contrary to the Account's present policy to purchase
warrants in excess of 5% of its total assets of which 2% may be
invested in warrants that are not listed on the New York or
American Stock Exchange.

The Account has also adopted the following restrictions that are not fundamental
policies and may be changed without shareholder approval. It is contrary to the
Account's present policy to:

(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its
assets in securities of other investment companies, invest not
more than 5% of its total assets in the securities of any one
investment company, or acquire not more than 3% of the
outstanding voting securities of any one investment company
except in connection with a merger, consolidation, or plan of
reorganization, and the Account may purchase securities of
closed-end companies in the open market where no underwriter or
dealer's commission or profit, other than a customary broker's
commission, is involved.

(2) Invest more than 15% of its total assets in securities not
readily marketable and in repurchase agreement maturing in more
than seven days.

Investment Restrictions

International SmallCap Account, MicroCap Account, MidCap Growth Account, Real
Estate Account, SmallCap Account, SmallCap Growth Account, SmallCap Value
Account and Utilities Account.

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The International SmallCap,
MicroCap, MidCap Growth, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
and Utilities Accounts each may not:

(1) Issue any senior securities as defined in the Investment Company
Act of 1940, as amended. Purchasing and selling securities and
futures contracts and options thereon and borrowing money in
accordance with restrictions described below do not involve the
issuance of a senior security.

(2) Invest in physical commodities or commodity contracts (other
than foreign currencies), but it may purchase and sell financial
futures contracts and options on such contracts.

(3) Invest in real estate, although it may invest in securities that
are secured by real estate and securities of issuers that invest
or deal in real estate.

(4) Borrow money, except it may (a) borrow from banks (as defined in
the Investment Company Act of 1940, as amended) or other
financial institutions or through reverse repurchase agreements
in amounts up to 331/3% of its total assets (including the
amount borrowed); (b) to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary
purposes; (c) obtain such short-term credits as may be necessary
for the clearance of purchases and sales of portfolio
securities, and (d) purchase securities on margin to the extent
permitted by applicable law. In addition, the MicroCap Account
may engage in transactions in mortgage dollar rolls which are
accounted for as financings.

(5) Make loans, except that the Account may (i) purchase and hold
debt obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend
its portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.

(6) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities)
or purchase more than 10% of the outstanding voting securities
of any one issuer, except that this limitation shall apply only
with respect to 75% of the total assets of each Account.

(7) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with
the sale of securities held in its portfolio.

(8) Concentrate its investments in any particular industry, except
that the Account may invest not more than 25% of the value of its
total assets in a single industry.

The Real Estate Account may not invest less than 25% of its total assets in
securities of companies in the real estate industry, and the Utilities Account
may not invest less than 25% of its total assets in securities of companies in
the public utilities industry except that each may, for temporary defensive
purposes, place all of its assets in cash, cash equivalents, bank certificates
of deposit, bankers acceptances, repurchase agreements, commercial paper,
commercial paper master notes, United States government securities, and
preferred stocks and debt securities, whether or not convertible into or
carrying rights for common stock.

(9) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the
securities sold that equals or exceeds the securities sold
short) or purchase any securities on margin, except to the
extent permitted by applicable law and except that the Account
may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on
margin.

Each of these Accounts has also adopted the following restrictions that are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Account's present policy to:

(1) Invest more than 15% of its total assets in illiquid securities
and in repurchase agreements maturing in more than seven days.

(2) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.

(3) Invest in companies for the purpose of exercising control or
management.

(4) Invest more than 25% (20% for each of the SmallCap and Utilities
Accounts, 10% for each of the MidCap Growth and SmallCap Value
Accounts) of its total assets in securities of foreign issuers.
This restriction does not apply to the International SmallCap
Account.

(5) Invest more than 5% of its assets in initial margin and premiums
on financial futures contracts and options on such contracts.

(6) Invest in real estate limited partnership interests or real
estate investment trusts except that this restriction shall not
apply to either the MicroCap or Real Estate Accounts.

(7) Acquire securities of other investment companies, except as
permitted by the Investment Company Act of 1940, as amended or
any rule, order or interpretation thereunder, or in connection
with a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange. The Account may purchase
securities of closed-end investment companies in the open market
where no underwriter or dealer's commission or profit, other than
a customary broker's commission, is involved.

Blue Chip Account, LargeCap Growth Account, MidCap Value Account and Stock Index
500 Account

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Blue Chip, Large Cap
Growth, MidCap Value and Stock Index 500 Accounts each may not:

(2) Invest in physical commodities or commodity contracts (other
than foreign currencies), but it may purchase and sell financial
futures contracts and options on such contracts, swaps and
securities backed by physical commodities.

(3) Invest in real estate, although it may invest in securities that
are secured by real estate and securities of issuers that invest
or deal in real estate.

(7) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with
the sale of securities held in its portfolio.

(8) Concentrate its investments in any particular industry, except
that the Account may invest not more than 25% of the value of
its total assets in a single industry, provided that, when the
Account has adopted a temporary defensive posture, there shall
be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities. This restriction applies to the Stock Index
500 Account except to the extent that the Standard & Poor's 500
Stock Index also is so concentrated.

Each of these Accounts has also adopted the following restrictions that are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Account's present policy to:

(1) Invest more than 15% of its total assets in illiquid securities
and in repurchase agreements maturing in more than seven days.

(3) Invest in companies for the purpose of exercising control or
management.

(4) Invest more than 25% (20% for the Blue Chip Account, 10% for the
Stock Index 500 Account) of its total assets in securities of
foreign issuers.

(5) enter into (i) any futures contracts and related options for
purposes other than bona fide hedging transactions within the
meaning of Commodity Futures Trading Commission ("CFTC")
regulations if the aggregate initial margin and premiums
required to establish positions in futures contracts and related
options that do not fall within the definition of bona fide
hedging transactions will exceed 5% of the fair market value of
an Account's net assets, after taking into account unrealized
profits and unrealized losses on any such contracts it has
entered into; and (ii) any futures contracts if the aggregate
amount of such Account's commitments under outstanding futures
contracts positions would exceed the market value of its total
assets.

(6) Invest in real estate limited partnership interests or real
estate investment trusts except that this restriction shall not
apply to the LargeCap Growth Account.

(7) Acquire securities of other investment companies, except as
permitted by the Investment Company Act of 1940, as amended or
any rule, order or interpretation thereunder, or in connection
with a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange. The Account may purchase
securities of closed-end investment companies in the open market
where no underwriter or dealer's commission or profit, other
than a customary broker's commission, is involved.

INCOME-ORIENTED ACCOUNTS

Investment Objectives

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

Government Securities Account seeks a high level of current income, liquidity
and safety of principal by purchasing obligations issued or guaranteed by the
United States Government or its agencies, with emphasis on Government National
Mortgage Association Certificates ("GNMA Certificates"). The guarantee by the
United States Government extends only to principal and interest; Account shares
are not guaranteed by the United States Government. There are certain risks
unique to GNMA Certificates.

High Yield Account seeks high current income primarily by purchasing high
yielding, lower or non-rated fixed income securities which are believed to not
involve undue risk to income or principal. Capital growth is a secondary
objective when consistent with the objective of high current income.

Investment Restrictions

Bond Account and High Yield Account

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Bond Account and High
Yield Account each may not:

(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities
of the issuer together own beneficially more than 5% of such
securities.

(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such
contracts.

(4) Invest in real estate, although it may invest in securities
which are secured by real estate and securities of issuers which
invest or deal in real estate.

(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total
assets at the time of the borrowing. The Bond Account and High
Yield Account may borrow only from banks.

(6) Make loans, except that the Account may (i) purchase and hold
debt obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend
its portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.

(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with
the sale of securities held in its portfolio.

(9) Concentrate its investments in any particular industry or
industries, except that the Bond Account and High Yield Account
each may invest not more than 25% of the value of its total
assets in a single industry.

(10) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the
securities sold that equals or exceeds the securities sold
short) or purchase any securities on margin, except it may
obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on
margin.

(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in
securities of issuers which invest in or sponsor such programs.

(1) Invest more than 15% of its total assets in securities not
readily marketable and in repurchase agreements maturing in more
than seven days. The value of any options purchased in the
Over-the-Counter market, including all covered spread options
and the assets used as cover for any options written in the
Over-the-Counter market are included as part of this 15%
limitation.

(2) Purchase warrants in excess of 5% of its total assets, of which
2% may be invested in warrants that are not listed on the New
York or American Stock Exchange.

(4) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of
reorganization or by purchase in the open market of securities
of closed-end companies where no underwriter or dealer's
commission or profit, other than a customary broker's
commission, is involved, and if immediately thereafter not more
than 10% of the value of the Account's total assets would be
invested in such securities.

(5) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.

(6) Invest in companies for the purpose of exercising control or
management.

(7) Invest more than 20% of its total assets in securities of foreign
issuers.

(8) Invest more than 5% of its total assets in the purchase of
covered spread options and the purchase of put and call options
on securities, securities indices and financial futures
contracts. Options on financial futures contracts and options on
securities indices will be used solely for hedging purposes; not
for speculation.

(9) Invest more than 5% of its assets in initial margin and premiums
on financial futures contracts and options on such contracts.

(10) Invest in arbitrage transactions.

(11) Invest in real estate limited partnership interests.

Government Securities Account

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Government Securities
Account may not:

(1) Issue any senior securities as defined in the Act except insofar
as the Account may be deemed to have issued a senior security by
reason of (a) purchasing any securities on a standby,
when-issued or delayed delivery basis; or (b) borrowing money in
accordance with restrictions described below.

(2) Purchase any securities other than obligations issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities, except that the Account may maintain
reasonable amounts in cash or commercial paper or purchase
short-term debt securities not issued or guaranteed by the U.S.
Government or its agencies or instrumentalities for daily cash
management purposes or pending selection of particular long-term
investments.

(3) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with
the sale of GNMA certificates held in its portfolio.

(4) Engage in the purchase and sale of interests in real estate,
including interests in real estate investment trusts (although
it will invest in securities secured by real estate or interests
therein, such as mortgage-backed securities) or invest in
commodities or commodity contracts, oil and gas interests, or
mineral exploration or development programs.

(5) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities
of the issuer together own beneficially more than 5% of such
securities.

(6) Sell securities short or purchase any securities on margin,
except it may obtain such short-term credits as are necessary
for the clearance of transactions. The deposit or payment of
margin in connection with transactions in options and financial
futures contracts is not considered the purchase of securities
on margin.

(7) Invest in companies for the purpose of exercising control or
management.

(8) Make loans, except that the Account may purchase or hold debt
obligations in accordance with the investment restrictions set
forth in paragraph (2) and may enter into repurchase agreements
for such securities, and may lend its portfolio securities
without limitation against collateral consisting of cash, or
securities issued or guaranteed by the United States Government
or its agencies or instrumentalities, which is equal at all
times to 100% of the value of the securities loaned.

(9) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total
assets at the time of the borrowing.

(10) Enter into repurchase agreements maturing in more than seven
days if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets without readily available market
quotations.

(11) Invest more than 5% of its total assets in the purchase of
covered spread options and the purchase of put and call options
on securities, securities indices and financial futures
contracts.

(12) Invest more than 5% of its assets in initial margin and premiums
on financial futures contracts and options on such contracts.

The Government Securities Account has also adopted the following restrictions
that are not a fundamental policy and may be changed without shareholder
approval. It is contrary to the Government Securities Account's present policy
to:

(1) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on future contracts are not deemed to be
pledges or other encumbrances.

(2) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its
assets in securities of other investment companies, invest not
more than 5% of its total assets in the securities of any one
investment company, or acquire not more than 3% of the
outstanding voting securities of any one investment company
except in connection with a merger, consolidation, or plan of
reorganization, and the Account may purchase securities of
closed-end companies in the open market where no underwriter or
dealer's commission or profit, other than a customary broker's
commission, is involved.

MONEY MARKET ACCOUNT

Investment Objective

Money Market Account 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 in a portfolio of money market
instruments.

Investment Restrictions

Money Market Account

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Money Market Account
may not:

(1) Concentrate its investments in any one industry. No more than
25% of the value of its total assets will be invested in
securities of issuers having their principal activities in any
one industry, other than securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, or
obligations of domestic branches of U.S.
banks and savings institutions. (See "Bank Obligations").

(2) Purchase the securities of any issuer if the purchase will cause
more than 25% of the value of its total assets to be invested in
the securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).

(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the outstanding voting securities of the issuer
to be held by the Account (other than securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).

(4) Invest a greater percentage of its total assets in securities
not readily marketable than is allowed by federal securities
rules or interpretations.

(5) Act as an underwriter except to the extent that, in connection
with the disposition of portfolio securities, it may be deemed
to be an underwriter under the federal securities laws.

(6) Purchase securities of any company with a record of less than 3
years continuous operation (including that of predecessors) if
the purchase would cause the value of the Account's aggregate
investments in all such companies to exceed 5% of the value of
the Account's total assets.

(7) Engage in the purchase and sale of illiquid interests in real
estate, including interests in real estate investment trusts
(although it may invest in securities secured by real estate or
interests therein) or invest in commodities or commodity
contracts, oil and gas interests, or mineral exploration or
development programs.

(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities
of the issuer together own beneficially more than 5% of such
securities.

(9) Purchase securities on margin, except it may obtain such
short-term credits as are necessary for the clearance of
transactions. The Account will not issue or acquire put and call
options, straddles or spreads or any combination thereof.

(10) Invest in companies for the purpose of exercising control or
management.

(11) Make loans to others except through the purchase of debt
obligations in which the Account is authorized to invest and by
entering into repurchase agreements (see "Account Investments").

(12) Borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which
might otherwise require the untimely disposition of securities,
in an amount not to exceed the lesser of (i) 5% of the value of
the Account's assets, or (ii) 10% of the value of the Account's
net assets taken at cost at the time such borrowing is made. The
Account will not issue senior securities except in connection
with such borrowings. The Account may not pledge, mortgage, or
hypothecate its assets (at value) to an extent greater than 10%
of the net assets.

(13) Invest in uncertificated time deposits maturing in more than
seven days; uncertificated time deposits maturing from two
business days through seven calendar days may not exceed 10% of
the value of the Account's total assets.

(14) Enter into repurchase agreements maturing in more than seven
days if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets (excluding time deposits) without
readily available market quotations.

The Money Market Account has also adopted the following restriction that is not
a fundamental policy and may be changed without shareholder approval. It is
contrary to the Money Market Account's present policy to: invest its assets in
the securities of any investment company except that the Account may invest not
more than 10% of its assets in securities of other investment companies, invest
not more than 5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting securities of any
one investment company except in connection with a merger, consolidation, or
plan of reorganization, and the Account may purchase securities of closed-end
companies in the open market where no underwriter or dealer's commission or
profit, other than a customary broker's commission, is involved.

ACCOUNTS' INVESTMENTS

The following information supplements the discussion of the Accounts" investment
objectives and policies in the Prospectus under the caption "CERTAIN INVESTMENT
STRATEGIES AND RELATED RISKS."

Fundamental Analysis

Selections of equity securities for the Accounts, except the Aggressive Growth,
Asset Allocation, LargeCap Growth, MicroCap, MidCap Growth , MidCap Value and
SmallCap Value Accounts, are made based upon an approach described broadly as
that of fundamental analysis.
Three basic steps are involved in this analysis.
o First is the continuing study of basic economic factors in an effort to
conclude what the future general economic climate is likely to be over the
next one to two years.
o Second, given some conviction as to the likely economic climate, the
Sub-Advisor attempts to identify the prospects for the major industrial,
commercial and financial segments of the economy. By looking at such
factors as demand for products, capacity to produce, operating costs,
pricing structure, marketing techniques, adequacy of raw materials and
components, domestic and foreign competition, and research productivity,
the Sub-Advisor evaluates the prospects for each industry for the near and
intermediate term.
o Finally, determinations are made regarding earnings prospects for
individual companies within each industry by considering the same types of
factors described above. These earnings prospects are then evaluated in
relation to the current price of the securities of each company.
This analysis process is often referred to as "top-down" fundamental analysis.

In selecting equity securities for the SmallCap Growth Account, these same three
basic steps are followed, but in the reverse order. This process is often
referred to as "bottom-up" fundamental analysis. The Sub-Advisor primarily uses
a bottom-up approach in selecting securities for the MidCap Value Account,
although a limited top-down analysis will be used as well.

The LargeCap Growth Account uses a bottom-up approach in building its portfolio
that seeks to identify individual companies with earnings growth potential that
may not be recognized by the market at large. Although themes may emerge in the
Account, securities are generally selected without regard to any defined
industry sector or other similarly defined selection procedure.

Restricted Securities

Each of the Accounts (except Government Securities and Money Market) has adopted
investment restrictions that limit its investments in illiquid securities to 15%
of its assets. The Board of Directors of each of the Growth-Oriented and
Income-Oriented Accounts has adopted procedures to determine the liquidity of
Rule 4(2) short-term paper and of restricted securities under Rule 144A.
Securities determined to be liquid under these procedures are excluded from this
limit when applying the preceding investment restrictions.

Generally, restricted securities are not readily marketable because they are
subject to legal or contractual restrictions upon resale. They are sold only in
a public offering with an effective registration statement or in a transaction
that is exempt from the registration requirements of the Securities Act of 1933.
When registration is required, an Account may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Account may be permitted to sell a
security. If, during such a period, adverse market conditions were to develop,
the Account might obtain a less favorable price than existed when it decided to
sell. Restricted securities and other securities not readily marketable are
priced at fair value as determined in good faith by or under the direction of
the Board of Directors.

Foreign Securities

Each of the following Accounts may invest in foreign securities to the indicated
percentage of its assets (debt securities issued in the United States pursuant
to a registration statement filed with the Securities and Exchange Commission
are not treated as foreign securities for purposes of these limitations.):
o International and International SmallCap Accounts - 100%;
o Aggressive Growth, LargeCap Growth, MicroCap, Real Estate and
SmallCap Growth Accounts - 25%;
o Bond, Capital Value, High Yield, SmallCap and Utilities
Accounts - 20%.
o Balanced, Growth, MidCap, MidCap Growth, MidCap Value, SmallCap
Value and Stock Index 500 Accounts - 10%.
o The Money Market Account does not invest in foreign securities
other than those that are United States dollar denominated. All
principal and interest payments for the security are payable in
U.S. dollars. The interest rate, the principal amount to be repaid
and the timing of payments related to the securities do not vary or
float with the value of a foreign currency, the rate of interest on
foreign currency borrowings or with any other interest rate or
index expressed in a currency other than U.S. dollars.

Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
Accounts that set forth the steps to be followed by the Manager and/or
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. Oversight of this
process is provided by the Executive Committee of the Board of Directors.

Securities of Smaller Companies

The International SmallCap, LargeCap Growth, MicroCap, MidCap, MidCap Growth,
MidCap Value, SmallCap, SmallCap Growth, SmallCap Value and Stock Index 500
Accounts invest in securities of companies with small- or mid-sized market
capitalizations. Market capitalization is defined as total current market value
of a company's outstanding common stock. Investments in companies with smaller
market capitalizations may involve greater risks and price volatility (wide,
rapid fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than older companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant factors within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.

Unseasoned Issuers
Each of the Accounts (except Government Securities Account) may invest in the
securities of unseasoned issuers. Unseasoned issuers are companies with a record
of less than three years continuous operation, including the operation of
predecessors and parents. Unseasoned issuers by their nature have only a limited
operating history that can be used for evaluating the company's growth
prospects. As a result, investment decisions for these securities may place a
greater emphasis on current or planned product lines and the reputation and
experience of the company's management and less emphasis on fundamental
valuation factors than would be the case for more mature growth companies. In
addition, many unseasoned issuers also may be small companies and involve the
risks and price volatility associated with smaller companies.

Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts

Each of the Accounts (except the Capital Value and Money Market Accounts) may
engage in the practices described under this heading. In the following
discussion, the terms "the Account," "each Account" or "the Accounts" refer to
each of the Accounts that may engage in these transactions.

Spread Transactions
Each Account may purchase covered spread options. Such covered spread options
are not presently exchange listed or traded. The purchase of a spread option
gives the Account the right to put, or sell, a security that it owns at a fixed
dollar spread or fixed yield spread in relation to another security that the
Account does not own, but which is used as a benchmark. The risk to the Account
in purchasing covered spread options is the cost of the premium paid for the
spread option and any transaction costs. In addition, there is no assurance that
closing transactions will be available. The purchase of spread options can be
used to protect each Account against adverse changes in prevailing credit
quality spreads, i.e., the yield spread between high quality and lower quality
securities. The security covering the spread option is maintained in a
segregated account by each Account's custodian. The Accounts do not consider a
security covered by a spread option to be "pledged" as that term is used in the
Accounts' policy limiting the pledging or mortgaging of assets.

Options on Securities and Securities Indices

Each Account may write (sell) and purchase call and put options on securities in
which it invests and on securities indices based on securities in which the
Account invests. The Accounts may write call and put options to generate
additional revenue, and may write and purchase call and put options in seeking
to hedge against a decline in the value of securities owned or an increase in
the price of securities which the Account plans to purchase.

Writing Covered Call and Put Options. When an Account writes a call option, it
gives the purchaser of the option the right to buy a specific security at a
specified price at any time before the option expires. When an Account writes a
put option, it gives the purchaser of the option the right to sell to the
Account a specific security at a specified price at any time before the option
expires. In both situations, the Account receives a premium from the purchaser
of the option.

The premium received by an Account reflects, among other factors, the current
market price of the underlying security, the relationship of the exercise price
to the market price, the time period until the expiration of the option and
interest rates. The premium generates additional income for the Account if the
option expires unexercised or is closed out at a profit. By writing a call, an
Account limits its opportunity to profit from any increase in the market value
of the underlying security above the exercise price of the option, but it
retains the risk of loss if the price of the security should decline. By writing
a put, an Account assumes the risk that it may have to purchase the underlying
security at a price that may be higher than its market value at time of
exercise.

The Accounts write only covered options and comply with applicable regulatory
and exchange cover requirements. The Accounts usually own the underlying
security covered by any outstanding call option. With respect to an outstanding
put option, each Account deposits and maintains with its custodian cash, U.S.
Government securities or other liquid securities with a value at least equal to
the exercise price of the option.

Once an Account has written an option, it may terminate its obligation, before
the option is exercised. The Account executes a closing transaction by
purchasing an option of the same series as the option previously written. The
Account has a gain or loss depending on whether the premium received when the
option was written exceeds the closing purchase price plus related transaction
costs.

Purchasing Call and Put Options. When an Account purchases a call option, it
receives, in return for the premium it pays, the right to buy from the writer of
the option the underlying security at a specified price at any time before the
option expires. An Account purchases call options in anticipation of an increase
in the market value of securities that it ultimately intends to buy. During the
life of the call option, the Account is able to buy the underlying security at
the exercise price regardless of any increase in the market price of the
underlying security. In order for a call option to result in a gain, the market
price of the underlying security must exceed the sum of the exercise price, the
premium paid and transaction costs.

When an Account purchases a put option, it receives, in return for the premium
it pays, the right to sell to the writer of the option the underlying security
at a specified price at any time before the option expires. An Account purchases
put options in anticipation of a decline in the market value of the underlying
security. During the life of the put option, the Account is able to sell the
underlying security at the exercise price regardless of any decline in the
market price of the underlying security. In order for a put option to result in
a gain, the market price of the underlying security must decline, during the
option period, below the exercise price enough to cover the premium and
transaction costs.

Once an Account purchases an option, it may close out its position by selling an
option of the same series as the option previously purchased. The Account has a
gain or loss depending on whether the closing sale price exceeds the initial
purchase price plus related transaction costs.

Options on Securities Indices. Each Account may purchase and sell put and call
options on any securities index based on securities in which the Account may
invest. Securities index options are designed to reflect price fluctuations in a
group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. The Accounts engage in transactions in put and call options on
securities indices for the same purposes as they engage in transactions in
options on securities. When an Account writes call options on securities
indices, it holds in its portfolio underlying securities which, in the judgment
of the Manager or the Sub-Advisor, correlate closely with the securities index
and which have a value at least equal to the aggregate amount of the securities
index options.

Risks Associated with Options Transactions. An options position may be closed
out only on an exchange that provides a secondary market for an option of the
same series. The Accounts generally purchase or write only those options for
which there appears to be an active secondary market. However, there is no
assurance that a liquid secondary market on an exchange exists for any
particular option, or at any particular time. If an Account is unable to effect
closing sale transactions in options it has purchased, it has to exercise its
options in order to realize any profit and may incur transaction costs upon the
purchase or sale of underlying securities. If an Account is unable to effect a
closing purchase transaction for a covered option that it has written, it is not
able to sell the underlying securities, or dispose of the assets held in a
segregated account, until the option expires or is exercised. An Account's
ability to terminate option positions established in the over-the-counter market
may be more limited than for exchange-traded options and may also involve the
risk that broker-dealers participating in such transactions might fail to meet
their obligations.

Futures Contracts and Options on Futures

Each Account may purchase and sell financial futures contracts and options on
those contracts. 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. Futures contracts, options on futures
contracts and the commodity exchanges on which they are traded are regulated by
the Commodity Futures Trading Commission ("CFTC"). Through the purchase and sale
of futures contracts and related options, an Account seeks to hedge against a
decline in securities owned by the Account or an increase in the price of
securities that the Account plans to purchase. An Account may also purchase and
sell futures contracts and related options to maintain cash reserves while
stimulating full investment in equity securities and to keep substantially all
of its assets exposed to the market.

Futures Contracts. When an Account sells a futures contract based on a financial
instrument, the Account is obligated to deliver that kind of instrument at a
specified future time for a specified price. When an Account purchases that kind
of contract, it is obligated to take delivery of the instrument at a specified
time and to pay the specified price. In most instances, these contracts are
closed out by entering into an offsetting transaction before the settlement
date. The Account realizes a gain or loss depending on whether the price of an
offsetting purchase plus transaction costs are less or more than the price of
the initial sale or on whether the price of an offsetting sale is more or less
than the price of the initial purchase plus transaction costs. Although the
Accounts usually liquidate futures contracts on financial instruments in this
manner, they may make or take delivery of the underlying securities when it
appears economically advantageous to do so.

A futures contract based on a securities index provides for the purchase or sale
of a group of securities at a specified future time for a specified price. These
contracts do not require actual delivery of securities but result in a cash
settlement. The amount of the settlement is based on the difference in value of
the index between the time the contract was entered into and the time it is
liquidated (at its expiration or earlier if it is closed out by entering into an
offsetting transaction).

When a futures contract is purchased or sold, a brokerage commission is paid.
Unlike the purchase or sale of a security or option, no price or premium is paid
or received. Instead, an amount of cash or U.S. Government securities (generally
about 5% of the contract amount) is deposited by the Account with its custodian
for the benefit of the futures commission merchant through which the Account
engages in the transaction. This amount is known as "initial margin." It does
not involve the borrowing of funds by the Account to finance the transaction. It
instead represents a "good faith" deposit assuring the performance of both the
purchaser and the seller under the futures contract. It is returned to the
Account upon termination of the futures contract if all the Account's
contractual obligations have been satisfied.

Subsequent payments to and from the broker, known as "variation margin," are
required to be made on a daily basis as the price of the futures contract
fluctuates, a process known as "marking to market." The fluctuations make the
long or short positions in the futures contract more or less valuable. If the
position is closed out by taking an opposite position prior to the settlement
date of the futures contract, a final determination of variation margin is made.
Any additional cash is required to be paid to or released by the broker and the
Account realizes a loss or gain.

In using futures contracts, the Account seeks to establish more accurately than
would otherwise be possible the effective price of or rate of return on
portfolio securities or securities that the Account proposes to acquire. An
Account, for example, sells futures contracts in anticipation of a rise in
interest rates that would cause a decline in the value of its debt investments.
When this kind of hedging is successful, the futures contract increases in value
when the Account's debt securities decline in value and thereby keep the
Account's net asset value from declining as much as it otherwise would. An
Account also sells futures contracts on securities indices in anticipation of or
during a stock market decline in an endeavor to offset a decrease in the market
value of its equity investments. When an Account is not fully invested and
anticipates an increase in the cost of securities it intends to purchase, it may
purchase financial futures contracts. When increases in the prices of equities
are expected, an Account purchases futures contracts on securities indices in
order to gain rapid market exposure that may partially or entirely offset
increases in the cost of the equity securities it intends to purchase.

Options on Futures. The Accounts may also purchase and write call and put
options on futures contracts. A call option on a futures contract gives the
purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.

Upon the exercise of a call, the writer of the option is obligated to sell the
futures contract (to deliver a long position to the option holder) at the option
exercise price, which will presumably be lower than the current market price of
the contract in the futures market. Upon exercise of a put, the writer of the
option is obligated to purchase the futures contract (deliver a short position
to the option holder) at the option exercise price, which will presumably be
higher than the current market price of the contract in the futures market.
However, as with the trading of futures, most options are closed out prior to
their expiration by the purchase or sale of an offsetting option at a market
price that reflects an increase or a decrease from the premium originally paid.
Options on futures can be used to hedge substantially the same risks addressed
by the direct purchase or sale of the underlying futures contracts. For example,
if an Account anticipates a rise in interest rates and a decline in the market
value of the debt securities in its portfolio, it might purchase put options or
write call options on futures contracts instead of selling futures contracts.

If an Account purchases an option on a futures contract, it may obtain benefits
similar to those that would result if it held the futures position itself. But
in contrast to a futures transaction, the purchase of an option involves the
payment of a premium in addition to transaction costs. In the event of an
adverse market movement, however, the Account is not subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs.

When an Account writes an option on a futures contract, the premium paid by the
purchaser is deposited with the Account's custodian. The Account must maintain
with its custodian all or a portion of the initial margin requirement on the
underlying futures contract. It assumes a risk of adverse movement in the price
of the underlying futures contract comparable to that involved in holding a
futures position. Subsequent payments to and from the broker, similar to
variation margin payments, are made as the premium and the initial margin
requirement are marked to market daily. The premium may partially offset an
unfavorable change in the value of portfolio securities, if the option is not
exercised, or it may reduce the amount of any loss incurred by the Account if
the option is exercised.

Risks Associated with Futures Transactions. There are a number of risks
associated with transactions in futures contracts and related options. An
Account's successful use of futures contracts is subject to the Manager and
Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Account's portfolio securities. For example, if an Account is
hedged against the possibility of an increase in interest rates that would
adversely affect debt securities held by the Account and the prices of those
debt securities instead increases, the Account loses part or all of the benefit
of the increased value of its securities it hedged because it has offsetting
losses in its futures positions. Other risks include imperfect correlation
between price movements in the financial instrument or securities index
underlying the futures contract, on the one hand, and the price movements of
either the futures contract itself or the securities held by the Account, on the
other hand. If the prices do not move in the same direction or to the same
extent, the transaction may result in trading losses.

Prior to exercise or expiration, a position in futures may be terminated only by
entering into a closing purchase or sale transaction. This requires a secondary
market on the relevant contract market. The Account enters into a futures
contract or related option only if there appears to be a liquid secondary
market. There can be no assurance, however, that such a liquid secondary market
exists for any particular futures contract or related option at any specific
time. Thus, it may not be possible to close out a futures position once it has
been established. Under such circumstances, the Account continues to be required
to make daily cash payments of variation margin in the event of adverse price
movements. In such situations, if the Account has insufficient cash, it may be
required to sell portfolio securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Account may be required to perform under the terms of the futures contracts it
holds. The inability to close out futures positions also could have an adverse
impact on the Account's ability effectively to hedge its portfolio.

Most United States futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. This daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.

Limitations on the Use of Futures and Options on Futures. Each Account intends
to come within an exclusion from the definition of "commodity pool operator"
provided by CFTC regulations by complying with certain limitations on the use of
futures and related options prescribed by those regulations.

The Accounts are required to operate within certain guidelines and restrictions
with respect to their use of futures and options thereon which have been
established by the CFTC. In particular, an Account is excluded from registration
as a "commodity pool operator" if it complies with Rule 4.5 adopted by the CFTC.
This Rule does not limit the percentage of an Account's assets that may be used
for futures margin and related options premiums for a bona fide hedging
position. However, under the Rule each Account must limit its aggregate initial
futures margin and related option premiums to no more than 5% of the Account's
net assets for hedging strategies that are not considered bona fide hedging
strategies under the Rule.

The Accounts may enter into futures contracts and related options transactions
only for bona fide hedging purposes as permitted by the CFTC and to a limited
extent to enhance returns. Each Account determines that the price fluctuations
in the futures contracts and options on futures used for hedging or risk
management purposes are substantially related to price fluctuations in
securities held by the Account or which it expects to purchase. In pursuing
traditional hedging activities, each Account may sell futures contracts or
acquire puts to protect against a decline in the price of securities that the
Account owns. Each Account may purchase futures contracts or calls on futures
contracts to protect the Account against an increase in the price of securities
the Account intends to purchase before it is in a position to do so.

When an Account purchases a futures contract, or purchases a call option on a
futures contract, it places any asset, including equity securities and
non-investment grade debt in a segregated account, so long as the asset is
liquid and marked to the market daily. The amount so segregated plus the amount
of initial margin held for the account of its broker equals the market value of
the futures contract.

Forward Foreign Currency Exchange Contracts
The Accounts (except the Government Securities and Money Market Accounts) may,
but are not obligated to, enter into forward foreign currency exchange contracts
with securities dealers, financial institutions or other parties deemed credit
worthy by the Account's Sub-Advisor to hedge the value of portfolio securities
denominated in or exposed to foreign currencies. MidCap Value can also engage in
foreign currency exchange transactions on a spot basis. Currency transactions
include forward currency contracts, exchange listed currency futures contracts
and options thereon, and exchange listed or over-the-counter options on
currencies. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a specified future date at a price set at the time of the contract.

The Accounts enter into forward foreign currency exchange contracts only for the
purpose of "hedging," that is limiting the risks associated with changes in the
relative rates of exchange between the U.S. dollar and foreign currencies in
which securities owned by an Account are denominated or exposed. It should be
noted that the use of forward foreign currency exchange contracts does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange between the currencies that can be achieved at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain that might result if the value of the
currency increases.

Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to an Account if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that an Account is engaging in proxy
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to an Account if it is
unable to deliver or receive currency or monies in settlement of obligations.
They could also cause hedges the Account has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Currency exchange rates may also fluctuate based on factors extrinsic to
a country's economy. Buyers and sellers of currency futures contracts are
subject to the same risks that apply to the use of futures contracts generally.
Further, settlement of a currency futures contract for the purchase of most
currencies must occur at a bank based in the issuing nation. Trading options on
currency futures contracts is relative new, and the ability to establish and
close out positions on these options is subject to the maintenance of a liquid
market that may not always be available.

Repurchase Agreements
All of the Accounts may invest in repurchase agreements. None of the Accounts
may enter into repurchase agreements that do not mature within seven days if any
such investment, together with other illiquid securities held by the Account,
amount to more than 15% of its total assets. The MicroCap Account (together with
other registered investment companies having management agreements with Goldman
or its affiliates) may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements. The LargeCap Growth Account (together with other
registered investment companies having management agreements with Janus or its
affiliates) may transfer uninvested cash balances into a single joint account,
the daily aggregate balance of which will be invested in one or more repurchase
agreements. Repurchase agreements typically involve the acquisition by the
Account of debt securities from a selling financial institution such as a bank,
savings and loan association or broker-dealer. A repurchase agreement provides
that the Account sells back to the seller and that the seller repurchases the
underlying securities at a specified price and at a fixed time in the future.
Repurchase agreements may be viewed as loans by an Account collateralized by the
underlying securities. This arrangement results in a fixed rate of return that
is not subject to market fluctuation during the Account's holding period.
Although repurchase agreements involve certain risks not associated with direct
investments in debt securities, each of the Accounts follows procedures
established by the Board of Directors that are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions that the Account's
Manager or Sub-Advisor believes present minimum credit risks. In addition, the
value of the collateral underlying the repurchase agreement is always at least
equal to the repurchase price, including accrued interest. In the event of a
default or bankruptcy by a selling financial institution, the affected Account
bears a risk of loss. In seeking to liquidate the collateral, an Account may be
delayed in or prevented from exercising its rights and may incur certain costs.
Further, to the extent that proceeds from any sale upon default of the
obligation to repurchase are less than the repurchase price, the Account could
suffer a loss.

Lending of Portfolio Securities

All of the Accounts may lend their portfolio securities. None of the Accounts
intends to lend its portfolio securities if, as a result, the aggregate of such
loans made by the Account would exceed 33 1/3% of its total assets. Portfolio
securities may be lent to unaffiliated broker-dealers and other unaffiliated
qualified financial institutions provided that such loans are callable at any
time on not more than five business days' notice and that cash or government
securities equal to at least 100% of the market value of the securities loaned,
determined daily, is deposited by the borrower with the Account and is
maintained each business day in a segregated account. While such securities are
on loan, the borrower pays the Account any income accruing thereon. The Account
may invest any cash collateral, thereby earning additional income, or may
receive an agreed-upon fee from the borrower. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities that occurs during the term of the loan belongs to the
Account and its shareholders. An Account pays reasonable administrative,
custodial and other fees in connection with such loans and may pay a negotiated
portion of the interest earned on the cash or government securities pledged as
collateral to the borrower or placing broker. An Account does not vote
securities that have been loaned, but it will call a loan of securities in
anticipation of an important vote.

When-Issued and Delayed Delivery Securities

Each of the Accounts may from time to time purchase securities on a when-issued
basis and may purchase or sell securities on a delayed delivery basis. The price
of such a transaction is fixed at the time of the commitment, but delivery and
payment take place on a later settlement date, which may be a month or more
after the date of the commitment. No interest accrues to the purchaser during
this period. The securities are subject to market fluctuations that involve the
risk for the purchaser that yields available in the market at the time of
delivery are higher than those obtained in the transaction. Each Account only
purchases securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities. However, an Account may sell the
securities before the settlement date, if such action is deemed advisable. At
the time an Account commits to purchase securities on a when-issued or delayed
delivery basis, it records the transaction and reflects the value of the
securities in determining its net asset value. Each Account also establishes a
segregated account with its custodian bank in which it maintains cash or liquid
assets equal in value to the Account's commitments for when-issued or delayed
delivery securities. The availability of liquid assets for this purpose and the
effect of asset segregation on an Account's ability to meet its current
obligations, to honor requests for redemption and to have its investment
portfolio managed properly 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 an Account's total assets that may be committed to
transactions in such agreements.

Industry Concentrations
Each of the Accounts, except the Real Estate and Utilities Accounts, may not
concentrate its investments in any particular industry. The Stock Index 500
Account may concentrate its investments in a particular industry only to the
extent that the S&P 500 Stock Index is concentrated. For purposes of applying
the SmallCap Growth Account's industry concentration restriction, the Account
uses the industry groups used in the Data Monitor Portfolio Monitoring System of
William O'Neill & Co, Incorporated. The LargeCap Growth Account uses Bloomberg
L.P. industry classifications. The other Accounts use industry classifications
based on the "Directory of Companies Filing Annual Reports with the Securities
and Exchange Commission."

Money Market Instruments

The Money Market Account invests all of its available assets in money market
instruments maturing in 397 days or less. The types of instruments that the
Account purchases are described below.

(1) U.S. Government Securities -- Securities issued or guaranteed
by the U.S. Government, including treasury bills, notes and bonds.

(2) U.S. Government Agency Securities -- Obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government.

o U.S. agency obligations include, but are not limited
to, the Bank for co-operatives, Federal Home Loan
Banks, Federal Intermediate Credit Banks, and the
Federal National Mortgage Association.
o U.S. instrumentality obligations include, but are not
limited to, the Export-Import Bank and Farmers Home
Administration.

Some obligations issued or guaranteed by U.S. Government agencies
and instrumentalities are supported by the full faith and credit of
the U.S. Treasury. Others, such as those issued by the Federal
National Mortgage Association, are supported by discretionary
authority of the U.S. Government to purchase certain obligations of
the agency or instrumentality. Still others, such as those issued
by the Student Loan Marketing Association, are supported only by
the credit of the agency or instrumentality.

(3) Bank Obligations -- Certificates of deposit, time deposits and
bankers' acceptances of U.S. commercial banks having total assets
of at least one billion dollars and overseas branches of U.S.
commercial banks and foreign banks, which in the Manager's opinion,
are of comparable quality. However, each such bank with its
branches has total assets of at least five billion dollars, and
certificates, including time deposits of domestic savings and loan
associations having at least one billion dollars in assets that are
insured by the Federal Savings and Loan Insurance Corporation. The
Account may acquire obligations of U.S. banks that are not members
of the Federal Reserve System or of the Federal Deposit Insurance
Corporation.

Any obligations of foreign banks must be denominated in U.S.
dollars. Obligations of foreign banks and obligations of overseas
branches of U.S. banks are subject to somewhat different
regulations and risks than those of U.S. domestic banks. For
example, an issuing bank may be able to maintain that the liability
for an investment is solely that of the overseas branch which could
expose the Account to a greater risk of loss. In addition,
obligations of foreign banks or of overseas branches of U.S. banks
may be affected by governmental action in the country of domicile
of the branch or parent bank. Examples of adverse foreign
governmental actions include the imposition of currency controls,
the imposition of withholding taxes on interest income payable on
such obligations, interest limitations, seizure or nationalization
of assets, or the declaration of a moratorium. Deposits in foreign
banks or foreign branches of U.S. banks are not covered by the
Federal Deposit Insurance Corporation. The Account only buys
short-term instruments where the risks of adverse governmental
action are believed by the Manager to be minimal. The Account
considers these factors along with other appropriate factors in
making an investment decision to acquire such obligations. It only
acquires those which, in the opinion of management, are of an
investment quality comparable to other debt securities bought by
the Account. The Account invests in certificates of deposit of
selected banks having less than one billion dollars of assets
providing the certificates do not exceed the level of insurance
(currently $100,000) provided by the applicable government agency.

A certificate of deposit is issued against funds deposited in a
bank or savings and loan association for a definite period of time,
at a specified rate of return. Normally they are negotiable.
However, the Account occasionally invests in certificates of
deposit that are not negotiable. Such certificates may provide for
interest penalties in the event of withdrawal prior to their
maturity. A bankers' acceptance is a short-term credit instrument
issued by corporations to finance the import, export, transfer or
storage of goods. They are termed "accepted" when a bank guarantees
their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at
maturity.

(4) Commercial Paper -- Short-term promissory notes issued by U.S.
or foreign corporations.

(5) Short-term Corporate Debt -- Corporate notes, bonds and
debentures that at the time of purchase have 397 days or less
remaining to maturity.

(6) Repurchase Agreements -- Instruments 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. (See "FUND INVESTMENTS - Repurchase
Agreements.")

The ratings of nationally recognized statistical rating organization (NRSRO),
such as Moody's Investor Services, Inc. ("Moody's") and Standard and Poor's
("S&P"), which are described in Appendix A, represent their opinions as to the
quality of the money market instruments which they undertake to rate. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. These ratings, including ratings of NRSROs other than Moody's and
S&P, are the initial criteria for selection of portfolio investments, but the
Manager further evaluates these securities.

Portfolio Turnover

Portfolio turnover normally differs for each Account, varies from year to year
(as well as within a year) and is affected by portfolio sales necessary to meet
cash requirements for redemptions of Account shares. This requirement may in
some cases limit the ability of an Account to effect certain portfolio
transactions. The portfolio turnover rate for an Account is calculated by
dividing the lesser of purchases or sales of its portfolio securities during the
fiscal year by the monthly average of the value of its portfolio securities
(excluding from the computation all securities, including options, with
maturities at the time of acquisition of one year or less). A high rate of
portfolio turnover generally involves correspondingly greater brokerage
commission expenses that are paid by the Account.

No portfolio turnover rate can be calculated for the Money Market Account
because of the short maturities of the securities in which it invests. The
portfolio turnover rates for each of the other Accounts for its most recent and
immediately preceding fiscal periods were as follows (annualized when reporting
period is less than one year):

Aggressive Growth - 155.6% and 172.6%
Asset Allocation - 162.7% and 131.6%
Balanced - 24.2% and 69.7%
Bond - 26.7% and 7.3%
Capital Value - 22.0% and 23.4%
Government Securities - 11.0% and 9.0%
Growth - 9.0% and 15.4%
High Yield - 87.8% and 32.0%
International - 33.9% and 22.7%
International SmallCap - 60.3%
MicroCap - 55.3%
MidCap - 26.9% and 7.8%
MidCap Growth - 91.9%
Real Estate - 4.4%
SmallCap - 45.2%
SmallCap Growth - 166.5%
SmallCap Value - 53.4%
Utilities - 9.5%

Fund History

Organization and Share Ownership: Effective January 1, 1998, certain Funds
sponsored by Principal 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. Each of the Accounts of 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: Aggressive Growth
Fund - August 20, 1993; Asset Allocation Fund - August 20, 1993; Balanced Fund -
November 26, 1986; Bond Fund - November 26, 1986; 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);
Emerging Growth Fund - February 20, 1987; Government Securities Fund - June 7,
1985; Growth Fund - August 20, 1993; Money Market Fund - June 10, 1982; and
World Fund August 20, 1993. The Articles of Incorporation for the Principal
Variable Contracts Fund, Inc. were amended on February 13, 1998 to reflect the
addition of the following new Accounts: International SmallCap; MicroCap; MidCap
Growth; Real Estate; SmallCap; SmallCap Growth; SmallCap Value; and Utilities.
The Articles of Incorporation were also amended on February 1, 1999 to reflect
the addition of the Blue Chip, LargeCap Growth, MidCap Value and Stock Index 500
Accounts. Principal Life Insurance Company owns 100% of each Account's
outstanding shares.

MANAGEMENT OF THE FUND

Board of Directors

Under Maryland law, a Board of Directors oversees the Fund. The Directors have
financial or other relevant experience and meet several times during the year to
review contracts, Fund activities and the quality of services provided to the
Fund. Other than serving as Directors, most of the Board members have no
affiliation with the Fund or service providers.

The current Directors and Officers are shown below. Each person also has the
same position with other mutual funds that are also sponsored by Principal Life
Insurance Company. Unless an address is shown, the mailing address for the
Directors and Officers is Principal Financial Group, Des Moines, Iowa 50392.

* John E. Aschenbrenner, 49, Director. Senior Vice President, Principal Life
Insurance Company since 1996; Vice President - Individual Markets
1990-1996. Director, Principal Management Corporation and Princor Financial
Services Corporation.

@ James D. Davis, 64, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.

*# Ralph C. Eucher, 46, Director and President. Vice President, Principal Life
Insurance Company since 1999. Director and Executive Vice President,
Princor Financial Services Corporation and Director and President,
Principal Management Corporation.

Pamela A. Ferguson, 55, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto,
President, Grinnell College.

* Dennis P. Francis, 55, Director. Senior Vice President, Principal Life
Insurance Company since 1998; Vice President - Commercial Real Estate
1990-1998.

@ Richard W. Gilbert, 58, Director. 1357 Asbury Avenue, Winnetka, Illinois.
President, Gilbert Communications, Inc. since 1993. Prior thereto,
President and Publisher, Pioneer Press.

*# J. Barry Griswell, 49, Director and Chairman of the Board. President,
Principal Life Insurance Company since 1998; Executive Vice President,
1996-1998; Senior Vice President, 1991-1996. Director and Chairman of the
Board, Principal Management Corporation and Princor Financial Services
Corporation.

Barbara A. Lukavsky, 58, Director. 13731 Bay Hill Court, Clive, Iowa.
President and CEO, Barbican Enterprises, Inc. since 1997. President and
CEO, Lu San ELITE USA, L.C. 1985-1998.

@# Richard G. Peebler, 69, Director. 1916 79th Street, Des Moines, Iowa. Dean
and Professor Emeritus, Drake University, College of Business and Public
Administration, since 1996. Prior thereto, Professor, Drake University,
College of Business and Public Administration.

* Craig L. Bassett, 46, Treasurer. Second Vice President and Treasurer,
Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
Prior thereto, Associate Treasurer.

* Michael J. Beer , 38, Financial Officer. Senior Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1997. Prior thereto, Vice President and Chief
Operating Officer, 1995-1997. Prior thereto, Financial Officer.

Michael W. Cumings, 47, Assistant Counsel. Counsel, Principal Life
Insurance Company since 1989.

* Arthur S. Filean, 60, Vice President and Secretary. Vice President, Princor
Financial Services Corporation, since 1990. Vice President, Principal
Management Corporation, since 1996.

* Ernest H. Gillum, 43, Assistant Secretary. Vice President - Compliance and
Product Development, Princor Financial Services Corporation and Principal
Management Corporation, since 1998. Prior thereto, Assistant Vice
President, Registered Products, 1995-1998. Prior thereto, Product
Development and Compliance Officer.

Jane E. Karli, 41, Assistant Treasurer. Assistant Treasurer, Principal Life
Insurance Company since 1998; Senior Accounting and Custody Administrator
1994-1998; Prior thereto, Senior Investment Cost Accountant.

* Michael D. Roughton, 47, Counsel. Counsel, Principal Life Insurance Company
since 1994. Prior thereto, Assistant Counsel. Counsel, Invista Capital
Management, Inc., Princor Financial Services Corporation, Principal
Investors Corporation and Principal Management Corporation.

* Considered to be "Interested Persons" as defined in the Investment
Company Act of 1940, as amended, because of current or former
affiliation with the Manager or Principal Life.
@ Member of Audit and Nominating Committee
# Member of Executive Committee (which is selected by the Board and which
may exercise all the powers of the Board, with certain exceptions, when
the Board is not in session. The Committee must report its actions to
the Board.)

COMPENSATION TABLE
fiscal year ended December 31, 1998

Compensation from Compensation from
Director the Fund Fund Complex*

James D. Davis $24,225 $53,375
Pamela A. Ferguson $22,800 $46,250
Richard W. Gilbert $24,225 $51,525
Barbara A. Lukavsky $24,225 $50,675
Richard G. Peebler** $24,600 $48,900

The Fund did not provide retirement benefits for any of the directors.

* Total compensation from the 20 investment companies included in the fund
complex for the fiscal year ended December 31, 1998.

** Richard Peebler received $1,800 from the Fund due to his participation in the
executive committee.

MANAGER AND SUB-ADVISORS

The Manager of each of the Accounts is Principal Management Corporation (the
"Manager"), a wholly-owned subsidiary of Princor Financial Services Corporation
which is a wholly-owned subsidiary of Principal Financial Services, Inc. The
Manager is an affiliate of Principal 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 Life Insurance Company.

The Manager has executed agreements with various Sub-Advisors. Under those
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account. For
these services, each Sub-Advisor is paid a fee by the Manager.

Accounts: Balanced, Blue Chip, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock Index 500
and Utilities
Sub-Advisor: Invista Capital Management, LLC ("Invista"). Invista, an indirectly
wholly-owned subsidiary of Principal Life Insurance Company and an
affiliate of the Manager, was founded in 1985. It manages investments for
institutional investors, including Principal Life Insurance Company. Assets
under management as of December 31, 1998 were approximately $31 billion.
Invista's address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.

Accounts: Aggressive Growth and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management Inc.("Morgan Stanley"). Morgan
Stanley, with principal offices at 1221 Avenue of the Americas, New York,
NY 10020, provides a broad range of portfolio management services to
customers in the U.S. and abroad. As of December 31, 1998, Morgan Stanley
managed investments totaling approximately $163.4 billion as named
fiduciary or fiduciary adviser. On December 1, 1998 Morgan Stanley Asset
Management Inc. changed its name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain instances using the
name Morgan Stanley Asset Management.

Account: MicroCap
Sub-Advisor: Goldman Sachs Asset Management ("Goldman"), One New York Plaza, New
York, NY 10004, is a separate operating division of Goldman, Sachs & Co.
("Goldman Sachs"). Goldman Sachs provides a wide range of fully
discretionary investment advisory services including quantitatively driven
and actively managed U.S. and international equity portfolios and global
fixed-income portfolios, commodity and currency products, and money market
mutual funds. As of December 31, 1998, Goldman, together with its
affiliates managed assets in excess of $195 billion.

Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation ("Dreyfus")., located at 200 Park Avenue,
New York, New York 10166, was formed in 1947. The Dreyfus Corporation is a
wholly-owned subsidiary of Mellon Bank, N.A., which is a wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). As of December 31, 1998,
The Dreyfus Corporation managed or administered approximately $118.5
billion in assets for approximately 1.7 million investor accounts
nationwide.

Account: MidCap Value
Sub-Advisor: Neuberger Berman Management, Inc. ("Neuberger Berman") is an
affiliate of Neuberger Berman LLC. Neuberger Berman is located at 605 Third
Avenue, 2nd Floor, New York, NY 10158-0180. Together with Neuberger Berman,
the firms manage more than $49 billion in total assets (as of September 30,
1998) and continue an asset management history that began in 1939.

Account: SmallCap Growth
Sub-Advisor: Berger Associates, Inc. ("Berger"). Berger's address is 210
University Boulevard, Suite 900, Denver, CO 80206. It serves as investment
advisor, sub-advisor, administrator or sub-administrator to mutual funds
and institutional investors. Berger is a wholly-owned subsidiary of Kansas
City Southern Industries, Inc. ("KCSI"). KCSI is a publicly traded holding
company with principal operations in rail transportation, through its
subsidiary The Kansas City Southern Railway Company, and financial asset
management businesses. Assets under management for Berger as of December
31, 1998 were approximately $3.4 billion.

Account: SmallCap Value
Sub-Advisor: J.P. Morgan Investment Management, Inc. ("J.P. Morgan Investment").
J.P. Morgan Investment, with principal offices at 522 Fifth Avenue, New
York, NY 10036 is a wholly-owned subsidiary of J.P. Morgan & Co.
Incorporated ("J.P. Morgan") a bank holding company. J.P. Morgan, through
J.P. Morgan Investment and other subsidiaries, offers a wide range of
services to governmental, institutional, corporate and individual customers
and acts as investment adviser to individual and institutional clients. As
of December 31, 1998, J.P. Morgan and its subsidiaries had total combined
assets under management of approximately $300 billion.

Each of the persons affiliated with the Fund who is also an affiliated person of
the Manager or a Sub-Advisor is named below, together with the capacities in
which such person is affiliated:
<TABLE>
<CAPTION>

Office Held With Office Held With
Name The Fund The Manager/Invista
<S> <C> <C>

John E. Aschenbrenner Director Director (Manager)
Craig Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Executive Vice President
& Chief Operating Officer (Manager)
Ralph C. Eucher Director and Director and President
President (Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Dennis P. Francis Director Director and Chairman of
the Board (Invista)
Ernest H. Gillum Assistant Secretary Vice President, Compliance and
Product Development (Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Michael D. Roughton Counsel Counsel (Manager; Invista)
</TABLE>

COST OF MANAGER'S SERVICES

For providing the investment advisory services, and specified other services,
the Manager, under the terms of the Management Agreement for the Fund, is
entitled to receive a fee computed and accrued daily and payable monthly, at the
following annual rates:
<TABLE>
<CAPTION>

Net Asset Value of Account

First Next Next Next
Account $250 million $250 million $250 million $250 million Thereafter
--------------- ------------ ------------ ------------ -----------------------------
<S> <C> <C> <C> <C> <C>

Blue Chip 0.60% 0.55% 0.50% 0.45% 0.40%
LargeCap Growth 1.10 1.05 1.00 0.95 0.90
MidCap Value 1.05 1.00 0.95 0.90 0.85
Overall Fee
Stock Index 500 0.35%
</TABLE>
<TABLE>
<CAPTION>

First Next Next Next Over
Account $100 million $100 million $100 million $100 million $400 million
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>

Aggressive Growth and
Asset Allocation 0.80% 0.75% 0.70% 0.65% 0.60%
Balanced, High Yield and Utilities 0.60 0.55 0.50 0.45 0.40
International 0.75 0.70 0.65 0.60 0.55
International SmallCap 1.20 1.15 1.10 1.05 1.00
MicroCap and SmallCap Growth 1.00 0.95 0.90 0.85 0.80
MidCap 0.65 0.60 0.55 0.50 0.45
MidCap Growth and Real Estate 0.90 0.85 0.80 0.75 0.70
Small Cap 0.85 0.80 0.75 0.70 0.65
Small Cap Value 1.10 1.05 1.00 0.95 0.90
All Other 0.50 0.45 0.40 0.35 0.30
</TABLE>

Management Fee
Net Assets as of For Year Ended
Account December 31, 1998 December 31, 1998
------- ----------------- -----------------
Aggressive Growth $224,058,066 0.77%
Asset Allocation 84,089,285 0.80
Balanced 198,603,294 0.57
Bond 121,972,775 0.49
Capital Value 385,723,793 0.43
Government Securities 141,317,226 0.49
Growth 259,827,613 0.47
High Yield 14,042,632 0.60
International 153,587,915 0.73
International SmallCap 13,075,152 1.20
MicroCap 5,383,599 1.00
MidCap 259,470,208 0.61
MidCap Growth 8,533,511 0.90
Money Market 83,262,822 0.50
Real Estate 10,908,756 0.90
SmallCap 12,094,305 0.85
SmallCap Growth 8,462,628 1.00
SmallCap Value 6,895,386 1.10
Utilities 18,298,074 0.60

Under a Sub-Advisory Agreement between Invista and the Manager, Invista performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the Balanced, Blue Chip, Capital Value, Government Securities,
Growth, International, International SmallCap, MidCap, SmallCap, Stock Index 500
and Utilities Accounts. The Manager compensates Invista for its sub-advisory
services as provided in the Sub-Advisory Agreement. The Manager may periodically
reallocate management fees between itself and Invista.

Under a Sub-Advisory Agreement between Morgan Stanley and the Manager, Morgan
Stanley performs all the investment advisory responsibilities of the Manager
under the Management Agreement for the Aggressive Growth and Asset Allocation
Accounts. The Manager pays Morgan Stanley a fee that is accrued daily and
payable monthly. The fee is based on the net asset value of each Account as
follows: first $40 million of net assets - the fee is 0.45%; next $160 million -
0.30%; next $100 million - 0.25%; and net assets over $300 million - 0.20%.
Invest in real estate limited partnership interests except that this restriction
shall not apply to either the MicroCap or Real Estate Accounts.

Under a Sub-Advisory Agreement between Berger and the Manager, Berger performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the SmallCap Growth Account. The Manager pays Berger a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $100 million of net assets - the fee is 0.50%;
next $200 million - 0.45%; and net assets over $300 million - 0.40%.

Under a Sub-Advisory Agreement between Dreyfus and the Manager, Dreyfus performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the MidCap Growth Account. The Manager pays Dreyfus a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $50 million of net assets - the fee is 0.40%; and
net assets over $50 million - 0.35%.

Under a Sub-Advisory Agreement between Goldman and the Manager, Goldman performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the MicroCap Account. The Manager pays Goldman a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $50 million of net assets - the fee is 0.50%; next
$150 million - 0.45%; and net assets over $200 million - 0.40%.

Under a Sub-Advisory Agreement between Janus Capital and the Manager, Janus
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the LargeCap Growth Account. The Manager pays Janus a
fee that is accrued daily and payable monthly. The fee is based on the net asset
value of the Account as follows: first $250 million of net assets - the fee is
1.10%; next $250 million - 1.05%; next $250 million - 1.00%; next $250 million -
0.95%; and thereafter - 0.90%.

Under a Sub-Advisory Agreement between J.P. Morgan Investment and the Manager,
J.P. Morgan Investment performs all the investment advisory responsibilities of
the Manager under the Management Agreement for the SmallCap Value Account. The
Manager pays J.P. Morgan Investment a fee that is accrued daily and payable
monthly. The fee is based on the net asset value of the Account as follows:
first $50 million of net assets - the fee is 0.60%; next $250 million - 0.55%;
and net assets over $300 million - 0.50%.

Under a Sub-Advisory Agreement between Neuberger Berman Management Inc. and the
Manager, Neuberger Berman performs all the investment advisory responsibilities
of the Manager under the Management Agreement for the MidCap Value Account. The
Manager pays Neuberger Berman a fee that is accrued daily and payable monthly.
The fee is based on the net asset value of the Account as follows: first $250
million of net assets - the fee is 1.05%; next $250 million - 1.00%; next $250
million - 0.95%; next $250 million - 0.90%; and thereafter - 0.85%.

Except for certain Fund expenses set out below, the Manager is responsible for
expenses, administrative duties and services including the following: expenses
incurred in connection with the registration of the Fund and Fund shares with
the Securities and Exchange Commission and state regulatory agencies; office
space, facilities and costs of keeping the books of the Fund; compensation of
personnel and officers and any directors who are also affiliated with the
Manager; fees for auditors and legal counsel; preparing and printing Fund
prospectuses; administration of shareholder accounts, including issuance,
maintenance of open account system, dividend disbursement, reports to
shareholders, and redemption. However, some or all of these expenses may be
assumed by Principal Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Life Insurance Company or affiliate thereof.

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.

Fees paid for investment management services during the periods indicated were
as follows:

Management Fees For Year Ended December 31,
1998 1997 1996
Aggressive Growth $1,436,590 $907,800 $491,699
Asset Allocation 650,963 566,727 425,427
Balanced 958,526 665,902 420,010
Bond 488,898 358,818 260,242
Capital Value 1,480,275 1,124,855 816,437
Government Securities 576,926 426,977 360,968
Growth 989,512 650,659 357,833
High Yield 87,806 87,845 75,111
International 1,045,627 768,332 376,123
International SmallCap 94,388
MicroCap 36,591
MidCap 1,504,567 1,145,372 606,697
MidCap Growth 36,858
Money Market 306,233 224,424 208,822
Real Estate 64,493
SmallCap 60,975
SmallCap Growth 42,319
SmallCap Value 42,234
Utilities 56,185

The Management Fees shown above include the fee paid to the Account's
Sub-Advisor, if any. Fees paid to each Sub-Advisor for the most recent and
immediately preceding fiscal periods were as follows: Aggressive Growth Account
$534,127, $403,710 and $243,337; Asset Allocation Account $375,391, $272,596 and
$219,613; Balanced Account $154,678, $65,013 and 35,655; Capital Value Account
$189,590, $138,908 and $76,181; Government Securities Account $30,334, $23,421
and $12,845; Growth Account $111,780, $84,191 and $46,173; International Account
$68,263, $91,476 and $50,168; International SmallCap Account $21,431; MidCap
Account $134,225, $112,374 and $61,629; SmallCap Account $16,533; and Utilities
Account $7,405.

Note: The Manager voluntarily waived a portion of its fee for the MicroCap
Account. It intends to continue the waiver and, if necessary, pay
expenses normally payable by the Account through December 31, 1999 in
an amount that will maintain total operating expenses at a level that
will not exceed 1.06%.

Note: The Manager voluntarily waived a portion of its fee for the MidCap
Growth Account. It intends to continue the waiver and, if necessary,
pay expenses normally payable by the Account through December 31, 1999
in an amount that will maintain total operating expenses at a level
that will not exceed 0.96%.

Note: The Manager voluntarily waived a portion of its fee for the SmallCap
Growth Account. It intends to continue the waiver and, if necessary,
pay expenses normally payable by the Account through December 31, 1999
in an amount that will maintain total operating expenses at a level
that will not exceed 1.06%.

Note: The Manager voluntarily waived a portion of its fee for the SmallCap
Value Account. It intends to continue the waiver and, if necessary, pay
expenses normally payable by the Account through December 31, 1999 in
an amount that will maintain total operating expenses at a level that
will not exceed 1.16%.

Note: The Manager intends to waive a portion of its fee for the LargeCap
Growth Account and, if necessary, pay expenses normally payable by the
Account through December 31, 1999 in an amount that will maintain total
operating expenses at a level that will not exceed 1.20%.

Note: The Manager intends to waive a portion of its fee for the MidCap Value
Account and, if necessary, pay expenses normally payable by the Account
through December 31, 1999 in an amount that will maintain total
operating expenses at a level that will not exceed 1.20%.

Note: The Manager intends to waive a portion of its fee for the Stock Index
500 Account and, if necessary, pay expenses normally payable by the
Account through December 31, 1999 in an amount that will maintain total
operating expenses at a level that will not exceed 0.40%.

The Management Agreement and Investment Service Agreement under which Principal
Capital Management, a subsidiary of Principal Life Insurance Company, has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its responsibilities for the Accounts were last approved by
the Fund's Board of Directors on September 14, 1998. The Sub-Advisory Agreements
between the Manager and Berger, the Manager and Dreyfus, the Manager and
Goldman, the Manager and Invista the Manager and J.P. Morgan Investment, and the
Manager and Morgan Stanley were also approved by the Fund's Board of Directors
on September 14, 1998.

The Second Amendment to the Management Agreement, the Second Amendment to the
Sub-Advisory Agreement between Principal Management and Invista (adding the Blue
Chip and Stock Index 500 Accounts), the Sub-Advisory Agreement between Principal
Management and Janus and the Sub-Advisory Agreement between Principal Management
and Neuberger Berman were approved by the Fund's Board of Directors on December
14, 1998.

Each of these agreements provides for continuation in effect from year to year
only so long as such continuation is specifically approved at least annually
either by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of an Account of the Fund. In either event
continuation shall be approved by vote of a majority of the Directors who are
not "interested persons" (as defined in the Investment Company Act of 1940) of
the Manager, Principal Life Insurance Company or its subsidiaries, the Fund and

1) in the case of the Sub-Advisory Agreement for each of the Balanced,
Blue Chip, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock Index
500, and Utilities Accounts, Invista;
2) in the case of the Sub-Advisory Agreement for each of Aggressive
Growth and Asset Allocation, Morgan Stanley;
3) for the Sub-Advisory Agreement for LargeCap Growth, Janus;
4) for the Sub-Advisory Agreement for MicroCap, Goldman;
5) for the Sub-Advisory Agreement for MidCap Growth, Dreyfus;
6) for the Sub-Advisory Agreement for MidCap Value, Neuberger Berman;
7) for the Sub-Advisory Agreement for SmallCap Growth, Berger; and
8) for the Sub-Advisory Agreement for SmallCap Value, J.P. Morgan
Investment.
The Agreements may be terminated at any time on 60 days written notice to the
Manager by the Board of Directors of the Fund or by a vote of a majority of the
outstanding securities of the Fund and by the Manager, Berger, Dreyfus, Goldman,
Invista, J.P. Morgan Investment, Janus, Morgan Stanley, Neuberger Berman or
Principal Life Insurance Company, as the case may be, on 60 days written notice
to the Fund. The Agreements will automatically terminate in the event of their
assignment.

BROKERAGE ON PURCHASES AND SALES OF SECURITIES

In distributing brokerage business arising out of the placement of orders for
the purchase and sale of securities for any Account, the objective of the
Accounts' Manager or Sub-Advisor is to obtain the best overall terms. In
pursuing this objective, the Manager, or Sub-Advisor, considers all matters it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and executing capability of the broker
or dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager, or Sub-Advisor, will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager, or Sub-Advisor, believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (c) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager, or Sub-Advisor,
exercises investment discretion. The Manager, or Sub-Advisor, may purchase
securities in the over-the-counter market, utilizing the services of principal
market matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager, or
Sub-Advisor, gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any such allocation is made, the primary
criteria used will be to obtain the best overall terms for such transactions.
The Manager, or Sub-Advisor, may pay additional commission amounts for research
services but generally does not do so. Such statistical data and research
information received from brokers or dealers may be useful in varying degrees
and the Manager, or Sub-Advisor, may use it in servicing some or all of the
accounts it manages. Some statistical data and research information may not be
useful to the Manager, or Sub-Advisor, in managing the client account, brokerage
for which resulted in the Manager's, or Sub-Advisor's, receipt of the
statistical data and research information. However, in the Manager's, or
Sub-Advisor's, opinion, the value thereof is not determinable and it is not
expected that the Manager's, or Sub-Advisor's, expenses will be significantly
reduced since the receipt of such statistical data and research information is
only supplementary to the Manager's, or Sub-Advisor's, own research efforts. The
Manager, or Sub-Advisor, allocated portfolio transactions for the Balanced
Account, Capital Value Account, Growth Account and International Account to
certain brokers during the fiscal year ended December 31, 1998 due to research
services provided by such brokers. These portfolio transactions resulted in
commissions paid to such brokers by the Fund in the amounts of $19,864.00,
$16,090.00, $15,756.25 and $4,965.86 respectively.

Subject to the rules promulgated by the SEC, as well as other regulatory
requirements, a Sub-Advisor also may allocate orders to broker-dealers
affiliated with the Sub-Advisor. The Sub-Advisor shall determine the amounts and
proportions of orders allocated to the Sub-Advisor or affiliate. The Board of
Directors of the Fund will receive quarterly reports on these transactions.

Purchases and sales of debt securities and money market instruments usually will
be principal transactions; portfolio securities will normally be purchased
directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the
Account paying no brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
the purchases from dealers serving as marketmakers will include the spread
between the bid and asked prices.

The following table shows the brokerage commissions paid during the periods
indicated. In each year, 100% of the commissions paid by each Account went to
broker-dealers that provided research, statistical or other factual information.

Total Brokerage Commissions Paid
Fiscal Year Ended
December 31,

Account 1998 1997 1996
------- ---- ---- ----
Aggressive Growth $606,022 $418,468 $250,591
Asset Allocation 214,204 164,992 109,360
Balanced 80,504 58,053 46,458
Capital Value 237,630 135,417 183,156
Growth 101,607 33,836 45,131
International 303,293 230,351 156,842
International SmallCap 52,240
MicroCap 21,437
MidCap 137,283 54,019 63,355
MidCap Growth 12,242
Real Estate 24,283
SmallCap 33,400
SmallCap Growth 8,899
SmallCap Value 8,292
Utilities 23,668

Brokerage commissions paid to affiliates during the periods indicated were as
follows:
<TABLE>
Commissions Paid to Goldman Sachs
<CAPTION>

Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
------- ---- ------ ----------------- ------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 1998 $30,744 5.07% 4.97%
Asset Allocation 1998 11,868 5.54 4.62
Balanced 1998 3,630 4.51 1.72
Growth 1998 4,620 4.55 5.03
International 1998 25,436 8.39 14.38
International SmallCap 1998 1,424 2.73 3.32
MicroCap 1998 2,737 12.77 17.07
MidCap 1998 640 0.47 0.59
MidCap Growth 1998 3,853 31.47 36.02
SmallCap 1998 300 0.90 1.44
SmallCap Growth 1998 325 3.65 5.03
</TABLE>
<TABLE>

Commissions Paid to J. P. Morgan Securities
<CAPTION>

Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
------- ---- ------ ----------------- ------------------------------
<S> <C> <C> <C> <C>
Aggressive Growth 1998 $34,133 5.63% 6.32%
Asset Allocation 1998 10,678 4.98 5.47
Balanced 1998 1,330 1.65 2.41
Capital Value 1998 4,375 1.84 1.95
Growth 1998 3,496 3.44 2.41
International 1998 1,261 0.42 0.73
MicroCap 1998 827 3.86 2.29
MidCap 1998 1,040 0.76 0.62
MidCap Growth 1998 78 0.64 0.31
Real Estate 1998 2,355 9.70 8.86
SmallCap 1998 120 0.36 0.91
</TABLE>
<TABLE>
Commissions Paid to Morgan Stanley and Co.
<CAPTION>

Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Asset Allocation 1998 $ 751 0.35% 0.27%
1997 2,974 1.80 1.29
Balanced 1998 3,155 3.92 2.11
1996 1,300 2.80 1.82
Capital Value 1998 4,620 1.94 1.77
1997 7,155 5.28 6.12
1996 3,650 1.99 1.48
Growth 1998 6,598 6.49 5.30
1997 1,250 3.69 3.83
International 1998 25,872 8.53 8.46
1997 10,411 4.37 4.20
1996 3,176 2.02 1.78
International SmallCap 1998 5,697 10.91 15.49
MicroCap 1998 30 0.14 0.14
MidCap 1998 2,248 1.64 2.19
1997 2,250 4.17 2.54
MidCap Growth 1998 210 1.72 1.15
Real Estate 1998 4,600 18.94 15.04
SmallCap 1998 220 0.66 0.86
SmallCap Value 1998 158 1.90 0.75
</TABLE>

Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management, Inc.,
which acts as a sub-advisor to two Accounts included in the Fund.

The Manager acts as investment advisor for each of the funds sponsored by
Principal Life Insurance Company and places orders to trade portfolio securities
for the funds and the Bond, High Yield, Money Market and Real Estate Accounts.
Orders to trade portfolio securities for the other Accounts are placed by the
sub-advisor for the specific Account. If, in carrying out the investment
objectives of the Accounts, occasions arise when purchases or sales of the same
equity securities are to be made for two or more of the Accounts or Funds at the
same time, (or, in the case of Accounts managed by Invista, for two or more
Funds and any other accounts managed by Invista), the Manager or Invista may
submit the orders to purchase or, whenever possible, to sell, to a broker/dealer
for execution on an aggregate or "bunched" basis. The Manager (or, in the case
of Accounts managed by Invista, Invista) may create several aggregate or
"bunched" orders relating to a single security at different times during the
same day. On such occasion, the Manager (or, in the case of Accounts managed by
Invista, Invista) will employ a computer program to randomly order the Accounts
whose individual orders for purchase or sale make up each aggregate or "bunched"
order. Securities purchased or proceeds of sales received on each trading day
with respect to each such aggregate or "bunched" orders shall be allocated to
the various Accounts (or, in the case of Invista, the various Accounts or Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Account's or Fund's (or, in the
case of Invista, each Account's or Fund's or other client account's) order, in
the sequence arrived at by the random ordering. Securities purchased for funds
(or, in the case of Invista, Accounts, Funds and other clients accounts)
participating in an aggregate or "bunched" order are placed into those Accounts
and, where applicable, other client accounts at a price equal to the average of
the prices achieved in the course of filling that aggregate or "bunched" order.

If purchases or sales of the same debt securities are to be made for two or more
of the Accounts or Funds at the same time, the securities are purchased or sold
proportionately in accordance with the amount of such security sought to be
purchased or sold at that time for each Account or Fund. If the purchase or sale
of securities consistent with the investment objectives of the Accounts or one
or more of the other clients for which Berger, Dreyfus, Goldman, J.P. Morgan
Investment, Janus, Morgan Stanley, or Neuberger Berman acts as investment
sub-advisor or advisor is to be made at the same time, the securities are
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each Account or client.

DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES

Growth-Oriented and Income-Oriented Accounts

The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Accounts are 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 an Account's portfolio securities do not materially affect the
current net asset value of that 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 Accounts treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share for each Account is determined by dividing the value of
securities in the Account's investment portfolio plus all other assets, less all
liabilities, by the number of Account shares outstanding. Securities for which
market quotations are readily available, including options and futures traded on
an exchange, are valued at market value, which is currently determined using the
last reported sale price or, if no sales are reported, as is regularly the case
for some securities traded over-the-counter, the last reported bid price. When
reliable market quotations are not considered to be readily available, which may
be the case, for example, with respect to certain debt securities, preferred
stocks, foreign securities and over-the-counter options, the investments are
valued by using market quotations considered reliable, prices provided by market
makers, that may include dealers with which the Account has executed
transactions, 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. Other assets are valued at fair value as determined in good faith by the
Board of Directors.

Generally, trading in foreign securities 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 that 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.

Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price that may not consistently represent a price at which a specific
transaction can be effected. It is the policy of International Account to value
such securities at prices at which it is expected those shares may be sold, and
the Manager or any Sub-Advisor, is authorized to make such determinations
subject to such oversight by the Fund's Board of Directors as may from time to
time be necessary.

Money Market Account

The net asset value of shares of the Money Market Account is determined at the
same time and on the same days as each of the Growth-Oriented Accounts and
Income-Oriented Accounts as described above. The net asset value per share for
the Account is computed by dividing the total value of the Account's securities
and other assets, less liabilities, by the number of Account shares outstanding.

All securities held by the Money Market Account are valued on an amortized cost
basis. Under this method of valuation, a security is initially valued at cost;
thereafter, the Account assumes a constant proportionate amortization in value
until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price that
would be received upon sale of the security. Use of the amortized cost valuation
method by the Money Market Account requires the Account to maintain a dollar
weighted average maturity of 90 days or less and to purchase only obligations
that have remaining maturities of 397 days or less or have a variable or
floating rate of interest. In addition, the Account can invest only in "Eligible
Securities" as that term is defined in Regulations issued under the Investment
Company Act of 1940 (see the Fund's Prospectus for a more complete description)
determined by the Board of Directors to present minimal credit risks.

The Board of Directors has established procedures designed to stabilize, to the
extent reasonably possible, the Account's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include a directive
to the Manager to test price the portfolio or specific securities thereof upon
certain changes in the Treasury Bill auction interest rate for the purpose of
identifying possible deviations in the net asset value per share calculated by
using available market quotations or equivalents from $1.00 per share. If such
deviation exceeds 1/2 of 1%, the Board of Directors will promptly consider what
action, if any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to shareholders, the Board will take such corrective action
as it regards as appropriate, including: the sale of portfolio instruments prior
to maturity; the withholding of dividends; redemptions of shares in kind; the
establishment of a net asset value per share based upon available market
quotations; or splitting, combining or otherwise recapitalizing outstanding
shares. The Account may also reduce the number of shares outstanding by
redeeming proportionately from shareholders, without the payment of any monetary
compensation, such value at $1.00 per share.

PERFORMANCE CALCULATION

Each of the Accounts may from time to time advertise its performance in terms of
total return. The figures used for total return and yield are based on the
historical performance of an Account, or its corresponding, predecessor mutual
fund, show the performance of a hypothetical investment and are not intended to
indicate future performance. Total return and yield will vary from time to time
depending upon market conditions, the composition of an Account's portfolio and
operating expenses. These factors and possible differences in the methods used
in calculating performance figures should be considered when comparing an
Account's performance to the performance of some other kind of investment. The
calculations of total return and yield for the Accounts do not include the fees
and charges of the separate accounts that invest in the Accounts and, therefore,
do not reflect the investment performance of those separate accounts.

Each Account may also include in its advertisements performance rankings and
other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of an Account to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.

Total Return

When advertising total return figures, each of the Growth-Oriented Accounts and
Income-Oriented Accounts will include its average annual total return for each
of the one, five and ten year periods (or if shorter, the period during which
its corresponding predecessor fund's registration statement has been in effect)
that end on the last day of the most recent calendar quarter. Average annual
total return 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. In its advertising, an Account
may also include average annual total return for some other period or cumulative
total return for a specified period. Cumulative total return is computed by
dividing the ending redeemable value (assuming the reinvestment of all dividends
and capital gains distributions at net asset value) by the initial investment.

The following table shows as of December 31, 1998 average annual total return
for each of the Accounts for the periods indicated:

Account 1-Year 5-Year 10-Year
------- ------ ------ -------
Aggressive Growth 18.95% 26.61%(1) N/A
Asset Allocation 9.18% 13.23%(1) N/A
Balanced 11.91% 12.74% 12.33%
Bond 7.69% 7.66% 9.46%
Capital Value 13.58% 19.03% 15.15%
Government Securities 8.27% 7.02% 9.35%
Growth 21.36% 19.48%(2) N/A
High Yield -.56% 7.79% 8.43%
International 9.98% 12.09%(2) N/A
International SmallCap -10.37%(3)
MicroCap -18.42%(3)
MidCap 3.69% 14.92% 16.22%
MidCap Growth Account -3.40%(3)
Real Estate -6.56%(3)
SmallCap -20.51%(3)
SmallCap Growth 2.96%(3)
SmallCap Value -15.06%(3)
Utilities 15.36%(3)

(1) Period beginning June 1, 1994 and ending December 31, 1998. (2) Period
beginning May 1, 1994 and ending December 31, 1998. (3) Period beginning
May 1, 1998 and ending December 31, 1998.

Yield

Money Market Account

The Money Market Account may advertise its yield and its effective yield.

Yield is computed by determining the net change, exclusive of capital changes,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of December 31, 1998, the Money Market Account's yield was 4.90%. Because
realized capital gains or losses in an Account's portfolio are not included in
the calculation, the Account's net investment income per share for yield
purposes may be different from the net investment income per share for dividend
purposes, that includes net short-term realized gains or losses on the Account's
portfolio.

Effective yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
The resulting effective yield figure is carried to at least the nearest
hundredth of one percent. As of December 31, 1998, the Money Market Account's
effective yield was 5.02%.

The yield quoted at any time for the Money Market Account represents the amount
that was earned during a specific, recent seven-day period and is a function of
the quality, types and length of maturity of instruments in the Account's
portfolio and the Account's operating expenses. The length of maturity for the
portfolio is the average dollar weighted maturity of the portfolio. This means
that the portfolio has an average maturity of a stated number of days for its
issues. The calculation is weighted by the relative value of each investment.

The yield for the Money Market Account fluctuates 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 Money Market 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.

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 is exempt from federal income tax upon the amount so distributed
to investors.

For federal income tax purposes, capital gains and losses on futures contracts
or options thereon, index options or options traded on qualified exchanges are
generally treated at 60% long-term and 40% short-term. In addition, an Account
must recognize any unrealized gains and losses on such positions held at the end
of the fiscal year. An Account may elect out of such tax treatment, however, for
a futures or options position that is part of an "identified mixed straddle"
such as a put option purchased by the Account with respect to a portfolio
security. Gains and losses on figures and options included in an identified
mixed straddle will be considered 100% short-term and unrealized gain or loss on
such positions will not be realized at year end. The straddle provisions of the
Code may require the deferral of realized losses to the extent that the Account
has unrealized gains in certain offsetting positions at the end of the fiscal
year, and may also require recharacterization of all or a part of losses on
certain offsetting positions from short-term to long-term, as well as adjustment
of the holding periods of straddle positions.

The 1986 Tax Reform Act imposes an excise tax on mutual funds that fail to
distribute net investment income and capital gains by the end of the calendar
year in accordance with the provisions of the Act. The Fund intends to comply
with the Act's requirements and to avoid this excise tax.

GENERAL INFORMATION AND HISTORY

On December 31, 1997, certain Funds sponsored by Principal Life Insurance
Company were reorganized into Accounts of the Principal Variable Contracts Fund,
Inc., a corporation incorporated in the State of Maryland. The new series
adopted the assets and liabilities of the corresponding Fund. The old Fund names
and the corresponding Account are shown below:

Fund Account
---- -------
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account

The Articles of Incorporation for the Principal Variable Contracts Fund, Inc.
were amended on February 13, 1998 to reflect the addition of the following new
Accounts:

International SmallCap Account SmallCap Account
MicroCap Account SmallCap Growth Account
MidCap Growth Account SmallCap Value Account
Real Estate Account Utilities Account

The Articles of Incorporation for the Principal Variable Contracts Fund, Inc.
were amended on February 1, 1999 to reflect the addition of the following new
Accounts:

Blue Chip Account MidCap Value Account
LargeCap Growth Account Stock Index 500 Account

FINANCIAL STATEMENTS

The financial statements for the Accounts for the fiscal period ended December
31, 1998 appearing in the Annual Report to Shareholders and the report thereon
of Ernst and Young LLP, independent auditors, 801 Grand Avenue, Des Moines, Iowa
50309, appearing therein are incorporated by reference in this Statement of
Additional Information. The Annual Report will be furnished, without charge, to
investors who request copies of the Statement of Additional Information.

APPENDIX A

Description of Bond Ratings:

Moody's Investors Service, Inc. Bond Ratings

Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large
or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally strong
position of such issues.

Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.

A: Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.

Baa: Bondsthat are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.

Ba: Bonds that 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 that 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: Bondsthat 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.

Ca: Bonds that are rated Ca represent obligations that are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds that are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.

RATING REFINEMENTS: 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 higher 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.

SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."

Description of Moody's Commercial Paper Ratings

Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.

Issuers rated Not Prime do not fall within any of the Prime rating
categories.

Description of Standard & Poor's Corporation's Debt Ratings

A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.

The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.

The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.

The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;

II. Nature of and provisions of the obligation;

III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.

AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.

A: Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.

BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.

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.

C: The rating "C" is reserved for income bonds on which no interest is
being paid.

D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.

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

Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.

NR: Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard &
Poor's does not rate a particular type of obligation as a matter of
policy.

Standard & Poor's, Commercial Paper Ratings

A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:

A: Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1 This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very
strong. Issues that possess overwhelming safety
characteristics will be given a "+" designation.

A-2 Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as
high as for issues designated "A-1".

A-3 Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat
more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the highest
designations.

B: Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.

C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.

D: This rating indicates that the issue is either in default or is
expected to be in default upon maturity.

The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.

Standard & Poor's rates notes with a maturity of less than three years as
follows:

SP-1A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.

SP-2A satisfactory capacity to pay principal and interest.

SP-3A speculative capacity to pay principal and interest.

<PAGE>
PART C
OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(a) Financial Statements included in the Registration Statement
(1) Part A:
Financial Highlights

(2) Part B:
Annual Report dated 12/31/98 incorporated by
reference

(b) Exhibits
(1) Amendment and Restatement of the Articles
of Incorporation (Filed 2/13/98)
(2) Bylaws
(5a) Management Agreement (Filed 10/23/97)
(5a1) First Amendment to Management Agreement
(Filed 2/13/98)
(5b) Investment Service Agreement (Filed 10/23/97)
(5c) Sub-Advisory Agreement - Invista Capital
Management, Inc. (Filed 10/23/97)
(5c1) First Amendment to Sub-Advisory Agreement
(Filed 2/13/98)
(5d) Sub-Advisory Agreement - Morgan Stanley Asset
Management, Inc. (Filed 10/23/97)
(5e) Sub-Advisory Agreement - Berger
Associates, Inc. (Filed 4/13/98)
(5f) Sub-Advisory Agreement - Dreyfus Corporation
(Filed 4/13/98)
(5g) Sub-Advisory Agreement - Goldman Sachs Asset
Management (Filed 4/13/98)
(5h) Sub-Advisory Agreement - J.P. Morgan
Investment Management, Inc. (Filed 4/13/98)
(5i) Sub-Advisory Agreement - Neuberger Berman
Management, Inc.
(5j) Sub-Advisory Agreement - Janus Capital
Corporation
(8a) Domestic Custody Agreement (Filed 10/23/97)
(8b) Global Custody Agreement (Filed 10/23/97)
(9) Agreement and Plan of Reorganization and
Liquidation (Filed 10/23/97)
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of
December 31, 1998, including the Report of
Ernst & Young LLP, independent auditors for
the Registrant.
(16) Total Return Performance Quotation
(Filed 4/12/96)
(27) Financial Data Schedules

Item 25. Persons Controlled by or Under Common Control with Registrant

Principal Life Insurance Company (an Iowa corporation)
a life group, pension and individual insurance company.

Sponsored the organization of the following mutual funds, some of
which it controls by virtue of owning voting securities:

Principal Balanced Fund, Inc.(a Maryland Corporation) 0.17% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on April 19, 1999.

Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.84% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on April 19, 1999.

Principal Bond Fund, Inc.(a Maryland Corporation) 0.62% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on April 19, 1999.

Principal Capital Value Fund, Inc. (a Maryland Corporation)
23.76% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on April 19,
1999.

Principal Cash Management Fund, Inc. (a Maryland Corporation)
8.51% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on April 19,
1999.

Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.04% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
April 19, 1999.

Principal Growth Fund, Inc. (a Maryland Corporation) 0.41% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on April 19, 1999.

Principal High Yield Fund, Inc. (a Maryland Corporation) 7.38%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on April 19, 1999.

Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 47.07% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
April 19, 1999.

Principal International Fund, Inc. (a Maryland Corporation)
22.93% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on April 19,
1999.

Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 43.01% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
April 19, 1999.

Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
31.37% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on April 19,
1999.

Principal MidCap Fund, Inc. (a Maryland Corporation) 0.66% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on April 19, 1999

Principal Real Estate Fund, Inc. (a Maryland Corporation) 68.91%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on April 19, 1999

Principal SmallCap Fund, Inc.(a Maryland Corporation) 22.07% of
shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on April 19,
1999

Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.30% of shares outstanding of the International Emerging
Markets Portfolio, 43.66% of the shares outstanding of the
International Securities Portfolio, 98.66% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Life Insurance Company (including subsidiaries
and affiliates) on April 19, 1999

Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.05% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on April 19,
1999.

Principal Utilities Fund, Inc. (a Maryland Corporation) 0.25% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on April 19, 1999.

Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Life Insurance Company and its Separate Accounts on
April 19, 1999: Aggressive Growth, Asset Allocation, Balanced,
Bond, Capital Value, Government Securities, Growth, High Yield,
International, International SmallCap, MicroCap, MidCap, MidCap
Growth, Money Market, Real Estate, SmallCap, SmallCap Growth,
SmallCap Value and Utilities.

Subsidiaries organized and wholly-owned by Principal Life
Insurance Company:

a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Life Insurance
Company.

b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)

c. Principal Development Investors, LLC (a Delaware
Corporation) A limited liability company engaged in
acquiring and improving real property through development
and redevelopment.

d. Principal Capital Management, LLC (a Delaware Corporation) A
limited liability company that provides investment
management services.

Subsidiaries wholly-owned by Principal Capital Management, LLC:

a. Principal Structured Investments, LLC (a Delaware
Corporation) a limited liability company that provides
product development administration, marketing and asset
management services associated with stable value products
together with other related institutional financial services
including derivatives, asset-liability management, fixed
income investment management and ancillary money management
products.

b. Principal Enterprise Capital, LLC (a Delaware Corporation) a
company engaged in the operation of nonresidential
buildings.

c. Principal Commercial Acceptance, LLC (a Delaware
Corporation) a limited liability company involved in
purchasing, managing and selling commercial real estate
assets in the secondary market.

d. Principal Real Estate Investors, LLC (a Delaware
Corporation) a registered investment advisor.

e. Principal Commercial Funding, LLC (a Delaware
Corporation) a correspondent lender and service provider for
loans.

f. Principal Real Estate Services, LLC (a Delaware Corporation)
a limited liability company which acts as a property manager
and real estate service provider.

Subsidiaries wholly-owned by Principal Holding Company:

a. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.

b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.

c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.

d. Princor Financial Services Corporation (an Iowa Corporation)
a registered broker-dealer.

e. Invista Capital Management, LLC (an Iowa Corporation) a
registered investment adviser.

f. Principal Marketing Services, Inc. (a Delaware Corporation)
a corporation formed to serve as an interface between
marketers and manufacturers of financial services products.

g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection
with the new corporate identity. It is not currently active.

h. Delaware Charter Guarantee & Trust Company, d/b/a Trustar
Retirement Services (a Delaware Corporation) a nondepository
trust company.

i. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that develops and manages
preferred provider organizations.

j. Principal Health Care, Inc. (an Iowa Corporation) a
developer and administrator of managed care systems.

k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.

l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.

m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.

n. Principal International, Inc. (an Iowa Corporation) a
company formed for the purpose of international business
development.

o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.

p. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration
of group insurance plans and serves as a record keeper and
third party administrator for various clients' defined
contribution plans.

q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.

r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.

s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.

t. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.

u. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.

v. Dental-Net, Inc. (an Arizona Corporation) holding company
of Employers Dental Services; a managed dental care services
organization. HMO and dental group practice.

w. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.

Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:

a. Principal Management Corporation (an Iowa Corporation) a
registered investment advisor.

Subsidiaries owned by The Admar Group, Inc.:

a. Admar Corporation (a California Corporation) a managed care
services organization.

b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.

c. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.

d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.

e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.

f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.

Subsidiary owned by Petula Associates, Ltd.

a. Magnus Properties, Inc. (an Iowa Corporation) which owns
real estate.

Subsidiary owned by Principal Residential Mortgage, Inc.:

a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a
brokerage and servicer of residential mortgages.

Subsidiaries owned by Dental-Net, Inc.

a. Employers Dental Services, Inc. (an Arizona corporation)
a prepaid dental plan organization.

Subsidiaries wholly-owned by Professional Pensions, Inc.:

a. Benefit Fiduciary Corporation (a Rhode Island corporation)
serves as a corporate trustee for retirement trusts.

b. PPI Employee Benefits Corporation (a Connecticut
corporation) a registered broker-dealer pursuant to Section
15(b) of the Securities Exchange Act an a member of the
National Association of Securities Dealers (NASD), limited
to the sale of open-end mutual funds and variable insurance
products.

c. Boston Insurance Trust, Inc. (a Massachusetts corporation)
authorized by charter to serve as a trustee in connection
with multiple-employer group life insurance trusts or
arrangements, and to generally participate in the
administration of insurance trusts.

Subsidiaries owned by Principal International, Inc.:

a. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.

b. Principal International Argentina, S.A. (an Argentina
services corporation).

c. Principal International Asia Limited (a Hong Kong
Corporation) a corporation operating as a regional
headquarters for Asia.

d. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.

e. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company (individual
group), annuities and pension.

f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and
group), personal accidents.

g. Principal Afore, S.A. de C.V. (a Mexico Corporation),
pension.

h. Zao Principal International (a Russia Corporation) inactive.

i. Principal Trust Company (Asia) Limited (an Asia trust
company).

j. Principal Asset Management Company (Asia) Ltd. (Hong Kong)
a corporation which manages pension funds.

k. Principal Consulting (India) Private Limited (an India
corporation) an India consulting company.

Subsidiaries owned by Principal International Argentina, S.A.:

a. Principal Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.

b. Principal Life Compania de Seguros, S.A. (an Argentina
Corporation) a life insurance company.

Subsidiary owned by Principal International de Chile, S.A.:

a. Principal Compania de Seguros de Vida Chile S.A. (a Chile
Corporation) life insurance and annuity company.

Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:

a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.

Subsidiary owned by Principal Afore, S.A. de C.V.:

a. Siefore Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.

Item 26. Number of Holders of Securities - As of: April 30, 1999

(1) (2)
Title of Class Number of Holders

Common-Principal Variable Contracts Fund, Inc.
Aggressive Growth Account 1
Asset Allocation Account 1
Balanced Account 1
Blue Chip Account 1
Bond Account 1
Capital Value Account 1
Government Securities Account 1
Growth Account 1
High Yield Account 1
International Account 1
International SmallCap Account 1
LargeCap Growth Account 1
MicroCap Account 1
MidCap Account 1
MidCap Growth Account 1
MidCap Value Account 1
Money Market Account 1
Real Estate Account 1
SmallCap Account 1
SmallCap Growth Account 1
SmallCap Value Account 1
Stock Index 500 Account 1
Utilities Account 1

Item 27. Indemnification

Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:

(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and

1. Was committed in bad faith; or

2. Was the result of active and deliberate dishonesty; or

(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or

(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.

If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.

The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.

Item 28. Business or Other Connection of Investment Adviser

A complete list of the officers and directors of the investment adviser,
Principal Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.

John E. Aschenbrenner The Principal Senior Vice President
Director Financial Group Principal Life Insurance
Company

Craig R. Barnes Same President & Chief Executive
Vice President Officer, Invista Capital
Management, Inc.

*Craig L. Bassett Same See Part B
Treasurer

*Michael J. Beer Same See Part B
Executive Vice President

Mary L. Bricker Same Counsel and Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Life
Insurance Company

David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Life
Insurance Company

*Ralph C. Eucher Same See Part B
President and Director

*Arthur S. Filean Same See Part B
Vice President

Dennis P. Francis Same Senior Vice President
Director Principal Life
Insurance Company

Paul N. Germain Same Vice President -
Vice President - Mutual Fund Operations
Mutual Fund Operations Princor Financial Services
Corporation

*Ernest H. Gillum Same See Part B
Vice President - Compliance
& Product Development

Thomas J. Graf Same Senior Vice President
Director Principal Life
Insurance Company

*J. Barry Griswell Same See Part B
Chairman of the Board
and Director

Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Life
Insurance Company

Ellen Z. Lamale Same Vice President & Chief Actuary
Director Principal Life Insurance
Company

Julia M. Lawler Same Second Vice President
Director Principal Life Insurance
Company

Gregg R. Narber Same Senior Vice President and
Director General Counsel
Principal Life
Insurance Company

Richard L. Prey Same Senior Vice President
Director Principal Life Insurance
Company

Layne A. Rasmussen Same Controller
Controller - Princor Financial Services
Mutual Funds Corporation

Elizabeth R. Ring Same Controller- Broker Dealer
Controller Operations
Princor Financial Services
Corporation

*Michael D. Roughton Same See Part B
Counsel

Jean B. Schustek Same Product Compliance Officer -
Product Compliance Officer - Princor Financial Services
Registered Products Corporation

Dewain A. Sparrgrove Same Vice President -
Vice President Investment Securities
Principal Life
Insurance Company

Principal Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Balanced Fund, Inc., Principal Blue
Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc.,
Principal Cash Management Fund, Inc., Principal Government Securities Income
Fund, Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal International
Fund, Inc., Principal International SmallCap Fund, Inc., Principal Limited Term
Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate Fund, Inc.,
Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc., Principal
Tax-Exempt Bond Fund, Inc., Principal Utilities Fund, Inc., Principal Variable
Contracts Fund, Inc. - funds sponsored by Principal Life Insurance Company.

Item 29. Principal Underwriters

(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal Government
Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield
Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal
International Fund, Inc., Principal International SmallCap Fund, Inc., Principal
Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate
Fund, Inc., Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc.,
Principal Tax-Exempt Bond Fund, Inc., Principal Utilities Fund, Inc., Principal
Variable Contracts Fund, Inc. and for variable annuity contracts participating
in Principal Life Insurance Company Separate Account B, a registered unit
investment trust for retirement plans adopted by public school systems or
certain tax-exempt organizations pursuant to Section 403(b) of the Internal
Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans,
certain non- qualified deferred compensation plans and Individual Retirement
Annuity Plans adopted pursuant to Section 408 of the Internal Revenue Code, and
for variable life insurance contracts issued by Principal Life Insurance Company
Variable Life Separate Account, a registered unit investment trust.

(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant

(b) (1) (2)
Positions
and offices
Name and principal with principal
business address underwriter

John E. Aschenbrenner Director Director
The Principal
Financial Group
Des Moines, IA 50392

Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392

Craig L. Bassett Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392

Michael J. Beer Acting President Financial Officer
The Principal
Financial Group
Des Moines, IA 50392

Jerald L. Bogart Insurance License Officer None
The Principal
Financial Group
Des Moines, IA 50392

Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392

Lynn A. Brones Vice President Sales, None
The Principal Princor Investment Network
Financial Group
Des Moines, IA 50392

David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392

Ralph C. Eucher Director and President and
The Principal Executive Vice President Director
Financial Group
Des Moines, IA 50392

Arthur S. Filean Vice President Vice President and
The Principal Secretary
Financial Group
Des Moines, IA 50392

Dennis P. Francis Director Director
The Principal
Financial Group
Des Moines, IA 50392

Paul N. Germain Vice President- None
The Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392

Ernest H. Gillum Vice President- Assistant Vice
The Principal Compliance and Product President
Financial Group Development
Des Moines, IA 50392

Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392

J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392

Susan R. Haupts Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392

Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392

Kraig L. Kuhlers Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392

Ellen Z. Lamale Director None
The Principal
Financial Group
Des Moines, IA 50392

Julia M. Lawler Director None
The Principal
Financial Group
Des Moines, IA 50392

John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392

Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392

Kelly A. Paul Systems & Technology None
The Principal Officer
Financial Group
Des Moines, IA 50392

Elise M. Pilkington Assistant Director - None
The Principal Retirement Consulting
Financial Group
Des Moines, IA 50392

Richard L. Prey Director None
The Principal
Financial Group
Des Moines, IA 50392

Layne A. Rasmussen Controller-Mutual Funds None
The Principal
Financial Group
Des Moines, IA 50392

Martin R. Richardson Operations Officer- None
The Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392

Elizabeth R. Ring Controller None
The Principal
Financial Group
Des Moines, IA 50392

Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392

Jean B. Schustek Product Compliance Officer- None
The Principal Registered Products
Financial Group
Des Moines, IA 50392

Kyle R. Selberg Vice President- None
The Principal Marketing
Financial Group
Des Moines, IA 50392

Minoo Spellerberg Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392

Roger C. Stroud Assistant Director- None
The Principal Marketing
Financial Group
Des Moines, IA 50392

Item 30. Location of Accounts and Records

All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.

Item 31. Management Services

Inapplicable.

Item 32. Undertakings

Indemnification

Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.

Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue

Shareholder Communications

Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications

Delivery of Annual Report to Shareholders

The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirments for effectiveness of this Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Des Moines and State of
Iowa, on the 19th day of April, 1999.

Principal Variable Contracts Fund, Inc.

(Registrant)

By /s/ R. C. Eucher
______________________________________
R. C. Eucher
President and Director

Attest:

/s/ A. S. Filean
______________________________________
A. S. Filean
Vice President and Secretary

Pursuant to the requirement of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.

Signature Title Date

/s/ R. C. Eucher
_____________________________ President and Director April 19, 1999
R. C. Eucher (Principal Executive _________________
Officer)

(J. B. Griswell)*
_____________________________ Director and April 19, 1999
J. B. Griswell Chairman of the Board _________________

/s/ M. J. Beer
_____________________________ Financial Officer April 19, 1999
M. J. Beer (Principal Financial _________________
and Accounting Officer)

(J. D. Davis)*
_____________________________ Director April 19, 1999
J. D. Davis _________________

(P. A. Ferguson)*
_____________________________ Director April 19, 1999
P. A. Ferguson _________________

(R. W. Gilbert)*
_____________________________ Director April 19, 1999
R. W. Gilbert _________________

(B. A. Lukavsky)*
_____________________________ Director April 19, 1999
B. A. Lukavsky _________________

(R. G. Peebler)*
_____________________________ Director April 19, 1999
R. G. Peebler _________________

*By /s/ R. C. Eucher
_____________________________________
R. C. Eucher
President and Director

Pursuant to Powers of Attorney
Previously Filed or Included

POWER OF ATTORNEY

The undersigned hereby constitutes and appoints J. B. Griswell, M. D. Roughton,
E. H. Gillum and A. S. Filean and each of them (with full power to each of them
to act alone), the undersigned's true and lawful attorney-in-fact and agent,
with full power of substitution to each, for and on behalf and in the name of
the undersigned, to execute and file any documents relating to registration
under the Securities Act of 1933 and the Investment Company Act of 1940 with
respect to open-end management investment companies currently organized or to be
organized in the future which are sponsored by Principal Life Insurance Company,
and any and all amendments thereto and reports thereunder with all exhibits and
all instruments necessary or appropriate in connection therewith, each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other, and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned each and every
act and thing necessary or appropriate to be done in order to effectuate the
same, as fully to all intents and purposes as the undersigned might or could do
in person; hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 19th day of
April, 1999.

/s/ R. C. Eucher
----------------------------------
R. C. Eucher

BYLAWS

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ARTICLE 1

Name, Fiscal Year

1.01 The name of this Corporation shall be Principal Variable Contracts
Fund, Inc. Except as otherwise from time to time provided by the board of
directors, the fiscal year of the Corporation shall begin January 1 and end
December 31.

ARTICLE 2

Stockholders' Meetings

2.01 Place of Meetings. All meetings of the stockholders shall be held
at such place within or without the State of Maryland, as is stated in the
notice of meeting.

2.02 Annual Meetings. The Board of Directors of the Corporation shall
determine whether or not an annual meeting of stockholders shall be held. In the
event that an annual meeting of stockholders is held, such meeting shall be held
on the first Tuesday after the first Monday of April in each year or on such
other day during the 31-day period following the first Tuesday after the first
Monday of April as the directors may determine.

2.03 Special Meetings. Special meetings of the stockholders shall be
held whenever called by the chairman of the board, the president or the board of
directors, or when requested in writing by 10% of the Corporation's outstanding
shares.

2.04 Notice of Stockholders' Meetings. Notice of each stockholders'
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called shall be given by mailing such notice
to each stockholder of record at his address as it appears on the records of the
Corporation not less than 10 nor more than 90 days prior to the date of the
meeting. Any meeting at which all stockholders entitled to vote are present
either in person or by proxy or of which those not present have waived notice in
writing shall be a legal meeting for the transaction of business notwithstanding
that notice has not been given as herein provided.

2.05 Quorum. Except as otherwise expressly required by law, these
bylaws or the Articles of Incorporation, as from time to time amended, at any
meeting of the stockholders the presence in person or by proxy of the holders of
one-third of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote, shall constitute a quorum, but a lesser
interest may adjourn any meeting from time to time and the meeting may be held
as adjourned without further notice. When a quorum is present at any meeting a
majority of the stock represented thereat shall decide any question brought
before such meeting unless the question is one upon which by express provision
of law or of these bylaws or the Articles of Incorporation a larger or different
vote is required, in which case such express provision shall govern.

2.06 Proxies and Voting Stockholders of record may vote at any meeting
either in person or by written proxy signed by the stockholder or by the
stockholder's duly authorized attorney-in-fact dated not more than eleven months
before the date of exercise, which shall be filed with the Secretary of the
meeting before being voted. Each stockholder shall be entitled to one vote for
each share of stock held, and to a fraction of a vote equal to any fractional
share held.

2.07 Stock Ledger. The Corporation shall maintain at the office of the
stock transfer agent of the Corporation, or at the office of any successor
thereto as stock transfer agent of the Corporation, an original stock ledger
containing the names and addresses of all stockholders and the number of shares
of each class held by each stockholder. Such stock ledger may be in written form
or any other form capable of being converted into written form within a
reasonable time for visual inspection.

ARTICLE 3

Board of Directors

3.01 Number, Service. The Corporation shall have a Board of Directors
consisting of not less than three and no more than fifteen members. The number
of Directors to constitute the whole board within the limits above-stated shall
be fixed by the Board of Directors. The Directors may be chosen (i) by
stockholders at any annual meeting of stockholders held for the purpose of
electing directors or at any meeting held in lieu thereof, or at any special
meeting called for such purpose, or (ii) by the Directors at any regular or
special meeting of the Board to fill a vacancy on the Board as provided in these
bylaws and Maryland General Corporation Law. Each director should serve until
the next annual meeting of shareholders and until a successor is duly qualified
and elected, unless sooner displaced.

3.02 Powers. The board of directors shall be responsible for the entire
management of the business of the Corporation. In the management and control of
the property, business and affairs of the Corporation the board of directors is
hereby vested with all the powers possessed by the Corporation itself so far as
this designation of authority is not inconsistent with the laws of the State of
Maryland, but subject to the limitations and qualifications contained in the
Articles of Incorporation and in these bylaws.

3.03 Executive Committee and Other Committees. The board of directors
may elect from its members an executive committee of not less than three which
may exercise certain powers of the board of directors when the board is not in
session pursuant to Maryland law. The executive committee may make rules for the
holding and conduct of its meetings and keeping the records thereof, and shall
report its action to the board of directors.

The board of directors may elect from its members such other
committees from time to time as it may desire. The number composing such
committees and the powers conferred upon them shall be determined by the board
of directors at its own discretion.

3.04 Meetings. Regular meetings of the board of directors may be held
in such places within or without the State of Maryland, and at such times as the
board may from time to time determine, and if so determined, notices thereof
need not be given. Special meetings of the board of directors may be held at any
time or place whenever called by the president or a majority of the directors,
notice thereof being given by the secretary or the president, or the directors
calling the meeting, to each director. Special meetings of the board of
directors may also be held without formal notice provided all directors are
present or those not present have waived notice thereof.

3.05 Quorum. A majority of the members of the board of directors from
time to time in office but in no event not less than one-third of the number
constituting the whole board shall constitute a quorum for the transaction of
business provided, however, that where the Investment Company Act of 1940
requires a different quorum to transact business of a specific nature, the
number of directors so required shall constitute a quorum for the transaction of
such business.

A lesser number may adjourn a meeting from time to time and
the meeting may be held without further notice. When a quorum is present at any
meeting a majority of the members present thereat shall decide any question
brought before such meeting except as otherwise expressly required by law, the
Articles of Incorporation or these bylaws.

3.06 Action by Directors Other than at a Meeting. Any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent to such
action is signed by all members of the Board of Directors or such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
3.07 Holding of Meetings by Conference Telephone Call. At any regular
or special meeting, members of the Board of Directors or any committee thereof
may participate by conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting.

ARTICLE 4

Officers

4.01 Selection. The officers of the Corporation shall be a president,
one or more vice presidents, a secretary and a treasurer. The board of directors
may, if it so determines, also elect a chairman of the board. All officers shall
be elected by the board of directors and shall serve at the pleasure of the
board. The same person may hold more than one office except the offices of
president and vice president.

4.02 Eligibility. The chairman of the board, if any, and the president
shall be directors of the Corporation. Other officers need not be directors.

4.03 Additional Officers and Agents. The board of directors may appoint
one or more assistant treasurers, one or more assistant secretaries and such
other officers or agents as it may deem advisable, and may prescribe the duties
thereof.

4.04 Chairman of the Board of Directors. The chairman of the board, if
any, shall preside at all meetings of the board of directors at which he is
present. He shall have such other authority and duties as the board of directors
shall from time to time determine.

4.05 The President. The president shall be the chief executive officer
of the Corporation; he shall have general and active management of the business,
affairs and property of the Corporation, and shall see that all orders and
resolutions of the board of directors are carried into effect. He shall preside
at meetings of stockholders, and of the board of directors unless a chairman of
the board has been elected and is present.

4.06 The Vice Presidents. The vice presidents shall respectively have
such powers and perform such duties as may be assigned to them by the board of
directors or the president. In the absence or disability of the president, the
vice presidents, in the order determined by the board of directors, shall
perform the duties and exercise the powers of the president.

4.07 The Secretary. The secretary shall keep accurate minutes of all
meetings of the stockholders and directors, and shall perform all duties
commonly incident to his office and as provided by law and shall perform such
other duties and have such other powers as the board of directors shall from
time to time designate. In his absence an assistant secretary or secretary pro
tempore shall perform his duties.

4.08 The Treasurer. The treasurer shall, subject to the order of the
board of directors and in accordance with any arrangements for performance of
services as custodian, transfer agent or disbursing agent approved by the board,
have the care and custody of the money, funds, securities, valuable papers and
documents of the Corporation, and shall have and exercise under the supervision
of the board of directors all powers and duties commonly incident to his office
and as provided by law. He shall keep or cause to be kept accurate books of
account of the Corporation's transactions which shall be subject at all times to
the inspection and control of the board of directors. He shall deposit all funds
of the Corporation in such bank or banks, trust company or trust companies or
such firm or firms doing a banking business as the board of directors shall
designate. In his absence, an assistant treasurer shall perform his duties.

ARTICLE 5

Vacancies

5.01 Removals. The stockholders may at any meeting called for the
purpose, by vote of the holders of a majority of the capital stock issued and
outstanding and entitled to vote, remove from office any director and, unless
the number of directors constituting the whole board is accordingly decreased,
elect a successor. To the extent consistent with the Investment Company Act of
1940, the board of directors may by vote of not less than a majority of the
directors then in office remove from office any director, officer or agent
elected or appointed by them and may for misconduct remove any thereof elected
by the stockholders.

5.02 Vacancies. If the office of any director becomes or is vacant by
reason of death, resignation, removal, disqualification, an increase in the
authorized number of directors or otherwise, the remaining directors may by vote
of a majority of said directors choose a successor or successors who shall hold
office for the unexpired term; provided that vacancies on the board of directors
may be so filled only if, after the filling of the same, at least two-thirds of
the directors then holding office would be directors elected to such office by
the stockholders at a meeting or meetings called for the purpose. In the event
that at any time less than a majority of the directors were so elected by the
stockholders, a special meeting of the stockholders shall be called forthwith
and held as promptly as possible and in any event within sixty days for the
purpose of electing an entire new board of directors.

ARTICLE 6

Certificates of Stock

6.01 Certificates. The board of directors may adopt a policy of not
issuing certificates except in extraordinary situations as may be authorized
from time to time by an officer of the Corporation. If such a policy is adopted,
a stockholder may obtain a certificate or certificates of the capital stock of
the Corporation owned by such stockholder only if the stockholder demonstrates a
specific reason for needing a certificate. If issued, the certificate shall be
in such form as shall, in conformity to law, be prescribed from time to time by
the board of directors. Such certificates shall be signed by the chairman of the
board of directors or the president or a vice president and by the treasurer or
an assistant treasurer or the secretary or an assistant secretary. If such
certificates are countersigned by a transfer agent or registrar other than the
Corporation or an employee of the Corporation, the signatures of the
aforementioned officers upon such certificates may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such officer or officers
of the Corporation.

6.02 Replacement of Certificates. The board of directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or its legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost or destroyed.

6.03 Stockholder Open Accounts. The Corporation may maintain or cause
to be maintained for each stockholder a stockholder open account in which shall
be recorded such stockholder's ownership of stock and all changes therein, and
certificates need not be issued for shares so recorded in a stockholder open
account unless requested by the stockholder and such request is approved by an
officer.

6.04 Transfers. Transfers of stock for which certificates have been
issued will be made only upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, whereupon
the Corporation will issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction on its books. Transfers of
stock evidenced by open account authorized by Section 6.03 will be made upon
delivery to the Corporation or the transfer agent of the Corporation of
instructions for transfer or evidence of assignment or succession, in each case
executed in such manner and with such supporting evidence as the Corporation or
transfer agent may reasonably require.

6.05 Closing Transfer Books. The transfer books of the stock of the
Corporation may be closed for such period (not to exceed 20 days) from time to
time in anticipation of stockholders' meetings or the declaration of dividends
as the directors may from time to time determine.

6.06 Record Dates. The board of directors may fix in advance a date,
not exceeding ninety days preceding the date of any meeting of stockholders, or
the date for the payment of any dividend, or the date for the allotment of
rights, or the date when any change or conversion or exchange of capital stock
shall go into effect, or a date in connection with obtaining any consent or for
any other lawful purpose, as a record date for the determination of the
stockholders entitled to notice of, and to vote at, any such meeting, and any
adjournment thereof, or entitled to receive payment of any such dividend, or to
any such allotment of rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock, or to give such consent, and in
such case such stockholders and only such stockholders as shall be stockholders
of record on the date as fixed shall be entitled to such notice of, and to vote
at, such meeting, and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.

6.07 Registered Ownership. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner and shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.

ARTICLE 7

Notices

7.01 Manner of Giving. Whenever under the provisions of the statutes or
of the Articles of Incorporation or of these bylaws notice is required to be
given to any director, committee member, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given, in the case of
stockholders, in writing, by mail, by depositing the same in a United States
post office or letter box, in a postpaid sealed wrapper, addressed to each
stockholder at such address as it appears on the books of the Corporation, or,
in default to other address, to such stockholder at the General Post Office in
the City of Baltimore, Maryland, and, in the case of directors, committee
members and officers, by telephone, or by mail or by telegram to the last
business address known to the secretary of the Corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.

7.02 Waiver. Whenever any notice is required to be given under the
provisions of the statutes or of the Articles of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.

ARTICLE 8

General Provisions

8.01 Disbursement of Funds. All checks, drafts, orders or instructions
for the payment of money and all notes of the Corporation shall be signed by
such officer or officers or such other person or persons as the board of
directors may from time to time designate.

8.02 Voting of Stock in Other Corporations. Unless otherwise ordered by
the board of directors, any officer or, at the direction of any such officer,
any Manager shall have full power and authority to attend and act and vote at
any meeting of stockholders of any corporation in which this Corporation may
hold stock, at of any such meeting may exercise any and all the rights and
powers incident to the ownership of such stock. Any officer of this corporation
or, at the direction of any such officer, any Manager may execute proxies to
vote shares of stock of other corporations standing in the name of this
Corporation."

8.03 Execution of Instruments. Except as otherwise provided in these
bylaws, all deeds, mortgages, bonds, contracts, stock powers and other
instruments of transfer, reports and other instruments may be executed on behalf
of the Corporation by the president or any vice president or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these bylaws, or any general or special authorization of the
board of directors. If the corporate seal is required, it shall be affixed by
the secretary or an assistant secretary.

8.04 Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its incorporation and the words "Corporate Seal,
Maryland." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.

ARTICLE 9

Regulations

9.01 Investment and Related Matters. The Corporation shall not purchase
or hold securities in violation of the investment restrictions enumerated in its
then current prospectus and the registration statement or statements filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933
and the Investment Company Act of 1940, as amended, nor shall the Corporation
invest in securities the purchase of which would cause the Corporation to
forfeit its rights to continue to publicly offer its shares under the laws,
rules or regulations of any state in which it may become authorized to so offer
its shares unless, by specific resolution of the board of directors, the
Corporation shall elect to discontinue the sale of its shares in such state.

9.02 Other Matters. When used in this section the following words shall
have the following meanings: "Sponsor" shall mean any one or more corporations,
firms or associations which have distributor's contracts in effect with this
Corporation. "Manager" shall mean any corporation, firm or association which may
at the time have an investment advisory contract with this Corporation.

(a) Limitation of Holdings by this Corporation of Certain
Securities and of Dealings with Officers or Directors.
This Corporation shall not purchase or retain securities
of any issuer if those officers and directors of the Fund
or its Manager owning beneficially more than one-half of
one per cent (0.5%) of the shares or securities of such
issuer together own beneficially more than five per cent
(5%) of such shares or securities; and each officer and
director of this Corporation shall keep the treasurer of
this Corporation informed of the names of all issuers
(securities of which are held in the portfolio of this
Corporation) in which such officer or director owns as
much as one-half of one percent (1/2 of 1%) of the
outstanding shares or securities and (except in the case
of a holding by the treasurer) this Corporation shall not
be charged with knowledge of any such security holding in
the absence of notice given if as aforesaid if this
Corporation has requested such information not less often
than quarterly. The Corporation will not lend any of its
assets to the Sponsor or Manager or to any officer or
director of the Sponsor or Manager or of this Corporation
and shall not permit any officer or director, and any
officer or director of the Sponsor or Manager, to deal for
or on behalf of the Corporation with himself as principal
agent, or with any partnership, association or corporation
in which he has a financial interest. Nothing contained
herein shall prevent (1) officers and directors of the
Corporation from buying, holding or selling shares in the
Corporation, or from being partners, officers or directors
of or otherwise financially interested in the Sponsor or
the Manager or any company controlling the Sponsor or the
Manager; (2) employment of legal counsel, registrar,
transfer agent, dividend disbursing agent or custodian who
is, or has a partner shareholder, officer or director who
is, an officer or director of the Corporation, if only
customary fees are charged for services to the
Corporation; (3) sharing statistical and research expenses
and office hire and expenses with any other investment
company in which an officer or director of the Corporation
is an officer or director or otherwise financially
interested.

(b) Limitation Concerning Participating by Interested Persons
in Investment Decisions. In any case where an officer or
director of the Corporation or of the Manager, or a member
of an advisory committee or portfolio committee of the
Corporation, is also an officer or a director of another
corporation, and the purchase or sale of shares issued by
that other corporation is under consideration, the officer
or director or committee member concerned will abstain
from participating in any decision made on behalf of the
Corporation to purchase or sell any securities issued by
such other corporation.

(c) Limitation on Dealing in Securities of this Corporation by
certain Officers, Directors, Sponsor or Manager. Neither
the Sponsor nor Manager, nor any officer or director of
this Corporation or of the Sponsor or Manager shall take
long or short positions in securities issued by this
Corporation, provided, however, that:

(1) The Sponsor may purchase from this Corporation shares
issued by this Corporation if the orders to purchase
from this Corporation are entered with this
Corporation by the Sponsor upon receipt by the
Sponsor of purchase orders for shares of this
Corporation and such purchases are not in excess of
purchase orders received by the Sponsor.

(2) The Sponsor may in the capacity of agent for this
Corporation buy securities issued by this Corporation
offered for sale by other persons.

(3) Any officer or director of this Corporation or of the
Sponsor or Manager or any Company controlling the
Sponsor or Manager may at any time, or from time to
time, purchase from this Corporation or from the
Sponsor shares issued by this Corporation at a price
not lower than the net asset value of the shares, no
such purchase to be in contravention of any
applicable state or federal requirement.

(d) Securities and Cash of this Corporation to be held by
Custodian subject to certain Terms and Conditions.

(1) All securities and cash owned by this Corporation
shall as hereinafter provided, be held by or
deposited with a bank or trust company having
(according to its last published report) not less
than two million dollars ($2,000,000) aggregate
capital, surplus and undivided profits (which bank or
trust company is hereby designated as "Custodian"),
provided such a Custodian can be found ready and
willing to act.

(2) This Corporation shall enter into a written contract
with the Custodian regarding the powers, duties and
compensation of the Custodian with respect to the
cash and securities of this Corporation held by the
Custodian. Said contract and all amendments thereto
shall be approved by the board of directors of this
Corporation.

(3) This Corporation shall upon the resignation or
inability to serve of its Custodian or upon change of
the Custodian: (aa) in case of such resignation or
inability to serve, use its best efforts to
obtain a successor Custodian;

(bb) require that the cash and securities owned
by this Corporation be delivered directly to
the successor Custodian; and

(cc) In the event that no successor Custodian can
be found, submit to the stockholders, before
permitting delivery of the cash and
securities owned by this Corporation
otherwise than to a successor Custodian, the
question whether or not this Corporation
shall be liquidated or shall function
without a Custodian.

(e) Amendment of Investment Advisory Contract. Any investment
advisory contract entered into by this Corporation shall
not be subject to amendment except by (1) affirmative vote
at a shareholders meeting, of the holders of a majority of
the outstanding stock of this Corporation, or (2) a
majority of such Directors who are not interested persons
(as the term is defined in the Investment Company Act of
1940) of the Parties to such agreements, cast in person at
a board meeting called for the purpose of voting on such
amendment.

(f) Reports relating to Certain Dividends. Dividends paid from
net profits from the sale of securities shall be clearly
revealed by this Corporation to its shareholders and the
basis of calculation shall be set forth.

(g) Maximum Sales Commission. The Corporation shall, in any
distribution contract with respect to its shares of common
stock entered into by it, provide that the maximum sales
commission to be charged upon any sales of such shares
shall not be more than nine per cent (9%) of the offering
price to the public of such shares. As used herein,
"offering price to the public" shall mean net asset value
per share plus the commission charged adjusted to the
nearest cent.

ARTICLE 10

Purchases and Redemption of Shares:
Suspension of Sales

10.01 Purchase by Agreement. The Corporation may purchase its shares by
agreement with the owner at a price not exceeding the net asset value next
computed following the time when the purchase or contract to purchase is made.

10.02 Redemption. The Corporation shall redeem such shares as are
offered by any stockholder for redemption upon the presentation of a written
request therefor, duly executed by the record owner, to the office or agency
designated by the Corporation. If the shareholder has received stock
certificates, the request must be accompanied by the certificates, duly endorsed
for transfer, in acceptable form; and the Corporation will pay therefor the net
asset value of the shares next effective following the time at which the
request, in acceptable form, is so presented. Payment for said shares shall
ordinarily be made by the Corporation to the stockholder within seven days after
the date on which the shares are presented.

10.03 Suspension of Redemption. The obligations set out in Section
10.02 may be suspended (i) for any period during which the New York Stock
Exchange, Inc. is closed other than customary week-end and holiday closings, or
during which trading on the New York Stock Exchange, Inc. is restricted, as
determined by the rules and regulations of the Securities and Exchange
Commission or any successor thereto; (ii) for any period during which an
emergency, as determined by the rules and regulations of the Securities and
Exchange Commission or any successor thereto, exists as a result of which
disposal by the Corporation of securities owned by it is not reasonably
practicable or as a result of which it is not reasonably practicable for the
Corporation to fairly determine the value of its net assets; or (iii) for such
other periods as the Securities and Exchange Commission or any successor thereto
may by order permit for the protection of security holders of the Corporation.
Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.

10.04 Suspension of Sales. The Corporation reserves the right to
suspend sales of its shares if, in the judgment of the majority of the board of
directors or a majority of the executive committee of its Board, if such
committee exists, it is in the best interest of the Corporation to do so, such
suspension to continue for such period as may be determined by such majority.

10.05 Sales only to Eligible Purchasers. Only Eligible Purchasers may
purchase shares directly from the Corporation. 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.

ARTICLE 11

Fractional Shares

11.01 The board of directors may authorize the issue from time to time
of shares of the capital stock of the Corporation in fractional denominations,
provided that the transactions in which and the terms upon which shares in
fractional denominations may be issued may from time to time be determined and
limited by or under authority of the board of directors.

ARTICLE 12

Indemnification

12.01(a) Every person who is or was a director, officer or employee of this
Corporation or of any other corporation which he served at the request
of this Corporation and in which this Corporation owns or owned shares
of capital stock or of which it is or was a creditor shall have a
right to be indemnified by this Corporation against all liability and
reasonable expenses incurred by him in connection with or resulting
from a claim, action, suit or proceeding in which he may become
involved as a party or otherwise by reason of his being or having been
a director, officer or employee of this Corporation or such other
corporation, provided (1) said claim, action, suit or proceeding shall
be prosecuted to a final determination and he shall be vindicated on
the merits, or (2) in the absence of such a final determination
vindicating him on the merits, the board of directors shall determine
that he acted in good faith and in a manner he reasonably believed to
be in the best interest of the Corporation in the case of conduct in
the director's official capacity with the Corporation and in all other
cases, that the conduct was at least not opposed to the best interest
of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful; said determination to be made by the board of directors
acting through a quorum of disinterested directors, or in its absence
on the opinion of counsel.

(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include but not be limited to reasonable
counsel fees and disbursements, amounts of any judgment, fine or
penalty, and reasonable amounts paid in settlement; (2) "claim,
action, suit or proceeding" shall include every such claim, action,
suit or proceeding, whether civil or criminal, derivative or
otherwise, administrative, judicial or legislative, any appeal
relating thereto, and shall include any reasonable apprehension or
threat of such a claim, action, suit or proceeding; (3) the
termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent creates
a rebuttable presumption that the director did not meet the standard
of conduct set forth in subsection (a)(2), supra.

(c) Notwithstanding the foregoing, the following limitations shall apply
with respect to any action by or in the right of the Corporation: (1)
no indemnification shall be made in respect of claim, issue or matter
as to which the person seeking indemnification shall have been
adjudged to be liable for negligence or misconduct in the performance
of his duty to the Corporation unless and only to the extent that the
Court of Chancery of the State of Maryland or the court in which such
action or suit was brought shall determine upon application that
despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's
fees and disbursements.

(d) The right of indemnification shall extend to any person otherwise
entitled to it under this bylaw whether or not that person continues
to be a director, officer or employee of this Corporation or such
other corporation at the time such liability or expense shall be
incurred. The right of indemnification shall extend to the legal
representative and heirs of any person otherwise entitled to
indemnification. If a person meets the requirements of this bylaw with
respect to some matters in a claim, action suit, or proceeding, but
not with respect to others, he shall be entitled to indemnification as
to the former. Advances against liability and expenses may be made by
the Corporation on terms fixed by the board of directors subject to an
obligation to repay if indemnification proves unwarranted.

(e) This bylaw shall not exclude any other rights of indemnification or
other rights to which any director, officer or employee may be
entitled to by contract, vote of the stockholders or as a matter of
law.

If any clause, provision or application of this section shall be
determined to be invalid, the other clauses, provisions or
applications of this section shall not be affected but shall remain in
full force and effect. The provisions of this bylaw shall be
applicable to claims, actions, suits or proceedings made or commenced
after the adoption hereof, whether arising from acts or omissions to
act occurring before or after the adoption hereof.

(f) Nothing contained in this bylaw shall be construed to protect any
director or officer of the Corporation against any liability to the
Corporation or its security holders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his
office.

ARTICLE 13

Amendments

13.01 These bylaws may be amended or added to, altered or repealed at
any annual or special meeting of the stockholders by the affirmative vote of the
holders of a majority of the shares of capital stock issued and outstanding and
entitled to vote, provided notice of the general purport of the proposed
amendment, addition, alteration or repeal is given in the notice of said
meeting, or, at any meeting of the board of directors by vote of a majority of
the directors then in office, except that the board of directors may not amend
Article 5 to permit removal by said board without cause of any director elected
by the stockholders.

PRINCIPAL VARIABLE CONTRACTS FUND, INC.
SUB-ADVISORY AGREEMENT
MIDCAP VALUE SERIES

AGREEMENT executed as of the 1st day of March, 1999, by and between PRINCIPAL
MANAGEMENT CORPORATION, an Iowa corporation (hereinafter called "the Manager"),
and NEUBERGER BERMAN MANAGEMENT INC., a New York corporation (hereinafter called
"the Sub-Advisor").

W I T N E S S E T H:

WHEREAS, the Manager is the manager and investment adviser to each Series of
Principal Variable Contracts Fund, Inc., (the "Fund"), an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and

WHEREAS, the Manager desires to retain the Sub-Advisor to furnish it with
portfolio selection and related research and statistical services in connection
with the investment advisory services for the MidCap Value Series of the Fund
(hereinafter called "the Series"), which the Manager has agreed to provide to
the Fund, and the Sub-Advisor desires to furnish such services; and

WHEREAS, The Manager has furnished the Sub-Advisor with copies properly
certified or authenticated of each of the following and will promptly provide
the Sub-Advisor with copies properly certified or authenticated of any amendment
or supplement thereto:

(a) Management Agreement (the "Management Agreement") with the Fund;

(b) The Fund's registration statement and financial statements as filed
with the Securities and Exchange Commission;

(d) Policies, procedures or instructions adopted or approved by the Board
of Directors of the Fund relating to obligations and services provided
by the Sub-Advisor.

NOW, THEREFORE, in consideration of the premises and the terms and conditions
hereinafter set forth, the parties agree as follows:

1. Appointment of Sub-Advisor

In accordance with and subject to the Management Agreement, the Manager
hereby appoints the Sub-Advisor to perform the services described in
Section 2 below for investment and reinvestment of the securities and
other assets of the Series, subject to the control and direction of the
Manager and the Fund's Board of Directors, for the period and on the
terms hereinafter set forth. The Sub-Advisor accepts such appointment
and agrees to furnish the services hereinafter set forth for the
compensation herein provided. The Sub-Advisor shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized, have no authority to act for or
represent the Fund or the Manager in any way or otherwise be deemed an
agent of the Fund or the Manager.

2. Obligations of and Services to be Provided by the Sub-Advisor

(a) Provide investment advisory services, including but not limited
to research, advice and supervision for the Series.

(b) Furnish to the Board of Directors of the Fund for approval (or
any appropriate committee of such Board), and revise from time to
time as economic conditions require, a recommended investment
program for the Series consistent with the Series' investment
objective and policies.

(c) Implement the approved investment program by placing orders for
the purchase and sale of securities without prior consultation
with the Manager and without regard to the length of time the
securities have been held, the resulting rate of portfolio
turnover or any tax considerations, subject always to the
provisions of the Fund's Certificate of Incorporation and Bylaws
and the requirements of the 1940 Act, as each of the same shall
be from time to time in effect.

(d) Advise and assist the officers of the Fund, as requested by the
officers, in taking such steps as are necessary or appropriate to
carry out the decisions of its Board of Directors, and any
appropriate committees of such Board, regarding the general
conduct of the investment business of the Series.

(e) Report to the Board of Directors of the Fund at such times and in
such detail as the Board of Directors may reasonably deem
appropriate in order to enable it to determine that the
investment policies, procedures and approved investment program
of the Series are being observed.

(f) Upon request, provide assistance and recommendations for the
determination of the fair value of certain securities when
reliable market quotations are not readily available for purposes
of calculating net asset value in accordance with procedures and
methods established by the Fund's Board of Directors.

(g) Furnish, at its own expense, (i) all necessary investment and
management facilities, including salaries of clerical and other
personnel required for it to execute its duties faithfully, and
(ii) administrative facilities, including bookkeeping, clerical
personnel and equipment necessary for the efficient conduct of
the investment advisory affairs of the Series.

(h) Open accounts with broker-dealers and future commission merchants
("broker-dealers"), select broker-dealers to effect all
transactions for the Series, place all necessary orders with
broker-dealers or issuers (including affiliated broker-dealers),
and negotiate commissions, if applicable. To the extent
consistent with applicable law, purchase or sell orders for the
Series may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Advisor. In such event
allocation of securities so sold or purchased, as well as the
expenses incurred in the transaction, will be made by the
Sub-Advisor in the manner the Sub-Advisor considers to be the
most equitable and consistent with its fiduciary obligations to
the Fund and to other clients. The Sub-Advisor will report on
such allocations at the request of the Manager, the Fund or the
Fund's Board of Directors providing such information as the
number of aggregated trades to which the Series was a party, the
broker-dealers to whom such trades were directed and the basis
for the allocation for the aggregated trades. The Sub-Advisor
shall use its best efforts to obtain execution of transactions
for the Series at prices which are advantageous to the Series and
at commission rates that are reasonable in relation to the
benefits received. However, the Sub-Advisor may select brokers or
dealers on the basis that they provide brokerage, research or
other services or products to the Sub-Advisor. To the extent
consistent with applicable law, the Sub-Advisor may pay a broker
or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission or dealer
spread another broker or dealer would have charged for effecting
that transaction if the Sub-Advisor determines in good faith that
such amount of commission is reasonable in relation to the value
of the brokerage and research products and/or services provided
by such broker or dealer. This determination, with respect to
brokerage and research products and/or services, may be viewed in
terms of either that particular transaction or the overall
responsibilities which the Sub-Advisor and its affiliates have
with respect to the Series as well as to accounts over which they
exercise investment discretion. Not all such services or products
need be used by the Sub-Advisor in managing the Series. In
addition, joint repurchase or other accounts may not be utilized
by the Series except to the extent permitted under any exemptive
order obtained by the Sub-Advisor provided that all conditions of
such order are complied with.

(i) Maintain all accounts, books and records with respect to the
Series as are required of an investment advisor of a registered
investment company pursuant to the 1940 Act and Investment
Advisor's Act of 1940 (the "Investment Advisor's Act"), and the
rules thereunder, and furnish the Fund and the Manager with such
periodic and special reports as the Fund or Manager may
reasonably request. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Advisor hereby agrees that all
records that it maintains for the Series are the property of the
Fund, agrees to preserve for the periods described by Rule 31a-2
under the 1940 Act any records that it maintains for the Account
and that are required to be maintained by Rule 31a-1 under the
1940 Act, and further agrees to surrender promptly to the Fund
any records that it maintains for the Series upon request by the
Fund or the Manager. The Sub-Advisor has no responsibility for
the maintenance of Fund records except insofar as is directly
related to the services provided to the Series.

(j) Observe and comply with Rule 17j-1 under the 1940 Act and the
Sub-Advisor's Code of Ethics adopted pursuant to that Rule as the
same may be amended from time to time. The Manager acknowledges
receipt of a copy of Sub-Advisor's current Code of Ethics.
Sub-Advisor shall promptly forward to the Manager a copy of any
material amendment to the Sub-Advisor's Code of Ethics.

(k) From time to time as the Manager or the Fund may request, furnish
the requesting party reports on portfolio transactions and
reports on investments held by the Series, all in such detail as
the Manager or the Fund may reasonably request. The Sub-Advisor
will make available its officers and employees to meet with the
Fund's Board of Directors at the Fund's principal place of
business on due notice to review the investments of the Series.

(l) Provide such information as is customarily provided by a
sub-advisor and may be required for the Fund or the Manager to
comply with their respective obligations under applicable laws,
including, without limitation, the Internal Revenue Code of 1986,
as amended (the "Code"), the 1940 Act, the Investment Advisers
Act, the Securities Act of 1933, as amended (the "Securities
Act"), and any state securities laws, and any rule or regulation
thereunder.

(m) Perform quarterly and annual tax compliance tests to monitor the
Series' compliance with Subchapter M of the Code and Section
817(h) of the Code. The Sub-Advisor shall notify the Manager
immediately upon having a reasonable basis for believing that the
Series has ceased to be in compliance or that it might not be in
compliance in the future. If it is determined that the Series is
not in compliance with the requirements noted above, the
Sub-Advisor, in consultation with the Manager, will take prompt
action to bring the Series back into compliance (to the extent
possible) within the time permitted under the Code.

3. Compensation

As full compensation for all services rendered and obligations assumed
by the Sub-Advisor hereunder with respect to the Series, the Manager
shall pay the compensation specified in Appendix A to this Agreement.

4. Liability of Sub-Advisor

Neither the Sub-Advisor nor any of its directors, officers, employees,
agents or affiliates shall be liable to the Manager, the Fund or its
shareholders for any loss suffered by the Manager or the Fund resulting
from any error of judgment made in the good faith exercise of the
Sub-Advisor's investment discretion in connection with selecting
investments for the Series or as a result of the failure by the Manager
or any of its affiliates to comply with the terms of this Agreement
and/or any insurance laws and rules, except for losses resulting from
willful misfeasance, bad faith or gross negligence of, or from reckless
disregard of, the duties of the Sub-Advisor or any of its directors,
officers, employees, agents, or affiliates.

5. Supplemental Arrangements

The Sub-Advisor may enter into arrangements with other persons
affiliated with the Sub-Advisor or with unaffiliated third parties to
better enable the Sub-Advisor to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Sub- Advisor, subject to written notification to and approval of the
Manager and, where required by applicable law, the Board of Directors
of the Fund.

6. Regulation

The Sub-Advisor shall submit to all regulatory and administrative
bodies having jurisdiction over the services provided pursuant to this
Agreement any information, reports or other material which any such
body may request or require pursuant to applicable laws and
regulations.

7. Duration and Termination of This Agreement

This Agreement shall become effective on the latest of (i) the date of
its execution, (ii) the date of its approval by a majority of the Board
of Directors of the Fund, including approval by the vote of a majority
of the Board of Directors of the Fund who are not interested persons of
the Manager, the Sub-Advisor, Principal Life Insurance Company or the
Fund cast in person at a meeting called for the purpose of voting on
such approval or (iii) if required by the 1940 Act, the date of its
approval by a majority of the outstanding voting securities of the
Series. It shall continue in effect thereafter from year to year
provided that the continuance is specifically approved at least
annually either by the Board of Directors of the Fund or by a vote of a
majority of the outstanding voting securities of the Fund and in either
event by a vote of a majority of the Board of Directors of the Fund who
are not interested persons of the Manager, Principal Life Insurance
Company, the Sub-Advisor or the Fund cast in person at a meeting called
for the purpose of voting on such approval.

If the shareholders of the Series fail to approve the Agreement or any
continuance of the Agreement in accordance with the requirements of the
1940 Act, the Sub-Advisor will continue to act as Sub-Advisor with
respect to the Series pending the required approval of the Agreement or
its continuance or of any contract with the Sub-Advisor or a different
manager or sub-advisor or other definitive action; provided, that the
compensation received by the Sub-Advisor in respect to the Series
during such period is in compliance with Rule 15a-4 under the 1940 Act.

This Agreement may be terminated at any time without the payment of any
penalty by the Board of Directors of the Fund or by the Sub-Advisor,
the Manager or by vote of a majority of the outstanding voting
securities of the Series on sixty days written notice. This Agreement
shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 7, the definitions
contained in Section 2(a) of the 1940 Act (particularly the definitions
of "interested person," "assignment" and "voting security") shall be
applied.

8. Amendment of this Agreement

No material amendment of this Agreement shall be effective until
approved, if required by the 1940 Act or the rules, regulations,
interpretations or orders issued thereunder, by vote of the holders of
a majority of the outstanding voting securities of the Series and by
vote of a majority of the Board of Directors of the Fund who are not
interested persons of the Manager, the Sub-Advisor, Principal Life
Insurance Company or the Fund cast in person at a meeting called for
the purpose of voting on such approval.

9. General Provisions

(a) Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Iowa. The
captions in this Agreement are included for convenience only and
in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.

(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such
address as such other party may designate for the receipt of such
notices. Until further notice to the other party, it is agreed
that the address of the Manager for this purpose shall be
Principal Financial Group, Des Moines, Iowa 50392-0200, and the
address of the Sub-Advisor shall be 605 Third Avenue, New York,
New York 10158-0180, Attention: General Counsel.

(1) the Sub-Advisor fails to be registered as an investment
adviser under the Investment Advisers Act or under the laws of
any jurisdiction in which the Sub-Advisor is required to be
registered as an investment advisor in order to perform its
obligations under this Agreement.

(2) the Sub-Advisor is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or
in equity, before or by any court, public board or body,
involving the affairs of the Series.

(e) This Agreement contains the entire understanding and agreement of
the parties.

IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.

PRINCIPAL MANAGEMENT CORPORATION

/s/ A. S. Filean
By ____________________________________________
A.S. Filean, Vice President

NEUBERGER BERMAN MANAGEMENT INC.

/s/ Peter Sundman
By ____________________________________________

APPENDIX A

The Sub-Advisor shall serve as investment sub-advisor for the MidCap Value
Series of the Fund. The Manager will pay the Sub-Advisor, as full compensation
for all services provided under this Agreement, a fee computed at an annual rate
as follows (the "Sub-Advisor Percentage Fee"):

First $100,000,000 of Assets....................... 0.500%
Next $150,000,000 of Assets........................ 0.475%
Next $250,000,000 of Assets........................ 0.450%
Next $250,000,000 of Assets........................ 0.425%
Assets above $750,000,000.......................... 0.400%

The Sub-Advisor Percentage Fee shall be accrued for each calendar day and
the sum of the daily fee accruals shall be paid monthly to the Sub-Advisor. The
daily fee accruals will be computed by multiplying the fraction of one over the
number of calendar days in the year by the applicable annual rate described
above and multiplying this product by the net assets of the Series as determined
in accordance with the Series' prospectus and statement of additional
information as of the close of business on the previous business day on which
the Series was open for business.

If this Agreement becomes effective or terminates before the end of any
month, the fee (if any) for the period from the effective date to the end of
such month or from the beginning of such month to the date of termination, as
the case may be, shall be prorated according to the proportion which such period
bears to the full month in which such effectiveness or termination occurs.

PRINCIPAL VARIABLE CONTRACTS FUND, INC.
SUB-ADVISORY AGREEMENT
LARGECAP GROWTH SERIES

AGREEMENT executed as of the 1st day of April, 1999, by and between PRINCIPAL
MANAGEMENT CORPORATION, an Iowa corporation (hereinafter called "the Manager")
and JANUS CAPITAL CORPORATION, a Colorado corporation (hereinafter called "the
Sub-Advisor").

W I T N E S S E T H:

WHEREAS, the Manager desires to retain the Sub-Advisor to furnish it with
portfolio selection and related research and statistical services in connection
with the investment advisory services which the Manager has agreed to provide to
the Fund, and the Sub-Advisor desires to furnish such services; and

(a) Management Agreement (the "Management Agreement") with the Fund;

(b) The Fund's registration statement and financial statements as filed
with the Securities and Exchange Commission;

(d) Policies, procedures or instructions adopted or approved by the Board
of Directors of the Fund relating to obligations and services provided
by the Sub-Advisor.

NOW, THEREFORE, in consideration of the premises and the terms and conditions
hereinafter set forth, the parties agree as follows:

1. Appointment of Sub-Advisor

In accordance with and subject to the Management Agreement, the Manager
hereby appoints the Sub-Advisor to perform the services described in
Section 2 below for investment and reinvestment of the securities and
other assets of the LargeCap Growth Series of the Fund (hereinafter
called "the Series"), subject to the control and direction of the
Manager and the Fund's Board of Directors, for the period and on the
terms hereinafter set forth. The Sub-Advisor accepts such appointment
and agrees to furnish the services hereinafter set forth for the
compensation herein provided. The Sub-Advisor shall for all purposes
herein be deemed to be an independent contractor and shall, except as
expressly provided or authorized, have no authority to act for or
represent the Fund or the Manager in any way or otherwise be deemed an
agent of the Fund or the Manager.

2. Obligations of and Services to be Provided by the Sub-Advisor

(a) Provide investment advisory services, including but not limited
to research, advice and supervision for the Series.

(c) Implement the approved investment program by placing orders for
the purchase and sale of securities without prior consultation
with the Manager and without regard to the length of time the
securities have been held, the resulting rate of portfolio
turnover or any tax considerations, subject always to the
provisions of the Fund's Certificate of Incorporation and Bylaws
as provided by the Manager and the requirements of the 1940 Act,
as each of the same shall be from time to time in effect.

(d) Advise and assist the officers of the Fund in taking such steps
as are necessary or appropriate to carry out the decisions of its
Board of Directors, and any appropriate committees of such Board,
regarding the general conduct of the investment business of the
Series.

(f) Provide assistance and recommendations for the determination of
the fair value of certain securities when reliable market
quotations are not readily available for purposes of calculating
net asset value in accordance with procedures and methods
established by the Fund's Board of Directors.

(h) Select brokers and dealers to effect all transactions for the
Series, place all necessary orders with brokers, dealers or
issuers (including affiliated broker-dealers), and negotiate
brokerage commissions if applicable. To the extent consistent
with applicable law, purchase or sell orders for the Series may
be aggregated with contemporaneous purchase or sell orders of
other clients of the Sub-Advisor. In such event allocation of
securities so sold or purchased, as well as the expenses incurred
in the transaction, will be made by the Sub-Advisor in the manner
the Sub-Advisor considers to be the most equitable and consistent
with its fiduciary obligations to the Fund and to other clients.
The Sub-Advisor will report on such allocations at the request of
the Manager, the Fund or the Fund's Board of Directors providing
such information as the number of aggregated trades to which the
Series was a party, the broker(s) to whom such trades were
directed and the basis for the allocation for the aggregated
trades. The Sub-Advisor shall use its best efforts to obtain
execution of transactions for the Series at prices which are
advantageous to the Series and at commission rates that are
reasonable in relation to the benefits received. However, the
Sub-Advisor may select brokers or dealers on the basis that they
provide brokerage, research or other services or products to the
Sub-Advisor. To the extent consistent with applicable law, the
Sub-Advisor may pay a broker or dealer an amount of commission
for effecting a securities transaction in excess of the amount of
commission or dealer spread another broker or dealer would have
charged for effecting that transaction if the Sub-Advisor
determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research
products and/or services provided by such broker or dealer. This
determination, with respect to brokerage and research products
and/or services, may be viewed in terms of either that particular
transaction or the overall responsibilities which the Sub-Advisor
and its affiliates have with respect to the Series as well as to
accounts over which they exercise investment discretion. Not all
such services or products need be used by the Sub-Advisor in
managing the Series. In addition, joint repurchase or other
accounts may not be utilized by the Series except to the extent
permitted under any exemptive order obtained by the Sub-Advisor
provided that all conditions of such order are complied with.

(j) Observe and comply with Rule 17j-1 under the 1940 Act and the
Sub-Advisors Code of Ethics adopted pursuant to that Rule as the
same may be amended from time to time. The Manager acknowledges
receipt of a copy of Sub-Advisor's current Code of Ethics.
Sub-Advisor shall promptly forward to the Manager a copy of any
amendment to the Sub-Advisor's Code of Ethics.

(l) Provide such non-proprietary information as is customarily
provided by a sub-advisor and may be required for the Fund or the
Manager to comply with their respective obligations under
applicable laws, including, without limitation, the Internal
Revenue Code of 1986, as amended (the "Code"), the 1940 Act, the
Investment Advisers Act, the Securities Act of 1933, as amended
(the "Securities Act") and any state securities laws, and any
rule or regulation thereunder, provided that the Sub-Advisor
shall not be responsible for portfolio accounting, nor shall it
be required to generate information derived from portfolio
accounting data.

(m) Perform quarterly and annual tax compliance tests to ensure that
the Series is in compliance with Subchapter M of the Code and
Section 817(h) of the Code, subject to receipt of such additional
information as may be required from the Manager and provided in
accordance with Section 9(d) of this Agreement. The Sub-Advisor
shall notify the Manager immediately upon having a reasonable
basis for believing that the Series has ceased to be in
compliance or that it might not be in compliance in the future.
If it is determined that the Series is not in compliance with the
requirements noted above, the Sub-Advisor, in consultation with
the Manager, will take prompt action to bring the Series back
into compliance within the time permitted under the Code.

(n) Be responsible for the preparation and filing of Schedule 13G and
Form 13F with the respect to investments of the Series. The
Sub-Advisor shall not be responsible for the preparation or
filing of any reports required by the Series by any governmental
or regulatory agency, except as expressly agreed to in writing.
Subject to approval by the Manager of the proxy voting guidelines
of the Sub-Advisor, the Sub-Advisor shall vote proxies received
in connection with securities held by the Series.

(o) Oversee the maintenance of all books and records required to be
maintained pursuant to the 1940 Act and the rules and regulations
promulgated thereunder with respect to actions by the Sub-Advisor
on behalf of the Series. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, Sub-Advisor hereby agrees that all
records which it maintains for the Series are the property of the
Fund, agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act any records which it maintains for the Fund
and which are required to be maintained by Rule 31a-1 under the
1940 Act and further agrees to surrender promptly to the Fund any
records which it maintains for the Fund upon request by the Fund.

3. Compensation and Expenses

The Manager and the Fund shall assume and pay their respective
organizational, operational and business expenses not specifically
assumed or agreed to be paid by the Sub-Advisor pursuant to this
Agreement. The Sub-Advisor shall pay its own organizational,
operational and business expenses and shall not be obligated to pay any
expenses of the Manager or the Fund, including without limitation: (a)
interest and taxes; (b) brokerage commissions and other costs in
connection with the purchase or sale of securities or other investment
instruments for the Series; and (c) custodian fees and expenses. Any
reimbursement of management fees required by any expense limitation
provision and any liability with respect to the management fee arising
out a violation of Section 36(b) of the 1940 Act shall be the sole
responsibility of the Manager.

4. Liability of Sub-Advisor

Neither the Sub-Advisor nor any of its managing directors, officers,
employees, agents or affiliates shall be liable to the Manager, the
Fund or its shareholders for any loss suffered by the Manager or the
Fund resulting from any error of judgment made in the good faith
exercise of the Sub-Advisor's investment discretion in connection with
selecting investments for the Series or as a result of the failure by
the Manager or any of its affiliates to comply with the terms of this
Agreement and/or any insurance laws and rules, except for losses
resulting from willful misfeasance, bad faith or gross negligence of,
or from reckless disregard of, the duties of the Sub-Advisor or any of
its directors, officers or employees.

5. Indemnification

Manager shall hold harmless and indemnify Sub-Advisor for any loss,
liability, cost, damage, or expense (including reasonable attorneys'
fees and costs) relating to the Fund arising from any claim or demand
by any past or present shareholder of the Fund that is not based upon
the services provided by the Sub-Advisor pursuant to this Agreement.
Manager acknowledges and agrees that Sub-Advisor makes no
representation or warranty, express or implied, that any level of
performance or investment results will be achieved by the Fund or that
the Fund will perform comparably with any standard or index, including
other clients of Sub-Advisor, whether public or private.

Manager and the Sub-Advisor each agree to indemnify the other against
any claim against, loss or liability to such other party (including
reasonable attorneys' fees) arising out of any act on the part of the
indemnifying party which constitutes willful misfeasance, bad faith,
gross negligence or reckless disregard of duty.

6. Supplemental Arrangements

7. Regulation

8. Duration and Termination of This Agreement

If the shareholders of the Series fail to approve the Agreement or any
continuance of the Agreement in accordance with the requirements of the
1940 Act, the Sub-Advisor will continue to act as Sub-Advisor with
respect to the Series pending the required approval of the Agreement or
its continuance or of any contract with the Sub-Advisor or a different
manager or sub-advisor or other definitive action, provided that the
Manager takes reasonably prompt action to obtain such approvals and,
provided further, that the compensation received by the Sub-Advisor in
respect to the Series during such period is in compliance with Rule
15a-4 under the 1940 Act.

9. Amendment of this Agreement

10. Representations and Warranties

The Manager represents and warrants the following:

(i) The Manager has been duly incorporated and is validly existing
in good standing as a corporation under the laws of the State of
Iowa.
(ii) The Manager has all requisite corporate power and authority
under the laws of Iowa and federal securities laws to execute,
deliver and to perform this Agreement.
(iii) All necessary corporate proceedings of the Manager have been
duly taken to authorize the execution, deliver and performance
of this Agreement by the Manager.
(iv) The Manager is a registered investment advisor under the
Investment Advisers Act of 1940 and is compliance with all other
required registrations.
(v) The Manager has complied in all material respects with all
registrations required by, and will comply in all material
respects with all applicable rules and regulations of, the
Securities and Exchange Commission.
(vi) The Manager has authority under the Management Agreement to
execute, deliver and perform this Agreement. (vii) The Manager has
received a copy of Part II of the Sub-Advisor's Form ADV.

The Sub-Advisor represents and warrants the following:

(i) The Sub-Advisor has been duly incorporated and is validly
existing in good standing as a corporation under the laws of the
state of Colorado.
(ii) The Sub-Advisor has all requisite corporate power and authority
under the laws of Colorado and federal securities laws to
execute, deliver and to perform this Agreement.
(iii) All necessary corporate proceedings of the Sub-Advisor have been
duly taken to authorize the execution, delivery and performance
of this Agreement by the Sub-Advisor.
(iv) The Sub-Advisor is a registered investment advisor under the
Investment Advisers Act of 1940 and is in compliance with all
other required registrations.
(v) The Sub-Advisor has complied in all material respects with all
registrations required by, and will comply in all material
respects with all applicable rules and regulations of, the
Securities and Exchange Commission.
(vi) The Sub-Advisor has authority to execute, deliver and perform
this Agreement.

11. Confidentiality and Proprietary Rights

The Manager will not, directly or indirectly, and will not permit it
affiliates, employees, officers, directors, agents, contractors or the
Fund or the Series to, in any form or by any means, use, disclose, or
furnish, to any person or entity, records or information concerning the
business of the Sub-Advisor, except as necessary for the performance of
its duties under this Agreement or the Management Agreement, or as
required by law upon, to the extent practicable, prior written notice
to the Sub-Advisor. The Sub-Advisor is the sole owner of the name and
mark "Janus". The Manager shall not, and shall not permit the Fund or
the Series to, without prior written consent of the Sub-Advisor, use
the name or mark "Janus" or make representations regarding the
sub-advisor or its affiliates. Upon termination of this Agreement for
any reason, the Manager shall immediately cease, and the Manager shall
cause the Fund or Series to immediately cease, all use of the Janus
name or any Janus mark.

12. Non-Exclusivity

The Sub-Advisor, its affiliates, or any of their directors, officers,
employees or agents may buy, sell, or trade any securities or other
investment instruments for their own account or for the account of
others for whom it or they may be acting, provided that such activities
will not adversely effect or otherwise impair the performance by the
Sub-Advisor of its responsibilities under this Agreement. The
Sub-Advisor and its affiliates may act as investment manager to or
provide other services with respect to various investment companies and
other managed accounts, which advice or services, including the nature
of such services, may differ from or be identical to advice given or
action taken with respect to the Series. In the event of such
activities, the transactions and associated costs will be allocated
among such clients (including the Series) in a manner that the
Sub-Advisor believes to be equitable to the accounts involved and
consistent with such account's objectives, policies and limitations.

13. General Provisions

(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such
address as such other party may designate for the receipt of such
notices. Until further notice to the other party, it is agreed
that the address of the Manager for this purpose shall be
Principal Financial Group, Des Moines, Iowa 50392-0200, and the
address of the Sub-Advisor shall be 100 Fillmore, Suite 300,
Denver, Colorado 80206-4923.

(d) The Manager shall provide (or cause the Series custodian to
provide) timely information to the Sub-Advisor regarding such
matters as the composition of the assets of the Series, cash
requirements and cash available for investment in the Series, any
applicable investment restrictions imposed by state insurance
laws and regulations, and all other reasonable information as may
be necessary for the Sub-Advisor to perform its duties and
responsibilities hereunder. Throughout the term of this
Agreement, the Manager shall continue to provide current
Prospectuses and Statements of Additional Information for the
Fund, procedures and other relevant information and documents to
the Sub-Advisor, including any amendments, updates or supplements
to such information or documents, before or at the time of the
amendments, updates or supplements become effective. The Manager
shall cooperate with the Sub-Advisor in setting up and
maintaining brokerage accounts and other accounts the Sub-Advisor
deems advisable to allow for the purchase or sale of various
securities pursuant to this Agreement.

(e) Assets of the Series shall be maintained in the custody of the
Series' custodian which shall be identified to the Sub-Advisor.
Assets added to the portfolio of the Series shall be delivered
directly to such custodian. The Sub-Advisor shall have no
liability for the acts or omissions of any custodian of the
Series' assets. The Sub-Advisor shall have no responsibility for
the segregation requirements of the 1940 Act or other applicable
law.

(f) This Agreement contains the entire understanding and agreement of
the parties.

IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.

PRINCIPAL MANAGEMENT CORPORATION

/s/ A. S. Filean
By ____________________________________________
A.S. Filean, Vice President

JANUS CAPITAL CORPORATION

/s/ Bonnie Howe
By ____________________________________________
Bonnie M. Howe
Assistant Vice President

APPENDIX A

The Sub-Advisor shall serve as investment sub-advisor for the LargeCap
Growth Series of the Fund. The Manager will pay the Sub-Advisor, as full
compensation for all services provided under this Agreement, a fee computed at
an annual rate as follows (the "Sub-Advisor Percentage Fee"):

First $100,000,000 of Assets.......................... 0.55%
Next $400,000,000 of Assets........................... 0.50%
Assets above $500,000,000............................. 0.45%

Planning for the Future...One Dollar at a Time

In the spring of 1982, Kay and Bill were contacted by a registered
representative. The registered representative asked if he could talk to them
about investing for their future. Bill hesitated, but Kay realized the need to
start planning for retirement. During their first meeting, the registered
representative helped Bill and Kay put together a household budget, and provided
them with four words to get their investment plan going: "One dollar per day."

One dollar per day. Though it didn't sound like much, Kay felt $30 per month was
all their budget could spare back in 1982. At the time, Kay had just realized a
dream and opened her own beauty shop. Bill worked at the local car dealership.
Together, they earned about $23,000.

In the early years, Bill didn't share Kay's enthusiasm for investing; he didn't
think $30 per month would ever amount to anything. Kay thought differently.
Following her registered representative's suggestion, she began investing $30
each month into an Individual Retirement Account (IRA).

Since she needed her money to grow and knew she would be investing for several
years, Kay (with her registered representative's help) selected the Principal
Growth Fund A. She made her first automatic monthly investment on June 30, 1982.

Within two years, Kay felt their budget would allow an increase in her monthly
contributions. In October 1984, during an annual review with her registered
representative, he suggested she raise the amount to $50 per month. Kay agreed,
commenting, "We don't even miss the money. It's just become part of our monthly
budget."

Five years passed and Kay's beauty shop business grew, as did her Principal
Growth Fund-A account. By the end of 1987, her investment had grown to $3,475.
Encouraged by the increasing value of her investment, on December 31, 1987, she
bumped up her monthly contribution to $75 and split it equally among Class A
shares of three Principal funds---Growth, International and MidCap. Her
accumulation even impressed Bill, who decided it was high time he opened a
Principal Mutual Funds IRA for himself.

In January 1989, Kay boosted her monthly automatic investments to $150, which
she maintains to this day. Over the past sixteen years, Kay has invested a total
of $21,245 into her funds. She remains very satisfied with the values of her
Principal Mutual Funds accounts. As of September 30, 1998, her Principal Mutual
Funds IRA was valued at $52,275.

Now, Kay has switched her $150 monthly contribution to a Roth IRA. She is
excited about reaping the tax advantages of this new type of IRA while still
realizing the same investment choices and benefits she has always enjoyed with
Principal Mutual Funds.

Over the years, Kay has encouraged many of her friends, relatives, and clients
to start investing for their futures with Principal Mutual Funds. Kay has been a
great source of referrals for her registered representative, not he least of
whom was her husband Bill!

One dollar per day. We know it doesn't sound like much, but for Kay and Bill
Green, it meant the beginnings of an investment plan which should lead to a more
secure future and a more comfortable retirement.

This story does not represent any actual investor, but does reflect actual
investment results of the Principal Mutual Funds mentioned. Past results do not
guarantee future performance. Returns and principal values fluctuate with
changes in market conditions so that the value at redemption may be more or less
than original cost. Withdrawals made from an IRA before age 59 1/2 may be
subject to penalties.

Total return represents the overall performance of an investment for a specific
period of time, assuming the reinvestment of dividends and capital gains and
after applicable expenses. Average annual total returns for A Shares are with a
maximum 4.75% sales charge. Average annual total returns for B Shares are with a
maximum 4% contingent deferred sales charge.

Average Annual Returns through 9/30/98
Including Sales Charges

1 yr. 5 yr. 10 yr.
Principal Growth Fund-A -1.89% 15.34% 15.59%
Principal Growth Fund-B -1.44% 19.20% --
Principal MidCap Fund-A -22.61% 11.44% 13.76%
Principal MidCap Fund-B -22.29% 14.99% --
Principal International Fund-A -16.93% 8.66% 9.44%
Principal International Fund-B -16.87% 9.24% --

Dear Shareholder

This has been a year that we all expected would occur eventually. After a long
bull market, stocks retreated in the third quarter. Equities fell nearly 20%, as
measured by the Standard & Poor's 500 index. For the first time in several
years, some stock funds show negative 12-month returns for the period ending
9/30/98.

Unnerved by negative economic and market events across the globe, including the
financial system collapse in Russia and the spreading of the Asian problems to
Brazil and Latin America, investors sought the safety of US Treasuries. Global
markets declined in the third quarter, with no major market remaining unscathed.
Only Hong Kong and several other distressed Asian markets held losses to a
minimum, likely because they had already fallen to such depths in the last 12
months. Europe, Japan and Latin America all recorded double-digit declines;
however, weakness in the US dollar helped offset these declines for US-dollar
investors.

Bonds were strong by comparison, especially high-quality issues. The 30-year
Treasury bond, considered the safest investment in the world, gained 10% as its
yield slipped below 5% for the first time ever.

Despite the market volatility, many positives still exist for the US economy:

o Interest rates are falling, feeling like a "tax cut" for consumers who
refinance mortgages.

o Prices are falling. Gasoline is under $1 in many regions; another "tax cut."
And prices continue to fall on computers, cars, furniture and fast food.

o Consumer spending is strong. Consumers continue to be a big driver in
economic growth.

o Gross domestic product (GDP) is positive--around 2% for the second half of
1998; sharply lower than the first quarter, but still positive.

We believe that many stocks are priced fairly. Despite recent jitters, we are
confident that owning good companies will always be rewarded over the long term.
The keys to successful investing include patience...a focus on the
long-term...and discipline to look beyond the latest financial headlines. The
investor profile on the inside cover illustrates the importance and benefits of
committing to a long-term investment plan.

We are proud to note that 1999 will mark our 30th anniversary. In an industry
which has experienced most of its expansion in the past decade, we offer you a
history of investment experience which most funds groups can't. In addition, our
investment team is part of, and supported by, an extensive group which has over
$70 billion in assets under management for the Principal Financial Group(R)--a
diversified group of financial services companies for over 119 years.

As a customer, keeping you informed about your investments is very important to
us. We hope that you will take some time to review this report. Given the market
volatility, we've included some thoughts about strategies to help you endure
uncertain financial markets on the following page. On the subsequent page is a
glossary of financial terms to help with your understanding of this report.

Thank you for your confidence in the Principal Mutual Funds.

Sincerely

/s/Stephan L. Jones

Stephan L. Jones
President
Princor Financial Services Corporation

Market Correction . . . Bear Market
What Do They Mean, and How Can You Protect Yourself

While "bull market" and "rally" are words we prefer to see, sometimes we must
face up to their antonyms. But do we really know what these words mean?

The words "correction" and "bear market" are often used interchangeably. What is
a bear market? A common definition is a decline in stock prices of 20% or more
over a period of at least two months. By comparison, a market correction is
usually defined as a steep decline in stock prices which may last only a few
days or weeks.

Bear markets have occurred, on average, about once every four or five years.
Since 1956, stocks as measured by the Dow Jones Industrial Average have
experienced nine periods generally regarded as bear markets.

How Can You Protect Your Investment Program?

Diversification helps reduce the market risk involved in owning a few individual
stocks. Stock mutual funds provide diversification by holding many different
issues. They enable investors to avoid putting "all their eggs in one basket" as
can be the case when investing in just a few individual securities. However,
owning a mutual fund does not eliminate the risk involved with investing in the
stock market. Investors should consider owning a variety of asset classes.

For example, a balanced portfolio of stocks, bonds and short-term securities can
help reduce the impact of a bear market. During one of the worst bear markets in
recent history - which began in January 1973 and lasted 23 months to December
1974 - the Standard & Poor's 500 Index fell 36%. A $10,000 investment in stocks
at the beginning of the bear market declined to $6364. A portfolio of 60% stocks
and 40% bonds (measured by the Salomon Brothers Corporate Bonds - US) fared
better by declining to $7770.* Of course, past performance does not guarantee
future results.

One common mistake made by investors during bear markets is to sell at or near
the bottom. Prudent investors are prepared by holding balanced portfolios
reflecting their objectives, risk tolerances and time horizons.

Are You Prepared For a Bear Market?

Market downturns are inevitable. Here are some guidelines to help you manage
your assets when downturns occur.

Stay calm. Watching investment values decline can be agonizing and cause you to
second guess your investment mix. The markets often move in irregular
cycles. Keep your focus on the long term, not avoiding a short-term loss.

Continue investing. When investment values decline, you have an opportunity to
invest at lower prices. Continue to make contributions if you invest
regularly through an automatic investment plan. Although, such a plan does
not assure a profit or protect against loss in a declining market.

Consider the tax consequences if you sell. If you've owned your investments for
some time, the outstanding gains over the past several years may impose a
substantial capital gain if your sell or exchange fund shares.

No one knows when or how severe the next bear market will be. Be prepared to
weather declines in stock and bond values over lengthy periods. You'll be glad
you did when the words "Bull Market" and "Rally" are back in the news!

* Source: CDA/Weisenberger

The Dow Jones Industrial Average is an index which follows stock price movements
of 30 blue chip U.S. companies. The stocks represent primarily industrial
companies, with some service-oriented companies.

S&P 500 Index is a market capitalization weighted index composed of 500
widely-held common stocks listed on the New York, American and Over-the-Counter
markets. The index encompasses approximately 75% of the total value of the U.S.
stock market.

Salomon Brothers Corporate Bonds - US is an index of long-term corporate bonds,
high-grade industrial and utility bonds rated Aa or better with an average
maturity of approximately 23 years.

The value of these indexes will vary according to the aggregate value of the
common equity of each of the securities included. The indexes represent asset
types which are subject to risk, including the possible loss of principal. These
are unmanaged indexes into which direct investment is not possible.
Commonly-Used Investment Terms

In this annual report, you may find some of the following investment terms. As a
result, we felt it might be useful to include a brief definition of some of the
more common investment terms.

Returns

o Total Return calculations show the overall dollar or percentage change in
value of a hypothetical fund investment assuming the reinvestment of all
portfolio distributions (i.e., dividends and capital gains).

o Average Annual Total Returns illustrate the annually compounded returns that
would have produced the fund's cumulative total returns if fund performance
had been constant over the period measured. Average annual returns are not the
same as year-by-year returns, and are reported in standard increments, usually
1, 3, 5 and 10 years.

Portfolio Statistics

o Price to Earnings (P/E) Ratio is a stock value measurement arrived at by
dividing a company's stock price by its earnings per share. The result is
expressed as a multiple rather than a percentage. A P/E ratio can be expressed
in current terms by using the current price divided by the most recent
quarter's earnings, or in future terms by dividing the current price by
projected earnings.

o Portfolio Turnover provides the percentage of the fund's portfolio which is
replaced during a given time period, usually one year.

o Expense Ratio refers to fund operating expenses and is expressed as a
percentage of net assets. Shareholders pay these expenses (e.g., management
fees paid to the portfolio manager for investment advisory services)
indirectly as they are deducted from income generated by the fund's portfolio
holdings not shareholder accounts.

Stock Types

o Blue Chip Stocks are stocks of the most well-established U.S. companies.
Typically, they are large, stable companies which have
demonstrated consistent earnings and the potential for long-term growth.

o Cyclical Stocks are those whose price and earnings tend to follow the ups
and downs of the business cycle. Some examples would
include: stocks of automobile manufacturers and steel producers.

o Growth Stocks are stocks of companies who have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples might include: high-tech, health care and
consumer staples stocks.

o Value Stocks are those companies whose stocks are believed to be undervalued
and, therefore, attractive. These stocks generally have low P/E ratios and
higher dividend yields.

o Large Capitalization Stocks (Large-Cap) are generally considered to be stocks
of companies with a market capitalization (total value of a company's
outstanding stock) of more than $5 billion. These stocks tend to comprise the
Dow Jones Industrial Average, the S&P 500 and the Russell 1000 Index.

o Medium Capitalization Stocks (Mid-Cap) are usually thought to be stocks of
companies with a market capitalization (total value of a company's outstanding
stock) of $1 - $5 billion. These stocks tend to make up the S&P 400.

o Small Capitalization Stocks (Small-Cap) are stocks of companies with a market
capitalization (total value of a company's outstanding stock) of less than $1
billion. These tend to be the stocks which make up the Nasdaq Composite Index
and the Russell 2000 Index.

Table of Contents

Page
Market Correction . . . Bear Market-- What Do They Mean, and How Can You
Protect Yourself............................................................ 2
Portfolio Managers' Comments................................................ 6

Domestic Growth-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 20
Statements of Operations................................................. 22
Statements of Changes in Net Assets...................................... 24
Notes to Financial Statements............................................ 26
Schedules of Investments
Balanced Fund.......................................................... 32
Blue Chip Fund......................................................... 35
Capital Value Fund..................................................... 36
Growth Fund............................................................ 37
MidCap Fund............................................................ 39
Real Estate Fund....................................................... 41
SmallCap Fund.......................................................... 42
Utilities Fund......................................................... 44
Financial Highlights..................................................... 46

International Growth-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 56
Statements of Operations................................................. 57
Statements of Changes in Net Assets...................................... 58
Notes to Financial Statements............................................ 60
Schedules of Investments
International Emerging Markets Fund.................................... 68
International Fund..................................................... 70
International SmallCap Fund............................................ 72
Financial Highlights..................................................... 76

Income-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 80
Statements of Operations................................................. 82
Statements of Changes in Net Assets...................................... 84
Notes to Financial Statements............................................ 86
Schedules of Investments
Bond Fund.............................................................. 94
Government Securities Income Fund...................................... 97
High Yield Fund........................................................ 97
Limited Term Bond Fund................................................. 99
Tax-Exempt Bond Fund................................................... 100
Financial Highlights..................................................... 106

Money Market Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 114
Statements of Operations................................................. 115
Statements of Changes in Net Assets...................................... 116
Notes to Financial Statements............................................ 118
Schedules of Investments
Cash Management Fund................................................... 122
Tax-Exempt Cash Management Fund........................................ 124
Financial Highlights..................................................... 128

Report of Independent Auditors.............................................. 131
Federal Income Tax Information.............................................. 132
Principal Mutual Funds...................................................... 137

<TABLE>
<CAPTION>
Principal Funds Performance

Average Annual Total Returns
As of October 31, 1998
- --------------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------- --------------------- -----------------
with without with without with without
sales sales sales sales sales sales
A Shares of: charge charge charge charge charge charge
- ------------------------------ --------------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balanced 5.78% 11.00% 10.21% 11.28% 10.43% 10.96%
Blue Chip 13.87 19.48 16.61 17.74 13.63(a) 14.34(a)
Bond 2.69 7.76 5.92 6.95 8.61 9.14
Capital Value 10.16 15.59 17.04 18.17 13.55 14.09
Government Securities Income 2.33 7.38 5.47 6.49 8.09 8.61
Growth 9.75 15.17 16.32 17.44 16.44 17.00
High Yield (7.73) (3.18) 5.62 6.64 6.35 6.86
International (2.86) 1.93 8.93 9.98 9.97 10.50
International Emerging Markets (24.82) (21.11) (28.45)(b) (25.45)(b)
International SmallCap (4.11) 0.30 (3.36)(b) 0.69(b)
Limited Term Bond 4.98 6.57 5.76(c) 6.36(c)
MidCap (14.02) (9.78) 12.25 13.33 14.58 15.13
Real Estate (19.43)(d) (15.45)(d)
SmallCap (19.90)(d) (15.95)(d)
Tax-Exempt Bond 1.74 6.76 4.74 5.75 7.27 7.79
Utilities 25.89 32.10 10.40 11.47 11.56(e) 12.48(e)
</TABLE>
1 Year 5 Years(f)
--------------------- ---------------------
with without with without
B Shares of: CDSC* CDSC* CDSC* CDSC*
- ------------------------------ --------------------- ---------------------
Balanced 6.18% 10.18% 14.35% 14.87%
Blue Chip 14.59 18.59 21.21 21.65
Bond 3.04 7.04 9.09 9.68
Capital Value 10.71 14.71 22.44 22.87
Government Securities Income 2.60 6.60 8.70 9.30
Growth 10.58 14.58 21.03 21.47
High Yield (7.52) (3.93) 6.87 7.50
International (2.68) 1.27 11.50 12.06
International Emerging Markets (24.41) (21.26) (28.20)(b) (25.65)(b)
International SmallCap (3.90) 0.10 (2.90)(b) (0.52)(b)
Limited Term Bond 4.99 6.24 5.70(c) 5.95(c)
MidCap (13.75) (10.24) 16.57 17.06
Real Estate (18.98)(d) (15.67)(d)
SmallCap (19.51)(d) (16.15)(d)
Tax-Exempt Bond 2.01 6.01 8.87 9.47
Utilities 27.23 31.23 18.74 19.21
* Contingent Deferred Sales Charge

R Shares of: 1 Year 5 Years(c)
- ------------------------------ ---------- ----------
Balanced 10.43% 12.44%
Blue Chip 19.01 17.89
Bond 7.05 7.60
Capital Value 14.77 19.51
Government Securities Income 6.66 6.98
Growth 14.46 16.11
High Yield (3.97) 4.59
International 1.13 11.04
International Emerging Markets (21.14) (25.55)
International SmallCap 0.50 0.86
Limited Term Bond 6.12 5.77
MidCap (10.37) 8.48
Real Estate (15.37)(d)
SmallCap (15.75)(d)
Utilities 31.47 16.13

(a) Partial period,
from effective date 3/1/91
(b) Partial period,
from effective date 8/29/97
(c) Partial period,
from effective date 2/29/96
(d) Partial period,
from effective date 12/31/97
(e) Partial period,
from effective date 12/16/92
(f) Partial period,
from effective date 12/9/94

Total return represents the overall perfor-mance of an investment for a specific
period of time, assuming the reinvestment of dividends and capital gains and
after applicable expenses. Average annual total returns for A shares are with
and without maximum 4.75% sales charge. Average annual total returns for B
shares are with and without maximum 4.0% contingent deferred sales charge. Total
returns reflect past performance. Past performance does not predict future
performance. The investment return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.

PORTFOLIO MANAGERS' COMMENTS

Principal Management Corporation, the adviser to the Principal Mutual Funds, is
staffed with investment professionals who manage each individual fund. Comments
by these individuals in the following paragraphs summarize in capsule form the
general strategy and recent results of each fund over the past year. We believe
any Principal Mutual Fund should, under normal circumstances, represent only a
portion of an investor's total investments. For most investors, a portfolio
should be balanced among stocks, bonds, and cash reserves to fit their own needs
and risk tolerance. Those who maintain this balanced approach should be aware of
the short-term results, but focus on the long term. Past performance is no
guarantee of future results. Fund values will fluctuate so that the shares, upon
redemption, may be worth more or less than their original cost.

Growth-Oriented Funds

Domestic Growth Funds

Principal Balanced Fund
- -----------------------
Marty Schafer Judi Vogel

Comparison of Change in Value of $10,000 Investment in the Balanced Fund Class
A, Lipper Balanced Fund Average, Lehman Brothers Government/Corporate Bond Index
and S&P 500 Stock Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 11.00% 11.28% 10.96%
Class B 10.18% 14.87%* -
Class R 10.43% 12.44%** -
- --------------------------------------------

Lehman Gov't. Lipper
Balanced Corporate Balanced S&P 500
Fund Bond Average Index
-------- ------------- -------- -------
9,527 10,000 10,000 10,000
1989 10,580 11,214 11,708 12,640
1990 9,387 11,831 11,097 11,693
1991 12,586 13,649 14,257 15,611
1992 14,079 15,085 15,502 17,167
1993 15,802 17,141 17,799 19,727
1994 15,951 16,346 17,673 20,488
1995 18,215 18,987 20,743 25,899
1996 20,965 20,011 23,821 32,135
1997 24,295 21,774 28,468 42,450
1998 26,966 24,012 31,067 51,785

Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.

* Since inception date 12/9/94
** Since inception date 2/29/96

A real mood swing occurred in the second half of the year versus the optimism
and high expectations evident in the first half. The last few months have been
characterized by tremendous volatility in the markets and increasing aversion to
risk on the part of investors. Unnerved by negative economic and market events
across the globe, including the financial system collapse in Russia and the
spreading of Asian contagion to Brazil and Latin America, investors have
recently sought the safety and security of U.S. Treasury bonds, shunning nearly
everything else in the process. International returns have been dismal with
domestic equity results only slightly better. Small cap stocks, down 20% in the
third quarter, have been especially hard hit. While the U.S. economic expansion
does continue, negative pressures are mounting. Accordingly, confidence in
continued growth and prosperity has been shaken. Market participants now require
greater compensation to take on risk in both stocks and bonds.

The Balanced Fund, with 55% in stocks and convertibles and 45% in fixed income
and cash, enjoyed above average returns for the year. With a focus on high
quality bonds and undervalued stocks, the Fund is positioned to perform well in
this period of global uncertainty. There is no independent market index against
which to measure returns of balanced portfolios. However, the S&P 500 Stock
Index and the Lehman Brothers Government/Corporate Bond Index are presented for
your information.

Principal Blue Chip Fund
- ------------------------
Mark Williams

Comparison of Change in Value of $10,000 Investment in the Blue Chip Fund Class
A, Lipper Growth & Income Fund Average and S&P 500 Stock Index

- -----------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Years 10 Year
- ------------------------------------------------
Class A 19.48% 17.74% 14.34%*
Class B 18.59% 21.65%** -
Class R 19.01% 17.89%*** -
- -----------------------------------------------

Blue Lipper S&P 500
Chip Growth & Income Stock
Fund Fund Average Index
------ --------------- -------
9,524 10,000 10,000
1991 10,181 10,544 10,911
1992 11,190 11,499 11,998
1993 11,822 13,424 13,787
1994 12,600 13,763 14,319
1995 15,455 16,510 18,100
1996 18,267 20,011 22,459
1997 22,391 25,638 29,668
1998 26,753 28,174 36,192

* Since inception date 3/1/91
** Since inception date 12/9/94
*** Since inception date 2/29/96

Principal Blue Chip Fund's investment strategy continues to concentrate on those
companies with a significant operating history, a well-capitalized balance
sheet, and a history of consistent increases in earnings and dividends. Special
importance is placed on the consistency of dividend increases, for two reasons.
First, by increasing the dividend, management sends a signal of confidence to
investors. Management generally increases the dividend when they are confident
of future business conditions. Second, companies that consistently increase the
dividend provide investors the benefit of a rising income stream. This differs
from bond investors who receive a fixed income stream.

For the year ended October 31, 1998, Principal Blue Chip Fund remained very
competitive versus its benchmarks. The Fund had a return of 19.5% well
outperforming the Lipper Growth and Income Fund Average with a 9.9% return, yet
underperforming the S&P 500 Index at 22.0%.

For the first half of the year, the S&P 500 Stock Index turned in strong
performance. The performance was remarkable given the mix of economic news.
During the period, the inflation-adjusted price of oil hit its lowest levels
since before the energy crisis of the 1970s. The Fund's two biggest positive
contributors to performance in the fourth quarter 1997 were consumer durables
and industrial cyclicals. The fact that the Fund was not invested in durables
was an advantage versus the benchmark. However, in cyclicals, stock selection
made the difference in fund performance. The first quarter of 1998 tells a
different story as the Fund lost some ground versus the benchmarks. Healthcare
was the best performing fund sector and technology the poorest performing sector
relative to the benchmarks. The second half of the year was an extremely
volatile (and negative) market. Major indices suffered their worst declines
since 1990, and third-quarter performance was the worst since the third quarter
of 1990. Investors saw markets rebound in September and October; however, this
late recovery was not enough to recapture the losses from July and August.
Principal Blue Chip Fund was no exception with technology and consumer cyclicals
sectors once again playing a major factor in sector underperformance. Stock
selection in the consumer staples sector versus the benchmark was a positive
contribution to the Fund.

Principal Capital Value Fund
- ----------------------------
Catherine Zaharis

Comparison of Change in Value of $10,000 Investment in the Capital Value Fund
Class A, Lipper Growth & Income Fund Average and S&P 500 Stock Index

- -----------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -----------------------------------------------
Class A 15.59% 18.17% 14.09%
Class B 14.71% 22.87%* -
Class R 14.77% 19.51%** -
- -----------------------------------------------

Lipper S&P 500
Capital Growth & Income Stock
Accumulation Fund Average Index
------------ --------------- -------
9,526 10,000 10,000
1989 10,840 12,047 12,640
1990 8,908 10,864 11,693
1991 12,528 14,503 15,611
1992 13,990 15,817 17,167
1993 15,447 18,465 19,727
1994 16,477 18,931 20,488
1995 19,433 22,709 25,899
1996 24,565 27,526 32,135
1997 30,795 35,266 42,450
1998 35,590 38,754 51,785

* Since Inception date 12/9/94
** Since Inception date 2/29/96

The strategy for the Principal Capital Value Fund is to look for companies that
are priced at a discount relative to their historical levels. Fund managers
focus on the future and how companies are valued relative to their worth as
ongoing business operations. This strategy gives the Fund a foundation based on
the underlying value of the business.

The most recent period has been marked by extreme volatility in the equity
markets. As uncertainty increased regarding the impact of worldwide economic
concerns on the U.S. economy, the stock market has reacted dramatically to any
change in the landscape.

Two issues drive stock prices currently earnings and interest rates. Until this
summer, both had a positive impact on stocks. Suddenly, earnings strength became
a concern to stock investors. Although the concerns have been offset by recent
Fed actions of lowering interest rates, the tug of war is not over, and greater
stock volatility could remain.

The S&P 500 Index continues to be led by a narrow group of stocks whose
valuations keep them out of the Fund's screening process. Therefore, the Fund
has lagged the S&P 500 for the latest period. However, most funds are
underweighted in this small group of companies, so in a comparison to its peers
the Fund's returns have been attractive. Management continues to focus on
companies where sustainability of earnings may be more predictable.

Principal Growth Fund
- ---------------------
Mike Hamilton

Comparison of Change in Value of $10,000 Investment in the Growth Fund Class A,
Lipper Growth Fund Average and S&P 500 Stock Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 15.17% 17.44% 17.00%
Class B 14.58% 21.47%* -
Class R 14.46% 16.11%** -
- --------------------------------------------

Lipper S&P 500
Growth Growth Stock
Fund Fund Average Index
------ ------------ -------
9,527 10,000 10,000
1989 11,245 12,431 12,640
1990 10,210 10,983 11,693
1991 16,265 15,522 15,611
1992 18,665 16,742 17,167
1993 20,500 19,600 19,727
1994 22,514 19,902 20,488
1995 27,758 24,674 25,899
1996 30,701 29,231 32,135
1997 39,773 37,206 42,450
1998 45,801 40,785 51,785

* Since Inception date 12/9/94
** Since Inception date 2/29/96

The bull market took a breather during the third quarter as stock prices staged
a broad pull back even though the domestic economy continued to grow. Global
conditions, particularly the continuing crisis in Asian financial markets and
problems in Latin America and Canada, seemed to make many investors
uncomfortable. Temporarily, they forgot about our relatively strong domestic
economy with its low interest rates, high level of consumer confidence and
falling commodity prices. The S&P 500 fell 19% from its high in mid-July, until
it reached its low at the end of August as investors sold good stocks along with
poor ones and generally fled to the safety of Treasury securities.

Principal Growth Fund performed as well as its peers during the retrenchment,
finishing between the S&P 500 Index and the Lipper Growth Fund Average
performances for the year ended October 31.

The Fund is built on the belief that markets behave rationally over time. This
means during portions of a market cycle, some Fund holdings may be out of favor.
As long as the fundamental business prospects of the companies are sound, the
Fund will hold these companies until they reach full value. The Manager looks
for companies with competitive advantages that will allow them to earn
above-average returns for many years. The Fund buys and holds these stocks to
make a profit as owners of the companies.

Principal MidCap Fund
- ---------------------
Mike Hamilton

Comparison of Change in Value of $10,000 Investment in the MidCap Fund Class A,
Lipper Mid-Cap Fund Average and S&P 500 Stock Index

- ---------------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- ---------------------------------------------------
Class A -9.78% 13.33% 15.13%
Class B -10.24% 17.06* -
Class R -10.37% 8.48** -
- ---------------------------------------------------

Lipper S&P 500
Mid Cap Stock
MidCap Fund Average Index
------ ------------ -------
9,523 10,000 10,000
1989 11,389 12,646 12,640
1990 9,378 10,886 11,693
1991 15,653 17,405 15,611
1992 17,475 18,632 17,167
1993 20,911 23,149 19,727
1994 22,345 23,639 20,488
1995 28,246 29,433 25,899
1996 33,018 34,811 32,135
1997 43,339 42,748 42,450
1998 39,101 41,512 51,785

* Since Inception date 12/9/94
** Since Inception date 2/29/96

The relatively solid performance of the U.S. economy in terms of low interest
rates, consumer confidence and moderate earnings growth was overshadowed in the
minds of U.S. stock investors during late summer. A growing awareness of
mounting problems in other economies led U.S. markets to join those of Europe,
Japan and Latin America in recording double-digit losses at the end of August.
By October, stock prices began to rebound as the Fed exerted leadership to keep
the domestic economy on track. Central banks acted to reinflate world economies.

Both the Principal MidCap Fund and the Lipper Mid-Cap Fund Average finished well
behind the S&P 500 Index for the year. This is due to the Index being heavily
weighted in large companies. These familiar names found investors preferrence
for most of this year as concerns grew over the aging bull market.

The Manager's investment approach in the Fund is based on attempting to estimate
the true economic value of a company and then purchasing the stock at a discount
to this value. As long as the fundamental business prospects of the company are
sound, the Fund will hold that company in its portfolio. This means that during
any portions of a market cycle, some portion of the holdings may be out of
favor. As a long-term investors, the Manager looks for results over two or more
market cycles and refrains from chasing the market during wild short-term price
swings.

Principal Real Estate Fund
- --------------------------
Kelly Rush

Comparison of Change in Value of $10,000 Investment in the Real Estate Fund,
Lipper Real Estate Fund Average and Morgan Stanley REIT Index

- -------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------
Class A -15.45%* - -
Class B -15.67%* - -
Class R -15.37%* - -
- -------------------------------------------

Principal Real Estate Fund, Inc.

REF REF REF Lipper Morgan S&P 500
Fund Fund Fund Real Estate Stanley Daily
Class A Class B Class R Fund Avg. REIT Reinv
------- ------- ------- ---------- -------
9,521 10,000 10,000 10,000 10,000 10,000
1998 8,068 8,452 8,482 8,318 8,346 11,463

* Since Inception date 12/31/97

Principal Real Estate Fund opened to the public in January 1998. The fund
invests primarily in equity securities of companies engaged principally in the
real estate industry. Fund managers have available the resources of real estate
professionals within the Principal Financial Group to identify companies
possessing the attributes considered essential for successful real estate
investing.

Real estate markets enjoyed a strong year in 1998, and real estate companies
experienced record earnings growth. While the operating environment was robust,
the prices of real estate company stocks were falling. Several factors have
contributed to the decline. The most predominant reason for the decline has been
the fear of deteriorating conditions in 1999 and beyond. For the period ended
October 31, 1998 Principal Real Estate Fund performed slightly better than the
Morgan Stanley REIT Index and the Lipper Real Estate Fund Average because of its
underweighting in the hotel sector and overweighting in companies which have
proven to be resilient in the face of market pressure.

Declining earnings growth from the record setting levels of 1998 is inevitable.
The transition from abnormally high earnings growth to a lower sustainable
earnings growth level has caused investor nervousness and price declines in
1998. This drop provided an attractive price entry point, in the Manager's
opinion, for patient investors in search of value opportunities supported by an
above average level of current income.

Principal SmallCap Fund
- -----------------------
John McClain Mark Williams

Comparison of Change in Value of $10,000 Investment in the SmallCap Fund, Lipper
Small-Cap Fund Average and S&P 600 Stock Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A -15.95%* - -
Class B -16.15%* - -
Class R -15.17%* - -
- --------------------------------------------

Principal SmallCap Fund, Inc.

SCF SCF SCF Lipper
Fund Fund Fund Small Cap S&P
Class A Class B Class R Fund Average 600
------- ------- ------- ----------- ------
9,527 10,000 10,000 10,000 10,000
1998 7,975 8,352 8,391 8,683 8,782

* Since Inception date 12/31/97

This is the first annual report of Principal SmallCap Fund, Inc., as its
inception date was January 1, 1998. Fund strategy is to take the best that
small-cap growth stocks have to offer and combine it in a single portfolio with
the best that small-cap value stocks have to offer. By doing so, managers hope
to provide superior results when compared to other small-cap funds.

Initially, approximately 60% of the Fund's assets were invested in growth stocks
with the balance in value stocks. The original allocation of 60/40 was still in
place at fiscal year end. This allocation was chosen initially for two reasons.
First, the small-cap value sector has outperformed the small-cap growth sector
for several measurement periods. Fund managers believe the performance balance
going forward has a good chance of being reversed, or at least not expanded
further. Second, the opportunities for superior stock selection are greater in
the growth area at this time.

Performance for small companies during July through September was a continuation
of poor performance logged earlier in the year. At October 31, the Principal
SmallCap Fund was below its benchmark with a return of -16.0 (net of expenses)
versus that of the Lipper SmallCap Fund Average at -13.2%. The Fund was ahead of
its benchmarks for the first part of the year until June erased its positive
performance. Approximately 65% of the Fund underperformance in the spring and
early summer was due to sector allocation choices and the rest was security
selection. Specifically, technology holdings were under severe pressure during
June as the Asian economic problems reignited investor concerns. The months of
July through September followed June's lead with continued negative returns. For
the benchmark, seven sectors had losses greater than 20%, three had losses
greater than 15% and one sector (Utilities) had a positive return. The Principal
SmallCap Fund experienced similar sector performance trends. The Fund
underperformed the benchmark due to exposure in the consumer cyclicals and
financial sectors.

Looking forward, small stocks are more attractive relative to large stocks than
at anytime in the last twenty years. This is based on trailing and projected
profits. Fund managers believe this is an opportunity.

Principal Utilities Fund
- ------------------------
Catherine Zaharis

Comparison of Change in Value of $10,000 Investments in the Utilities Fund Class
A, Lipper Utilities Fund Average, Dow Jones Utilities Index with Income and S&P
500 Stock Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 32.10% 11.47% 12.48*
Class B 31.23% 19.21%** -
Class R 31.47% 16.13%*** -
- --------------------------------------------

Dow Jones
Dow Jones Utilities Lipper
Utilities Utilities With Income Utilities Fund S&P 500
Fund With Income Index Average Index
--------- ----------- ------------ -------------- -------
9,524 10,000 10,000 10,000
1993 11,250 11,658 11,575 10,979
1994 9,540 9,349 10,475 11,402
1995 11,864 11,810 26.32% 12,325 14,414
1996 12,829 13,216 11.91% 13,733 17,885
1997 14,658 14,879 12.58% 16,179 23,625
1998 19,364 19,027 27.88% 19,720 28,821

* Since Inception date 12/16/92
** Since Inception date 12/9/94
*** Since Inception date 2/29/96

The utility industry continues to evolve on all fronts -- electrics, gas and
telephones. Convergence continues to be a theme on the electric and gas side.
Companies are trying to provide as many products and services as possible to
each customer, and a natural growth aspect is other utility products. Another
theme is concentration. Some companies favor a focus on making electricity and
others believe they are better sellers of electricity.

Regardless of the strategy, the goal is growth, a rare occurrence in a mature
industry. Fund management's goal is to look at each strategy, the company's
strengths and weaknesses, and determine if the company's plans are achievable.
As events are changing rather rapidly, an increasing awareness of corporate
plans is a must.

Telecommunications is in a similar situation with one distinction. This sector
still enjoys substantial growth of business from existing product lines and
regions, but it is still important to understand and believe each company's
growth strategy.

Principal Utilities Fund, with its focus on quality and long term success, has
enjoyed success. For the past year, the Fund outperformed both its index and
peer group. When the index does well, the Fund tends to be near the top of its
peer group as the Fund's current strategy is to hold only utility stocks. Fund
managers were also aided by a lack of foreign utilities, which have struggled
substantially in the past year.

International Growth Funds

Principal International Emerging Markets Fund
- ---------------------------------------------
Kurt Spieler

Comparison of Change in Value of $10,000 Investment in the International
Emerging Markets Fund, Lipper Emerging Markets Fund Average and MSCI EMF Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A -21.11% -25.45%* -
Class B -21.26% -25.65%* -
Class R -21.14% -25.55%* -
- --------------------------------------------

IEM IEM IEM Lipper Emerging
Fund Fund Fund Markets
Class A Class B Class R Fund Average
------- ------- ------- --------------
9,524 10,000 10,000 10,000
1997 7,895 8,280 8,280 8,816
1998 6,228 6,520 6,530 6,010

* Since Inception date 8/29/97

Principal International Emerging Markets Fund experienced high volatility in the
second half of the fiscal year. From April 30 to the low on September 11, the
Fund returned -38%. Catalyst events for the negative returns include high
interest rates, a deterioration in the macroeconomic environment and low
liquidity in many emerging markets. In the Manager's view, emerging markets
became ridiculously oversold in September after the Russian debt moratorium and
devaluation. The second and third quarter represented the two worst quarters
since inception of emerging market indices. Since September 11, emerging markets
have rallied with the Fund returning a positive 18% through October 31. Reasons
for the rally include the decline in interest rates in many countries (including
the U.S.), increased stability in Asia and Latin America, and cheap valuations.

The Fund outperformed both the MSCI Emerging Market Free Index and Lipper
Emerging Market Index in the second half. Relative returns were +7.4% vs. MSCI
and +7.6% vs. Lipper. This is a result of the strategy of focusing on countries
that require less external financing from the international community. This list
includes such countries as Israel, Poland, Hungary, Hong Kong and Singapore. The
Fund portfolio remains diversified by region with EMEA (Eastern Europe, Middle
East, Africa) making up 37% of assets, Latin America 31% and Asia 25%. The
portfolio is defensive by country and company with no exposure in Russia and
Malaysia. Generally, the Fund holds companies that have strong cash generative
abilities and solid balance sheets. Overall, the Fund strategy is founded on the
belief that international markets are inefficient. The manager will continue to
add value by buying high quality companies at a discount to their investment
value, and find these undervalued companies through application of internal
research and bottom-up analysis.

Principal International Fund
- ----------------------------
Scott Opsal

Comparison of Change in Value of $10,000 Investment in the International Fund
Class A, Lipper International Fund Average and MSCI EAFE Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 1.93% 9.98% 10.50%
Class B 1.27% 12.06%* -
Class R 1.13% 11.04%** -
- --------------------------------------------

Lipper MSCI
International International EAFE
Fund Average Index
------------- ------------- ------
9,534 10,000 10,000
1989 10,048 11,493 10,814
1990 10,141 11,406 9,428
1991 11,545 12,377 10,083
1992 11,358 11,771 8,750
1993 16,059 15,704 12,028
1994 17,600 17,365 13,242
1995 17,781 17,259 13,193
1996 21,047 19,111 14,575
1997 25,354 21,097 15,249
1998 25,842 21,955 16,720

* Since Inception date 12/9/94
** Since Inception date 2/29/96

Global investment markets experienced considerable volatility of returns during
the past year. In the first half of 1998, international equity markets advanced
due to strong economic growth and low interest rates throughout the world and as
Europe moved closer to Monetary Union. The third quarter saw the international
markets collapse, as investors became increasingly risk averse. The Fund's
European overweighting provided an early benefit as investor enthusiasm drove up
stock prices based on strong fundamentals. Emerging markets exposure to hurt the
Fund's return relative to the Morgan Stanley's EAFE Index as these markets
underperformed for the year. Near zero weighting in Japan benefited the Fund as
this country continued to experience financial problems.

World stock markets' volatility was highlighted during the third quarter as
markets came crashing down and investors sought safety. The markets had been
highly valued during the year as they were "priced for perfection" with strong
consumer confidence and an attractive investment outlook. As Asian troubles
spread, other markets experienced problems during the year, and Russia's
currency devaluation in August brought the problem to a head. This, in
connection with the short-term debt problems in Brazil, led investors to demand
higher risk premiums and place their money in safer investments.

Entering the second half, the Fund was positioned defensively to limit the
downside risk in the market. Unfortunately, any exposure to emerging markets
hurt investment returns. During the year, growth-oriented investments performed
better than value investments. Investors sought safety in large capitalization,
blue chip companies despite their higher valuations. Management's value approach
to investing led the Fund to avoid these high valuation companies. The currency
exposure during the past year was neutral to the Fund's overall return.

Looking forward, the Fund's current strategy remains defensive in all respects.
The Fund is overweighted in Europe which, despite the world's troubles, still
has the most robust economic outlook of the developed markets. The recently
weaker U.S. dollar may negatively impact Europe's exporters, but Fund managers
expect European economic growth to remain well above recession levels. And,
reasonable earnings performance is expected from the portfolio. The Fund's
overweighting in the U.K. is not based on a top-down view of that economy.
Rather, it reflects the fact that Fund managers have uncovered a fair number of
unique companies and discrete opportunities there which offer
higher-than-average expected returns. Latin America continues to face economic
weakness. Although we are seeing prices that more fully reflect that outlook and
will be researching "deep value" opportunities where we think the stock price
has overly discounted the company's future prospects. The Fund's manager
continues to monitor the Asian markets in hopes of identifying interesting
investments when the market turns.

Principal International SmallCap Fund
- -------------------------------------
Darren Sleister

Comparison of Change in Value of $10,000 Investment in the International
SmallCap Fund, Lipper International Small-Cap Fund Average and Morgan Stanley
Capital International EAFE

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 0.30% 0.69%* -
Class B 0.10% 0.52%* -
Class R 0.50% 0.86%* -
- --------------------------------------------

ISF ISF ISF Lipper Int'l
Fund Fund Fund SmallCap MSCI
Class A Class B Class R Fund Average EAFE
------- ------- ------- ------------- ------
9,524 10,000 10,000 10,000 10,000
1997 9,486 9,960 9,960 9,736 9,748
1998 9,514 9,970 10,010 9,774 10,689

* Since Inception date 8/29/97

The ancient Chinese cure "May you live in interesting times," could now describe
the recent investment environment. SmallCap international stocks have fluctuated
widely recently as high levels of volatility gripped equity markets in general.
The Asian economic malaise crept into other parts of the world in the past
several months. For instance, Russia defaulted on some of its debt which sent
emerging country financial markets into a tailspin. Brazil's economy hovered on
the edge of collapse and was pressured recently into accepting a bailout
package. In short, the current state of world affairs does not favor strong
economic growth in many areas outside of the U.S. As small stocks tend to
benefit from a strong economic environment, the current perception is that small
companies should be sold. In many cases this has been accomplished in
spectacular fashion, resulting in small stocks becoming an excellent value.

Given the uncertainty surrounding Asia, Fund managers continue to favor
companies operating with clearly defined Western-management principles. As such,
the Principal International SmallCap Fund is heavily weighted in European,
Australian and Canadian stocks. At this time, growth companies offer the best
risk/return trade-off compared to more traditional value stocks. Management's
bottom-up, borderless stock selection criteria has taken the Fund to the
telecommunications, temporary employment, information technology, deep-sea oil
exploration and development, and niche financial companies. The Fund Manager
continues to choose stocks on an individual, stand-alone basis. This means the
industry and country exposures are the output of finding solid individual
investments rather than attempting to predict changes in economic activity or
currencies.

The Fund's investment philosophy firmly believes that paying less for a stock is
better than paying more. It is recognized that buying into a falling market can
be difficult as prices tomorrow may well be lower than today. However, stocks
are purchased for the long run and the Fund continues to invest in those
companies believed to generate solid returns for the longer term. When markets
sell off violently and the underlying economic conditions are not changing
significantly, this is generally a good buying opportunity. Investors in the
Fund should remember that volatility is not avoidable at all times but Fund
managers use such times to benefit shareholders.

Investment results for the period generally paralled the Lipper International
SmallCap Fund average. Results lagged the Morgan Stanley EAFE Index due to
different country weightings in the Fund and a much lower average capitalization
level in the Fund. The EAFE index is comprised of much larger companies that
pertained better in this market.

Important Notes on the Growth-Oriented Funds:

Lipper Balanced Fund Average: This average consists of funds whose primary
objective is 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 currently contains 395 funds.

Lipper Emerging Markets Fund Average: This average consists of funds which
invest at least 65% of their total assets in emerging market equity securities,
where "emerging market" is defined by a country's GNP per capita or other
economic measures. The one-year average currently contains 151 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 currently contains 725 funds.

Lipper International Small Cap Funds Average: This average consists of funds
which invest at least 65% of their assets in equity securities of non-United
States companies with market capitalizations less than U.S. $1 billion at the
time of purchase. The one-year average currently contains 53 funds.

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 currently contains 302 funds.

Lipper Utilities Fund Average: This average consists of funds which invest 65%
of their equity portfolio in utility shares. The one-year average currently
contains 100 funds.

Morgan Stanley EMF (Emerging Markets Free) Index: This average is capitalization
weighted and consists of stocks from 26 countries. These countries include:
Argentina, Brazil, Chile, China Free, Columbia, Czech Republic, Greece, Hungary,
India, Indomesia Free, Israel, Jordan, Korea at 50%, Malaysia Free, Mexico Free,
Pakistan, Peru, Philippines Free, Poland, Portugal, South Africa, Sri Lanka,
Taiwan at 50%, Thailand Free, Turkey and Venezuela.

Morgan Stanley REIT Index: This is a capitalization-weighted index of the most
actively traded real estate investment trusts, and is designed to be a measure
of real estate equity performance.

Standard & Poor's 600 Index: This is a market-value weighted index consisting of
600 domestic stocks chosen for market size, liquidity and industry group
representation.

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

Income-Oriented Funds

Principal Bond Fund
- -------------------
Scott Bennett

Comparison of Change in Value of $10,000 Investment in the Bond Fund Class A,
Lipper Corporate Debt BBB Rated Fund Average and Lehman Brothers BAA Corporate
Index

- -------------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------------
Class A 7.76% 6.95% 9.14%
Class B 7.04% 9.68%* -
Class R 7.05% 7.60%** -
- -------------------------------------------------

Lehman Lipper
Bond Baa BBB Corp.
Fund Index Average
------ ------ ---------
9,522 10,000 10,000
1989 10,623 11,236 10,944
1990 10,950 11,549 11,232
1991 12,706 13,641 13,151
1992 14,070 15,217 14,572
1993 16,211 17,635 16,773
1994 15,236 16,852 15,873
1995 18,242 20,111 18,154
1996 19,107 21,484 19,159
1997 21,047 23,667 20,993
1998 22,682 25,142 22,181

* Since Inception date 12/9/94
** Since Inception date 2/29/96

For the year ending October 31, 1998, the Principal Bond Fund outperformed its
competition and the Lehman Brothers BAA Corporate Index by posting strong
absolute returns during a period of market upheaval and general economic
uncertainty. Corporate bonds, which make up the bulk of the Fund's holdings,
benefited from lower Treasury rates over the past year. However, they have been
impacted by investor fears of an expansion of the global economic slowdown and
problems in the financial markets. This has resulted in extreme investor risk
aversion as evidenced by U.S. Treasuries being the star performer of the bond
market during the past year. Because of these fears, corporate bonds have
underperformed Treasuries as buyers demanded a much greater premium to hold
corporates. This extreme bias towards Treasuries eased in the last several weeks
of October allowing corporates to improve their relative performance.

Principal Bond Fund has performed well in this environment by increasing the
credit quality of the portfolio, maintaining a somewhat longer duration than its
peers and continuing to focus on domestic companies. The biggest contributor to
the outperformance during the past year has been the increased quality emphasis
of the portfolio with 33% of the portfolio rated A- or higher including 4% which
is rated AAA. This has been significant as the higher the credit quality, the
higher the return during the past year. The bulk of the higher-rated bonds in
the Fund are in liquid instruments which can be sold quickly and reinvested in
higher yielding investments as market conditions improve.

Principal Government Securities Income Fund
- -------------------------------------------
Marty Schafer

Comparison of Change in Value of $10,000 Investment in the Government Securities
Income Fund Class A, Lipper GNMA Fund Average and Lehman Brothers GNMA Inex

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 7.38% 6.49% 8.61%
Class B 6.60% 9.30%* -
Class R 6.66% 6.98%** -
- --------------------------------------------

Government Lehman Lipper
Securities GNMA GNMA
Income Fund Index Average
9,521 10,000 10,000
1989 10,554 11,142 10,976
1990 11,206 12,067 11,777
1991 13,085 14,129 13,536
1992 14,111 15,371 14,660
1993 15,776 16,536 15,851
1994 14,789 16,281 15,363
1995 17,370 18,755 17,458
1996 18,423 20,096 18,427
1997 20,124 21,946 19,973
1998 21,609 23,520 21,325

* Since Inception date 12/9/94
** Since Inception date 2/29/96

Being long in duration* and fully invested set the stage for a very respectable
year. For three quarters of the past year, the economy was led by reasonable
growth, shrinking federal deficits and non-threatening inflation which pushed
interest rates lower. However, the fourth quarter was marked by financial
turmoil which wreaked havoc in the U.S. bond and stock markets. This was
followed by an unprecedented contraction in liquidity and dramatically wider
spreads across all fixed income products. Nevertheless, the Fund's disciplined
and long-term investment approach, combined with its long-term economic
forecast, has produced a very solid performance. For the year ended October 31,
1998, the Fund outperformed both the Lipper and Lehman Indices.

Fund management continues to believe the current portfolio is well positioned
for the period ahead. Value is added by selecting undervalued mortgage-backed
securities, combined with adjusting the duration of the portfolio as needed. As
of October 31, 1998, the duration of the fund was 3.34 years versus the index of
2.05 years. Given the absolute level of current interest rates, we plan on
moving the fund duration closer to the index over the coming quarters.

Principal High Yield Fund
- -------------------------
Mark Denkinger

Comparison of Change in Value of $10,000 Investment in the High Yield Fund Class
A, Lipper High Current Yield Fund Average and Lehman Brothers High Yield
Composite Bond Index

- -----------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -----------------------------------------------
Class A -3.18% 6.64% 6.86%
Class B -3.93% 7.50%* -
Class R -3.97% 4.59%** -
- -----------------------------------------------

Lehman Lipper
High High Yield High Yield
Yield Fund Index Average
---------- ---------- ----------
9,526 10,000 10,000
1989 9,779 10,195 10,111
1990 8,360 8,885 8,875
1991 10,499 13,209 12,101
1992 12,091 15,224 14,084
1993 13,399 17,949 16,911
1994 13,593 18,168 16,841
1995 15,187 21,016 19,065
1996 16,992 23,349 21,476
1997 19,086 26,553 24,582
1998 18,479 26,420 23,758

* Since Inception date 12/9/94
** Since Inception date 2/29/96

After several years of strong returns, the high yield market underperformed its
fixed income counterparts for the year ended October 31, 1998. Principal High
Yield Fund posted a total return of -3.18% for the year. This performance
trailed the Lehman Brothers High Yield Index return of -.50%, but slightly
outperformed the Lipper High Current Yield Fund Average of -3.35%. The relative
performance was negatively impacted by the Fund's exposure to Indonesia in the
first half the year. After seeing spreads continue to narrow for the first three
quarters of the year, spreads widened substantially in the fourth quarter.
August was one of the worst performing months in high yield history as the Fund
returned -6.58%. With financial problems throughout Asia, Russia and Latin
America continuing, investors became risk averse and looked to U.S. Treasuries
as a safe haven. High yield securities were adversely impacted with these market
conditions and followed the equity markets lower. Unlike other fixed income
securities, high yield securities have a higher correlation to the equity market
than to interest rates.

The high yield market was very active for most of 1998. New issues continued at
a frivolous pace setting new records each month. This new issue volume, combined
with historically low default rates, low inflation and a strong economy
continued to make the high yield market attractive for the first half of fiscal
1998. The August market downturn changed all this, and spreads widened
substantially and new issues came to a halt. Returns turned negative and the
outlook was grim heading into October. October experienced a dramatic change in
tone from the first to second halves of the month. The first half of October
continued negative returns and spread widening. During the second half, market
returns were decidedly positive and spreads narrowed as confidence and money
flows returned to the market. With default rates remaining low, it became
evident that current spreads were more than compensating for the potential risks
in the market.

Principal High Yield Fund maintains a BB- average quality. While Fund managers
have increased the exposure to CCC quality and non-rated securities during the
year, the overall quality of the portfolio has not significantly changed. This
is a relatively conservative risk position compared to other funds in the high
yield market and worked to the Fund's benefit during these troubling times.
Going forward, Fund managers will be more willing to lower the quality of the
Fund when market conditions warrant the increased risk. Throughout 1998, the
number of bonds in the portfolio has been reduced and the focus on sector
diversification has been renewed. At October 31, 1998, the Fund was well
diversified among 50 bonds of various sectors and it is currently overweighted
in telecommunication/media. Also, exposure to securities of a cyclical nature
has been reduced in anticipation of a slower economy. Principal High Yield Fund
continues to demonstrate its worth as an asset class that can enhance overall
portfolio diversification and returns.

Principal Limited Term Bond Fund
- --------------------------------
Marty Schafer

Comparison of Change in Value of $10,000 Investment in the Limited Term Bond
Fund, Lipper Short-Intermediate Investment Grade Debt Fund Average and Lehman
Brothers Intermediate Government/Corporate Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 6.57% 6.36%* -
Class B 6.24% 5.95%* -
Class R 6.12% 5.77%* -
- --------------------------------------------

Limited Term Limited Term
Bond Fund Bond Fund
Class A Class B
------------ ------------
9,851 10,000
1996 10,208 10,332
1997 10,897 10,985
1998 11,614 11,670

Limited Term Lehman Brothers Lipper Intermediate
Bond Fund Government Corporate Investment Grade
Class R Intermediate Index Bond Fund Average
------------ -------------------- -------------------
10,000 10,000 10,000
1996 10,324 10,368 10,357
1997 10,944 11,145 11,032
1998 11,615 12,161 11,801

* Since Inception date 2/29/96

Principal Limited Term Bond Fund continues to be an investment well suited for
those investors looking to improve on lower yielding money markets funds and
similar investments.

Fund managers kept duration shorter than the benchmarks and produced returns
through asset selection. For the year, this process led to slightly below
average performance as rates fell; again showing duration dominates performance.
Absolute returns for fixed income sectors (not including treasuries) were solid
for the year, however, in comparison to treasuries it was a poor year.

For three quarters of the past year the economy was led by reasonable growth,
shrinking federal deficits and non-threatening inflation which pushed interest
rates lower. However, the fourth quarter was marked by financial turmoil which
wreaked havoc in the U.S. bond and stock markets. Investor confidence was
undermined by: Asia, Russia, Latin America, hedge funds, supply stock market,
etc. There was only one place for many investors to hide - U.S. Treasuries.

Fund strategy continues to stay fully invested, find the best value among
various short-term fixed income securities, maintain high credit quality
standards and manage duration within the target range.

Principal Tax-Exempt Bond Fund
- ------------------------------
Dan Garrett

Comparison of Change in Value of $10,000 Investment in the Tax-Exempt Bond Fund
Class A, Lipper General Municipal Debt Tax-Exempt Bond Fund Average and Lehman
Brothers Municipal Bond Index

- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 6.76% 5.75% 7.79%
Class B 6.01% 9.47%* -
- --------------------------------------------

Lehman Lipper
Tax-Exempt Municipal General
Bond Fund Bond Index Municipal Debt
---------- ---------- --------------
9,523 10,000 10,000
1989 10,471 10,811 10,779
1990 10,895 11,613 11,376
1991 12,322 13,027 12,775
1992 13,212 14,119 13,720
1993 15,215 16,107 15,839
1994 14,087 15,405 14,911
1995 16,345 17,691 16,954
1996 17,339 18,700 17,820
1997 18,849 20,287 19,267
1998 20,124 21,914 20,639

Note: Past performance is not predictive of future performance. The performance
of Class B will vary from the performance of Class A shares based on the
differences in loads and fees.

* Since Inception date 12/9/94

Principal Tax-Exempt Bond Fund strives to provide income free from federal tax
while preserving capital. The financial markets were quite volatile the past few
months. For disciplined investors, these gyrations were reminders of why
long-term goals and asset allocation are sound ideas.

Supported by strong local and state budget surpluses and ongoing growth in the
domestic economy, municipal bond values were steadier than other bond sectors
during this turmoil. The Fund focuses on projects for the public good (e.g.,
utilities, industrial pollution control) where the revenues for debt service is
tied to corporate guarantees. These bonds tend to provide higher income than the
average bond in both the Lehman Municipal Bond Index and the Fund's Lipper peer
group with only a slightly higher risk. With fears of global market turmoil,
markets have seen the risk premium's increase reflected in lower prices. The
less liquid a bond (the ability to find a buyer), the more severe the price
drop.

The Fund has a slightly lower credit quality (average rating A) than its Lipper
peers (AA) or the Lehman Index (AA). This resulted in lower average prices on
the Fund's holdings for the past few months. This underperformance is slight and
covers a few months when fears of extreme credit market turmoil prevailed. This
fear has since been calmed by moves of the Fed and other global banks to lower
rates ensuring that markets will function, credit will be available for
businesses and consumers at reasonable rates, and financial markets will provide
liquidity for securities trading. As risk premiums have come down, the Fund's
holdings have risen faster than its peers.

Looking forward, the U.S. economy shows signs of continued low inflation with
steady growth. The Fund's holdings in higher coupon revenue bonds should
continue to provide positive relative return compared to the broader municipal
market and the Fund's peers. The Fund's disciplined approach continues to
provide good value for those seeking high tax-exempt income.

Principal Cash Management Fund
Principal Tax-Exempt Cash Management Fund
- -----------------------------------------
Mike Johnson Steve Schneider

On September 29, 1998, at the Federal Open Market Committee (FOMC) meeting, the
Federal Reserve cut its targeted Fed Funds rate** by .25% to 5.25%. Two weeks
later the Fed stepped in again and cut Fed funds by an additional .25% to 5.00%.
These were the first Fed funds adjustments to take place since March 1997 and
the first downward moves since January 1996. The rate cuts were aimed at easing
the effects of a global slowdown on the U.S. economy. Rates had been holding
quite steady through the year until Alan Greenspan began dropping hints about a
potential rate cut. Following these comments, the market began pricing in a .25%
to .50% downward adjustment in rates. The industry's average maturity for the
bulk of fiscal 1998 was in the high 50 and 60+ day area. The Funds strove to
stay on top of the industry average. However, due to a planned early May
redemption resulting from the transition of certain "sweep accounts" (short-term
balances of customers of securities dealers) to another fund organization the
Funds' average days lagged significantly. Barring unusual circumstances, Fund
management actively monitors the industry averages to keep both yields and
average maturities in line. Both funds continue to invest from a list of high
credit quality investments that is carefully monitored.

Investment in the money market funds is neither insured nor guaranteed by the
U.S. Government. While the Funds strive to maintain a $1.00 per share net asset
value, it is possible to lose money by investing in them.

Principal Tax-Exempt Cash Management Fund income dividends are exempt from
federal taxation but may not be exempt from state and local taxes. The
alternative minimum tax applies to some investors.

Important Notes for Income-Oriented Funds:

Greater credit risks are inherent in a fund which invests primarily in high
yield bonds.

* Duration is the dollar weighted, present value of cash flows, principal and
interest, expressed in time.

** The Fed Funds rate is the rate at which banks lend to each other on an
overnight basis.

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 Standard & Poor's.

Lehman Brothers GNMA Index: An unmanaged index of 15- and 30-year fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA) and Graduated Payment Mortgages (GPMs) with at least $100
million outstanding and one year or more to maturity.

Lehman Brothers High Yield Composite Bond 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.

Lehman Brothers Intermediate Government/Corporate Index: An unmanaged index of
U. S. Government agency and Treasury securities and investment-grade corporate
debt securities with maturities of five to ten years.

Lehman Brothers Municipal Bond Index: An unmanaged index of investment-grade,
tax-exempt bonds which have been issued within the last five years and at least
one year or more to maturity. This index is classified into four main sectors:
General Obligation, Revenue, Insured and Prerefunded.

Lipper Corporate Debt BBB Rated Fund Average: This average consists of funds
which invest at least 65% of their assets in corporate and government debt
issues rated in the top four grades. The one-year average currently contains 91
funds.

Lipper General Municipal Debt Fund Average: This average consists of funds which
invest at least 65% of their assets in municipal debt issues in the top four
credit ratings. The one-year average currently contains 239 funds.

Lipper GNMA Fund Average: This average consists of funds which invest a least
65% of their assets in Government National Mortgage Association securities. The
one-year average currently contains 51 funds.

Lipper High Current Yield Fund Average: This average consists of funds which aim
at high (relative) current yield from fixed-income securities. No quality or
maturity restrictions. They tend to invest in lower grade debt issues. The
one-year average currently contains 235 funds.

Lipper Short-Intermediate Investment Grade Debt Fund Average: This average
consists of funds which invest at least 65% of their assets in investment-grade
debt issues rated in the top four grades with dollar-weighted average maturities
of one to five years. The one-year average currently contains 94 funds.

Note: Mutual fund data from Lipper Analytical Services, Inc.
October 31, 1998

STATEMENTS OF ASSETS AND LIABILITIES

Principal Principal Principal Principal Principal Principal
Balanced Blue Chip Capital Value Growth MidCap Real Estate
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.

Investment in securities
<S> <C> <C> <C> <C> <C> <C>
-- at cost $125,244,229 $155,325,151 $478,777,622 $305,883,113 $332,380,783 $12,930,842

Assets
Investment in securities
-- at value (Note 4) $140,184,928 $192,975,605 $642,787,372 $500,523,733 $428,959,431 $11,535,535
Cash........................ 2,002 2,007 2,671 2,032 6,877 2,195
Receivables:
Dividends and interest.... 829,209 111,884 1,018,354 467,753 196,306 16,877
Investment securities sold 1,711,697 320,900 3,600,782 -- -- --
Capital Stock sold........ 201,239 658,133 702,535 951,013 419,030 4,297
Other assets................ 3,953 708 25,013 8,637 3,395 --

Total Assets 142,933,028 194,069,237 648,136,727 501,953,168 429,585,039 11,558,904
Liabilities
Accrued expenses............ 111,941 46,689 354,341 319,251 364,182 21,167
Payables:
Investment securities
purchased -- -- -- 9,438,610 4,054,794 --
Capital Stock reacquired.. 43,420 188,017 290,179 875,158 326,224 --

Total Liabilities 155,361 234,706 644,520 10,633,019 4,745,200 21,167

Net Assets Applicable to
Outstanding Shares.......... 142,777,667 $193,834,531 $647,492,207 $491,320,149 $424,839,839 $11,537,737

Net Assets Consist of:
Capital Stock............... $ 93,597 $89,454 $208,612 $ 87,647 $ 106,816 $ 13,750
Additional paid-in capital.. 122,961,011 156,056,332 439,309,526 300,079,580 328,552,043 13,496,703
Accumulated undistributed
net investment income..... 500,739 607 3,066,439 982,816 -- 35,698
Accumulated undistributed
net realized gain (loss)
on investment
transactions...... 4,281,621 37,684 40,897,880 (4,470,514) (397,668) (613,107)
Net unrealized appreciation
(depreciation)of
investments.. 14,940,699 37,650,454 164,009,750 194,640,620 96,578,648 (1,395,307)

Total Net Assets $142,777,667 $193,834,531 $647,492,207 $491,320,149 $424,839,839 $11,537,737

Capital Stock
(par value: $.01 a share):
Shares authorized.......... 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000

Net Asset Value Per Share:
Class A:
Net Assets............... $104,414,116 $126,740,153 $565,052,308 $395,954,359 $332,942,120 $ 5,489,536
Shares issued and
outstanding............ 6,832,891 5,837,421 18,189,057 7,059,140 8,344,793 654,401
Net asset value per
share... $15.28 $21.71 $31.07 $56.09 $39.90 $8.39
Maximum offering price
per share(a).......... $16.04 $22.79 $32.62 $58.89 $41.89 $8.81

Class B:
Net Assets.............. $18,929,793 $34,223,360 $44,764,507 $64,808,709 $68,357,748 $3,119,646
Shares issued and
outstanding........... 1,243,950 1,587,969 1,448,791 1,157,692 1,739,784 372,195
Net asset value
per share(b).......... $15.22 $21.55 $30.90 $55.98 $39.29 $8.38

Class R:
Net Assets........ $19,433,758 $32,871,018 $37,675,392 $30,557,081 $23,539,971 $2,928,555
Shares issued and
outstanding 1,282,856 1,520,018 1,223,310 547,909 596,991 348,440
Net asset value per
share $15.15 $21.63 $30.80 $55.77 $39.43 $8.40

<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>

October 31, 1998

STATEMENTS OF ASSETS AND LIABILITIES

Principal Principal
SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.

Investment in securities
-- at cost $33,007,985 $68,557,497

Assets
Investment in securities
-- at value (Note 4) $29,620,107 $98,511,173
Cash........................ 3,088 30,500
Receivables:
Dividends and interest.... 4,679 336,744
Investment securities sold -- --
Capital Stock sold........ 235,364 201,826
Other assets................ 21 514

Total Assets 29,863,259 99,080,757
Liabilities
Accrued expenses............ 32,840 112,172
Payables:
Investment securities
purchased -- --
Capital Stock reacquired.. 53,976 39,790

Total Liabilities 86,816 151,962

Net Assets Applicable to
Outstanding Shares.......... $29,776,443 $98,928,795

Net Assets Consist of:
Capital Stock............... $ 35,322 $ 61,406
Additional paid-in capital.. 34,355,800 67,157,974
Accumulated undistributed
net investment income..... -- 280,319
Accumulated undistributed
net realized gain (loss)
on investment
transactions...... (1,226,801) 1,475,420
Net unrealized appreciation
(depreciation)of
investments.. (3,387,878) 29,953,676

Total Net Assets $29,776,443 $98,928,795

Capital Stock
(par value: $.01 a share):
Shares authorized.......... 100,000,000 100,000,000

Net Asset Value Per Share:
Class A:
Net Assets............... $18,437,838 $83,533,366
Shares issued and
outstanding............ 2,186,171 5,183,590
Net asset value per
share... $8.43 $16.11
Maximum offering price
per share(a).......... $8.85 $16.91

Class B:
Net Assets.............. $6,650,394 $11,390,675
Shares issued and
outstanding........... 791,193 707,750
Net asset value
per share(b).......... $8.41 $16.09

Class R:
Net Assets........ $4,688,211 $4,004,754
Shares issued and
outstanding 554,813 249,210
Net asset value per
share $8.45 $16.07

(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

See accompanying notes.

Year Ended October 31, 1998, Except as Noted

STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>

Principal Principal Principal Principal Principal
Balanced Blue Chip Capital Value Growth MidCap
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.

Net Investment Income
Income:
Dividends................................... $ 1,386,241 $ 2,704,996 $ 14,038,593 4,527,977 3,036,707
Interest.................................... 3,893,561 283,944 822,481 2,792,407 1,865,304

Total Income 5,279,802 2,988,940 14,861,074 7,320,384 4,902,011
Expenses:
Management and investment advisory fees (Note 3) 750,616 764,784 2,349,118 1,863,070 2,548,924
Distribution and shareholder servicing
fees (Notes 1 and 3)..................... 497,017 704,240 1,313,474 1,346,009 1,525,106
Transfer and administrative services
(Notes 1 and 3)......................... 521,852 832,394 1,247,865 1,421,948 1,840,474
Registration fees (Note 1).................. 48,742 89,529 110,642 89,906 101,101
Custodian fees.............................. 5,061 3,970 2,460 4,244 4,821
Auditing and legal fees..................... 6,392 7,422 6,175 10,717 8,342
Directors' fees............................. 7,384 7,385 7,372 7,446 7,371
Other....................................... 9,028 11,443 39,501 29,568 33,839

Total Gross Expenses 1,846,092 2,421,167 5,076,607 4,772,908 6,069,978
Less: Management and investment
advisory fees waived............... -- -- -- -- --

Total Net Expenses 1,846,092 2,421,167 5,076,607 4,772,908 6,069,978

Net Investment Income (Operating Loss) 3,433,710 567,773 9,784,467 2,547,476 (1,167,967)

Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investment
transactions 4,283,465 21,090 40,907,350 (4,470,515) (397,666)
Net realized gains from other investment
companies .................................. -- -- -- -- --
Change in unrealized appreciation/
depreciation of investments.............. 4,621,248 23,303,399 33,306,303 58,299,881 (47,859,461)

Net Realized and Unrealized
Gain (Loss) on Investments 8,904,713 23,324,489 74,213,653 53,829,366 (48,257,127)

Net Increase (Decrease) in Net Assets
Resulting from Operations $12,338,423 $23,892,262 $83,998,120 $56,376,842 (49,425,094)

<FN>
(a)Period from December 11, 1997 (date operations commenced) through October
31, 1998.

See accompanying notes.
</FN>
</TABLE>

Year Ended October 31, 1998, Except as Noted

STATEMENTS OF OPERATIONS

Principal Principal Principal
Real Estate SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc.(a) Fund, Inc.(a) Fund, Inc

Net Investment Income
Income:
Dividends................................... 438,265 74,378 $3,334,804
Interest.................................... 68,103 103,891 104,549

Total Income 506,368 178,269 3,439,353
Expenses:
Management and investment advisory fees (Note 3) 87,653 147,083 531,644
Distribution and shareholder servicing
fees (Notes 1 and 3)..................... 33,946 75,049 294,281
Transfer and administrative services
(Notes 1 and 3)......................... 76,546 199,807 304,813
Registration fees (Note 1).................. 3,977 3,039 31,613
Custodian fees.............................. 1,746 4,493 1,789
Auditing and legal fees..................... 6,256 3,849 4,899
Directors' fees............................. 2,775 2,700 7,385
Other....................................... 1,300 514 5,987

Total Gross Expenses 214,199 436,534 1,182,411
Less: Management and investment
advisory fees waived............... -- -- 82,515

Total Net Expenses 214,199 436,534 1,099,896

Net Investment Income (Operating Loss) 292,169 (258,265) 2,339,457

Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investment
transactions (631,002) (1,226,801) 1,540,023
Net realized gains from other investment
companies .................................. 17,895 -- --
Change in unrealized appreciation/
depreciation of investments.............. (1,395,307) (3,387,878) 19,641,699

Net Realized and Unrealized
Gain (Loss) on Investments (2,008,414) (4,614,679) 21,181,722

Net Increase (Decrease) in Net Assets
Resulting from Operations $(1,716,245) $(4,872,944) $23,521,179

<FN>
(a)Period from December 11, 1997 (date operations commenced) through October
31, 1998.

See accompanying notes.
</FN>
</TABLE>

Years Ended October 31, Except as Noted

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Principal Principal
Balanced Blue Chip Capital Value
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
1998 1997 1998 1997 1998 1997
Operations
<S> <C> <C> <C> <C> <C> <C>

Net investment income(operating loss) 3,433,710 2,134,586 567,773 773,899 9,784,467 9,136,213
Net realized gain (loss) from
investment transactions 4,283,465 7,456,891 21,090 12,146,669 40,907,350 44,903,311
Change in unrealized appreciation/
depreciation of investments 4,621,248 3,601,722 23,303,399 617,291 33,306,303 57,109,297
Net Increase (Decrease) in Net Assets
Resulting from Operations 12,338,423 13,193,199 23,892,262 13,537,859 83,998,120 111,148,821

Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... (2,435,139) (1,962,353) (571,140) (664,560) (9,413,649) (8,406,934)
Class B ................................... (269,151) (152,316) (21,463) (25,978) (302,359) (131,991)
Class R.................................... (300,221) (102,915) (42,466) (42,305) (272,715) (86,476)
From net realized gain on investments:
Class A ................................... (5,882,074) (6,130,810) (8,442,806) (1,212,100) (40,827,739) (60,902,870)
Class B ................................... (842,073) (566,868) (1,993,541) (188,032) (2,381,772) (1,471,954)
Class R.................................... (725,965) (112,915) (1,692,630) (55,610) (1,697,455) (338,789)
Tax return of capital distributions:
Class A ................................... -- -- -- -- -- --
Class B ................................... -- -- -- -- -- --
Class R.................................... -- -- -- -- -- --

Total Dividends and Distributions (10,454,623) (9,028,177) (12,764,046) (2,188,585) (54,895,689) (71,339,014)

Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 23,880,103 21,449,772 46,354,686 34,250,614 73,344,881 57,963,775
Class B ................................... 8,010,824 5,741,685 15,736,209 11,442,392 17,966,775 15,764,589
Class R.................................... 11,459,488 9,101,517 18,838,628 14,353,877 22,090,590 16,511,369
Shares issued in reinvestment of dividends and
distributions:
Class A.................................... 8,093,981 7,361,276 8,730,513 1,791,093 49,153,586 68,083,831
Class B ................................... 1,101,436 712,904 2,000,486 211,943 2,633,936 1,583,642
Class R.................................... 1,026,031 215,722 1,734,897 97,891 2,028,417 425,209
Shares redeemed:
Class A ................................... (14,404,904) (17,550,684) (15,983,191) (9,512,640) (78,578,133) (103,901,296)
Class B ................................... (2,320,820) (943,794) (3,609,645) (1,463,536) (4,560,133) (1,795,682)
Class R ................................... (3,017,907) (846,178) (4,847,775) (1,259,802) (5,699,984) (1,636,526)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions 33,828,232 25,242,220 68,954,808 49,911,832 78,379,935 52,998,911

Total Increase 35,712,032 29,407,242 80,083,024 61,261,106 107,482,366 92,808,718

Net Assets
Beginning of period........................... 107,065,635 77,658,393 113,751,507 52,490,401 540,009,841 447,201,123
End of period [including undistributed
net investment income as set forth below]... 142,777,667 107,065,635 193,834,531 113,751,507 647,492,207 540,009,841

Undistributed Net Investment Income ........... 500,739 75,127 607 79,494 3,066,439 3,270,973
<FN>
(a) Period from December 11, 1997 (date operations commenced) through
October 31, 1998.

See accompanying notes.
</FN>
</TABLE>
Years Ended October 31, Except as Noted

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>

Principal Principal Principal
Growth MidCap Real Estate
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
1998 1997 1998 1997 1998(a)
Operations
<S> <C> <C> <C> <C> <C>
Net investment income(operating loss) 2,547,476 2,008,065 (1,167,967) 419,786 292,169
Net realized gain (loss) from
investment transactions (4,470,515) 11,213,338 (397,666) 10,456,322 (613,107)
Change in unrealized appreciation/
depreciation of investments 58,299,881 65,942,389 (47,859,461) 80,084,426 (1,395,307)
Net Increase (Decrease) in Net Assets
Resulting from Operations 56,376,842 79,163,792 (49,425,094) 90,960,534 (1,716,245)

Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... (2,281,014) (1,853,254) -- (741,359) (118,861)
Class B ................................... (84,298) (14,911) -- (4,780) (70,429)
Class R.................................... (5,786) (8,766) -- (594) (67,181)
From net realized gain on investments:
Class A ................................... (9,421,497) (2,178,840) (8,489,268) (7,708,737) --
Class B ................................... (1,280,548) (232,571) (1,505,719) (989,543) --
Class R.................................... (518,291) (27,607) (456,798) (95,503) --
Tax return of capital distributions:
Class A ................................... -- -- (3,831) -- --
Class B ................................... -- -- (351) -- --
Class R.................................... -- -- (114) -- --

Total Dividends and Distributions (13,591,434) (4,315,949) (10,456,081) (9,540,516) (256,471)

Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 80,738,775 54,732,684 84,673,707 76,822,359 6,657,527
Class B ................................... 23,436,918 14,638,635 26,339,797 24,764,751 3,740,670
Class R.................................... 16,186,162 13,558,095 14,593,610 14,520,116 3,419,415
Shares issued in reinvestment of dividends and
distributions:
Class A.................................... 11,393,839 3,915,241 8,301,363 8,245,913 117,899
Class B ................................... 1,340,964 244,569 1,491,031 981,686 72,055
Class R.................................... 524,005 36,360 456,912 96,080 69,699
Shares redeemed:
Class A ................................... (49,829,917) (35,146,370) (60,048,924)(36,719,008) (394,690)
Class B ................................... (6,849,158) (4,184,396) (9,249,916) (4,945,062) (118,103)
Class R ................................... (4,298,409) (1,144,394) (5,504,466) (1,479,854) (54,019)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions 72,643,179 46,650,424 61,053,114 82,286,981 13,510,453

Total Increase 115,428,587 121,498,267 1,171,939 163,706,999 11,537,737

Net Assets
Beginning of period........................... 375,891,562 254,393,295 423,667,900 259,960,901 --
End of period [including undistributed
net investment income as set forth below]... 491,320,149 375,891,562 424,839,839 423,667,900 11,537,737

Undistributed Net Investment Income .......... 982,816 813,820 -- 36,047 35,698

<FN>
(a) Period from December 11, 1997 (date operations commenced) through
October 31, 1998.

See accompanying notes.
</FN>
</TABLE>

Years Ended October 31, Except as Noted

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>

Principal Principal
SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.
1998(a) 1998 1997
Operations
<S> <C> <C> <C>
Net investment income(operating loss) (258,265) 2,339,457 2,768,051
Net realized gain (loss) from
investment transactions (1,226,801) 1,540,023 1,274,214
Change in unrealized appreciation/
depreciation of investments (3,387,878) 19,641,699 5,564,046
Net Increase (Decrease) in Net Assets
Resulting from Operations (4,872,944) 23,521,179 9,606,311

Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... -- (2,238,576) (2,431,314)
Class B ................................... -- (202,869) (183,927)
Class R.................................... -- (59,525) (28,627)
From net realized gain on investments:
Class A ................................... -- -- --
Class B ................................... -- -- --
Class R.................................... -- -- --
Tax return of capital distributions:
Class A ................................... (4,160) -- --
Class B ................................... (3,120) -- --
Class R.................................... (3,120) -- --

Total Dividends and Distributions (10,400) (2,500,970) (2,643,868)

Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 22,354,702 12,723,975 5,270,881
Class B ................................... 8,073,780 4,293,220 2,196,079
Class R.................................... 5,958,145 2,547,194 1,364,313
Shares issued in reinvestment of dividends and
distributions:
Class A.................................... 4,160 1,973,186 2,147,554
Class B ................................... 3,120 182,379 165,257
Class R.................................... 3,120 59,486 28,603
Shares redeemed:
Class A ................................... (967,357) (13,805,582) (15,663,584)
Class B ................................... (232,397) (2,155,400) (1,595,827)
Class R ................................... (537,486) (725,248) (272,901)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions 34,659,787 5,093,210 (6,359,625)

Total Increase 29,776,443 26,113,419 602,818

Net Assets
Beginning of period........................... -- 72,815,376 72,212,558
End of period [including undistributed
net investment income as set forth below]... 29,776,443 98,928,795 72,815,376

Undistributed Net Investment Income ........... -- 280,319 445,581

<FN>
(a) Period from December 11, 1997 (date operations commenced) through
October 31, 1998.

See accompanying notes.
</FN>
</TABLE>

October 31, 1998

NOTES TO FINANCIAL STATEMENTS

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.

Note 1 -- Significant Accounting Policies

Principal Balanced Fund, Inc., Principal Blue Chip Fund, Inc., Principal Capital
Value Fund, Inc., Principal Growth Fund, Inc., Principal MidCap Fund, Inc.,
Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc. and Principal
Utilities Fund, Inc. (the "Domestic Growth Funds") are registered under the
Investment Company Act of 1940, as amended, as open-end diversified management
investment companies and operate in the mutual fund industry.

Effective January 1, 1998, the following changes were made to the names of the
Domestic Growth Funds:

Former Fund Name New Fund Name
- -------------------------------------- ----------------------------------
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.

On December 11, 1997, the initial purchases of 400,000 shares of Class A Capital
Stock, 300,000 shares of Class B Capital Stock and 300,000 shares of Class R
Capital Stock of each of Principal Real Estate Fund, Inc. and Principal SmallCap
Fund, Inc. were made by Principal Life Insurance Company (formerly known as
Principal Mutual Life Insurance Company) (see Note 3). Effective December 31,
1997, Principal Real Estate Fund, Inc. and Principal SmallCap Fund, Inc. each
began offering Class A and Class B shares to the public and Class R shares to
eligible purchasers.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Class R shares are sold without an initial sales charge and are not
subject to a CDSC. Class B shares and Class R shares bear higher ongoing
distribution fees than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) after four years. All classes
of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the Domestic Growth Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
declares separate dividends on each class of shares.

The Domestic Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the periods ended October 31, 1998, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>

Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Balanced Fund, Inc. 241,795 140,18 115,035 121,030 28,933 25,380 12,833 7,101 9,962
Principal Blue Chip Fund, Inc. 265,449 247,915 190,876 139,580 44,191 36,727 31,197 11,989 13,307
Principal Capital Value Fund, Inc. 789,870 296,909 226,695 341,696 59,885 54,503 36,224 16,356 13,383
Principal Growth Fund, Inc. 790,328 367,515 188,166 450,403 95,041 46,878 30,541 10,811 11,436
Principal MidCap Fund, Inc. 869,425 483,775 171,906 516,585 123,162 59,007 26,629 13,205 11,889
Principal Real Estate Fund, Inc. 13,607 16,949 3,390 2,520 1,036 403 1,700 287 1,684
Principal SmallCap Fund, Inc. 40,552 30,209 4,288 15,514 4,511 1,153 1,401 1,201 102
Principal Utilities Fund, Inc. 191,411 82,003 20,867 78,984 13,075 6,383 10,105 7,256 7,035
</TABLE>

The Domestic Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities and preferred stocks,
the investments are valued by using 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 each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.

The Domestic Growth Funds record investment transactions generally one day after
the trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The Domestic Growth
Funds record dividend income on the ex-dividend date. Interest income is
recognized on an accrual basis.

The Domestic Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the Domestic Growth Funds' cash balances to be
deposited into a single joint account along with the cash of other registered
investment companies managed by Principal Management Corporation (formerly known
as Princor Management Corporation) (the "Manager"). These balances may be
invested in one or more short-term instruments.

Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments are determined in accordance with federal tax
regulations, which may differ from generally accepted accounting principles.
Permanent book and tax basis differences are reclassified within the capital
accounts based on their federal tax basis treatment; temporary differences do
not require reclassification. Reclassifications made for Principal MidCap Fund,
Inc. and Principal SmallCap Fund, Inc. for the year ended October 31, 1998
aggregated $1,172,263 and $268,657 respectively. Other reclassifications made
for the periods ended October 31, 1998 and 1997 were not material.

Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes, but not for tax purposes, are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent distributions exceed current
and accumulated earnings and profits for federal income tax purposes, they are
reported as return of capital distributions.

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Note 2 -- Federal Income Taxes

No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes approximates that used for financial
reporting purposes.

At October 31, 1998, the Domestic Growth Funds had approximate net capital loss
carryforwards as follows:
<TABLE>
<CAPTION>

Principal Principal Principal Principal
Growth MidCap Real Estate SmallCap
Net Capital Loss Carryforwards Expire In: Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.

Note 3 -- Management Agreement and Transactions With Affiliates

The Domestic Growth Funds have agreed to pay investment advisory and management
fees to Principal Management Corporation (wholly owned by Princor Financial
Services Corporation, a subsidiary of Principal Life Insurance Company) computed
at an annual percentage rate of each fund's average daily net assets. The annual
rate used in this calculation for the Domestic Growth Funds is as follows:

<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)

First Next Next Next Over
$100 $100 $100 $100 $400

<S> <C> <C> <C> <C> <C>
Principal Balanced Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
Principal Blue Chip Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Capital Value Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Growth Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal MidCap Fund, Inc. 0.65% 0.60% 0.55% 0.50% 0.45%
Principal Real Estate Fund, Inc. 0.90% 0.85% 0.80% 0.75% 0.70%
Principal SmallCap Fund, Inc. 0.85% 0.80% 0.75% 0.70% 0.65%
Principal Utilities Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
</TABLE>

The Domestic Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.

The Manager voluntarily waived a portion of its fee for the Principal Utilities
Fund, Inc. The waivers are in amounts that maintain total operating expenses
within certain limits. The limits are expressed as a percentage of average net
assets attributable to each class on an annualized basis during the reporting
period. The amount waived and the operating expense limits, which were
maintained at or below those shown, are as follows:

<TABLE>
<CAPTION>
Amount Waived

Year Ended Year Ended Expense
October 31, 1998 October 31, 1997 Limit

Principal Utilities Fund, Inc.
<S> <C> <C> <C>
Class A $60,477 $65,940 1.15%
Class B 9,557 3,753 1.95%
Class R 12,481 9,355 1.65%
</TABLE>

The Manager ceased its waiver of expenses October 31, 1998.

Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. Princor Financial Services Corporation also
retains sales charges on sales of Class A shares based on declining rates which
begin at 4.75% of the offering price. The aggregate amount of these charges
retained, by fund, for the periods ended October 31, 1998 were as follows:

Class A Class B

Principal Balanced Fund, Inc. $ 682,760 $ 33,555
Principal Blue Chip Fund, Inc. 1,172,738 57,361
Principal Capital Value Fund, Inc. 1,691,500 77,543
Principal Growth Fund, Inc. 1,990,628 89,098
Principal MidCap Fund, Inc. 2,295,383 152,254
Principal Real Estate Fund, Inc. 52,363 917
Principal SmallCap Fund, Inc. 397,232 1,159
Principal Utilities Fund, Inc. 302,546 36,807

No brokerage commissions were paid by the Domestic Growth Funds to Princor
Financial Services Corporation during the periods ended October 31, 1998 and
1997. Brokerage commissions were paid to other affiliates by the following
funds:

Periods Ended Year Ended
October 31, 1998 October 31, 1997

Principal Balanced Fund, Inc. $ 6,080 $15,194
Principal Blue Chip Fund, Inc. 2,315 21,243
Principal Capital Value Fund, Inc. 32,675 17,016
Principal Growth Fund, Inc. 18,750 4,637
Principal MidCap Fund, Inc. 7,716 3,750
Principal Real Estate Fund, Inc. 14,745 --
Principal SmallCap Fund, Inc. 1,050 --
Principal Utilities Fund, Inc. 3,235 4,665

The Domestic Growth Funds bear distribution and shareholder servicing fees with
respect to Class A shares computed at an annual rate of up to .25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the Domestic Growth Funds adopted a distribution plan with respect to Class B
shares that provides for distribution and shareholder servicing fees computed at
an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the Domestic Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the Domestic Growth
Funds.

At October 31, 1998, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company and benefit plans sponsored on behalf of Principal Life
Insurance Company owned shares of the Domestic Growth Funds as follows:

Class A Class B Class R

Principal Balanced Fund, Inc. 56,947 111 2,661
Principal Blue Chip Fund, Inc. 64,478 99 71
Principal Capital Value Fund, Inc. 5,004,324 71 52
Principal Growth Fund, Inc. 37,577 37 27
Principal MidCap Fund, Inc. 46,739 45 32
Principal Real Estate Fund, Inc. 409,528 306,709 307,067
Principal SmallCap Fund, Inc. 400,425 300,319 300,319
Principal Utilities Fund, Inc. 85,553 123 92

Note 4 -- Investment Transactions

For the periods ended October 31, 1998, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Domestic Growth Funds were as
follows:

Purchases Sales

Principal Balanced Fund, Inc. $ 86,937,874 $ 29,929,482
Principal Blue Chip Fund, Inc. 54,535,363 735,207
Principal Capital Value Fund, Inc. 167,160,767 138,801,462
Principal Growth Fund, Inc. 144,105,468 89,116,523
Principal MidCap Fund, Inc. 131,971,760 106,338,131
Principal Real Estate Fund, Inc. 18,328,496 5,192,357
Principal SmallCap Fund, Inc. 35,175,646 3,215,257
Principal Utilities Fund, Inc. 12,674,891 10,367,659

At October 31, 1998, net unrealized appreciation (depreciation) of investments
by the Domestic Growth Funds was composed of the following:

<TABLE>
<CAPTION>
Net Unrealized
Appreciation

Gross Unrealized (Depreciation)

Appreciation (Depreciation) of Investments

<S> <C> <C> <C>
Principal Balanced Fund, Inc. $ 17,834,181 $ (2,893,482) $ 14,940,699
Principal Blue Chip Fund, Inc. 44,720,024 (7,069,570) 37,650,454
Principal Capital Value Fund, Inc. 179,712,466 (15,702,716) 164,009,750
Principal Growth Fund, Inc. 197,621,764 (2,981,144) 194,640,620
Principal MidCap Fund, Inc. 135,193,328 (38,614,680) 96,578,648
Principal Real Estate Fund, Inc. 55,032 (1,450,339) (1,395,307)
Principal SmallCap Fund, Inc. 2,447,869 (5,835,747) (3,387,878)
Principal Utilities Fund, Inc. 30,487,207 (533,531) 29,953,676
</TABLE>

The Domestic Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.

Note 5 -- Capital Share Transactions

Transactions in Capital Stock by fund were as follows:

<TABLE>
<CAPTION>
Principal Principal Principal Principal
Balanced Blue Chip Capital Value Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.

Year Ended October 31, 1998:
Shares sold:
<S> <C> <C> <C> <C>
Class A ......................................... 1,578,648 2,196,999 2,383,996 1,435,543
Class B ......................................... 531,549 749,555 582,574 414,689
Class R ......................................... 764,170 893,287 717,506 290,030
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 551,343 445,659 1,687,027 219,136
Class B ........................................... 75,490 102,886 91,259 26,054
Class R ......................................... 70,471 89,024 70,217 10,249
Shares redeemed:
Class A ......................................... (952,391) (760,092) (2,537,205) (888,842)
Class B ......................................... (153,016) (171,471) (148,042) (121,844)
Class R ......................................... (202,139) (231,149) (186,811) (76,609)

Net Increase 2,264,125 3,314,698 2,660,521 1,308,406

Year Ended October 31, 1997:
Shares sold:
Class A ......................................... 1,484,901 1,757,696 2,094,307 1,188,640
Class B ......................................... 394,660 585,899 569,099 315,097
Class R ......................................... 632,661 734,050 600,469 296,077
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 521,642 97,219 2,633,617 89,929
Class B ........................................... 50,747 11,785 61,682 5,779
Class R ......................................... 15,156 5,263 16,393 863
Shares redeemed:
Class A ......................................... (1,197,833) (495,337) (3,785,181) (760,739)
Class B ......................................... (65,006) (73,924) (64,340) (91,289)
Class R ......................................... (57,684) (62,702) (58,005) (23,813)

Net Increase 1,779,244 2,559,949 2,068,041 1,020,544

Principal Principal Principal Principal
MidCap Real Estate SmallCap Utilities
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.

Periods Ended October 31, 1998, Except as Noted:
Shares sold:
Class A ......................................... 1,891,397 684,793 2,291,199 853,517
Class B ......................................... 593,857 377,186 817,321 286,360
Class R ......................................... 327,198 346,800 610,143 172,466
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 188,881 13,045 425 130,341
Class B ........................................... 34,300 7,946 319 12,065
Class R ......................................... 10,456 7,688 319 3,932
Shares redeemed:
Class A ......................................... (1,383,727) (43,437) (105,453) (928,474)
Class B ......................................... (215,454) (12,937) (26,447) (144,160)
Class R ......................................... (127,550) (6,048) (55,649) (48,307)

Net Increase 1,319,358 1,375,036 3,532,177 337,740

Year Ended October 31, 1997:
Shares sold:
Class A ......................................... 1,925,742 N/A N/A 442,282
Class B ......................................... 622,365 N/A N/A 182,586
Class R ......................................... 363,949 N/A N/A 114,303
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 223,920 N/A N/A 179,204
Class B ........................................... 27,006 N/A N/A 13,766
Class R ......................................... 2,629 N/A N/A 2,382
Shares redeemed:
Class A ......................................... (920,261) N/A N/A (1,312,610)
Class B ......................................... (125,040) N/A N/A (133,160)
Class R ......................................... (36,211) N/A N/A (23,006)

Net Increase (Decrease) 2,084,099 (534,253)
</TABLE>

Note 6 -- Line of Credit

The Domestic Growth Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, the Domestic Growth Funds had
no outstanding borrowings under the line of credit.

Note 7 -- Year 2000 Problem (Unaudited)

Like other mutual funds, financial and business organizations and individuals
around the world, the Domestic Growth Funds could be adversely affected if the
computer systems used by the Manager and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Manager is
taking steps it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems it uses and to obtain reasonable
assurances that comparable steps are being taken by each fund's other major
service providers. At this time, however there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the funds.

October 31, 1998

SCHEDULES OF INVESTMENTS

GROWTH FUNDS (DOMESTIC)

PRINCIPAL BALANCED FUND, INC.

Shares
Held Value
Common Stocks (54.08%)

Auto & Home Supply Stores (0.71%)
Autozone, Inc. 38,700(a) $ 1,018,294

Bakery Products (0.37%)
Sara Lee Corp. 8,900 531,219

Beverages (0.87%)
Pepsico, Inc. 36,700 1,238,625
Business Credit Institutions (0.19%)
Associates First Capital `A' 3,840 270,720
Chemicals & Allied Products (0.51%)
Dow Chemical Co. 7,800 730,275
Commercial Banks (4.50%)
BankAmerica Corp. 15,500 890,281
BankBoston Corp. 19,200 706,800
Bankers Trust Corp. 12,500 785,156
Chase Manhattan Corp. 14,700 835,144
First Union Corp. 21,292 1,234,936
Fleet Financial Group, Inc. 29,400 1,174,162
PNC Financial Corp. 15,900 795,000
6,421,479
Commercial Printing (0.70%)
R. R. Donnelley & Sons Co. 23,100 996,188
Communications Equipment (0.35%)
General Instrument Corp. 19,600(a) 503,475
Computer & Data Processing
Services (2.46%)
Adobe Systems, Inc. 23,700 879,862
Electronic Data Systems Corp. 37,600 1,529,850
First Data Corp. 41,600 1,102,400
3,512,112
Computer & Office Equipment (2.84%)
3COM Corp. 14,200(a) 512,087
Compaq Computer Corp. 26,900 850,712
Hewlett-Packard Co. 16,700 1,005,131
International Business
Machines Corp. 11,300 1,677,344
4,045,274
Consumer Products (2.71%)
Fortune Brands, Inc. 34,300 1,134,044
UST, Inc. 29,500 1,003,000
RJR Nabisco Holdings Corp. 11,000 314,187
Philip Morris Cos., Inc. 27,700 1,416,162
3,867,393
Crude Petroleum & Natural Gas (1.35%)
Texaco, Inc. 32,500 1,927,656
Department Stores (0.62%)
Dillard's, Inc., Class A 28,600 888,388
Drugs (4.23%)
Abbott Labs 14,200 666,512
American Home Products Corp. 23,900 1,165,125
Johnson & Johnson 19,200 1,564,800
Merck & Co., Inc. 13,100 1,771,775
Pharmacia & Upjohn, Inc. 16,500 873,469
6,041,681
Electric Services (2.66%)
Central & Southwest Corp. 51,500 1,432,344
Dominion Resources, Inc. 19,900 919,131
Houston Industries, Inc. 26,700 829,369
Potomac Electric Power Co. 23,400 612,787
3,793,631
Electrical Industrial Apparatus (0.82%)
Emerson Electric Co. 17,800 1,174,800
Electronic Distribution Equipment (0.56%)
General Electric Co. 9,100 796,250
Fats & Oils (0.74%)
Archer Daniels Midland Co. 63,193 1,054,533
Federal & Federally-Sponsored
Credit (0.32%)
Federal National Mortgage Association 6,400 453,200
Fire, Marine & Casualty Insurance (2.99%)
Citigroup, Inc. 19,100 898,894
General Re Corp. 5,100 1,120,406
Loews Corp. 12,800 1,202,400
Safeco Corp. 24,300 1,052,494
4,274,194
General Industrial Machinery (0.80%)
Pall Corp. 45,500 1,148,875
Tyco International Ltd. 1 47
1,148,922
Grain Mill Products (0.83%)
Ralston-Ralston Purina Group 35,400 1,181,475
Groceries & Related Materials (1.00%)
Sysco Corp. 53,200 1,433,075
Grocery Stores (1.71%)
Albertson's, Inc. 17,700 983,456
American Stores Co. 44,900 1,462,056
2,445,512
Industrial Inorganic Chemicals (0.53%)
Eastman Chemical Co. 4,850 284,938
Praxair Inc. 11,800 474,950
759,888
Jewlery, Silverware & Plated Ware (0.13%)
Jostens, Inc. 8,400 189,525
Life Insurance (0.43%)
Lincoln National Corp. 8,100 614,588
Machinery, Equipment & Supplies (0.83%)
Grainger (W. W.), Inc. 25,600 1,179,200
Management & Public Relations (0.45%)
Dun & Bradstreet Corp. 22,500 638,438
Meat Products (0.98%)
Tyson Foods, Inc. 60,850 1,399,550
Medical Instruments & Supplies (0.67%)
St. Jude Medical, Inc. 33,850(a) 956,263
Medical Services & Health
Insurance (1.68%)
Aon Corp. 11,400 706,800
Conseco, Inc. 18,100 627,844
Pacificare Health Systems,
Inc., Class B 13,600(a) 1,071,000
2,405,644
Metal Forgings & Stampings (0.47%)
Newell Co. 15,100 664,400
Miscellaneous Converted Paper
Products (0.81%)
Minnesota Mining & Mfg. Co. 14,400 1,152,000
Miscellaneous Food & Kindred
Products (0.43%)
Universal Foods Corp. 28,600 620,263
Miscellaneous Transportation
Equipment (0.44%)
FMC Corp. 12,400(a) 633,175
Motor Vehicles & Equipment (0.56%)
Ford Motor Co. 14,654 794,979
Paper Mills (1.81%)
Fort James Corp. 16,962 683,781
Kimberly Clark Corp. 30,800 1,486,100
Union Camp Corp. 9,600 412,800
2,582,681
Petroleum Refining (3.44%)
Amerada Hess Corp. 17,500 966,875
Amoco Corp. 22,300 1,251,587
Atlantic Richfield Co. 19,700 1,356,838
Exxon Corp. 18,800 1,339,500
4,914,800
Plumbing & Heating (0.14%)
Masco Corp. 7,200 202,950
Pulp Mills (0.37%)
Boise Cascade Corp. 18,900 529,200
Rubber & Plastics Footwear (0.46%)
Nike, Inc. 14,900 650,944
Sanitary Services (1.75%)
Browning-Ferris Industries, Inc. 24,800 878,850
Waste Management, Inc. 35,742 1,612,858
2,491,708
Security Brokers & Dealers (0.19%)
Bear Stearns Cos., Inc. 7,500 267,656
Telephone Communication (2.36%)
AT&T Corp. 13,800 859,050
GTE Corp. 18,600 1,091,587
Motorola, Inc. 19,200 998,400
SBC Communications, Inc. 9,100 421,444
3,370,481
Variety Stores (0.31%)
Wal-Mart Stores, Inc. 6,400 441,600

Total Common Stocks 77,208,304

Principal
Amount Value
Bonds (31.22%)

Beverages (0.70%)
Seagram Co., Ltd.
Notes; 6.50%; 4/1/2003 $1,000,000 1,007,195

Blast Furnace & Basic
Steel Products (0.76%)
Carpenter Technology Corp.
Medium-Term Notes;
6.99%; 4/20/2018 800,000 794,285
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/2007 350,000 309,750
1,104,035
Business Credit Institutions (2.20%)
CIT Group Holdings
Senior Medium-Term Notes;
6.38%; 10/1/2002 1,000,000 1,019,533
Ford Motor Credit Co. Notes;
7.75%; 3/15/2005 1,000,000 1,108,054
Heller Financial, Inc. Notes;
6.44%; 10/6/2002 1,000,000 1,004,575
3,132,162
Commercial Banks (0.99%)
NationsBank Corp.
Subordinated Notes;
7.80%; 9/15/2016 1,300,000 1,415,406

Communications Equipment (1.00%)
Motorola, Inc.
Debentures;
7.50%; 5/15/2025 1,291,000 1,431,487

Computer & Office Equipment (1.51%)
International Business Machines Corp.
Debentures;
7.00%; 10/30/2025 1,300,000 1,412,437
Seagate Technology, Inc.
Senior Notes;
7.37%; 3/1/2007 750,000 748,074
2,160,511
Consumer Products (1.39%)
Philip Morris Cos., Inc. Notes;
7.25%; 9/15/2001 1,500,000 1,579,070
6.15%; 3/15/2010 400,000 404,384
1,983,454
Department Stores (0.82%)
Dillard's, Inc.
Notes; 7.38%; 6/1/2006 600,000 639,737
Fred Meyer, Inc. Senior Notes;
7.38%; 3/1/2005 500,000 526,855
1,166,592
Electric Services (0.75%)
Virginia Electric & Power Co.
First Mortgage Bond;
7.38%; 7/1/2002 1,000,000 1,069,860

Farm & Garden Machinery (0.85%)
Deere & Co.
Senior Debentures;
8.50%; 1/9/2022 $1,000,000 1,210,995

Forest Products (0.68%)
Weyerhaeuser Co.
Debentures;
6.95%; 10/1/2027 1,000,000 971,997

Functions Closely Related to
Banking (0.94%)
J.P. Morgan & Co., Inc.
Subordinated Notes;
6.70%; 11/01/2007 1,300,000 1,338,949

General Government (1.13%)
Province of Quebec, Canada
Debentures;
7.50%; 7/15/2002 500,000 536,180
7.00%; 1/30/2007 1,000,000 1,076,580
1,612,760
General Industrial Machinery (1.10%)
Ingersoll-Rand
Medium-Term Notes;
6.46%; 11/19/2003 1,000,000 1,042,574
Timken Co.
Medium-Term Notes;
7.30%; 8/13/2002 500,000 532,203
1,574,777
Miscellaneous Investing (1.76%)
Federal Realty Investment Trust Notes;
8.88%; 1/15/2000 1,000,000 1,039,864
Kimco Realty Corp. Senior Notes;
6.50%; 10/1/2003 1,500,000 1,465,956
2,505,820
Mortgage Bankers & Brokers (0.71%)
Countrywide Funding Corp.
Medium-Term Notes;
6.54%; 4/14/2000 1,000,000 1,011,842

Motion Picture Production &
Services (0.38%)
Viacom, Inc.
Guaranteed Senior Notes;
7.75%; 6/1/2005 500,000 541,852

Motor Vehicles & Equipment (2.04%)
Chrysler Corp. Debentures;
7.45%; 3/1/2027 1,400,000 1,535,401
General Motors Corp. Debentures;
7.70%; 4/15/2016 1,250,000 1,380,664
2,916,065
Paper & Paper Products (0.33%)
Boise Cascade Office Products Corp.
Notes; 7.05%; 5/15/2005 500,000 471,235

Paper Mills (0.71%)
International Paper Co. Notes;
6.88%; 7/10/2000 1,000,000 1,018,075

Personal Credit Institutions (1.47%)
Associates Corp. of North America
Senior Notes; 6.45%; 10/15/2001 1,000,000 1,026,550
General Electric Capital Corp.
Notes; 6.50%; 11/1/2026 1,000,000 1,065,532
2,092,082
Petroleum & Petroleum Products (0.74%)
Enron Corp. Notes;
6.75%; 9/1/2004 1,000,000 1,051,830

Plumbing & Heating, Except
Electricity (0.73%)
Masco Corp. Notes;
6.13%; 9/15/2003 1,000,000 1,037,319

Railroads (1.62%)
Norfolk Southern Debentures;
9.00%; 3/1/2021 1,000,000 1,282,295
Union Pacific Corp. Notes;
7.00%; 6/15/2000 1,000,000 1,023,642
2,305,937
Security Brokers & Dealers (2.18%)
Lehman Brothers, Inc.
Senior Subordinated Notes;
6.13%; 2/1/2001 1,000,000 989,724
Merrill Lynch & Co.
Notes; 7.00%; 1/15/2007 1,000,000 1,017,921
Morgan Stanley Group, Inc.
Debentures; 8.88%; 10/15/2001 1,000,000 1,095,804
3,103,449
Surety Insurance (2.10%)
Allstate Corp.
Debentures; 6.75%; 5/15/2018 2,000,000 1,961,674
MBIA, Inc.
Debentures; 7.00%; 12/15/2025 1,000,000 1,037,524
2,999,198
Telephone Communication (0.80%)
AT&T Corp.
Senior Notes; 7.75%; 3/1/2007 1,000,000 1,146,477

Trucking & Courier Services,
Except Air (0.04%)
Builders Transport, Inc. Convertible
Subordinated Debentures;
6.50%; 5/1/2011 306,000(b) 59,670

Trusts (0.79%)
Salomon Smith Barney Holdings, Inc.
Notes; 7.98%; 3/1/2000 1,100,000 1,131,938

Total Bonds 44,572,969

Description of Issue Principal
Type Rate Maturity Amount Value

Federal Home Loan Mortgage Corporation (FHLMC)
Certificates (2.63%)

FHLMC 6.50% 10/1/2027 $1,891,366 $1,906,535
FHLMC 7.00 12/1/2027 1,816,008 1,852,474

Total FHLMC Certificates 3,759,009

Government National Mortgage Association (GNMA)
Certificates (3.03%)

GNMA II 6.00 6/20/2026-9/20/2028 4,403,248 4,331,792

Principal
Amount Value

U.S. Government Treasury Note (1.53%)

Treasury Note (1.53%)
6.00%; 2/15/2026 $2,000,000 $ 2,184,376

Asset-Backed Securities (2.10%)

Motor Vehicles & Equipment (1.39%)
GMAC Commercial Mortgage Securities,
Inc. Mortgage Pass-Through Certificates,
Series 1998-C2, Class C; 6.50%;
8/15/2008 2,000,000 1,975,460

Personal Credit Institutions (0.72%)
Chase Manhattan Credit Card Master Trust
Asset-Backed Certificates, Series 97-2,
Class A; 6.30%; 4/15/2003 1,000,000 1,024,250

Total Asset-Backed Securities 2,999,710

Commercial Paper (3.59%)

Personal Credit Institutions (3.59%)
Investment in Joint Trade Account;
Associates Corp.;
5.72%; 11/2/1998 5,128,768 5,128,768

Total Portfolio Investments (98.18%) 140,184,928

Cash, receivables and other assets,
net of liabilities (1.82%) 2,592,739

Total Net Assets (100.00%) $142,777,677

(a) Non-income producing security - No dividend paid during the period.
(b) Non-income producing - Security in default.

PRINCIPAL BLUE CHIP FUND, INC.

Shares
Held Value
Common Stocks (96.06%)

Bakery Products (3.27%)
Sara Lee Corp. 106,200 $ 6,338,812

Beverages (5.55%)
Anheuser-Busch Cos., Inc. 111,300 6,615,394
Pepsico, Inc. 122,600 4,137,750
10,753,144
Commercial Banks (4.20%)
Bank One Corp. 85,419 4,174,854
J.P. Morgan & Co., Inc. 42,000 3,958,500
8,133,354
Computer & Office Equipment (6.08%)
Automatic Data Processing, Inc. 74,300 5,781,469
Hewlett-Packard Co. 99,700 6,000,694
11,782,163
Drugs (12.10%)
American Home Products Corp. 111,100 5,416,125
Johnson & Johnson 74,800 6,096,200
Merck & Co., Inc. 44,800 6,059,200
Pharmacia & Upjohn, Inc. 111,000 5,876,063
23,447,588
Eating & Drinking Places (3.04%)
McDonald's Corp. 88,000 5,885,000
Electronic Distribution Equipment (5.52%)
Emerson Electric Co. 77,300 5,101,800
General Electric Co. 64,000 5,600,000
10,701,800
Fire, Marine & Casualty Insurance (4.91%)
American International Group 57,375 4,891,219
Chubb Corp. 75,300 4,630,950
9,522,169
General Industrial Machinery (3.01%)
Pall Corp. 231,200 5,837,800

Grain Mill Products (2.36%)
Kellogg Co. 138,500 4,570,500

Grocery Stores (3.31%)
Sysco Corp. 238,200 6,416,512

Medical Instruments & Supplies (3.16%)
Becton, Dickinson & Co. 145,200 6,116,550

Metal Cans & Shipping Containers (2.39%)
Crown Cork & Seal Co., Inc. 145,400 4,634,625

Miscellaneous Converted Paper
Products (2.20%)
Minnesota Mining & Mfg. Co. 53,400 4,272,000

Miscellaneous Food & Kindered
Products (2.70%)
Bestfoods 96,000 5,232,000

Miscellaneous Shopping Goods (1.90%)
Toys `R' Us, Inc. 188,700(a) 3,691,444

Petroleum Refining (7.75%)
Exxon Corp. 83,100 5,920,875
Mobil Corp. 63,000 4,768,312
Royal Dutch Petroleum Co. ADR 88,100 4,338,925
15,028,112
Preserved Fruits & Vegetables (2.54%)
H.J. Heinz Co. 84,900 4,934,812

Sanitary Services (2.51%)
Browning-Ferris Industries, Inc. 137,100 4,858,481

Sugar & Confectionery Products (2.95%)
Wrigley Wm. Jr. Co. 70,600 5,714,187

Telephone Communication (8.89%)
AT&T Corp. 90,300 5,621,175
GTE Corp. 112,900 6,625,819
Motorola, Inc. 95,800 4,981,600
17,228,594
Variety Stores (3.59%)
Wal-Mart Stores, Inc. 100,800 6,955,200

Women's Clothing Stores (2.13%)
The Limited, Inc. 161,100 4,128,188

Total Common Stocks 186,183,035

Principal
Amount Value
Commercial Paper (3.50%)

Personal Credit Institutions (3.50%)
Investment in Joint Trade Account;
Associates Corp.; 5.72%; 11/2/1998 6,792,570 6,792,570

Total Portfolio Investments (99.56%) 192,975,605

Cash, receivables and other assets,
net of liabilities (0.44%) 858,926

Total Net Assets (100.00%) $193,834,531

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL CAPITAL VALUE FUND, INC.
Shares
Held Value
Common Stocks (95.46%)

Beverages (3.29%)
Anheuser-Busch Cos., Inc. 285,000 16,939,688
Pepsico, Inc. 129,700 4,377,375
21,317,063
Commercial Banks (18.75%)
Bank One Corp. 324,764 15,872,840
BankAmerica Corp. 161,000 9,247,438
BankBoston Corp. 201,400 7,414,038
Chase Manhattan Corp. 200,000 11,362,500
Comerica, Inc. 270,000 17,415,000
First Union Corp. 320,760 18,604,080
KeyCorp 459,000 13,913,437
Summit Bancorp 364,500 13,828,219
Union Planters Corp. 296,100 13,750,144
121,407,696
Commercial Printing (1.03%)
R. R. Donnelley & Sons Co. 155,000 6,684,375

Communications Equipment (2.10%)
Harris Corp. 386,900 13,565,681

Computer & Office Equipment (1.60%)
Hewlett-Packard Co. 82,000 4,935,375
International Business Machines Corp. 36,600 5,432,813
10,368,188
Crude Petroleum & Natural Gas (1.75%)
Texaco, Inc. 190,600 11,304,962

Department Stores (2.24%)
Sears, Roebuck & Co. 322,300 14,483,356

Drugs (7.29%)
Abbott Labs 94,800 4,449,675
American Home Products Corp. 231,300 11,275,875
Merck & Co., Inc. 85,000 11,496,250
Pharmacia & Upjohn, Inc. 378,000 20,010,375
47,232,175
Electric Services (4.51%)
Dominion Resources, Inc. 98,200 4,535,612
FPL Group, Inc. 85,100 5,324,069
Houston Industries, Inc. 530,000 16,463,125
Potomac Electric Power Co. 110,000 2,880,625
29,203,431
Electrical Industrial Apparatus (1.24%)
Emerson Electric Co. 121,394 8,012,004

Electronic Distribution Equipment (1.09%)
General Electric Co. 81,000 7,087,500

Fats & Oils (1.06%)
Archer Daniels Midland Co. 410,550 6,851,053

General Industrial Machinery (1.28%)
Pall Corp. 329,300 8,314,825
Tyco International Ltd. 7 424
8,315,249
Grain Mill Products (2.35%)
Kellogg Co. 264,800 8,738,400
Ralston-Ralston Purina Group 195,000 6,508,125
15,246,525
Greeting Cards (2.29%)
American Greetings Corp. 369,100 14,810,137

Groceries & Related Products (1.75%)
Sysco Corp. 421,000 11,340,687

Grocery Stores (1.41%)
American Stores Co. 280,000 9,117,500

Life Insurance (2.31%)
American General Corp. 218,600 14,974,100

Machinery, Equipment & Supplies (1.28%)
Grainger (W. W.), Inc. 180,600 8,318,888

Management & Public Relations (1.19%)
Dun & Bradstreet Corp. 270,600 7,678,275

Meat Products (1.17%)
Tyson Foods, Inc. 329,550 7,579,650

Medical Services & Health
Insurance (1.07%)
Aon Corp. 111,900 6,937,800

Metal Cans & Shipping Containers (4.03%)
Ball Corp. 251,000 10,589,063
Crown Cork & Seal Co., Inc. 485,600 15,478,500
26,067,563
Metal Forgings & Stampings (0.68%)
Newell Co. 100,200 4,408,800

Miscellaneous Converted Paper
Products (3.94%)
Avery Dennison Corp. 301,600 12,497,550
Minnesota Mining & Mfg. Co. 162,600 13,008,000
25,505,550
Miscellaneous Food & Kindred
Products (0.32%)
Universal Foods Corp. 96,600 2,095,013

Paper Mills (2.54%)
Kimberly Clark Corp. 341,200 16,462,900

Petroleum Refining (6.39%)
Amoco Corp. 70,000 3,928,750
Atlantic Richfield Co. 204,600 14,091,825
Chevron Corp. 190,000 15,485,000
Exxon Corp. 110,100 7,844,625
41,350,200
Plumbing & Heating, Except
Electrical (2.80%)
Masco Corp. 643,000 18,124,562

Rental of Railroad Cars (2.56%)
GATX Corp. 480,000 16,560,000

Sanitary Services (2.30%)
Browning-Ferris Industries, Inc. 420,000 14,883,750

Telephone Communication (7.85%)
AT&T Corp. 245,500 15,282,375
SBC Communications, Inc. 395,280 18,306,405
US West, Inc. 300,000 17,212,500
50,801,280

Total Common Stocks 618,095,913

Principal
Amount Value

Commercial Paper (3.81%)

Personal Credit Institutions (3.81%)
Investment in Joint Trade Account,
Associates Corp.; 5.72%; 11/2/1998 24,691,459 24,691,459

Total Portfolio Investments (99.27%) 642,787,372

Cash and receivables, net of liabilities (0.73%) 4,704,835

Total Net Assets (100.00%) $647,492,207

PRINCIPAL GROWTH FUND, INC.

Shares
Held Value
Common Stocks (88.88%)

Advertising (1.19%)
Interpublic Group of Cos., Inc. 100,000 5,850,000

Beverages (2.90%)
Coca-Cola Co. 60,000 4,057,500
Pepsico, Inc. 302,500 10,209,375
14,266,875
Carpets & Rugs (0.71%)
Shaw Industries, Inc. 200,000 3,475,000

Cash Grains (1.71%)
Pioneer Hi-Bred International, Inc. 300,000 8,400,000

Commercial Banks (8.37%)
Bank One Corp. 178,500 8,724,188
BankAmerica Corp. 71,644 4,115,052
Firstar Corp. 150,000 8,512,500
FirstMerit Corp. 100,000 2,650,000
National City Corp. 72,000 4,630,500
Norwest Corp. 100,000 3,718,750
US Bancorp 240,000 8,760,000
41,110,990

Communications Equipment (3.69%)
General Instrument Corp. 175,000(a) 4,495,312
Lucent Technologies 90,000 7,216,875
Northern Telecom Ltd. (Foreign) 150,000 6,421,875
18,134,062
Computer & Data Processing
Services (2.58%)
Gtech Holdings Corp. 139,300(a) 3,343,200
Microsoft Corp. 88,000(a) 9,317,000
12,660,200
Computer & Office Equipment (5.56%)
Automatic Data Processing, Inc. 100,000 7,781,250
Ceridian Corp. 172,800(a) 9,914,400
Compaq Computer Corp. 67,567 2,136,806
Hewlett-Packard Co. 79,100 4,760,831
Pitney Bowes, Inc. 49,400 2,720,088
27,313,375
Consumer Products (1.32%)
Philip Morris Cos., Inc. 127,200 6,503,100
Department Stores (0.81%)
May Department Stores 65,000 3,965,000
Drugs (14.75%)
American Home Products Corp. 185,200 9,028,500
Bristol-Myers Squibb Co. 50,000 5,528,125
Forest Laboratories, Inc. 132,600(a) 5,544,338
Genzyme Corp. - General Division 100,756(a) 4,238,049
Johnson & Johnson 128,000 10,432,000
Lilly (Eli) & Co. 100,000 8,093,750
Merck & Co., Inc. 75,800 10,251,950
Pharmacia & Upjohn, Inc. 220,000 11,646,250
Smithkline Beecham PLC ADR 120,000 7,650,000
72,412,962
Electrical Goods (0.30%)
Avnet, Inc. 30,000 1,492,500
Electronic Components &
Accessories (3.49%)
Intel Corp. 132,000 11,772,750
Linear Technology Corp. 90,000 5,366,250
17,139,000
Electronic Distribution Equipment (0.71%)
General Electric Co. 40,000 3,500,000
Federal & Federally Sponsored
Credit (3.13%)
Federal Home Loan Mtg. 65,700 3,777,750
Federal National Mortgage
Association 163,600 11,584,925
15,362,675
Fire, Marine & Casualty Insurance (1.14%)
Citigroup, Inc. 118,650 5,583,966
Forest Products (0.09%)
Georgia Timber Group 20,000 443,750
General Industrial Machinery (3.72%)
Ingersoll-Rand Co. 105,000 5,302,500
Tyco International Ltd. 209,400 12,969,712
18,272,212
Grain Mill Products (2.89%)
General Mills, Inc. 50,000 3,675,000
Ralston-Ralston Purina Group 315,000 10,513,125
14,188,125
Groceries & Related Products (1.44%)
Sysco Corp. 262,800 7,079,175
Grocery Stores (0.12%)
Casey's General Stores, Inc. 42,104 589,456
Hospitals (1.92%)
Humana, Inc. 105,000(a) 1,988,437
Universal Health Services, Inc. 145,400(a) 7,460,838
9,449,275
Investment Offices (0.89%)
AMVESCAP PLC Sponsored ADR 120,000 4,395,000
Lumber & Other Building Materials (2.66%)
Home Depot, Inc. 300,000 13,050,000
Medical Instruments & Supplies (2.86%)
Becton, Dickinson & Co. 140,000 5,897,500
Boston Scientific Corp. 150,000(a) 8,165,625
14,063,125
Medical Services & Health
Insurance (2.60%)
Aon Corp. 60,000 3,720,000
Foundation Health Systems, Inc. 147,500(a) 1,733,125
Pacificare Health Systems, Inc. 28,540(a) 2,247,525
Torchmark Corp. 56,700 2,480,625
United Healthcare Corp. 60,000 2,613,750
12,795,025
Miscellaneous Converted Paper
Products (0.51%)
Minnesota Mining & Mfg. Co. 31,400 2,512,000
Miscellaneous Fabricated Metal
Products (0.75%)
Parker-Hannifin Corp. 103,350 3,694,763
Miscellaneous Food & Kindred
Products (0.55%)
Bestfoods 50,000 2,725,000
Motor Vehicles & Equipment (0.83%)
Dana Corp. 98,000 4,097,625
Petroleum Refining (2.05%)
Atlantic Richfield Co. 40,000 2,755,000
Exxon Corp. 102,600 7,310,250
10,065,250
Plumbing & Heating, Except
Electric (0.92%)
Masco Corp. 160,000 4,510,000
Radio, Television, & Computer
Stores (0.20%)
Tandy Corp. 20,000 991,250
Refrigeration & Service Machinery (0.42%)
Tecumseh Products Co. 40,000 2,080,000
Sanitary Services (1.07%)
Browning-Ferris Industries, Inc. 80,000 2,835,000
Waste Management, Inc. 53,945 2,434,268
5,269,268
Soap, Cleaners & Toilet Goods (3.06%)
Colgate-Palmolive Co. 80,000 7,070,000
Ecolab, Inc. 266,400 7,958,700
15,028,700
Sugar & Confectionery Products (0.91%)
Wrigley Wm. Jr. Co. 55,000 4,451,563
Telephone Communication (4.20%)
AT&T Corp. 103,730 6,457,193
MCI Worldcom, Inc. 256,829(a) 14,189,802
20,646,995
Toys & Sporting Goods (0.90%)
Mattel, Inc. 123,046 4,414,275
Women's & Children's
Undergarments (0.96%)
Warnaco Group 185,200 4,734,175

Total Common Stocks 436,715,712

Principal
Amount Value
Bond (0.50%)

Electrical Industrial Apparatus (0.50%)
Liebert Co.; Convertible Subordinated
Debentures; 8.00%; 11/15/2010 $ 500,000 $ 2,443,750

Commercial Paper (12.49%)

Business Credit Institutions (6.45%)
American Express Credit Corp.;
5.10%; 11/9/1998 5,190,000 5,184,118
5.10%; 11/16/1998 13,740,000 13,710,802
General Electric Capital Corp.
5.27%; 11/9/1998 9,955,000 9,943,342
5.08%; 11/16/1998 2,840,000 2,833,989
31,672,251
Personal Credit Institutions (6.04%)
Ford Motor Credit Co.
5.04%; 11/2/1998 485,000 484,932
5.28%; 11/2/1998 13,150,000 13,148,082

Household Finance Corp.
5.28%; 11/9/1998 490,000 489,425
5.10%; 11/23/1998 15,600,000 15,551,380
Investment in Joint Trade Account;
Associates Corp.;
5.72%; 11/2/1998 18,201 18,201
29,692,020

Total Commercial Paper 61,364,271

Total Portfolio Investments (101.87%) 500,523,733

Liabilities, net of cash, receivables and
other assets (-1.87%) $(9,203,584)

Total Net Assets (100.00%) $491,320,149

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL MIDCAP FUND, INC.
Shares
Held Value
Common Stocks (88.53%)

Blast Furnace & Basic Steel
Products (1.24%)
Carpenter Technology 150,000 $ 5,259,375

Carpets & Rugs (0.81%)
Shaw Industries, Inc. 198,700 3,452,412

Chemicals & Allied Products (0.29%)
Sigma-Aldrich Corp. 40,400 1,248,613

Commercial Banks (9.53%)
Associated Banc Corp. 167,535 5,884,667
First Federal Capital Corp. 328,796 5,014,139
Independent Bank Corp. Michigan 104,265 2,111,366
Mercantile Bancorp, Inc. 195,529 8,933,231
Merchants Bancorp, Inc. 116,200 3,486,000
North Fork Bancorp, Inc. 362,187 7,198,467
Peoples Heritage Financial
Group, Inc. 197,800 3,560,400
Princeton National Bancorp, Inc. 150,000 2,531,250
Summit Bancorp 46,950 1,781,166
40,500,686
Commercial Printing (0.34%)
Merrill Corp. 87,200 1,460,600

Computer & Data Processing
Services (9.19%)
American Management Systems, Inc. 101,000(a) 3,099,438
Cadence Design Systems, Inc. 177,700(a) 3,798,337
Cerner Corp. 238,900(a) 5,345,387
HBO & Co. 276,000 7,245,000
ICG Communications, Inc. 129,000(a) 2,668,688
Microsoft Corp. 73,200(a) 7,750,050
Synopsys, Inc. 201,900(a) 9,135,975
39,042,875
Computer & Office Equipment (3.58%)
3COM Corp. 150,000(a) 5,409,375
Cabletron Systems, Inc. 102,000(a) 1,160,250
EMC Corp. 134,000(a) 8,626,250
15,195,875
Construction & Related Machinery (0.61%)
Cooper Cameron Corp. 75,000(a) 2,606,250

Crude Petroleum & Natural Gas (2.46%)
Devon Energy Corp. 165,000 5,589,375
Newfield Exploration Co. 200,000(a) 4,862,500
10,451,875
Dairy Products (0.20%)
Dreyer's Grand Ice Cream, Inc. 65,400 858,375

Department Stores (1.24%)
Saks, Inc. 232,060(a) 5,279,365

Drugs (5.80%)
Centocor, Inc. 140,700(a) 6,261,150
Dura Pharmaceuticals, Inc. 282,000(a) 3,401,625
Genzyme Corp. - General Division 83,000(a) 3,491,187
Pharmacia & Upjohn, Inc. 75,700 4,007,369
Watson Pharmaceuticals 134,000(a) 7,453,750
24,615,081
Electronic Components &
Accessories (6.22%)
Altera Corp. 125,000(a) 5,203,125
Intel Corp. 70,300 6,269,881
Linear Technology Corp. 99,900 5,956,538
Solectron Corp. 157,300(a) 9,005,425
26,434,969
Engineering & Architectural
Services (1.15%)
Paychex, Inc. 98,043 4,877,639

Fabricated Rubber Products, NEC (2.02%)
Weatherford International 314,800 8,558,625

Fire, Marine & Casualty Insurance (0.94%)
Berkley W.R. Corp. 132,750 4,003,242

General Industrial Machinery (4.14%)
Flow International Corp. 187,200(a) 1,965,600
Kaydon Corp. 181,600 6,378,700
Pentair, Inc. 137,500 5,173,438
Roper Industries, Inc. 228,000 4,061,250
17,578,988
Grocery Stores (0.93%)
Casey's General Stores, Inc. 282,800 3,959,200

Holding Offices (0.64%)
ISB Financial Corp. 109,100 2,713,863

Hospitals (2.49%)
Humana, Inc. 249,300(a) 4,721,119
Universal Health Services,
Inc., Class B 114,000(a) 5,849,625
10,570,744
Hotels & Motels (0.88%)
Four Seasons Hotel, Inc. 163,100 3,751,300

Household Appliances (1.65%)
Maytag Corp. 141,300 6,985,519

Industrial Inorganic Chemicals (0.37%)
ICN Pharmaceuticals, Inc. 67,821 1,585,316

Industrial Machinery, NEC (1.58%)
Coltec Industries 401,000(a) 6,691,687

Insurance Agents, Brokers &
Services (1.82%)
Equifax, Inc. 200,000 7,737,500

Investment Offices (1.20%)
AMVESCAP PLC Sponsored ADR 138,920 5,087,945

Iron & Steel Foundries (0.25%)
Atchison Casting Corp. 111,100(a) 1,062,394

Laundry, Cleaning & Garment
Services (0.91%)
G&K Services, Inc. 84,600 3,870,450

Measuring & Controlling Devices (0.00%)
ISCO, Inc. 1 2

Meat Products (1.07%)
Michael Foods, Inc. 188,500 4,524,000

Medical Instruments & Supplies (2.24%)
Boston Scientific Corp. 68,100(a) 3,707,194
Steris Corp. 252,600(a) 5,809,800
9,516,994
Medical Services & Health
Insurance (4.65%)
Alternative Living Services 234,200(a) 6,118,475
Foundation Health Systems,
Inc., Class A 332,340(a) 3,904,995
Orthofix International NV 156,200(a) 1,991,550
Pacificare Health Systems,
Inc., Class B 51,391 4,047,041
United Healthcare Corp. 85,000 3,702,813
19,764,874
Miscellaneous Chemical Products (0.87%)
Cytec Industries 72,600(a) 1,742,400
H.B. Fuller Co. 47,500 1,953,437
3,695,837
Miscellaneous Investing (0.35%)
Cendant Corp. 129,938(a) 1,486,166

Office Furniture (0.55%)
Chromcraft Revington, Inc. 142,800(a) 2,311,575

Oil & Gas Field Service (1.08%)
Diamond Offshore Drilling 150,000 4,603,125

Operative Builders (1.41%)
D. R. Horton, Inc. 294,500 4,675,187
Pulte Corp. 50,400 1,297,800
5,972,987
Paints & Allied Products (0.79%)
RPM, Inc. 200,500 3,370,906

Personal Credit Institutions (0.16%)
Firstplus Financial Group 152,000(a) 674,500

Plumbing, Heating &
Air Conditioning (0.85%)
Apogee Enterprises, Inc. 343,700 3,608,850

Refrigeration & Service Machinery (0.31%)
Tecumseh Products Co. 25,200 1,310,400

Sanitary Services (1.75%)
Browning-Ferris Industries, Inc. 86,200 3,054,713
Republic Services, Inc., Class A 200,000(a) 4,375,000
7,429,713
Savings Institutions (4.86%)
Greenpoint Financial Corp. 190,000 6,234,375
Sterling Financial Corp. 124,133(a) 2,032,678
TCF Financial Corp. 333,100 7,848,669
WSFS Financial Corp. 265,000 4,538,125
20,653,847
Security Brokers & Dealers (0.75%)
Jefferies Group, Inc. 106,400 3,192,000

Telephone Communication (2.83%)
Hyperion Telecomm, Inc., Class A 300,000(a) 2,925,000
McLeodUSA, Inc. 171,300(a) 6,263,156
Winstar Communications, Inc. 105,000 2,835,000
12,023,156
Toys & Sporting Goods (0.66%)
Mattel, Inc. 78,050 2,800,044

Trucking & Courier Services,
Except Air (0.43%)
J.B. Hunt Transport Services, Inc. 109,900 1,840,825

Women's And Children's
Undergarments (0.44%)
Warnaco Group, Class A 73,612 1,881,707

Total Common Stocks 376,102,269

Principal
Amount Value
Bond (0.01%)

Management & Public Relations (0.01%)
Complete Management, Inc.
Convertible Debentures;
8.00%; 12/15/2003 $ 200,000 $ 39,750

Commercial Paper (12.43%)

Business Credit Institutions (2.22%)
American Express Credit Corp.;
5.10%;11/9/1998 5,365,000 5,358,920
General Electric Capital Corp.;
5.10%; 11/2/1998 1,915,000 1,914,729
5.45%; 11/6/1998 700,000 699,470
5.22%; 11/9/1998 555,000 554,356
5.08%; 11/16/1998 925,000 923,030
9,450,505
Personal Credit Institutions (10.21%)
Investment in Joint Trade Account;
Associates Corp.;
5.73%; 11/02/1998 $18,845,800 $18,845,800
Ford Motor Credit Co.;
5.28%; 11/02/1998 7,940,000 7,938,844
Household Finance Corp.;
5.09%; 11/16/1998 4,110,000 4,101,284
5.10%; 11/23/1998 12,520,000 12,480,979
43,366,907

Total Commercial Paper 52,817,412

Total Portfolio Investments (100.97%) 428,959,431

Liabilities, net of cash, receivables and
other assets (-0.97%) (4,119,592)

Total Net Assets (100.00%) $424,839,839

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL REAL ESTATE FUND, INC.
Shares
Held Value
Common Stocks (96.45%)

Apartment REITs (21.77%)
Archstone Comm. Trust 17,400 $ 350,175
Apartment Investment & Management Co. 4,300 150,231
Avalonbay Communities, Inc. 9,987 320,832
BRE Properties, Inc. 9,400 226,775
Camden Property Trust 9,900 266,063
Equity Residential Properties Trust 8,000 336,000
Gables Residential Trust 10,500 276,281
Irvine Apartment Communities, Inc. 12,200 320,250
Walden Residential Properties, Inc. 11,500 265,219
2,511,826
Factory Outlet REITs (1.49%)
Chelsea GCA Realty 5,000 171,875

Hotel REITs (9.62%)
Felcor Lodging Trust 7,600 179,075
Host Marriott Corp. 24,300(a) 352,350
Meristar Hospitality Corp. 19,500 360,750
Sunstone Hotel Investors, Inc. 24,000 217,500
1,109,675
Mall REITs (12.69%)
CBL & Associates Properties, Inc. 11,500 299,719
General Growth Properties 6,500 231,156
Rouse Co. 9,500 266,594
Simon Property Group, Inc. 13,000 389,187
Taubman Centers, Inc. 20,300 277,856
1,464,512
Manufactured Housing REITs (2.75%)
Manufactured Home Communities, Inc. 6,000 $ 149,625
Sun Communities, Inc. 5,000 167,188
316,813
Mortgage, Mixed Use & Miscellaneous
REITs (6.00%)
Bradley Real Estate, Inc. 22,700 476,700
Eastgroup Properties, Inc. 11,300 215,406
692,106
Net Lease REITs (2.72%)
Trinet Corporate Realty Trust, Inc. 10,900 313,375

Office & Industrial REITs (31.55%)
Prologis Trust 10,900 237,756
Arden Realty Group, Inc. 6,900 149,213
Cabot Industrial Trust 24,600 492,000
Carramerica Realty Corp. 18,400 414,000
Cornerstone Properties 13,000 201,500
Duke Realty Investments, Inc. 12,300 293,663
Equity Office Properties Trust 8,500 204,000
First Industrial Realty Trust, Inc. 17,000 435,624
Highwoods Properties, Inc. 11,000 307,312
Kilroy Realty Corp. 10,900 241,844
Liberty Property Trust 9,000 207,000
Mack-Cali Realty Corp. 6,700 198,488
Spieker Properties, Inc. 7,500 258,750
3,641,150
Self Storage REITs (2.88%)
Storage USA 10,900 331,769

Shopping Center REITs (4.98%)
Burnham Pacific Properties, Inc. 16,200 212,625
Federal Realty Investment Trust 16,000 362,000
574,625

Total Common Stocks 11,127,726

Principal
Amount Value
Commercial Paper (3.53%)

Federal & Federally Sponsored
Credit (3.53%)
Investment in Joint Trade Account;
Federal National Mortgage
Association; 5.45%; 11/2/1998 $407,686 $ 407,809

Total Portfolio Investments (99.98%) 11,535,535

Cash & receivables, net of liabilities (0.02%) 2,202

Total Net Assets (100.00%) $11,537,737

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL SMALLCAP FUND, INC.
Shares
Held Value
Common Stocks (91.84%)

Blast Furnace & Basic Steel
Products (1.05%)
Carpenter Technology Corp. 8,900 $ 312,056

Commercial Banks (3.16%)
Associated Banc-Corp. 9,925 348,616
First Federal Capital Corp. 22,500 343,125
Valley National Bancorp 9,200 248,400
940,141
Commercial Printing (0.66%)
World Color Press, Inc. 6,450(a) 195,919

Communications Equipment (5.65%)
DSP Communications, Inc. 60,700(a) 595,619
Reltec Corp. 20,000(a) 430,000
Sawtek, Inc. 25,100(a) 506,706
Spectrian Corp. 14,100(a) 150,694
1,683,019
Communications Services, NEC (1.06%)
Smartalk Teleservices, Inc. 13,000(a) 75,562
World Access, Inc. 11,250(a) 240,469
316,031
Computer & Data Processing
Services (7.02%)
Advanced Communications System, Inc. 17,950(a) 175,013
Barra, Inc. 8,950(a) 236,056
Cotelligent, Inc. 21,000(a) 396,375
Gtech Holdings Corp. 8,250(a) 198,000
Hypercom Corp. 22,500(a) 213,750
ICG Communications, Inc. 13,100(a) 271,006
SPSS, Inc. 9,200(a) 175,950
Structural Dynamics Research Corp. 10,000(a) 143,750
Synopsys, Inc. 6,200(a) 280,550
2,090,450
Computer & Office Equipment (1.10%)
Smart Modular Technologies, Inc. 15,650(a) 328,650

Construction & Related Machinery (1.31%)
JLG Industries, Inc. 23,500 389,219

Crude Petroleum & Natural Gas (1.49%)
Forcenergy, Inc. 14,250(a) 84,609
Nuevo Energy Co. 16,900(a) 358,069
442,678
Drugs (4.55%)
Chirex, Inc. 16,100(a) 245,525
Dura Pharmaceuticals, Inc. 16,500(a) 199,031
Inhale Therapeutic Systems, Inc. 11,950(a) 313,688
Liposome Co., Inc. 60,000(a) 375,000
Matritech, Inc. 90,900(a) 221,569
1,354,813
Eating & Drinking Places (1.74%)
CEC Entertainment, Inc. 9,800(a) 276,850
Ruby Tuesday, Inc. 14,200 239,625
516,475
Electric Services (1.29%)
TNP Enterprises, Inc. 11,400 $ 384,750

Electronic Components &
Accessories (6.06%)
DII Group, Inc. 21,050(a) 309,172
Flextronics International, Ltd. 11,250(a) 584,297
Jabil Circuit, Inc. 7,950(a) 368,184
Microchip Technology, Inc. 9,100(a) 246,269
Sanmina Corp. 7,200(a) 295,200
1,803,122
Fabricated Structural Metal
Products (1.26%)
Aavid Thermal Technologies, Inc. 25,000(a) 375,000

Family Clothing Stores (0.65%)
Pacific Sunwear of California, Inc. 9,000(a) 194,625

Fire, Marine & Casualty Insurance (2.24%)
Berkley W.R. Corp. 10,600 319,656
HCC Insurance Holdings, Inc. 19,300 346,194
665,850
Footwear, Except Rubber (1.27%)
Wolverine World Wide, Inc. 28,900 377,506

Furniture & Home Furnishing
Stores (0.92%)
Cost Plus, Inc. 9,100(a) 273,000

General Industrial Machinery (1.43%)
General Scanning, Inc. 16,750(a) 92,125
Regal-Beloit Corp. 15,800 332,787
424,912
Grain Mill Products (1.27%)
Ralcorp Holdings, Inc. 21,500(a) 378,938

Hotels & Motels (0.91%)
Four Seasons Hotel, Inc. 8,000 184,000
Servico, Inc. 17,950(a) 87,506
271,506
Industrial Machinery, NEC (0.43%)
Industrial Distribution Group, Inc. 17,750(a) 128,688

Industrial Organic Chemicals (0.62%)
CFC International, Inc. 21,450(a) 185,006

Lumber & Other Building Materials (1.13%)
Eagle Hardware & Garden, Inc. 14,500(a) 337,125

Measuring & Controlling Devices (3.24%)
Cytyc Corporation 24,050(a) 402,837
Integrated Measurement Systems, Inc. 24,300(a) 182,250
Quickturn Design Systems, Inc. 34,500(a) 379,500
964,587
Medical Instruments & Supplies (3.63%)
ADAC Laboratories 16,500(a) 488,813
Focal, Inc. 26,850(a) 258,431
Hologic, Inc. 24,400 333,975
1,081,219
Men's & Boys' Clothing Stores (2.05%)
Abercrombie & Fitch Co. 8,000(a) $ 317,500
Hot Topic, Inc. 15,600(a) 292,500
610,000
Men's & Boys' Furnishings (0.72%)
Nautica Enterprises, Inc. 10,350(a) 214,116

Metal Forgings & Stampings (1.26%)
Varlen Corp. 12,600 376,425

Metal Services, NEC (1.20%)
BMC Industries, Inc. 49,700 357,219

Miscellaneous Apparel & Accessory
Stores (2.06%)
Pier 1 Imports, Inc. 28,000 259,000
The Buckle, Inc. 19,600(a) 355,250
614,250
Miscellaneous Chemical Products (1.18%)
H.B. Fuller Co. 8,500 349,562

Miscellaneous Converted Products (1.49%)
Shorewood Packaging Corp. 27,675(a) 442,800

Miscellaneous Electrical Equipment &
Supplies (0.69%)
Motorcar Parts & Accessories 16,550(a) 206,875

Miscellaneous Equipment Rental &
Leasing (0.43%)
T & W Financial Corp. 11,000(a) 129,250

Miscellaneous Fabricated Metal
Products (1.13%)
Watts Industries, Inc. 18,300 336,262

Miscellaneous Manufacturers (1.09%)
Russ Berrie & Co. 16,500 325,875

Miscellaneous Shopping Goods
Stores (0.68%)
Zale Corp. 8,600(a) 203,713

Miscellaneous Textile Goods (1.06%)
Kellwood Co. 11,600 316,100

Motor Vehicles & Equipment (1.03%)
United Auto Group, Inc. 22,300(a) 306,625

Non-Store Retailers (0.93%)
USA Floral Products, Inc. 30,450(a) 277,856

Office Furniture (2.42%)
Chromcraft Revington, Inc. 22,100(a) 357,744
Kimball International, Inc., Class B 19,600 363,212
720,956
Oil & Gas Field Services (0.76%)
Marine Drilling Co., Inc. 20,250(a) 226,547

Personal Credit Institutions (0.10%)
Firstplus Financial Group, Inc. 6,450(a) 28,622

Personnel Supply Services (0.80%)
Remedytemp, Inc. 13,000(a) 237,250

Petroleum Refining (0.95%)
IRI International Corp. 52,000(a) 282,750

Photographic Equipment &
Supplies (0.87%)
Imax Corp. 10,100(a) 258,812

Plumbing, Heating & Air
Conditioning (0.96%)
Apogee Enterprises, Inc. 27,200 285,600

Public Building & Related
Furniture (0.34%)
BE Aerospace Inc. 4,700(a) 101,050

Rubber & Plastics Footwear (0.62%)
Vans, Inc. 22,200(a) 183,150

Savings Institutions (1.15%)
Community First Bankshares, Inc. 17,200 341,850

Security Brokers & Dealers (1.24%)
Jefferies Group, Inc. 12,300 369,000

Soap, Cleaners & Toilet Goods (1.86%)
Carter-Wallace Inc. 20,900 370,975
Digene Corp. 30,550(a) 183,300
554,275
Surety Insurance (1.85%)
CMAC Investment Corp. 6,600 276,375
Enhance Financial Services Group, Inc. 11,200 275,100
551,475
Telephone Communication (3.10%)
Audiovox Corp., Class A 88,900(a) 488,950
Intermedia Communications, Inc. 9,000(a) 166,500
Winstar Communications, Inc. 9,900(a) 267,300
922,750
Women's Clothing Stores (2.68%)
St. John Knits, Inc. 11,450 231,147
Wet Seal, Inc., Class A 26,900(a) 568,262
799,409

Total Common Stocks 27,345,709

Principal
Amount Value
Commercial Paper (7.64%)

Federal & Federally Sponsored
Credit (7.64%)
Investment in Joint Trade Account;
Federal National Mortgage
Association; 5.45%; 11/2/1998 $2,274,742 $2,274,398

Total Portfolio Investments (99.48%) 29,620,107

Cash, receivables and other assets,
net of liabilities (0.52%) 156,336

Total Net Assets (100.00%) $29,776,443

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL UTILITIES FUND, INC.
Shares
Held Value
Common Stocks (96.40%)

Combination Utility Services (22.22%)
Baltimore Gas & Electric Co. 82,500 $2,588,438
Cilcorp, Inc. 15,100 777,650
Citizens Utilities 334,483 3,010,347
L G & E Energy Corp. 45,400 1,197,425
Montana Power Co. 47,800 2,070,338
Nipsco Industries, Inc. 83,200 2,490,800
Pacificorp 107,600 2,051,125
Scana Corp. 85,600 2,894,350
Utilicorp United, Inc. 69,000 2,479,687
Washington Water Power Co. 40,500 761,906
Wisconsin Energy Corp. 54,300 1,662,937
21,985,003
Electric Services (36.12%)
Allegheny Energy 86,000 2,644,500
Carolina Power & Light Co. 50,300 2,307,513
Dominion Resources, Inc. 46,300 2,138,481
Duke Energy Corp. 42,700 2,762,156
Edison International 109,400 2,885,425
Enron Corp. 58,680 3,095,370
FPL Group, Inc. 37,600 2,352,350
GPU, Inc. 62,400 2,691,000
Houston Industries, Inc. 94,900 2,947,831
Ipalco Enterprises, Inc. 10,000 458,750
MidAmerican Energy Holdings 56,800 1,476,800
Pinnacle West Capital Corp. 59,700 2,615,606
Southern Co. 85,800 2,418,488
Teco Energy, Inc. 90,500 2,500,062
Texas Utilities Holdings 55,600 2,432,500
35,726,832
Gas Production & Distribution (3.52%)
AGL Resources, Inc. 54,400 1,139,000
New Jersey Resources Corp. 38,700 1,487,531
Peoples Energy Corp. 23,300 859,188
3,485,719
Telephone Communication (34.54%)
Ameritech Corp. 96,600 $5,210,362
AT&T Corp. 46,900 2,919,525
Bell Atlantic Corp. 73,600 3,910,000
BellSouth Corp. 59,500 4,748,844
GTE Corp. 52,900 3,104,569
MCI Worldcom, Inc. 81,724 4,515,251
RCN Corp. 81,000(a) 1,303,594
Sprint Corp. 53,400 4,098,450
US West, Inc. 76,000 4,360,500
34,171,095

Total Common Stocks 95,368,649

Principal
Amount Value
Commercial Paper (3.18%)

Personal Credit Institutions (3.18%)
Investment in Joint Trade Account;
Associates Corp.;
5.72%; 11/2/1998 $3,142,524 $3,142,524

Total Portfolio Investments (99.58%) 98,511,173

Cash, receivables and other assets,
net of liabilities (0.42%) 417,622

Total Net Assets (100.00%) $98,928,795

(a) Non-income producing security - No dividend paid during the period.

FINANCIAL HIGHLIGHTS

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>

PRINCIPAL BALANCED FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $15.11 $14.61 $13.74 $12.43 $13.26
Income from Investment Operations:
Net Investment Income............................... .42 .35 .38 .41 .32
Net Realized and Unrealized Gain (Loss) on Investments 1.15 1.81 1.59 1.31 (.20)

Total from Investment Operations 1.57 2.16 1.97 1.72 .12
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.37) (.36) (.43) (.36) (.40)
Distributions from Capital Gains.................... (1.03) (1.30) (.67) (.05) (.55)

Total Dividends and Distributions (1.40) (1.66) (1.10) (.41) (.95)

Net Asset Value, End of Period......................... $15.28 $15.11 $14.61 $13.74 $12.43

Total Return(b)........................................ 11.00% 15.88% 15.10% 14.18% .94%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $104,414 $85,436 $70,820 $57,125 $53,366
Ratio of Expenses to Average Net Assets............. 1.28% 1.33% 1.28% 1.37% 1.51%
Ratio of Net Investment Income to Average Net Assets 2.86% 2.42% 2.82% 3.21% 2.70%
Portfolio Turnover Rate............................. 57.0% 27.6% 32.6% 35.8% 14.4%

PRINCIPAL BALANCED FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $15.05 $14.56 $13.71 $11.80
Income from Investment Operations:
Net Investment Income............................... .31 .25 .29 .31
Net Realized and Unrealized Gain (Loss) on Investments 1.14 1.79 1.55 1.90

Total from Investment Operations 1.45 2.04 1.84 2.21
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.25) (.25) (.32) (.30)
Distributions from Capital Gains.................... (1.03) (1.30) (.67) --

Total Dividends and Distributions (1.28) (1.55) (.99) (.30)

Net Asset Value, End of Period......................... $15.22 $15.05 $14.56 $13.71

Total Return(b)........................................ 10.18% 14.96% 14.10% 18.72%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $18,930 $11,885 $5,964 $1,263
Ratio of Expenses to Average Net Assets............. 2.04% 2.14% 2.13% 1.91%(d)
Ratio of Net Investment Income to Average Net Assets 2.08% 1.58% 1.93% 2.53%(d)
Portfolio Turnover Rate............................. 57.0% 27.6% 32.6% 35.8%(d)

PRINCIPAL BALANCED FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $14.98 $14.52 $13.81
Income from Investment Operations:
Net Investment Income............................... .33 .29 .24
Net Realized and Unrealized Gain (Loss) on Investments 1.15 1.76 .73

Total from Investment Operations 1.48 2.05 .97
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.28) (.30) (.26)
Distributions from Capital Gains.................... (1.03) (1.29) --

Total Dividends and Distributions (1.31) (1.59) (.26)

Net Asset Value, End of Period......................... $15.15 $14.98 $14.52

Total Return(b)........................................ 10.43% 15.16% 7.52%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $19,434 $9,745 $875
Ratio of Expenses to Average Net Assets............. 1.88% 1.99% 1.49%(d)
Ratio of Net Investment Income to Average Net Assets 2.22% 1.66% 2.26%(d)
Portfolio Turnover Rate............................. 57.0% 27.6% 32.6%(d)

PRINCIPAL BLUE CHIP FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $20.22 $17.10 $15.03 $12.45 $11.94
Income from Investment Operations:
Net Investment Income............................... .12 .21 .23 .24 .20
Net Realized and Unrealized Gain (Loss) on Investments 3.57 3.58 2.45 2.55 .57

Total from Investment Operations 3.69 3.79 2.68 2.79 .77
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.12) (.21) (.26) (.21) (.26)
Distributions from Capital Gains.................... (2.08) (.46) (.35) -- --

Total Dividends and Distributions (2.20) (.67) (.61) (.21) (.26)

Net Asset Value, End of Period......................... $21.71 $20.22 $17.10 $15.03 $12.45

Total Return(b)........................................ 19.48% 22.57% 18.20% 22.65% 6.58%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $126,740 $79,985 $44,389 $35,212 $27,246
Ratio of Expenses to Average Net Assets............. 1.31% 1.30% 1.33% 1.38% 1.46%
Ratio of Net Investment Income to Average Net Assets .57% 1.10% 1.41% 1.83% 1.72%
Portfolio Turnover Rate............................. .5% 55.4% 13.3% 26.1% 5.5%

PRINCIPAL BLUE CHIP FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $20.14 $17.03 $14.99 $11.89
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) .07 .11 .15
Net Realized and Unrealized Gain (Loss) on Investments 3.53 3.54 2.41 3.10

Total from Investment Operations 3.51 3.61 2.52 3.25
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.02) (.04) (.13) (.15)
Distributions from Capital Gains.................... (2.08) (.46) (.35) --

Total Dividends and Distributions (2.10) (.50) (.48) (.15)

Net Asset Value, End of Period......................... $21.55 $20.14 $17.03 $14.99

Total Return(b)........................................ 18.59% 21.59% 17.18% 26.20%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $34,223 $18,265 $6,527 $1,732
Ratio of Expenses to Average Net Assets............. 2.02% 2.06% 2.19% 1.90%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.14)% .32% .49% .97%(d)
Portfolio Turnover Rate............................. .5% 55.4% 13.3% 26.1%(d)

PRINCIPAL BLUE CHIP FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $20.16 $17.08 $16.21
Income from Investment Operations:
Net Investment Income............................... .02 .13 .12
Net Realized and Unrealized Gain (Loss) on Investments 3.57 3.53 .90

Total from Investment Operations 3.59 3.66 1.02
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.12) (.15)
Distributions from Capital Gains.................... (2.08) (.46) --

Total Dividends and Distributions (2.12) (.58) (.15)

Net Asset Value, End of Period......................... $21.63 $20.16 $17.08

Total Return(b)........................................ 19.01% 21.82% 7.02%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $32,871 $15,502 $1,575
Ratio of Expenses to Average Net Assets............. 1.85% 1.89% 1.48%(d)
Ratio of Net Investment Income to Average Net Assets .02%(e) .45% .68%(d)
Portfolio Turnover Rate............................. .5% 55.4% 13.3%(d)

PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $29.69 $27.72 $23.69 $20.83 $21.41
Income from Investment Operations:
Net Investment Income............................... .50 .50 .45 .45 .39
Net Realized and Unrealized Gain (Loss) on Investments 3.88 5.80 5.48 3.15 .93

Total from Investment Operations 4.38 6.30 5.93 3.60 1.32
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.53) (.48) (.43) (.39) (.41)
Distributions from Capital Gains.................... (2.47) (3.85) (1.47) (.35) (1.49)

Total Dividends and Distributions (3.00) (4.33) (1.90) (.74) (1.90)

Net Asset Value, End of Period......................... $31.07 $29.69 $27.72 $23.69 $20.83

Total Return(b)........................................ 15.59% 25.36% 26.41% 17.94% 6.67%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $565,052 $494,444 $435,617 $339,656 $285,965
Ratio of Expenses to Average Net Assets............. .74% .70% .69% .75% .83%
Ratio of Net Investment Income to Average Net Assets 1.67% 1.85% 1.82% 2.08% 2.02%
Portfolio Turnover Rate............................. 23.2% 30.8% 50.2% 46.0% 31.7%

PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $29.51 $27.58 $23.61 $19.12
Income from Investment Operations:
Net Investment Income............................... .26 .23 .21 .33
Net Realized and Unrealized Gain (Loss) on Investments 3.86 5.77 5.45 4.46

Total from Investment Operations 4.12 6.00 5.66 4.79
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.26) (.22) (.22) (.30)
Distributions from Capital Gains.................... (2.47) (3.85) (1.47) --

Total Dividends and Distributions (2.73) (4.07) (1.69) (.30)

Net Asset Value, End of Period......................... $30.90 $29.51 $27.58 $23.61

Total Return(b)........................................ 14.71% 24.13% 25.19% 25.06%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $44,765 $27,240 $9,832 $2,248
Ratio of Expenses to Average Net Assets............. 1.52% 1.65% 1.70% 1.50%(d)
Ratio of Net Investment Income to Average Net Assets .88% .84% .80% 1.07%(d)
Portfolio Turnover Rate............................. 23.2% 30.8% 50.2% 46.0%(d)

PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $29.44 $27.57 $24.73
Income from Investment Operations:
Net Investment Income............................... .28 .30 .19
Net Realized and Unrealized Gain (Loss) on Investments 3.84 5.74 2.81

Total from Investment Operations 4.12 6.04 3.00
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.29) (.32) (.16)
Distributions from Capital Gains.................... (2.47) (3.85) --

Total Dividends and Distributions (2.76) (4.17) (.16)

Net Asset Value, End of Period......................... $30.80 $29.44 $27.57

Total Return(b)........................................ 14.77% 24.36% 12.74%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $37,675 $18,326 $1,752
Ratio of Expenses to Average Net Assets............. 1.50% 1.50% 1.16%(d)
Ratio of Net Investment Income to Average Net Assets .88% .93% 1.18%(d)
Portfolio Turnover Rate............................. 23.2% 30.8% 50.2%(d)

PRINCIPAL GROWTH FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $50.43 $39.54 $37.22 $31.14 $30.41
Income from Investment Operations:
Net Investment Income............................... .35 .31 .35 .35 .26
Net Realized and Unrealized Gain (Loss) on Investments 7.14 11.26 3.50 6.67 2.56

Total from Investment Operations 7.49 11.57 3.85 7.02 2.82
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.34) (.31) (.35) (.31) (.28)
Distributions from Capital Gains.................... (1.49) (.37) (1.18) (.63) (1.81)

Total Dividends and Distributions (1.83) (.68) (1.53) (.94) (2.09)

Net Asset Value, End of Period......................... $56.09 $50.43 $39.54 $37.22 $31.14

Total Return(b)........................................ 15.17% 29.55% 10.60% 23.29% 9.82%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $395,954 $317,386 $228,361 $174,328 $116,363
Ratio of Expenses to Average Net Assets............. .95% 1.03% 1.08% 1.16% 1.30%
Ratio of Net Investment Income to Average Net Assets .66% .68% .95% 1.12% .95%
Portfolio Turnover Rate............................. 21.9% 16.5% 1.8% 12.2% 13.6%

PRINCIPAL GROWTH FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $50.36 $39.43 $37.10 $28.33
Income from Investment Operations:
Net Investment Income............................... .06 .09 .08 .21
Net Realized and Unrealized Gain (Loss) on Investments 7.14 11.23 3.48 8.76

Total from Investment Operations 7.20 11.32 3.56 8.97
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.09) (.02) (.05) (.20)
Distributions from Capital Gains.................... (1.49) (.37) (1.18) --

Total Dividends and Distributions (1.58) (.39) (1.23) (.20)

Net Asset Value, End of Period......................... $55.98 $50.36 $39.43 $37.10

Total Return(b)........................................ 14.58% 28.92% 9.80% 31.48%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $64,809 $42,241 $24,019 $8,279
Ratio of Expenses to Average Net Assets............. 1.46% 1.48% 1.79% 1.80%(d)
Ratio of Net Investment Income to Average Net Assets .15% .23% .22% .31%(d)
Portfolio Turnover Rate............................. 21.9% 16.5% 1.8% 12.2%(d)

PRINCIPAL GROWTH FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $50.16 $39.40 $39.27
Income from Investment Operations:
Net Investment Income............................... .02 .06 .10
Net Realized and Unrealized Gain (Loss) on Investments 7.09 11.16 .13

Total from Investment Operations 7.11 11.22 .23
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.01) (.09) (.10)
Distributions from Capital Gains.................... (1.49) (.37) --

Total Dividends and Distributions (1.50) (.46) (.10)

Net Asset Value, End of Period......................... $55.77 $50.16 $39.40

Total Return(b)........................................ 14.46% 28.72% 1.12%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $30,557 $16,265 $2,014
Ratio of Expenses to Average Net Assets............. 1.59% 1.69% 1.42%(d)
Ratio of Net Investment Income to Average Net Assets .01% .00% .14%(d)
Portfolio Turnover Rate............................. 21.9% 16.5% 1.8%(d)

PRINCIPAL MIDCAP FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $45.33 $35.75 $31.45 $25.08 $23.56
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) .07 .14 .12 --
Net Realized and Unrealized Gain (Loss) on Investments (4.26) 10.80 5.05 6.45 1.61

Total from Investment Operations (4.33) 10.87 5.19 6.57 1.61
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.11) (.14) (.06) --
Distributions from Capital Gains.................... (1.10) (1.18) (.75) (.14) (.09)

Total Dividends and Distributions (1.10) (1.29) (.89) (.20) (.09)

Net Asset Value, End of Period......................... $39.90 $45.33 $35.75 $31.45 $25.08

Total Return(b)........................................ (9.78)% 31.26% 16.89% 26.89% 6.86%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $332,942 $346,666 $229,465 $150,611 $92,965
Ratio of Expenses to Average Net Assets............. 1.22% 1.26% 1.32% 1.47% 1.74%
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.14)% .20% .46% .47% .02%
Portfolio Turnover Rate............................. 25.1% 9.5% 12.3% 13.5% 8.1%

PRINCIPAL MIDCAP FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $44.88 $35.48 $31.31 $23.15
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.23) (.05) (.04) --
Net Realized and Unrealized Gain (Loss) on Investments (4.26) 10.64 4.97 8.18

Total from Investment Operations (4.49) 10.59 4.93 8.18
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.01) (.01) (.02)
Distributions from Capital Gains.................... (1.10) (1.18) (.75) --

Total Dividends and Distributions (1.10) (1.19) (.76) (.02)

Net Asset Value, End of Period......................... $39.29 $44.88 $35.48 $31.31

Total Return(b)........................................ (10.24)% 30.64% 16.07% 35.65%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $68,358 $59,554 $28,480 $8,997
Ratio of Expenses to Average Net Assets............. 1.73% 1.69% 2.01% 2.04%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.66)% (.24)% (.24)% (.17)%(d)
Portfolio Turnover Rate............................. 25.1% 9.5% 12.3% 13.5%(d)

PRINCIPAL MIDCAP FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $45.10 $35.67 $33.77
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.28) (.12) .04
Net Realized and Unrealized Gain (Loss) on Investments (4.29) 10.74 1.88

Total from Investment Operations (4.57) 10.62 1.92
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.01) (.02)
Distributions from Capital Gains.................... (1.10) (1.18) --

Total Dividends and Distributions (1.10) (1.19) (.02)

Net Asset Value, End of Period......................... $39.43 $45.10 $35.67

Total Return(b)........................................ (10.37)% 30.56% 6.20%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $23,540 $17,448 $2,016
Ratio of Expenses to Average Net Assets............. 1.89% 1.87% 1.53%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.82)% (.45)% .29%(d)
Portfolio Turnover Rate............................. 25.1% 9.5% 12.3%(d)

PRINCIPAL REAL ESTATE FUND, INC.
Class A shares 1998(g)
Net Asset Value, Beginning of Period................... 10.15
Income from Investment Operations:
Net Investment Income............................... .20
Net Realized and Unrealized Gain (Loss) on Investments (1.76)

Total from Investment Operations (1.56)
Less Dividends:
Dividends from Net Investment Income................ (.20)

Total Dividends (.20)

Net Asset Value, End of Period......................... $8.39

Total Return(b)........................................ (15.45)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 5,490
Ratio of Expenses to Average Net Assets............. 2.25%(d)
Ratio of Net Investment Income to Average Net Assets 2.89%(d)
Portfolio Turnover Rate............................. 60.4%(d)

PRINCIPAL REAL ESTATE FUND, INC.
Class B shares 1998(g)
Net Asset Value, Beginning of Period................... 10.15
Income from Investment Operations:
Net Investment Income............................... .20
Net Realized and Unrealized Gain (Loss) on Investments (1.78)

Total from Investment Operations (1.58)
Less Dividends:
Dividends from Net Investment Income................ (.19)

Total Dividends (.19)

Net Asset Value, End of Period......................... 8.38

Total Return(b)........................................ (15.67)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 3,120
Ratio of Expenses to Average Net Assets............. 2.47%(d)
Ratio of Net Investment Income to Average Net Assets 2.67%(d)
Portfolio Turnover Rate............................. 60.4%(d)

PRINCIPAL REAL ESTATE FUND, INC.
Class R shares 1998(g)
Net Asset Value, Beginning of Period................... 10.15
Income from Investment Operations:
Net Investment Income............................... .23
Net Realized and Unrealized Gain (Loss) on Investments (1.78)

Total from Investment Operations (1.55)
Less Dividends:
Dividends from Net Investment Income................ (.20)

Total Dividends (.20)

Net Asset Value, End of Period......................... 8.40

Total Return(b)........................................ (15.37)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 2,928
Ratio of Expenses to Average Net Assets............. 1.99%(d)
Ratio of Net Investment Income to Average Net Assets 3.07%(d)
Portfolio Turnover Rate............................. 60.4%(d)

PRINCIPAL SMALLCAP FUND, INC.
Class A shares 1998(g)
Net Asset Value, Beginning of Period................... 9.92
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.08)
Net Realized and Unrealized Gain (Loss) on Investments (1.41)

Total from Investment Operations (1.49)
Less Dividends:
Dividends from Net Investment Income................ --

Total Dividends --

Net Asset Value, End of Period......................... $8.43

Total Return(b)........................................ (15.95)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 18,438
Ratio of Expenses to Average Net Assets............. 2.58%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.65)%(d)
Portfolio Turnover Rate............................. 20.5%(d)

PRINCIPAL SMALLCAP FUND, INC.
Class B shares 1998(g)
Net Asset Value, Beginning of Period................... 9.91
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.11)
Net Realized and Unrealized Gain (Loss) on Investments (1.39)

Total from Investment Operations (1.50)
Less Dividends:
Dividends from Net Investment Income................ --

Total Dividends --

Net Asset Value, End of Period......................... $8.41

Total Return(b)........................................ (16.15)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 6,550
Ratio of Expenses to Average Net Assets............. 2.80%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.85)%(d)
Portfolio Turnover Rate............................. 20.5%(d)

PRINCIPAL SMALLCAP FUND, INC.
Class R shares 1998(g)
Net Asset Value, Beginning of Period................... 9.91
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07)
Net Realized and Unrealized Gain (Loss) on Investments (1.39)

Total from Investment Operations (1.46)
Less Dividends:
Dividends from Net Investment Income................ --
Total Dividends --

Net Asset Value, End of Period......................... $8.45

Total Return(b)........................................ (15.75)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 4,688
Ratio of Expenses to Average Net Assets............. 2.07%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.12)%(d)
Portfolio Turnover Rate............................. 20.5%(d)

PRINCIPAL UTILITIES FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $12.55 $11.40 $10.94 $9.25 $11.45
Income from Investment Operations:
Net Investment Income(h)............................ .41 .48 .44 .48 .46
Net Realized and Unrealized Gain (Loss) on Investments 3.59 1.12 .45 1.70 (2.19)

Total from Investment Operations 4.00 1.60 .89 2.18 (1.73)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.44) (.45) (.43) (.49) (.45)
Distributions from Capital Gains.................... -- -- -- -- (.02)

Total Dividends and Distributions (.44) (.45) (.43) (.49) (.47)

Net Asset Value, End of Period......................... $16.11 $12.55 $11.40 $10.94 $9.25

Total Return(b)........................................ 32.10% 14.26% 8.13% 24.36% (15.20)%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $83,533 $64,366 $66,322 $65,873 $56,747
Ratio of Expenses to Average Net Assets(h).......... 1.15% 1.15% 1.17% 1.04% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.73% 3.90% 3.85% 4.95% 4.89%
Portfolio Turnover Rate............................. 11.9% 22.5% 34.2% 13.0% 13.8%

PRINCIPAL UTILITIES FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $12.53 $11.38 $10.93 $9.20
Income from Investment Operations:
Net Investment Income(h)............................ .30 .38 .36 .40
Net Realized and Unrealized Gain (Loss) on Investments 3.59 1.13 .43 1.77

Total from Investment Operations 3.89 1.51 .79 2.17
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.33) (.36) (.34) (.44)
Distributions from Capital Gains.................... -- -- -- --

Total Dividends and Distributions (.33) (.36) (.34) (.44)

Net Asset Value, End of Period......................... $16.09 $12.53 $11.38 $10.93

Total Return(b)........................................ 31.23% 13.41% 7.23% 24.18%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $11,391 $6,937 $5,579 $3,952
Ratio of Expenses to Average Net Assets(h).......... 1.90% 1.90% 1.93% 1.72%(d)
Ratio of Net Investment Income to Average Net Assets 2.04% 3.14% 3.07% 3.84%(d)
Portfolio Turnover Rate............................. 11.9% 22.5% 34.2% 13.0%(d)

PRINCIPAL UTILITIES FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $12.49 $11.33 $11.75
Income from Investment Operations:
Net Investment Income(h)............................ .33 .39 .28
Net Realized and Unrealized Gain (Loss) on Investments 3.58 1.14 (.41)

Total from Investment Operations 3.91 1.53 (.13)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.33) (.37) (.29)
Distributions from Capital Gains.................... -- -- --

Total Dividends and Distributions (.33) (.37) (.29)

Net Asset Value, End of Period......................... $16.07 $12.49 $11.33

Total Return(b)........................................ 31.47% 13.72% (.31)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $4,005 $1,512 $311
Ratio of Expenses to Average Net Assets(h).......... 1.65% 1.65% 1.47%(d)
Ratio of Net Investment Income to Average Net Assets 2.21% 3.35% 3.77%(d)
Portfolio Turnover Rate............................. 11.9% 22.5% 34.2%(d)
</TABLE>

Notes to Financial Highlights

(a) Effective January 1, 1998, the following changes were made to the names of
the Domestic Growth Funds:

Former Fund Name New Fund Name
--------------------------------------------------------------------------
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.

(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.

(d) Computed on an annualized basis.

(e) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Domestic Growth Funds' Class B shares
recognized net investment income as follows for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994,
none of which was distributed to the sole shareholder, Principal Management
Corporation. The Domestic Growth Funds' Class B shares incurred unrealized
losses on investments during the initial interim period as follows. This
represents Class B share activities of each fund prior to the initial
public offering of Class B shares:
Per Share
Net Investment Per Share
Income Unrealized (Loss)

Principal Balanced Fund, Inc. $-- $(.19)
Principal Blue Chip Fund, Inc. -- (.15)
Principal Capital Value Fund, Inc. -- (.46)
Principal Growth Fund, Inc. -- (.86)
Principal MidCap Fund, Inc. -- (.77)
Principal Utilities Fund, Inc. .01 (.01)

(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Certain of the Domestic
Growth Funds' Class R shares recognized net investment income for the
period from the initial purchase of Class R shares on February 27, 1996
through February 28, 1996 as follows, none of which was distributed to the
sole shareholder, Principal Management Corporation. Additionally, the
Domestic Growth Funds incurred unrealized gains (losses) on investments
during the initial interim period as follows. This represents Class R share
activities of each fund prior to the initial offering of Class R shares:

Per Share
Net Investment Per Share
Income Unrealized (Loss)

Principal Balanced Fund, Inc. $-- $(.03)
Principal Blue Chip Fund, Inc. .01 (.02)
Principal Capital Value Fund, Inc. .01 (.11)
Principal Growth Fund, Inc. .01 .10
Principal MidCap Fund, Inc -- .19

(g) Period from December 31, 1997, date Class A and Class B shares first
offered to the public and Class R shares first offered to eligible
purchasers, through October 31, 1998. With respect to Principal Real Estate
Fund, Inc. Class A, Class B and Class R shares, net investment income
aggregating $.03 per share for the period from the initial purchase of
shares on December 11, 1997 through December 30, 1997 was recognized, of
which $.01 per share was distributed to its sole shareholder, Principal
Life Insurance Company, during the period. With respect to Principal
SmallCap Fund, Inc. Class A, Class B and Class R shares, net investment
income aggregating $.01 per share from the initial purchase of shares on
December 11, 1997 through December 30, 1997 was recognized. Principal
SmallCap Fund, Inc. Class A, Class B and Class R distributed a tax return
of capital of $.01 per share to the sole shareholder Principal Life
Insurance Company, during the period. Principal Real Estate Fund, Inc. and
Principal SmallCap Fund, Inc. Class A, Class B and Class R shares incurred
unrealized gains (losses) on investments during the initial interim period
as follows. This represents Class A, Class B and Class R share activities
of each fund prior to the initial public offering of each class of shares.

Per Share Unrealized
Gain (Loss)

Class Class Class
A B R

Principal Real Estate Fund, Inc. $ .13 $ .13 $ .13
Principal SmallCap Fund, Inc. (.08) (.09) (.09)

(h) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, Principal Utilities Fund, Inc. would have had per share net
investment income and the ratios of expenses to average net assets as
shown:

Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
Class A 1998 $.39 1.23% $ 60,477
1997 .46 1.25% 65,940
1996 .43 1.25% 54,932
1995 .46 1.30% 151,145
1994 .41 1.50% 284,836

Class B 1998 .29 2.00% 9,557
1997 .37 1.95% 3,753
1996 .34 2.06% 6,690
1995(e) .40 1.81%(d) 1,338

Class R 1998 .28 2.10% 12,481
1997 .31 2.67% 9,355
1996(f) .28 1.47%(d) --

October 31, 1998

STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>

Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.

<S> <C> <C> <C>
Investment in securities -- at cost........ $16,534,258 $327,089,074 $22,704,728

Assets
Investment in securities -- at value (Note 4) $12,795,683 $368,412,087 $21,433,644
Cash.................................... 19,179 20,827 4,413
Receivables:
Dividends and interest.................. 26,337 800,343 37,404
Investment securities sold.............. 70,239 841,417 356,814
Capital Stock sold...................... 7,669 559,034 38,716
Other assets............................... -- 1,979 --

Total Assets 12,919,107 370,635,687 21,870,991
Liabilities
Accrued expenses........................... 39,471 396,493 49,926
Payables:
Net payable for foreign currency
contract (Note 5).................... 19,040 89,575 --
Investment securities purchased......... 70,691 7,560,762 65,603
Capital Stock reacquired................ -- 416,522 3,220
Indebtedness (Note 7) ..................... -- -- 85,000

Total Liabilities 129,202 8,463,352 203,749

Net Assets Applicable to Outstanding Shares $12,789,905 $362,172,335 $21,667,242

Net Assets Consist of:
Capital Stock.............................. $ 19,571 $ 393,967 $ 21,695
Additional paid-in capital................. 17,964,592 294,729,701 22,744,050
Accumulated undistributed net
investment income ...................... -- 4,262,374 --
Accumulated undistributed net realized
gain (loss) from investment and
foreign currency transactions........... (1,436,265) 21,542,398 171,669
Net unrealized appreciation (depreciation)
of investments.......................... (3,738,575) 41,323,013 (1,271,084)
Net unrealized appreciation (depreciation) on
translation of assets and liabilities in
foreign currencies...................... (19,418) (79,118) 912

Total Net Assets $12,789,905 $362,172,335 $21,667,242

Capital Stock (par value: $.01 a share):
Shares authorized.......................... 100,000,000 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets....................... $7,312,361 $302,756,625 $11,765,019
Shares issued and outstanding. 1,117,661 32,894,131 1,177,376
Net asset value per share...... $6.54 $9.20 $9.99
Maximum offering price per share(a) $6.87 $9.66 $10.49

Class B: Net Assets....................... $3,275,343 $41,676,330 $6,585,150
Shares issued and outstanding. 502,111 4,560,292 660,703
Net asset value per share(b)... $6.52 $9.14 $9.97

Class R: Net Assets....................... $2,202,201 $17,739,380 $3,317,073
Shares issued and outstanding. 337,289 1,942,312 331,451
Net asset value per share............... $6.53 $9.13 $10.01

See accompanying notes.

Year Ended October 31, 1998

STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.

Net Investment Income
Income:
<S> <C> <C> <C>
Dividends............................. $ 329,076 $ 9,704,858 $ 338,236
Withholding tax on foreign dividends... (17,844) (1,140,879) (29,429)
Interest............................... 56,907 1,282,335 65,346

Total Income 368,139 9,846,314 374,153

Expenses:
Management and investment advisory
fees (Note 3)....................... 157,324 2,492,037 242,403
Distribution and shareholder servicing
fees (Notes 1 and 3)................ 54,053 1,022,931 81,404
Transfer and administrative services
(Notes 1 and 3)..................... 119,948 1,168,106 153,320
Registration fees (Note 1)............. 43,535 98,860 37,217
Custodian fees ........................ 37,425 120,802 16,497
Auditing and legal fees ............... 9,712 10,214 9,229
Directors' fees ....................... 7,526 7,390 7,115
Other ................................. 622 27,346 1,005

Total Net Expenses 430,145 4,947,686 548,190

Net Investment Income (Operating Loss) (62,006) 4,898,628 (174,037)

Net Realized and Unrealized Gain (Loss)on
Investments and Foreign
Currencies Net realized gain (loss) from:
Investment transactions................ (1,349,593) 21,724,953 365,750
Foreign currency transactions.......... (10,717) (159,094) (2,884)
Change in unrealized appreciation/depreciation of:
Investments............................ (1,750,572) (21,749,628) (1,229,130)
Translation of assets and liabilities in
foreign currencies.................. (21,381) (101,686) 889

Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies (3,132,263) (285,455) (865,375)

Net Increase (Decrease) in Net Assets
Resulting from Operations $(3,194,269) $ 4,613,173 $(1,039,412)

</TABLE>

See accompanying notes.

Years Ended October 31, Except as Noted

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>

Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.

<S> <C> <C> <C> <C> <C> <C>
1998 1997(a) 1998 1997 1998 1997(a)
Operations
Net investment income (operating loss).... $(62,006) $(861) $4,898,628 $3,090,074 $ (174,037) $ (1,911)

Net realized gain (loss) from investment and
foreign currency transactions.......... (1,360,310) (85,030) 21,565,859 7,071,870 362,866 (154,500)
Change in unrealized appreciation/depreciation
of investments and translation of assets
and liabilities in foreign currencies (1,771,953) (1,986,040) (21,851,314) 32,599,107 (1,228,241) (41,931)

Net Increase (Decrease) in Net
Assets Resulting from Operations (3,194,269) (2,071,931) 4,613,173 42,761,051 (1,039,412) (198,342)

Dividends and Distributions to Shareholders
From net investment income:
Class A................................ -- -- (3,230,657) (2,378,873) -- --
Class B ............................... -- -- (135,323) (79,037) -- --
Class R ............................... -- -- (60,535) (19,984) -- --

From net realized gain on investments and
foreign currency transactions:
Class A ............................... -- -- (6,125,804) (6,657,874) -- --
Class B ............................... -- -- (754,887) (635,525) -- --
Class R................................ -- -- (272,111) (55,824) -- --

Total Dividends and Distributions -- -- (10,579,317) (9,827,117) -- --

Capital Share Transactions (Note 6)
Shares sold:
Class A................................ 4,862,019 5,966,460 61,935,765 96,500,904 8,737,574 6,307,287
Class B ............................... 1,321,774 3,867,018 14,284,105 20,265,356 3,023,591 4,967,080
Class R................................ 609,470 3,028,924 9,941,189 11,220,828 532,826 3,022,777
Shares issued in reinvestment of dividends
and distributions:
Class A................................ -- -- 9,196,905 8,872,973 -- --
Class B ............................... -- -- 870,916 696,974 -- --
Class R................................ -- -- 332,448 75,789 -- --
Shares redeemed:
Class A ............................... (797,000) (7,197) (44,920,651) (26,121,521) (2,487,754) (7,102)
Class B ............................... (339,033) (118,315) (6,478,598) (5,667,020) (895,810) (97,291)
Class R ............................... (338,015) -- (3,796,800) (1,083,455) (192,387) (5,795)

Net Increase in Net Assets from
Capital Share Transactions 5,319,215 12,736,890 41,365,279 104,760,828 8,718,040 14,186,956

Total Increase 2,124,946 10,664,959 35,399,135 137,694,762 7,678,628 13,988,614

Net Assets
Beginning of period....................... 10,664,959 -- 326,773,200 189,078,438 13,988,614 --

End of period (including undistributed net
investment income as set forth below). 12,789,905 10,664,959 362,172,335 326,773,200 21,667,242 13,988,614

Undistributed Net Investment Income....... $ -- $ -- $4,262,374 $2,790,261 $ -- $ --

<FN>
(a) Period from August 14, 1997 (date operations commenced) through October 31,
1997.
</FN>

See accompanying notes.
</TABLE>

October 31, 1998

NOTES TO FINANCIAL STATEMENTS

Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.

Note 1 -- Significant Accounting Policies

Principal International Emerging Markets Fund, Inc., Principal International
Fund, Inc. and Principal International SmallCap Fund, Inc. (the "International
Growth Funds") are registered under the Investment Company Act of 1940, as
amended, as open-end diversified management investment companies and operate in
the mutual fund industry.

Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.

On August 14, 1997, the initial purchases of 400,000 shares of Class A Capital
Stock, 300,000 shares of Class B Capital Stock and 300,000 shares of Class R
Capital Stock of each of Principal International Emerging Markets Fund, Inc. and
Principal International SmallCap Fund, Inc. were made by Principal Life
Insurance Company (formerly known as Principal Mutual Life Insurance Company)
(see Note 3). Effective August 29, 1997, Principal International Emerging
Markets Fund, Inc. and Principal International SmallCap Fund, Inc. began
offering Class A and Class B shares to the public and Class R shares to eligible
purchasers.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Class R shares are sold without an initial sales charge and are not
subject to a CDSC. Class B shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) after four years. All classes
of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the International Growth Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
declares separate dividends on each class of shares.

The International Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the year ended October 31, 1998, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees

Class A Class B Class R Class A Class B Class R Class A Class B Class R

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal International
Emerging Markets Fund, Inc. $26,567 $21,608 $ 5,878 $12,431 $3,105 $ 445 $10,446 $9,086 $15,389
Principal International Fund, Inc. 602,849 299,813 120,269 326,519 78,169 40,326 21,324 14,281 11,794
Principal International SmallCap Fund, Inc. 34,908 38,235 8,261 13,637 4,975 427 8,996 5,349 5,730
</TABLE>

The International Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities, preferred stocks and
foreign securities, the investments are valued by using 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 each fund's Board of
Directors. Securities with remaining maturities of 60 days or less are valued at
amortized cost, which approximates market.

Generally, trading in foreign securities 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 each fund's
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities are valued at their fair value
as determined in good faith by the Manager under procedures established and
regularly reviewed by each fund's Board of Directors. To the extent each fund
invests in foreign securities listed on foreign exchanges which trade on days on
which the fund does not determine its net asset value, for example Saturdays and
other customary national U.S. holidays, each fund's net asset value could be
significantly affected on days when shareholders do not have access to the
International Growth Funds.

Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Growth Funds to value such securities at prices at which it is expected those
shares may be sold, and the manager or any sub-adviser is authorized to make
such determinations subject to such oversight by each fund's Board of Directors
as may occasionally be necessary.

The value of foreign securities in foreign currency amounts is expressed in U.S.
dollars at the closing daily rate of exchange. The identified cost of the
portfolio holdings is translated at approximate rates prevailing when acquired.
Income and expense amounts are translated at approximate rates prevailing when
received or paid, with daily accruals of such amounts reported at approximate
rates prevailing at the date of valuation. Since the carrying amount of the
foreign securities is determined based on the exchange rate and market values at
the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.

The International Growth Funds record investment transactions generally one day
after the trade date, except for short-term investment transactions which are
recorded generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The International Growth
Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities whereby the ex-dividend date has passed; such dividends
are recorded as soon as the International Growth Funds are informed of the
ex-dividend date. Interest income is recognized on an accrual basis.

Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between trade and
settlement dates on security transactions, and the difference between the amount
of dividends and foreign withholding taxes recorded on the books and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
appreciation on translation of assets and liabilities in foreign currencies
arise from changes in the exchange rate relating to assets and liabilities,
other than investments in securities, purchased and held in non-U.S. denominated
currencies.

The International Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the International Growth Funds' cash balances
to be deposited into a single joint account along with the cash of other
registered investment companies managed by Principal Management Corporation
(formerly known as Princor Management Corporation) (the "Manager"). These
balances may be invested in one or more short-term instruments.

Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments and foreign currency transactions are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. Permanent book and tax basis
differences are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Reclassifications made for Principal International Emerging Markets Fund, Inc.
and Principal International SmallCap Fund, Inc. for the year ended October 31,
1998 aggregated $75,696 and $181,352 respectively. Other reclassifications made
for the periods ended October 31, 1998 and 1997 were not material.

Note 2 -- Federal Income Taxes

At October 31, 1998, Principal International Emerging Markets Fund, Inc. had net
capital loss carryforwards of approximately $72,000 which expires in 2005 and
$1,350,000 which expires in 2006.

Note 3 -- Management Agreement and Transactions With Affiliates

The International Growth Funds have agreed to pay investment advisory and
management fees to Principal Management Corporation (wholly owned by Princor
Financial Services Corporation, a subsidiary of Principal Life Insurance
Company) computed at an annual percentage rate of each fund's average daily net
assets. The annual rate used in this calculation for the International Growth
Funds is as follows:

<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)

First Next Next Next Over
$100 $100 $100 $100 $400

<S> <C> <C> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. 1.25% 1.20% 1.15% 1.10% 1.05%
Principal International Fund, Inc. 0.75% 0.70% 0.65% 0.60% 0.55%
Principal International SmallCap Fund, Inc. 1.20% 1.15% 1.10% 1.05% 1.00%
</TABLE>

The International Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.

<TABLE>
<CAPTION>
Class A Class B

<S> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 111,414 $ 2,911
Principal International Fund, Inc. 1,271,429 97,586
Principal International SmallCap Fund, Inc. 185,226 11,813
</TABLE>

No brokerage commissions were paid by the International Growth Funds to Princor
Financial Services Corporation during the periods. Brokerage commissions were
paid to other affiliates by the following funds:
<TABLE>
<CAPTION>
Year Ended Periods Ended
October 31, 1998 October 31, 1997

<S> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 4,730 $ 1,586
Principal International Fund, Inc. 138,499 20,595
Principal International SmallCap Fund, Inc. 6,610 1,502
</TABLE>

The International Growth Funds bear distribution and shareholder servicing fees
with respect to Class A shares computed at an annual rate of up to .25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the International Growth Funds adopted a distribution plan with respect to Class
B shares that provides for distribution and shareholder servicing fees computed
at an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the International Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the International
Growth Funds.

Class A Class B Class R

<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. 400,000 300,000 300,000
Principal International Fund, Inc. 8,948,596 167 144
Principal International SmallCap Fund, Inc. 400,000 300,000 300,000
</TABLE>

Note 4 -- Investment Transactions

For the year ended October 31, 1998, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the International Growth Funds
were as follows:
<TABLE>
<CAPTION>
Purchases Sales

<S> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 10,650,789 $ 5,255,733
Principal International Fund, Inc. 160,865,537 133,077,387
Principal International SmallCap Fund, Inc. 24,647,135 18,690,336
</TABLE>

At October 31, 1998, net unrealized appreciation (depreciation) of investments
by the International Growth Funds was composed of the following:

<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation (Depreciation)
Appreciation (Depreciation) of Investments

<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 914,650 $ (4,653,225) $(3,738,575)
Principal International Fund, Inc. 75,054,616 (33,731,603) 41,323,013
Principal International SmallCap Fund, Inc. 1,545,687 (2,816,771) (1,271,084)
</TABLE>

At October 31, 1998, the International Growth Funds held the following
securities which were purchased in a private placement transaction and may
require registration, or an exemption therefrom, in order to effect a sale in
the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of October 31, Percentage of
Security Description Acquisition Cost 1998 Net Assets

<S> <C> <C> <C> <C> <C>
Principal International Al Ahram Beverages Co. ADR 8/21/97 $ 56,100 $ 61,710 .48%
Emerging Markets Fund, Inc. 4/14/98 12,050 11,220 .09
9/28/98 19,350 16,830 .13
Bank Handlowy GDR 8/14/97 50,200 45,600 .35
2/23/98 31,100 22,800 .18
4/2/98 16,625 11,400 .09
4/21/98 16,100 11,400 .09
Banque Libanaise le Commerce
SAL ADR 8/14/97 115,250 86,250 .68
2/19/98 7,440 6,900 .05
Banque Marocaine du Commerce
Exterieur 8/15/97 87,600 116,800 .91
Eesti Uhispank GDR 3/24/98 79,750 25,375 .20
4/2/98 15,250 5,075 .04
Industrial Credit & Investment Corp.
of India ADR 8/14/97 137,750 41,800 .32
10/7/97 31,400 11,000 .09
10/20/97 33,400 11,000 .09
11/10/97 15,000 5,500 .04
12/4/97 10,750 5,500 .04
12/17/97 18,675 9,900 .08
1/13/98 13,975 7,150 .06
6/5/98 13,000 5,500 .04
7/14/98 14,365 7,150 .06
8/28/98 20,988 12,650 .10
Mol Magyar Olaj-Es Gazipari ADR 3/20/98 $150,000 $111,801 .87%
4/14/98 16,250 11,180 .09
5/20/98 13,800 11,180 .09
8/4/98 11,950 8,944 .07
9/2/98 18,113 20,124 .16
9/23/98 20,570 24,596 .19
Paints & Chemical Industries
Co. GDR 9/26/97 149,225 116,522 .92
9/26/97 5,745 5,505 .04
10/20/97 11,700 9,175 .07
10/30/97 19,750 18,350 .14
12/4/97 12,155 11,928 .09
1/23/98 3,450 3,670 .03
4/14/98 14,788 11,928 .09
7/20/98 21,390 21,102 .17
9/1/98 17,040 22,020 .17
Pick Szeged RT GDR 7/7/98 26,510 18,257 .14
7/8/98 27,280 18,257 .14
7/14/98 12,950 8,299 .06
9/2/98 20,400 24,896 .20
9/23/98 14,490 24,896 .20
10/22/98 14,200 16,597 .13
10/27/98 20,410 21,576 .17
Reliance Industries GDR 8/14/97 72,000 30,450 .24
10/24/97 22,125 10,150 .08
12/12/97 21,750 15,225 .12
1/2/98 17,535 10,658 .08
1/13/98 12,750 8,628 .07
4/6/98 13,800 7,612 .06
7/14/98 13,050 9,135 .07
Tata Engineering & Locomotive
Ltd. Co. GDR 8/14/97 71,250 15,209 .12
10/1/97 19,000 5,070 .04
10/20/97 18,900 5,070 .04
12/30/97 7,650 2,282 .02
Videsh Sanchar Nigam Ltd. GDR 8/14/97 132,800 84,000 .66
11/18/97 28,250 21,000 .16
12/2/97 14,250 10,500 .08
12/12/97 10,720 8,400 .07
1/2/98 15,235 11,550 .09
1/13/98 13,620 12,600 .10
3/5/98 10,440 8,400 .07
4/3/98 21,038 17,850 .14
6/5/98 19,800 18,900 .15
7/14/98 11,750 10,500 .08
7/30/98 10,875 10,500 .08
9/28/98 16,688 15,750 .12

1,428,752 11.18
</TABLE>
<TABLE>
<CAPTION>
Value at Value as a
Date of October 31, Percentage of
Security Description Acquisition Cost 1998 Net Assets

<S> <C> <C> <C> <C> <C>
Principal International Fokus Bank 10/9/95 $ 557,692 $1,033,640 .29%
Fund, Inc. 12/17/96 797,392 1,033,640 .29
Kemira OY 12/13/96 610,584 411,838 .11
12/20/96 1,478,458 963,700 .27
2/26/97 1,162,586 831,912 .23
4/8/97 615,051 494,205 .14
4/9/97 41,573 32,947 .01

4,801,882 1.34

Principal International Bure Investment Aktiebolaget AB 8/14/97 46,173 52,963 .25
SmallCap Fund, Inc. 8/18/97 46,092 52,963 .25
8/22/97 8,101 9,268 .04
6/25/98 104,616 84,740 .39
8/5/98 32,121 29,129 .13
8/27/98 34,931 35,750 .16
10/19/98 38,867 42,370 .20
10/20/98 12,055 13,240 .06
Computacenter PLC 5/21/98 188,072 130,342 .60
5/21/98 22,261 21,219 .10
9/28/98 32,653 30,312 .14
10/2/98 64,456 61,382 .28
Industrial & Financial Systems 8/14/97 1,752 3,786 .02
8/18/97 10,528 22,720 .11
10/9/97 26,974 37,867 .17
10/30/97 53,442 75,734 .35
11/12/97 91,032 132,534 .61
Newsquest PLC 10/16/97 227,052 222,735 1.03
11/13/97 35,652 34,604 .16
8/26/98 49,359 43,752 .20

1,137,410 5.25
</TABLE>

The International Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.

Note 5 -- Foreign Currency Contracts

At October 31, 1998, Principal International Emerging Markets Fund, Inc. and
Principal International Fund, Inc. owned forward contracts to sell Hong Kong
Dollars ("HKD") at specified future dates at fixed exchange rates. Forward
foreign currency contracts are valued at the forward rate, and are
marked-to-market daily. The change in market value is recorded by each fund as
an unrealized gain or loss. When the contract is closed, each fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
<TABLE>
<CAPTION>
Value at
Contracts In Exchange Settlement October 31, Net Unrealized
to Deliver For Date 1998 (Depreciation)
<S> <C> <C> <C> <C> <C>
Principal International

Emerging Markets Fund, Inc. 3,575,000 HKD $ 440,000 3/1/99 $ 459,040 $(19,040)
Principal International Fund, Inc. 16,818,750 HKD 2,070,000 3/1/99 2,159,575 (89,575)
</TABLE>

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

Note 6 -- Capital Share Transactions

Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Year Ended October 31, 1998:
Shares sold:
Class A ......................................... 620,056 6,434,705 770,054
Class B ......................................... 169,453 1,480,411 260,731
Class R ......................................... 87,602 1,035,347 47,319
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- 1,012,117 --
Class B ........................................... -- 95,849 --
Class R ......................................... -- 36,589 --
Shares redeemed:
Class A ......................................... (110,092) (4,688,589) (216,075)
Class B ......................................... (43,618) (672,121) (79,482)
Class R ......................................... (53,356) (400,191) (17,457)

Net Increase 670,045 4,334,117 765,090

Periods Ended October 31, 1997:
Shares sold:
Class A ......................................... 608,541 10,828,384 624,104
Class B ......................................... 389,744 2,259,005 489,175
Class R ......................................... 303,043 1,249,248 302,174
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- 1,075,120 --
Class B ........................................... -- 85,277 --
Class R ......................................... -- 9,208 --
Shares redeemed:
Class A ......................................... (844) (2,929,702) (707)
Class B ......................................... (13,468) (638,189) (9,721)
Class R ......................................... -- (118,068) (585)

Net Increase 1,287,016 11,820,283 1,404,440
</TABLE>

Note 7 -- Line of Credit

The International Growth Funds participate with other funds and portfolios
managed by Principal Management Corporation in an unsecured joint line of credit
with a bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, the Principal International
SmallCap Fund, Inc. had an outstanding borrowing of $85,000 at an annual rate of
5.93%. No other International Growth Fund had outstanding borrowings at October
31, 1998 under the line of credit.

Note 8 -- Year 2000 Problem (Unaudited)

Like other mutual funds, financial and business organizations and individuals
around the world, the International Growth Funds could be adversely affected if
the computer systems used by the Manager and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Manager
is taking steps it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems it uses and to obtain reasonable
assurances that comparable steps are being taken by each fund's other major
service providers. At this time, however there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the funds.

Note 9 -- Euro Conversion (Unaudited)

The planned introduction of a new European currency, the euro, may result in
uncertainties for European securities in the markets in which they trade and
with respect to the operation of each of the International Growth Funds'
portfolios. Currently, the euro is expected to be introduced on January 1, 1999
by eleven European countries that are members of the European Economic and
Monetary Union ("EMU"). The introduction of the euro will require the
redenomination of European debt and equity securities over a period of time,
which may result in various accounting differences and/or tax treatments that
otherwise would not likely occur. Additional questions are raised by the fact
that certain other EMU members, including the United Kingdom, will not
officially be implementing the euro on January 1, 1999. If the introduction of
the euro does not take place as planned, there could be negative effects, such
as severe currency fluctuations and market disruptions.

The Manager is actively working to address euro-related issues and understands
that other key service providers are taking similar steps. At this time,
however, no one knows precisely what the degree of impact will be. To the extent
that the market impact or effect on a portfolio holding is negative, it could
hurt the fund's performance.

GROWTH FUNDS (INTERNATIONAL)

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.

Shares
Held Value

Common Stocks (85.92%)

Air Transportation, Scheduled (0.28%)
Cintra SA De Cv Ser'anpv 73,000 $ 35,336

Bakery Products (0.58%)
Nong Shim Co., Ltd. 1,600 74,576

Beer, Wine & Distilled Beverages (1.45%)
South African Breweries Ltd. 9,531 184,849

Beverages (8.18%)
Al Ahram Beverages Co. ADR 3,200(a) 89,760
Embotelladora Andina ADR, Series A 9,800 130,463
PanAmerican Beverages ADR 9,100 184,275
Fomento Economico Mexicano ADR 10,550 274,959
Pepsi-Gemex SA De Cv GDR 11,400 74,100
Quilmes Industrial Quines SA ADR 31,900 293,081

1,046,638
Blast Furnace & Basic Steel
Products (1.29%)
Hylsamex SA, Class B 36,100 49,428
Tubos De Acero De Mexico ADR 13,600 115,600

165,028
Cable & Other Pay TV Services (1.44%)
Ceske Radiokomunikace GDR 6,050(b) 184,525

Central Reserve Depositories (0.78%)
Banco Santiago SA ADR 7,300 99,462

Chemicals & Allied Products (0.81%)
Sarantis SA 8,980 103,351

Commercial Banks (5.61%)
Banco Portugues Do Atlantico 5,900(b) 118,341
Banco Rio De La Plata ADR 16,900 152,100
Bank Handlowy GDR 8,000(a) 91,200
Banque Libanaise Le Commerce SAL ADR 5,400(a) 93,150
Banque Marocaine du Commerce Exterieur 4,800(a) 116,880
Big Bank Gdanski SA 111,995 115,395
Eesti Uhispank GDR 6,000(a)(b) 30,450

717,516
Communications Equipment (2.25%)
ECI Telecommunications Ltd. ADR 8,700 288,187

Computer & Data Processing
Services (1.02%)
Tecnomatix Technologies Ltd. ADR 9,000(b) 130,500

Computer & Office Equipment (2.42%)
Orbotech Ltd. ADR 7,100(b) 248,500
Sindo Ricoh Co. 2,000 60,479

308,979
Construction & Related Machinery (0.87%)
Barlow Ltd. 23,458 110,812

Consumer Products (2.89%)
Rothmans Industries Ltd. 43,000 217,875
Souza Cruz SA 12,100 82,163
Tabak AS 300 70,337

370,375
Crude Petroleum & Natural Gas (1.47%)
Mol Magyar Olaj-Es Gazipari ADR 8,400(a) 187,825

Deep Sea Foreign Transportation of
Freight (0.11%)
Noble Group Ltd. ADR 98,000(b) 14,210

Drugs (1.32%)
Teva Pharmaceutical ADR 4,300 169,581

Eating & Drinking Places (1.00%)
Cafe De Coral Holdings Ltd. 373,000 127,608

Electric Services (3.43%)
Companhia Paranaense De Enersis ADR 20,400 158,100
Electricidade De Portugal SA 5,700 143,407
Enersis SA ADR 6,600 137,775

439,282
Electrical Industrial Apparatus (0.33%)
Guangdong Kelon Electric Holdings 50,000 42,603

Electronic Components &
Accessories (3.19%)
Elec & Eltek International ADR 34,500 172,500
Varitronix 90,000 170,798
Wong Circuits Holdings Ltd. ADR 80,000 65,200

408,498
Electronic Distribution
Equipment (3.87%)
Tadiran Ltd. ADR 4,900 144,244
Techtronic Industries Co. 1,164,000 219,396
Vtech Holdings Ltd. 35,000 131,261

494,901
Engines & Turbines (0.59%)
First Tractor Co. Ltd. 242,000 76,543

Federal & Federally Sponsored
Credit (0.92%)
Industrial Credit & Investment
Corp. of India ADR 21,300(a) 117,150

Fire, Marine & Casualty Insurance (0.45%)
Alfa, Series A 21,700 57,237

Foreign Banks, Branches &
Agencies (1.13%)
Bank Leumi Le - Israel 55,000 70,054
Credicorp Ltd. ADR 11,050 74,587

144,641
Furniture & Home Furnishing
Stores (0.58%)
Grupo Elektra SA CPO 175,000 74,683

Grocery Stores (1.19%)
Blue Square Chain Investments &
Property Ltd. 11,900(b) 151,571

Holding Offices (1.62%)
The India Fund, Inc. ADR 33,400(b)$ 206,662

Measuring & Controlling Devices (2.24%)
IDT Holdings Singapore Ltd. ADR 195,000 149,175
Moulin International Holding 1,230,000 136,561

285,736
Meat Products (1.04%)
Pick Szeged RT GDR 16,000(a) 132,778

Medical Instruments & Supplies (1.70%)
Medison Co. 19,600 216,876

Metal Cans & Shipping Containers (0.62%)
Colep 9,100(b) 78,746

Miscellaneous Electrical Equipment &
Supplies (1.28%)
G.P. Batteries International 74,500 163,804

Miscellaneous Food & Kindred
Products (0.90%)
Thai Union Frozen Products 28,000 115,067

Miscellaneous Investing (1.07%)
Banco Latino Americano
De Exportaciones 6,300 136,631

Miscellaneous Non-Durable (1.90%)
Desc SA ADR 12,900 243,487

Miscellaneous Textile Goods (2.07%)
Esprit Holdings Ltd. 466,000 172,960
Reliance Industries GDR 18,100(a) 91,858

264,818
Motor Vehicles & Equipment (0.22%)
Tata Engineering & Locomotive Ltd.
Co. GDR 10,900(a) 27,631

Newspapers (0.62%)
Investec-Consultadoria Internacional SA 2,000 78,935

Oil & Gas Field Services (0.17%)
Gulf Indonesia Resources Ltd. ADR 2,200(b) 21,725

Paints & Allied Products (1.72%)
Paints & Chemical Industries Co. GDR 24,000(a) 220,200

Paperboard Containers & Boxes (0.69%)
Hung Hing Print Group 228,000 88,304

Petroleum Refining (3.99%)
Sasol Ltd. 41,100 201,110
YPF Sociedad Anonima ADR 10,700 309,631

510,741
Search & Navigation Equipment (1.70%)
Elbit Systems Ltd. ADR 18,800 217,375

Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings 62,000(c) --

Security & Commodity Exchanges (0.71%)
OTK Holdings Ltd. ADR 146,000 91,090

Services, NEC (0.92%)
IDT International 900,000 $ 117,351

Telephone Communications (11.29%)
Compania Anonima Telefonos De
Venezuela ADR 4,200 65,100
Compania De Telecomunicacion De
Chile ADR 7,400 162,338
Global Telesystems Group, Inc. ADR 5,400(b) 216,338
Hellenic Telecommunication 7,811 177,578
Matav RT ADR 9,000 241,875
Telec De Sao Paulo SA 200,000(b) 21,880
Telecommunicacoes Brasileiras SA ADR 2,200 167,063
Telefonica De Argentina ADR 4,900 162,006
Videsh Sanchar Nigam Ltd. GDR 21,900(a)(b) 229,950

1,444,128

Total Common Stocks 10,988,552

Preferred Stocks (6.70%)

Cement, Hydraulic (1.56%)
Titan Cement Co. 3,700 199,578

Central Reserve Depositories (0.43%)
Banco Ganadero SA ADR 7,700 55,344

Electric Services (1.05%)
Centrais Electricas De Santa Catarina 247,000 134,591

Industrial Inorganic Chemicals (0.27%)
Fertilizantes Fosfatados Fosfertil NPV 13,800,000 34,012

Telephone Communication (3.39%)
Telemig Celular 1,300,000(b) 12,206
Telesp Celular SA 1,290,000(b) 62,723
Telecomunicacoes De Minus Gerais 1,220,000 36,808
Telec De Sao Paulo SA 1,940,000(b) 322,013

433,750

Total Preferred Stocks 857,275

Principal
Amount Value

Commercial Paper (7.43%)

Federal & Federally Sponsored
Credit (7.43%)
Federal National Mortgage Association;
5.45%; 11/2/1998 $949,569 $ 949,856

Total Portfolio Investments (100.05%) 12,795,683

Liabilities, net of cash, receivables and
other assets (-0.05%) (5,778)

Total Net Assets (100.00%) $12,789,905

(a) Restricted security - See Note 4 to the financial statements.
(b) Non-income producing security - No dividend paid during the period.
(c) Peregrine Investment Holdings has filed a plan of liquidation.

Principal International Emerging Markets Fund, Inc.
Investments by Country

Total Percentage of
Country Value Total Value

Argentina $ 916,819 7.17%
Brazil 1,031,560 8.06
Chile 530,038 4.14
China 119,145 0.93
Colombia 55,344 0.43
Czech Republic 471,200 3.68
Egypt 309,960 2.42
Estonia 30,450 0.24
Greece 480,507 3.76
Hong Kong 1,164,238 9.10
Hungary 562,477 4.40
India 673,252 5.26
Indonesia 21,725 0.17
Israel 1,420,012 11.10
Korea, Republic of 351,932 2.75
Lebanon 93,150 0.73
Mexico 1,109,106 8.67
Morocco 116,880 0.91
Panama 136,631 1.07
Peru 74,587 0.58
Poland 206,595 1.61
Portugal 419,428 3.28
Singapore 782,763 6.12
South Africa 587,861 4.59
Thailand 115,067 0.90
United States 949,856 7.42
Venezuela 65,100 0.51

Total $12,795,683 100.00%

PRINCIPAL INTERNATIONAL FUND, INC.

Shares
Held Value

Common Stocks (93.28%)

Advertising (1.75%)
WPP Group PLC 1,295,000 $ 6,354,407

Beverages (0.87%)
PanAmerican Beverages ADR 156,300 3,165,075

Blast Furnace & Basic Steel
Products (0.31%)
Tubos De Acero De Mexico ADR 132,000 1,122,000
Central Reserve Depositories (2.62%)
National Westminster Bank 329,931 5,511,549
Union Bank of Norway 209,660 3,981,603

9,493,152
Commercial Banks (14.01%)
Bank of Ireland 428,239 7,896,075
Barclays PLC 146,594 3,147,327
BG Bank 106,000 6,145,237
Fokus Bank 240,000(a) 2,067,280
Istituto Mobiliare Italiano 413,000 6,353,066
Merita PLC Class A 1,187,670 6,364,546
National Australia Bank Ltd. 326,437 4,306,363
Royal Bank of Canada Montreal Quebec 143,000 6,572,426
Svenska Handelsbanken Class A 30,000 1,260,736
Svenska Handelsbanken AB Free 172,750 6,640,948

50,754,004
Communications Equipment (2.06%)
ECI Telecommunications Ltd. ADR 225,000 7,453,125

Communications Services, NEC (1.10%)
Koninklijke KPN NV 102,780 3,995,245

Computer & Office Equipment (1.24%)
Orbotech Ltd. ADR 128,200(b) 4,487,000

Concrete, Gypsum & Plaster
Products (1.78%)
Lafarge SA 63,000 6,439,591

Consumer Products (5.36%)
Imasco Ltd. 413,457 7,750,840
Imperial Tobacco Group PLC 303,500 3,123,332
Societe Nationale D'Exploitation
Industrielle Des Tabacs et
Allumettes 43,750 2,598,133
Swedish Match Co. 1,688,000 5,938,445

19,410,750
Copper Ores (0.96%)
Trelleborg AB Class B 379,000 3,466,672

Deep Sea Foreign
Transportation of Freight (0.58%)
Van Ommeren NV 64,841 2,100,406

Drugs (5.62%)
Elan Corp. PLC ADR 75,000(b) 5,254,688
Novartis AG 4,423 7,969,999
Pharmacia & Upjohn, Inc. 135,000 7,146,562

20,371,249
Electrical Goods (1.28%)
Smiths Industries PLC 344,000 4,623,184

Electronic Components &
Accessories (1.22%)
Elec & Eltek International ADR 757,400 3,787,000
Varitronix 340,000 645,236

4,432,236
Electronic Distribution
Equipment (2.31%)
Phillips Electronics 157,100 8,361,050

Engines & Turbines (1.20%)
RHI AG 89,000 2,787,906
Scapa Group PLC 835,400 1,559,937

4,347,843
Farm & Garden Machinery (0.81%)
New Holland NV 231,000 2,916,375

Finance Services (0.50%)
Takefuji Corp. 34,000 $ 1,811,948

Gas Production & Distribution (0.79%)
Omv AG 30,600 2,870,363

Hose, Belting, Gaskets & Packing (0.55%)
Phoenix AG 94,000 1,986,503

Industrial Inorganic Chemicals (0.76%)
Kemira OY 332,000(a) 2,734,602

Investment Offices (1.40%)
AMVESCAP PLC 671,400 5,076,644

Life Insurance (1.03%)
QBE Insurance Group Ltd. 946,390 3,721,878

Meat Products (5.79%)
Danisco AS 120,000 6,632,853
Orkla ASA Class A 111,000 1,874,591
Orkla ASA Class B 349,600 5,216,491
Unilever NV 97,800 7,257,722

20,981,657
Miscellaneous Chemical Products (1.52%)
Hoechst AG 132,000 5,507,382

Miscellaneous Converted
Paper Products (1.64%)
Bunzl PLC 1,285,000 5,939,500

Miscellaneous Food & Kindred
Products (1.03%)
Greencore Group PLC 991,000 3,734,168

Miscellaneous Non-Durable Goods (2.93%)
Desc S.A. Class B 3,140,000 2,878,597
Diageo PLC 716,179 7,736,044

10,614,641
Miscellaneous Textile Goods (0.73%)
Esprit Holdings Ltd. 7,082,000 2,628,550

Miscellaneous Transportation
Equipment (0.79%)
Autoliv, Inc. 86,000 2,843,375

Motor Vehicles & Equipment (1.98%)
E.C.I.A. Equipment & Composants 20,000 3,797,098
Mayflower Corp. PLC 1,557,000 3,389,765

7,186,863
Newspapers (0.77%)
Publishing & Broadcasting Ltd. 710,000 2,805,479

Oil & Gas Field Services (0.94%)
Eni Spa 571,000 3,398,392

Paperboard Containers & Boxes (0.93%)
Buhrmann NV 187,200 3,357,754

Personnel Supply Services (1.02%)
Vedior NV 144,265 3,676,767

Petroleum Refining (5.25%)
Repsol Petroleo SA 155,400 7,785,649
Sasol Ltd. 751,000 3,674,784
YPF Sociedad Anonima ADR 261,000 7,552,688

19,013,121
Plastic Materials & Synthetics (0.96%)
Astra AB 222,466 $ 3,486,320

Pulp Mills (2.38%)
Lassila & Tikanoja Ltd. OY 164,000 3,906,006
Upm-Kymmene OY 196,980 4,711,043

8,617,049
Radio & Television Broadcasting (0.91%)
Mirror Group PLC 1,351,000 3,291,971

Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings 2,289,000(b)(c) --

Soap, Cleaners & Toilet Goods (3.29%)
Benckiser NV Class B 98,650 5,593,598
Reckitt & Colman PLC 367,297 6,329,515

11,923,113
Special Industry Machinery (1.55%)
Cookson Group 2,673,200 5,596,018

Sugar & Confectionery Products (2.35%)
Nestle 4,004 8,516,047

Telephone Communications (6.41%)
Nokia Corp. Class A ADR 62,000 5,769,875
Swisscom AG 10,600(b) 3,593,106
Telecom Corp. of New Zealand Ltd. 1,395,000 5,723,645
Telecom Italia-DI 1,617,200 8,154,110

23,240,736

Total Common Stocks 337,854,205

Preferred Stock (0.70%)

Commercial Banks (0.70%)
National Australia Bank
ECU Convertible 96,000 2,538,000

Principal
Amount Value

Commercial Paper (7.74%)

Business Credit Institutions (3.19%)
General Electric Capital Corp.;
5.18%; 11/3/1998 $ 5,750,000 $ 5,748,345
5.45%; 11/6/1998 5,805,000 5,800,606

11,548,951
Personal Credit Institutions (4.55%)
Ford Motor Credit Co.;
5.15%; 11/4/1998 6,035,000 6,032,410
Household Finance Corp.;
5.10%; 11/2/1998 10,440,000 10,438,521

16,470,931

Total Commercial Paper (7.74%) 28,019,882

Total Portfolio Investments (101.72%) 368,412,087

Liabilities, net of cash, receivables
and other assets (-1.72%) (6,239,752)

Total Net Assets (100.00%) $362,172,335

(a)Restricted security - See Note 4 to the financial statements.
(b)Non-income producing security - No dividend paid during the period.
(c)Peregrine Investment Holdings has filed a plan of liquidation.

Principal International Fund, Inc.
Investments by Country

Total Percentage of
Country Value Total Value

Argentina $ 7,552,687 2.05%
Australia 13,371,720 3.63
Austria 5,658,268 1.54
Canada 14,323,266 3.89
Denmark 12,778,090 3.47
Finland 23,486,072 6.37
France 12,834,822 3.48
Germany 7,493,885 2.03
Hong Kong 3,273,786 0.89
Israel 11,940,125 3.24
Italy 17,905,568 4.86
Japan 1,811,948 0.49
Mexico 7,165,672 1.95
Netherlands 37,258,918 10.11
New Zealand 5,723,645 1.55
Norway 13,139,965 3.57
Singapore 3,787,000 1.03
South Africa 3,674,784 1.00
Spain 7,785,649 2.11
Sweden 23,636,496 6.42
Switzerland 20,079,153 5.45
United Kingdom 78,564,123 21.32
United States 35,166,445 9.55

Total $368,412,087 100.00%

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.

Shares
Held Value

Common Stocks (80.44%)

Advertising (2.42%)
Industrial & Financial Systems 28,800(a)(b)$272,641
United Group Ltd. 170,000 252,826

525,467
Air Transportation, Scheduled (1.34%)
Ryanair Holdings PLC ADR 9,900(a) 290,812

Airports, Flying Fields
& Services (3.63%)
Aeroporti Di Roma 29,400 183,952
Auckland International Airport Ltd 394,500(a) 409,355
Virgin Express Holdings ADR 23,800(a) 193,375

786,682
Central Reserve Depositories (1.09%)
Union Bank of Norway 12,420 235,865

Commercial Banks (1.38%)
Banco Pastor SA 5,600 298,818

Communications Equipment (1.08%)
Research In Motion Ltd. 67,900(a)$ 234,825

Computer & Data Processing
Services (4.64%)
Computacenter PLC 32,100(a)(b) 243,255
Computershare Ltd. 63,900 270,386
Equant ADR 4,000(a) 175,000
Intentia International AB 3,800(a) 101,601
Merkantildata ASA 21,500 215,816

1,006,058
Computer & Office Equipment (1.21%)
Orbotech Ltd. ADR 7,500(a) 262,500

Drugs (1.44%)
Fabrica Espanola De Productos 20,760 312,616

Electric Services (2.99%)
Independent Energy Holdings ADR 36,400(a) 245,700
Vestas Wind Systems 8,300(a) 402,085

647,785
Electrical Industrial Apparatus (0.47%)
Doncasters PLC ADR 7,300(a) 102,200

Electrical Work (1.25%)
Internatio-Muller NV 2,200 53,007
Telesystem International
Wireless, Inc. 20,800(a) 217,820

270,827
Electronic Components &
Accessories (0.41%)
Elec & Eltek International ADR 17,900 89,500

Electronic Distribution
Equipment (3.67%)
C/TAC NV 14,500(a) 308,993
Techtronic Industries Co. 1,447,000 272,737
Vtech Holdings Ltd. 57,000 213,768

795,498
Engines & Turbines (0.49%)
RHI AG 3,400 106,504

Fabricated Rubber Products, NEC (1.50%)
Semperit AG Holding 3,000 324,405

Grocery Stores (0.35%)
Superdiplo SA 2,900(a) 74,907

Hose, Belting, Gaskets & Packing (2.01%)
Phoenix AG 20,600 435,340

Hotels & Motels (0.66%)
Choice Hotels Scandinavia 110,000(a) 143,245

Household Furniture (0.68%)
Ekornes ASA 16,000 146,500

Investment Offices (0.68%)
Tyndall Australia Ltd. 121,442 146,604

Life Insurance (1.01%)
Scor SA 3,800 217,871

Measuring & Controlling Devices (0.53%)
Sensonor ASA 59,900(a) 113,755

Meat Products (0.93%)
Perkins Foods PLC 89,360 201,281

Medical Instruments & Supplies (1.12%)
Cochlear Ltd. 47,900 241,611

Metalworking Machinery (2.11%)
Mikron Holding AG 2,200 458,166

Miscellaneous Amusement, Recreation
Services (1.89%)
Tab Ltd. 215,500(a) 408,999

Miscellaneous Business Services (0.38%)
Enator AB 3,400 81,772

Miscellaneous Electrical Equipment &
Supplies (2.41%)
Kaba Holding AG, Class B 1,080 522,416

Miscellaneous Food & Kindred
Products (1.25%)
Greencore Group PLC 72,100 271,679

Miscellaneous Manufacturers (1.06%)
Docdata NV 13,600(a) 229,376

Miscellaneous Non-Durable Goods (2.66%)
Austria Tabakwerke AG 8,200 577,063

Miscellaneous Plastics Products,
NEC (1.06%)
Airspray NV 7,700(a) 230,463

Miscellaneous Primary Metal
Products (0.00%)
YBM Magnex International, Inc. 28,300(a) 183

Miscellaneous Transportation
Services (0.53%)
ASG AB, Class B 5,500 114,688

Motor Vehicles & Equipment (1.40%)
E.C.I.A. Equipment & Composants 1,100 208,840
Mayflower Corp. PLC 43,000 93,616

302,456
Newspapers (1.39%)
Newsquest PLC 75,700(b) 301,091

Non-Classifiable Establishments (1.48%)
Bure Investment Aktiebolaget AB 24,200(b) 320,423

Non-Residential Building
Construction (0.54%)
Algeco 1,200 116,396

Oil & Gas Field Services (2.49%)
Cie Generale De Geophysique 800(a) 51,828
Cie Generale De Geophysique ADR 2,500(a) 33,125
Det Sondenfjelds-Norske
Dampskibsselska 9,400(a) 133,247
Hydralift ASA, A Shares 19,000(a) 118,557
Hydralift ASA, B Shares 3,800(a) 21,907
Petrolia Drilling ASA 75,300(a) 179,772

538,436
Personnel Supply Services (2.47%)
Dis Deutshcer Industries Service AG 3,100 $ 150,678
Unique International NV 13,700 383,637

534,315
Pulp Mills (2.73%)
Lassila & Tikanoja Ltd. OY 14,800 352,493
Miquel Y Costas 7,300 237,961

590,454
Real Estate Agents & Managers (1.27%)
Tornet Fastighet 21,500 275,046

Sanitary Services (1.81%)
De Sammensluttede Vognmand AS 4,500 393,111

Security Brokers & Dealers (4.18%)
AOT NV 29,200 362,718
Kempen & Co. NV 8,212 448,484
Van Der Moolen Holdings 1,365 95,376

906,578
Services To Buildings (0.72%)
Spotless Group Ltd. 71,000 156,842

Special Industry Machinery (1.09%)
Aixtron 1,400 237,112

Telephone Communication (7.80%)
Aapt Ltd. 71,400(a) 142,175
Esat Telecom Group PLC ADR 8,000(a) 242,000
Esprit Telecom Group PLC ADR 20,900(a) 376,200
Global Telesystems Group, Inc. ADR 6,700(a) 268,419
Metronet Communications ADR, Class B 28,800(a) 662,400

1,691,194
Trusts (0.74%)
NHP PLC 62,040(a) 160,004

Total Common Stocks 17,429,739

Principal
Amount Value

Commercial Paper (18.48%)

Federal & Federally Sponsored
Credit (18.48%)
Federal Home Loan Mortgage Corporation;
4.74%; 11/4/1998 $2,004,208 $2,004,208
Federal National Mortgage Association;
5.45%; 11/2/1998 1,999,697 1,999,697

Total Commercial Paper 4,003,905

Total Portfolio Investments (98.92%) 21,433,644

Cash and receivables, net of liabilities (1.08%) 233,598

Total Net Assets (100.00%) $21,667,242

(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.

Principal International SmallCap Fund, Inc.
Investments by Country

Total Percentage of
Country Value Total Value

Australia $1,619,443 7.56%
Austria 1,007,971 4.70
Belgium 193,375 0.90
Canada 1,115,228 5.20
Czech Republic 268,419 1.25
Denmark 795,196 3.71
Finland 352,493 1.64
France 628,060 2.93
Germany 823,131 3.84
Hong Kong 486,505 2.27
Ireland 532,812 2.49
Israel 262,500 1.22
Italy 183,952 0.86
Netherlands 2,287,055 10.67
New Zealand 409,355 1.91
Norway 1,308,664 6.11
Singapore 89,500 0.42
Spain 924,301 4.31
Sweden 1,166,171 5.44
Switzerland 980,583 4.57
United Kingdom 1,995,025 9.31
United States 4,003,905 18.69

Total $21,433,644 100.00%

FINANCIAL HIGHLIGHTS

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class A shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.29 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.73) (1.21)

Total from Investment Operations (1.75) (1.22)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --

Total Dividends and Distributions -- --

Net Asset Value, End of Period......................... $6.54 $8.29

Total Return(b)........................................ (21.11)% (10.18)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $7,312 $5,039
Ratio of Expenses to Average Net Assets............. 3.31% 2.03%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.36)% (.32)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class B shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.05) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.71) (1.22)

Total from Investment Operations (1.76) (1.23)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --

Total Dividends and Distributions -- --

Net Asset Value, End of Period......................... $6.52 $8.28

Total Return(b)........................................ (21.26)% (10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,275 $3,116
Ratio of Expenses to Average Net Assets............. 3.59% 2.16%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.69)% (.46)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)
............................

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class R shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.04) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.71) (1.22)

Total from Investment Operations (1.75) (1.23)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --

Total Dividends and Distributions -- --

Net Asset Value, End of Period......................... $6.53 $8.28

Total Return(b)........................................ (21.14)% 10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $2,202 $2,510
Ratio of Expenses to Average Net Assets............. 3.47% 2.20%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.60)% (.51)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)

See accompanying notes.
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>

PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.33 $8.14 $7.28 $7.44 $6.85
Income from Investment Operations:
Net Investment Income............................... .13 .09 .10 .08 .01
Net Realized and Unrealized Gain (Loss) on Investments .04 1.52 1.17 (.02) .64

Total from Investment Operations .17 1.61 1.27 .06 .65

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.10) (.11) (.08) (.03) (.02)
Distributions from Capital Gains.................... (.20) (.31) (.33) (.19) (.04)

Total Dividends and Distributions (.30) (.42) (.41) (.22) (.06)

Net Asset Value, End of Period......................... $9.20 $9.33 $8.14 $7.28 $7.44

Total Return(b)........................................ 1.93% 20.46% 18.36% 1.03% 9.60%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $302,757 $281,158 $172,276 $126,554 $115,812
Ratio of Expenses to Average Net Assets............. 1.25% 1.39% 1.45% 1.63% 1.74%
Ratio of Net Investment Income to Average Net Assets 1.45% 1.25% 1.43% 1.10% .10%
Portfolio Turnover Rate............................. 38.7% 26.6% 23.8% 35.4% 13.2%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class B shares 1998 1997 1996 1995(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.26 $8.07 $7.24 $6.71
Income from Investment Operations:
Net Investment Income............................... .07 .03 .03 .05
Net Realized and Unrealized Gain (Loss) on Investments .04 1.51 1.15 .51

Total from Investment Operations .11 1.54 1.18 .56

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.03) (.04) (.02) (.03)
Distributions from Capital Gains.................... (.20) (.31) (.33) --

Total Dividends and Distributions (.23) (.35) (.35) (.03)

Net Asset Value, End of Period......................... $9.14 $9.26 $8.07 $7.24

Total Return(b)........................................ 1.27% 19.62% 17.16% 9.77%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $41,676 $33,842 $15,745 $3,908
Ratio of Expenses to Average Net Assets............. 1.91% 2.17% 2.28% 2.19%(d)
Ratio of Net Investment Income to Average Net Assets .77% .42% .64% .58%(d)
Portfolio Turnover Rate............................. 38.7% 26.6% 23.8% 35.4%(d)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class R shares 1998 1997 1996(g)
- ------------------------------------------------------------------- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.27 $8.12 $7.48
Income from Investment Operations:
Net Investment Income............................... .06 .07 .01
Net Realized and Unrealized Gain (Loss) on Investments .04 1.47 .63

Total from Investment Operations .10 1.54 .64

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.08) --
Distributions from Capital Gains.................... (.20) (.31) --

Total Dividends and Distributions (.24) (.39) --

Net Asset Value, End of Period......................... $9.13 $9.27 $8.12

Total Return(b)........................................ 1.13% 19.65% 9.29%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $17,739 $11,773 $1,057
Ratio of Expenses to Average Net Assets............. 2.01% 2.10% 1.59%(d)
Ratio of Net Investment Income to Average Net Assets .67% .44% .78%(d)
Portfolio Turnover Rate............................. 38.7% 26.6% 23.8%(d)
</TABLE>

See accompanying notes.

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class A shares 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .10 (.07)

Total from Investment Operations .03 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --

Total Dividends and Distributions -- --

Net Asset Value, End of Period......................... $9.99 $9.96

Total Return(b)........................................ .30% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $11,765 $6,210
Ratio of Expenses to Average Net Assets............. 2.66% 1.99%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.81)% (.40)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class B shares 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.10) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .11 (.07)

Total from Investment Operations .01 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --

Total Dividends and Distributions -- --

Net Asset Value, End of Period......................... $9.97 $9.96

Total Return(b)........................................ .10% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,585 $4,774
Ratio of Expenses to Average Net Assets............. 2.90% 2.07%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (1.05)% (.47)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)
</TABLE>
<TABLE>
<CAPTION>

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class R shares 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .12 (.07)

Total from Investment Operations .05 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --

Total Dividends and Distributions -- --

Net Asset Value, End of Period......................... $10.01 $9.96

Total Return(b)........................................ .50% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,317 $3,004
Ratio of Expenses to Average Net Assets............. 2.51% 2.15%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.68)% (.54)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)

</TABLE>

See accompanying notes.

Notes to Financial Highlights

(a) Period from August 29, 1997, date Class A and Class B shares first offered
to the public and Class R shares first offered to eligible purchasers,
through October 31, 1997. Principal International Emerging Markets Fund,
Inc. and Principal International SmallCap Fund, Inc. classes of shares
recognized net investment income as follows for the period from the initial
purchase of shares on August 14, 1997, through August 28, 1997, none of
which was distributed to the sole shareholder, Principal Life Insurance
Company. Principal International Emerging Markets Fund, Inc. and Principal
International SmallCap Fund, Inc. incurred unrealized gains (losses) on
investments during the initial interim period as follows. This represents
Class A, Class B and Class R share activities prior to the initial public
offering of all classes of shares of each fund.

Per Share
Net Investment
Income

Principal International Emerging Markets Fund, Inc.:
Class A $.01 $(.50)
Class B .01 (.50)
Class R .01 (.50)

Principal International SmallCap Fund, Inc.:
Class A .01 .03
Class B .01 .03
Class R .01 .03

(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.

(d) Computed on an annualized basis.

(e) Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.

(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal International Fund, Inc. Class
B shares recognized no net investment income for the period from the
initial purchase by Principal Management Corporation of Class B shares on
December 5, 1994, through December 8, 1994. Additionally, Class B shares
incurred unrealized losses on investments of $.07 per share during the
initial interim period. This represents Class B share activities of the
fund prior to the initial public offering of Class B shares.

(g) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Principal International
Fund, Inc. Class R shares recognized no net investment income for the
period from the initial purchase by Principal Management Corporation of
Class R shares on February 27, 1996, through February 28, 1996.
Additionally, Class R shares incurred unrealized gains on investments of
$.02 per share during the initial interim period. This represents Class R
share activities of the fund prior to the intial offering of Class R
shares.

<TABLE>
<CAPTION>
October 31, 1998

STATEMENTS OF ASSETS AND LIABILITIES

Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.

<S> <C> <C>
Investment in securities -- at cost............................... $170,474,225 $282,353,179
------------ ------------
------------ ------------

Assets
Investment in securities -- at value (Note 4)..................... $179,472,476 $291,952,706
Cash ............................................................ 2,035 3,852
Receivables:
Interest....................................................... 3,094,436 1,547,275
Investment securities sold..................................... -- --
Capital Stock sold............................................. 492,795 518,797
Other assets...................................................... 3,589 17,027
------------ ------------

Total Assets 183,065,331 294,039,657
Liabilities
Accrued expenses.................................................. 141,357 189,849
Payables:
Investment securities purchased................................ -- 9,113,438
Capital Stock reacquired....................................... 181,310 754,994
Indebtedness (Note 6)............................................. -- --
------------ ------------

Total Liabilities 322,667 10,058,281
------------ ------------

Net Assets Applicable to Outstanding Shares....................... $182,742,664 $283,981,376
------------ ------------
------------ ------------

Net Assets Consist of:
Capital Stock..................................................... $ 157,709 $ 244,238
Additional paid-in capital........................................ 173,027,577 275,891,834
Accumulated undistributed (overdistributed)
net investment income.......................................... 33,837 254,305
Accumulated net realized gain (loss) on investment transactions .. 525,290 (2,008,528)
Net unrealized appreciation (depreciation) of investments......... 8,998,251 9,599,527
------------ ------------
Total Net Assets $182,742,664 $283,981,376
------------ ------------
------------ ------------

Capital Stock (par value: $.01 a share):
Shares authorized................................................. 100,000,000 100,000,000

Net Asset Value Per Share:
Class A: Net Assets............................................... $148,081,417 $251,455,080
Shares issued and outstanding............................ 12,778,833 21,617,045
Net asset value per share................................ $11.59 $11.63
Maximum offering price per share(a)...................... $12.17 $12.21
------ ------
------ ------
Class B: Net Assets .............................................. $22,465,556 $24,369,677
Shares issued and outstanding............................ 1,940,097 2,100,344
Net asset value per share(b)............................. $11.58 $11.60
------ ------
------ ------
Class R: Net Assets............................................... $12,195,691 $8,156,619
Shares issued and outstanding............................ 1,051,897 706,374
Net asset value per share................................ $11.59 $11.55
------ ------
------ ------

<FN>
(a)Maximum offering price is equal to net asset value plus a front-end
sales charge of 4.75% (1.50% with respect to Principal Limited Term Bond
Fund, Inc.) of the offering price or 4.99% of the net asset value (1.52%
of net asset value with respect to Principal Limited Term Bond Fund,
Inc.)
(b)Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
October 31, 1998

STATEMENTS OF ASSETS AND LIABILITIES

Principal Principal Principal
High Yield Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.

<S> <C> <C> <C>
Investment in securities -- at cost............................... $49,663,453 $30,883,301 $197,560,741
----------- ----------- ------------
----------- ----------- ------------

Assets
Investment in securities -- at value (Note 4)..................... $45,353,447 $31,044,504 $212,152,700
Cash ............................................................ 27,865 2,016 4,376
Receivables:
Interest....................................................... 1,150,194 351,223 3,989,442
Investment securities sold..................................... -- 16,695 --
Capital Stock sold............................................. 56,589 8,210 423,276
Other assets...................................................... 2,036 -- 7,512
----------- ----------- ------------

Total Assets 46,590,131 31,422,648 216,577,306
Liabilities
Accrued expenses.................................................. 66,187 24,664 138,975
Payables:
Investment securities purchased................................ 1,643,916 -- --
Capital Stock reacquired....................................... 145,226 27,279 34,426
Indebtedness (Note 6)............................................. -- -- 120,000
----------- ----------- ------------

Total Liabilities 1,855,329 51,943 293,401
---------- ----------- ------------

Net Assets Applicable to Outstanding Shares....................... $44,734,802 $31,370,705 $216,283,905
----------- ----------- ------------
----------- ----------- ------------

Net Assets Consist of:
Capital Stock..................................................... $ 58,731 $ 31,575 $ 171,819
Additional paid-in capital........................................ 50,862,953 31,196,899 201,351,447
Accumulated undistributed (overdistributed)
net investment income.......................................... (48,931) 24,590 83,391
Accumulated net realized gain (loss) on investment transactions .. (1,827,945) (43,562) 85,289
Net unrealized appreciation (depreciation) of investments......... (4,310,006) 161,203 14,591,959
----------- ----------- ------------
Total Net Assets $44,734,802 $31,370,705 $216,283,905
----------- ----------- ------------
----------- ----------- ------------

Capital Stock (par value: $.01 a share):
Shares authorized................................................. 100,000,000 100,000,000 100,000,000

Net Asset Value Per Share:
Class A: Net Assets............................................... $33,473,629 $27,631,893 $204,864,505
Shares issued and outstanding............................ 4,384,993 2,781,690 16,275,214
Net asset value per share................................ $7.63 $9.93 $12.59
Maximum offering price per share(a)...................... $8.01 $10.08 $13.22
----- ------ ------
----- ------ ------
Class B: Net Assets .............................................. $8,526,963 $1,704,891 $11,419,400
Shares issued and outstanding............................ 1,124,088 170,914 906,696
Net asset value per share(b)............................. $7.59 $9.98 $12.59
----- ------ ------
----- ------ ------
Class R: Net Assets............................................... $2,734,210 $2,033,921 N/A
Shares issued and outstanding............................ 363,981 204,914 N/A
Net asset value per share................................ $7.51 $9.93 N/A
----- ----- ------
----- ----- ------

STATEMENTS OF OPERATIONS

Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.

<S> <C> <C>
Net Investment Income
Interest income.................................................... $11,618,838 $18,885,184

Expenses:
Management and investment advisory fees (Note 3)................ 782,241 1,239,644
Distribution and shareholder servicing fees (Notes 1 and 3)..... 539,213 692,648
Transfer and administrative services (Notes 1 and 3)............ 482,817 499,207
Registration fees (Note 1)...................................... 53,167 37,239
Custodian fees ................................................. 2,786 10,837
Auditing and legal fees ........................................ 8,973 7,377
Directors' fees ................................................ 7,335 7,348
Other .......................................................... 11,664 20,798
----------- -----------
Total Gross Expenses 1,888,196 2,515,098
Less: Management and investment
advisory fees waived......................................... 172,366 --
----------- -----------
Total Net Expenses 1,715,830 2,515,098
----------- -----------
Net Investment Income 9,903,008 16,370,086

Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions.............. 598,317 242,270
Change in unrealized appreciation/depreciation
of investments ................................................. 1,323,899 2,717,566
----------- -----------
Net Realized and Unrealized
Gain (Loss) on Investments 1,922,216 2,959,836
----------- -----------

Net Increase (Decrease) in Net Assets
Resulting from Operations $11,825,224 $19,329,922
----------- -----------
----------- -----------
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1998

STATEMENTS OF OPERATIONS

Principal Principal Principal
High Yield Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.

<S> <C> <C> <C>
Net Investment Income
Interest income.................................................... $ 4,371,633 $1,788,479 $11,754,268

Expenses:
Management and investment advisory fees (Note 3)................ 287,858 133,825 974,740
Distribution and shareholder servicing fees (Notes 1 and 3)..... 197,857 50,768 530,667
Transfer and administrative services (Notes 1 and 3)............ 217,020 90,187 199,780
Registration fees (Note 1)...................................... 49,117 38,997 49,540
Custodian fees ................................................. 2,728 2,366 2,666
Auditing and legal fees ........................................ 6,527 4,740 6,784
Directors' fees ................................................ 7,347 7,348 7,359
Other .......................................................... 4,343 4,483 16,905
----------- ---------- -----------
Total Gross Expenses 772,797 332,714 1,788,441
Less: Management and investment
advisory fees waived......................................... -- 100,270 --
----------- ---------- -----------
Total Net Expenses 772,797 232,444 1,788,441
----------- ---------- -----------
Net Investment Income 3,598,836 1,556,035 9,965,827

Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions.............. 148,393 (2,668) 919,377
Change in unrealized appreciation/depreciation
of investments ................................................. (5,300,030) 172,616 2,567,043
----------- ---------- -----------
Net Realized and Unrealized
Gain (Loss) on Investments (5,151,637) 169,948 3,486,420
----------- ---------- -----------

Net Increase (Decrease) in Net Assets
Resulting from Operations $(1,552,801) $1,725,983 $13,452,247
----------- ---------- -----------
----------- ---------- -----------
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31

STATEMENTS OF CHANGES IN NET ASSETS

Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.

1998 1997 1998 1997

<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 9,903,008 $ 8,629,236 $ 16,370,086 $ 16,566,061
Net realized gain (loss) from investment transactions ........... 598,317 921,121 242,270 (776,007)
Change in unrealized appreciation/depreciation
of investments................................................ 1,323,899 3,176,634 2,717,566 7,674,729
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 11,825,224 12,726,991 19,329,922 23,464,783

Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (8,430,036) (8,447,557) (15,088,625) (16,727,976)
Class B....................................................... (977,376) (648,042) (1,071,553) (797,919)
Class R....................................................... (530,322) (193,972) (334,428) (127,873)
Excess distribution of net investment income:
Class A....................................................... -- -- -- --
Class B....................................................... -- -- -- --
Class R....................................................... -- -- -- --
------------ ------------ ------------ ------------
Total Dividends and Distributions (9,937,734) (9,289,571) (16,494,606) (17,653,768)

Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 41,289,926 27,360,904 39,967,883 31,378,780
Class B....................................................... 10,554,095 6,449,151 10,634,274 6,564,032
Class R....................................................... 8,716,511 6,016,081 4,770,310 3,952,066
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 6,299,889 5,936,473 12,166,316 13,338,406
Class B....................................................... 833,944 523,092 882,934 644,830
Class R....................................................... 524,979 193,561 329,918 127,615
Shares redeemed:
Class A....................................................... (27,535,115) (23,209,507) (53,118,031) (59,260,515)
Class B....................................................... (2,514,110) (1,891,456) (2,741,242) (3,726,468)
Class R....................................................... (3,120,947) (948,686) (1,161,190) (510,669)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 35,049,172 20,429,613 11,731,172 (7,491,923)
------------ ------------ ------------ ------------
Total Increase (Decrease) 36,936,662 23,867,033 14,566,488 (1,680,908)

Net Assets
Beginning of year................................................ 145,806,002 121,938,969 269,414,888 271,095,796
------------ ------------ ------------ ------------
End of year (including undistributed (overdistributed) net
investment income as set forth below)......................... $182,742,664 $145,806,002 $283,981,376 $269,414,888
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

Undistributed (Overdistributed) Net Investment Income........... $ 33,837 $ 68,563 $ 254,30 $ 447,772
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------

See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31

STATEMENTS OF CHANGES IN NET ASSETS

Principal Principal
High Yield Limited Term Bond
INCOME FUNDS Fund, Inc. Fund, Inc.

1998 1997 1998 1997

<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 3,598,836 $ 3,025,285 $ 1,556,035 $ 1,200,046
Net realized gain (loss) from investment transactions ........... 148,393 1,000,035 (2,668) (30,744)
Change in unrealized appreciation/depreciation
of investments................................................ (5,300,030) 221,232 172,616 99,272
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations (1,552,801) 4,246,552 1,725,983 1,268,574

Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (2,856,403) (2,851,339) (1,431,290) (1,227,443)
Class B....................................................... (571,855) (305,236) (53,434) (14,695)
Class R....................................................... (189,231) (76,561) (78,892) (27,342)
Excess distribution of net investment income:
Class A....................................................... (50,532) -- -- --
Class B....................................................... (10,117) -- -- --
Class R....................................................... (3,347) -- -- --
----------- ----------- ----------- -----------
Total Dividends and Distributions (3,681,485) (3,233,136) (1,563,616) (1,269,480)

Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 11,927,135 12,193,322 12,780,385 6,544,078
Class B....................................................... 4,358,175 4,993,786 1,373,038 580,621
Class R....................................................... 1,736,594 1,904,286 1,710,613 847,672
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 1,574,414 1,195,770 1,358,983 1,161,005
Class B....................................................... 427,433 195,332 42,187 8,758
Class R....................................................... 191,997 76,523 77,461 27,342
Shares redeemed:
Class A....................................................... (14,350,135) (4,508,255) (7,216,941) (4,380,863)
Class B....................................................... (1,816,211) (825,099) (344,198) (78,682)
Class R....................................................... (839,238) (149,618) (370,918) (355,461)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 3,210,164 15,076,047 9,410,610 4,354,470
----------- ----------- ----------- -----------
Total Increase (Decrease) (2,024,122) 16,089,463 9,572,977 4,353,564

Net Assets
Beginning of year................................................ 46,758,924 30,669,461 21,797,728 17,444,164
----------- ----------- ----------- -----------
End of year (including undistributed (overdistributed) net
investment income as set forth below)......................... $44,734,802 $46,758,924 $31,370,705 $21,797,728
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------

Undistributed (Overdistributed) Net Investment Income........... $ (48,931) $ 33,718 $ 24,590 $ 25,655
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31

STATEMENTS OF CHANGES IN NET ASSETS

Principal
Tax-Exempt Bond
INCOME FUNDS Fund, Inc.

1998 1997

<S> <C> <C>
Operations
Net investment income............................................ $ 9,965,827 $ 10,171,880
Net realized gain (loss) from investment transactions ........... 919,377 818,662
Change in unrealized appreciation/depreciation
of investments................................................ 2,567,043 5,658,545
------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 13,452,247 16,649,087

Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (9,655,683) (10,615,003)
Class B....................................................... (408,929) (312,381)
Class R....................................................... N/A N/A
Excess distribution of net investment income:
Class A....................................................... -- --
Class B....................................................... -- --
Class R....................................................... -- --
------------ ------------
Total Dividends and Distributions (10,064,612) (10,927,384)

Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 30,673,603 24,107,825
Class B....................................................... 4,178,912 2,704,384
Class R....................................................... N/A N/A
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 6,533,809 7,156,854
Class B....................................................... 306,980 214,928
Class R....................................................... N/A N/A
Shares redeemed:
Class A....................................................... (28,581,284) (30,946,309)
Class B....................................................... (1,005,105) (1,143,685)
Class R....................................................... N/A N/A
------------ ------------
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 12,106,915 2,093,997
------------ ------------
Total Increase (Decrease) 15,494,550 7,815,700

Net Assets
Beginning of year................................................ 200,789,355 192,973,655
------------ ------------
End of year (including undistributed (overdistributed) net
investment income as set forth below)......................... $216,283,905 $200,789,355
------------ ------------
------------ ------------

Undistributed (Overdistributed) Net Investment Income........... $ 83,391 $ 191,601
------------ ------------
------------ ------------

See accompanying notes.
</TABLE>
NOTES TO FINANCIAL STATEMENTS

Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.

Note 1 -- Significant Accounting Policies

Principal Bond Fund, Inc., Principal Government Securities Income Fund, Inc.,
Principal High Yield Fund, Inc., Principal Limited Term Bond Fund, Inc. and
Principal Tax-Exempt Bond Fund, Inc. (the "Income Funds") are registered under
the Investment Company Act of 1940, as amended, as open-end diversified
management investment companies and operate in the mutual fund industry.

Effective January 1, 1998, the following changes were made to the names of the
Income Funds:

<TABLE>
<CAPTION>
Former Fund Name New Fund Name
---------------- -------------
<S> <C> <C>
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
</TABLE>

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Class R shares are sold without an initial sales charge and are not
subject to a CDSC. Class B shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) after four years. All classes
of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the Income Funds' respective Board
of Directors. In addition, the Board of Directors of each fund declares separate
dividends on each class of shares.

The Income Funds allocate daily all income, expenses (other than class-specific
expenses) and realized and unrealized gains or losses to each class of shares
based upon the relative proportion of the value of shares outstanding of each
class. Expenses specifically attributable to a particular class are charged
directly to such class. Class-specific expenses charged to each class during the
year ended October 31, 1998, which are included in the corresponding captions of
the Statement of Operations, were as follows:

<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
-------------------------- ------------------------- --------------------------
Class A Class B Class R Class A Class B Class R Class A Class B Class R
-------- -------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. $311,884 $157,212 $70,117 $103,059 $26,545 $14,181 $12,906 $10,861 $8,660
Principal Government Securities Income Fund, Inc. 491,907 154,126 46,615 161,187 21,608 8,023 12,562 9,470 9,315
Principal High Yield Fund, Inc. 92,573 85,322 19,962 35,188 12,133 5,166 11,749 10,526 7,860
Principal Limited Term Bond Fund, Inc. 36,351 5,062 9,355 6,718 1,484 2,244 10,987 8,429 8,290
Principal Tax-Exempt Bond Fund, Inc. 464,545 66,122 N/A 53,011 3,387 N/A 23,416 13,979 N/A
</TABLE>

The Income Funds value securities for which market quotations are readily
available at market value, which is determined using the last reported sale
price or, if no sales are reported, as is regularly the case for some securities
traded over-the-counter, the last reported bid price. When reliable market
quotations are not considered to be readily available, which may be the case,
for example, with respect to certain debt securities and preferred stocks, the
investments are valued by using 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 each fund's Board of Directors. Securities with
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market.

The Income Funds record investment transactions generally one day after the
trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. Interest income is
recognized on an accrual basis.

The Income Funds may, pursuant to an exemptive order issued by the Securities
and Exchange Commission, transfer uninvested funds into a joint trading account.
The order permits the Income Funds' cash balances to be deposited into a single
joint account along with the cash of other registered investment companies
managed by Principal Management Corporation (formerly known as Princor
Management Corporation) (the "Manager"). These balances may be invested in one
or more short-term instruments.

Note 2 -- Federal Income Taxes

At October 31, 1998, the Income Funds had approximate net capital loss
carryforwards as follows:

<TABLE>
<CAPTION>
Principal
Government Principal Principal
Securities Income High Yield Limited Term Bond
Net Capital Loss Carryforwards Expire In: Fund, Inc. Fund, Inc. Fund, Inc.
---------------------------------------- ----------------- ---------- -----------------
<S> <C> <C> <C>
1999 $ - $ 429,000 $ -
2000 - 561,000 -
2001 - 409,000 -
2002 157,000 323,000 -
2003 1,075,000 106,000 -
2004 - - 4,000
2005 776,000 - 31,000
2006 - - 9,000
---------- ---------- -------
$2,008,000 $1,828,000 $44,000
---------- ---------- -------
---------- ---------- -------
</TABLE>

Note 3 -- Management Agreement and Transactions With Affiliates

The Income Funds have agreed to pay investment advisory and management fees to
Principal Management Corporation [wholly owned by Princor Financial Services
Corporation, a subsidiary of Principal Life Insurance Company (formerly known as
Principal Mutual Life Insurance Company)] computed at an annual percentage rate
of each fund's average daily net assets. The annual rate used in this
calculation for the Income Funds is as follows:

<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)
---------------------------------------------------------------------------
First Next Next Next Over
$100 $100 $100 $100 $400
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Government Securities Income Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal High Yield Fund, Inc. 0.60 0.55 0.50 0.45 0.40
Principal Limited Term Bond Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal Tax-Exempt Bond Fund, Inc. 0.50 0.45 0.40 0.35 0.30
</TABLE>

The Income Funds also reimburse the Manager for transfer and administrative
services, including the cost of accounting, data processing, supplies and other
services rendered.

The Manager voluntarily waives a portion of its fee for some of the Income
Funds. The waivers are in amounts that maintain total operating expenses for
each fund within certain limits. The limits are expressed as a percentage of
average daily net assets attributable to each class on an annualized basis
during the reporting period. The amounts waived and the operating expense
limits, which were maintained at or below those shown, are as follows:

<TABLE>
<CAPTION>
Amount
Waived
-----------------------------------------------
Year Ended Year Ended Expense
October 31, 1998 October 31, 1997 Limit
---------------- ---------------- -------
<S> <C> <C> <C>
Principal Bond Fund, Inc.
Class A $121,092 $41,526 0.95%
Class B 26,130 8,982 1.70
Class R 25,144 10,427 1.45
Principal Limited Term Bond Fund, Inc.
Class A 76,952 46,271 0.90
Class B 11,537 6,528 1.25
Class R 11,781 6,831 1.50
</TABLE>

The Manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by Principal Limited Term Bond Fund, Inc. through
October 31, 1999. Effective November 1, 1998, the expense limits were increased
to 1.00%, 1.35% and 1.60%, for Class A, Class B and Class R shares,
respectively. The Manager ceased its waiver of expenses for Principal Bond Fund,
Inc. on October 31, 1998.

Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00% (.25% and 1.25% for Principal Limited Term Bond
Fund, Inc., respectively), of the lesser of the current market value or the cost
of shares being redeemed. Princor Financial Services Corporation also retains
sales charges on sales of Class A shares based on declining rates which begin at
4.75% of the offering price (1.50% for Principal Limited Term Bond Fund, Inc.).
The aggregate amount of these charges retained, by fund, for the year ended
October 31, 1998 were as follows:

Class A Class B
-------- --------
Principal Bond Fund, Inc. $852,533 $35,337
Principal Government Securities Income Fund, Inc. 805,031 41,791
Principal High Yield Fund, Inc. 300,230 34,925
Principal Limited Term Bond Fund, Inc. 75,772 1,419
Principal Tax-Exempt Bond Fund, Inc. 643,073 24,683

No brokerage commissions were paid by the Income Funds to affiliated broker
dealers during the year.

The Income Funds bear distribution and shareholder servicing fees with respect
to Class A shares computed at an annual rate of up to .25% (.15% for the
Principal Limited Term Bond Fund, Inc.) of the average daily net assets
attributable to Class A shares of each fund. Each of the Income Funds adopted a
distribution plan with respect to Class B shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to 1.00% of the
average daily net assets attributable to Class B shares of each fund (.50% for
the Principal Limited Term Bond Fund, Inc.). Each of the Income Funds, with the
exception of Principal Tax-Exempt Bond Fund, Inc., adopted a distribution plan
with respect to Class R shares that provides for distribution and shareholder
servicing fees computed at an annual rate of up to .75% of the average daily net
assets attributable to Class R shares of each fund. Distribution and shareholder
servicing fees are paid to Princor Financial Services Corporation; a portion of
the fees are subsequently remitted to retail dealers. Pursuant to the
distribution agreements, fees unused by the principal underwriter at the end of
the fiscal year are returned to the Income Funds.

<TABLE>
<CAPTION>
Class A Class B Class R
--------- ------- -------
<S> <C> <C> <C>
Principal Bond Fund, Inc. 178,252 124 104
Principal Government Securities Income Fund, Inc. 94,035 122 103
Principal High Yield Fund, Inc. 396,345 174 5,053
Principal Limited Term Bond Fund, Inc. 1,171,382 117 4,731
Principal Tax-Exempt Bond Fund, Inc. 92,517 113 N/A
</TABLE>

Note 4 -- Investment Transactions

For the year ended October 31, 1998, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U. S. government securities) by the Income Funds were as
follows:

Purchases Sales
----------- -----------
Principal Bond Fund, Inc. $59,929,649 $23,024,436
Principal High Yield Fund, Inc. 32,903,766 30,183,099
Principal Limited Term Bond Fund, Inc. 12,957,730 6,012,923
Principal Tax-Exempt Bond Fund, Inc. 25,434,992 13,567,920

At October 31, 1998, net unrealized appreciation (depreciation) of investments
by the Income Funds was composed of the following:

<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
----------------------------------- Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
------------ -------------- ---------------------------
<S> <C> <C> <C>
Principal Bond Fund, Inc. $ 9,764,858 $ (766,607) $ 8,998,251
Principal Government Securities Income Fund, Inc. 9,701,127 (101,600) 9,599,527
Principal High Yield Fund, Inc. 485,117 (4,795,123) (4,310,006)
Principal Limited Term Bond Fund, Inc. 387,785 (226,582) 161,203
Principal Tax-Exempt Bond Fund, Inc. 14,607,775 (15,816) 14,591,959
</TABLE>

The Income Funds may trade portfolio securities on a "to-be-announced" (TBA)
basis. In a TBA transaction, the fund commits to purchase or sell securities for
which all specific information is not known at the time of the trade. Securities
purchased on a TBA basis are not settled until they are delivered to the fund,
normally 15 to 30 days later. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other portfolio securities. As of October 31, 1998, Principal Government
Securities Income Fund, Inc. had TBA purchase commitments involving securities
with a face amount of $9,000,000, cost of $9,113,438 and market value of
$9,092,817. The fund has set aside investment securities and other assets in
excess of the commitments to serve as collateral.

Note 4 -- Investment Transactions (Continued)

At October 31, 1998, the Income Funds held the following securities which may
require registration under the Securities Act of 1933, or an exemption
therefrom, in order to effect a sale in the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of October 31, Percentage of
Security Description Acquisition Cost 1998 Net Assets
-------------------------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. John Hancock Mutual Life
Insurance Co. Surplus Notes 1/8/97 $2,396,100 $2,616,117 1.43%

Principal High Yield Fund, Inc. BE Aerospace Senior Subordinated
Notes 10/28/98 750,000 768,750 1.72
Cenargo International PLC
First Mortgage Notes 10/22/98 1,305,000 1,305,000 2.92
Qwest Communications International
Senior Notes 10/28/98 893,916 920,250 2.06
---------- -----
2,994,000 6.70
Principal Limited Term Bond Fund, Inc. Orix Credit Alliance, Inc.
Medium-Term Notes 11/8/96 850,000 850,704 2.71

Principal Tax-Exempt Bond Fund, Inc. Eddyville, Iowa, IDR Ref. Bonds,
Cargill, Inc. Project 1/11/95 859,910 1,050,000 .49
</TABLE>
The Income Funds' investments are with various issuers in various industries.
The Schedules of Investments contained herein summarize concentrations of credit
risk by issuer and industry.

Note 5 -- Capital Share Transactions

Transactions in Capital Stock by fund were as follows:

<TABLE>
<CAPTION>
Principal Principal Principal
Bond Government Securities High Yield
Fund, Inc. Income Fund, Inc. Fund, Inc.
---------- --------------------- ----------
Year Ended October 31, 1998:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 3,558,782 3,449,728 1,429,263
Class B ......................................... 911,403 919,042 520,583
Class R............................................ 751,757 414,918 208,702
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 544,557 1,053,198 190,004
Class B ........................................... 72,083 76,520 51,887
Class R............................................ 45,324 28,745 23,509
Shares redeemed:
Class A ......................................... (2,379,170) (4,587,595) (1,722,188)
Class B ......................................... (216,720) (237,166) (222,473)
Class R............................................ (268,084) (100,699) (101,674)
--------- --------- ---------
Net Increase 3,019,932 1,016,691 377,613
--------- --------- ---------
--------- --------- ---------

</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal
Bond Government Securities High Yield
Fund, Inc. Income Fund, Inc. Fund, Inc.
---------- --------------------- ----------
Year Ended October 31, 1997:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 2,460,201 2,799,875 1,440,198
Class B ......................................... 581,347 585,099 591,875
Class R............................................ 542,993 354,800 227,035
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 534,855 1,189,680 141,482
Class B ........................................... 47,159 57,621 23,153
Class R............................................ 17,417 11,432 9,113
Shares redeemed:
Class A ......................................... (2,091,860) (5,287,652) (532,170)
Class B ......................................... (170,486) (332,061) (97,891)
Class R............................................ (84,604) (45,744) (17,821)
--------- --------- ---------
Net Increase (Decrease) 1,837,022 (666,950) 1,784,974
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>

Principal Principal
Limited Term Bond Tax-Exempt Bond
Fund, Inc. Fund, Inc.
----------------- ---------------
Year Ended October 31, 1998:
Shares sold:
<S> <C> <C>
Class A ......................................... 1,291,180 2,447,392
Class B ......................................... 138,167 333,971
Class R............................................ 173,119 N/A
Shares issued in reinvestment of dividends and distributions:
Class A ......................................... 137,689 522,117
Class B ......................................... 4,256 24,507
Class R............................................ 7,859 N/A
Shares redeemed:
Class A ......................................... (729,920) (2,279,032)
Class B ......................................... (34,626) (80,155)
Class R............................................ (37,539) N/A
--------- ---------
Net Increase 950,185 968,800
--------- ---------
--------- ---------

</TABLE>
<TABLE>
<CAPTION>

Year Ended October 31, 1997:
Shares sold:
<S> <C> <C>
Class A ......................................... 666,459 1,983,441
Class B ......................................... 58,936 222,542
Class R............................................ 86,576 N/A
Shares issued in reinvestment of dividends and distributions:
Class A ......................................... 118,478 589,808
Class B ......................................... 892 17,694
Class R............................................ 2,797 N/A
Shares redeemed:
Class A ......................................... (445,740) (2,541,274)
Class B ......................................... (7,993) (93,935)
Class R............................................ (36,339) N/A
--------- ---------

Net Increase 444,066 178,276
--------- ---------
--------- ---------
</TABLE>

Note 6 -- Line of Credit

The Income Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, Principal Tax-Exempt Bond Fund,
Inc. had an outstanding borrowing of $120,000 at an annual rate of 5.93%. No
other Income Fund had outstanding borrowings at October 31, 1998 under the line
of credit.

Note 7 -- Year 2000 Problem (Unaudited)

Like other mutual funds, financial and business organizations and individuals
around the world, the Income Funds could be adversely affected if the computer
systems used by the Manager and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem." The Manager is taking steps
it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems it uses and to obtain reasonable assurances that
comparable steps are being taken by each fund's other major service providers.
At this time, however there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the funds.
SCHEDULES OF INVESTMENTS

INCOME FUNDS

PRINCIPAL BOND FUND, INC.
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Bonds (95.93%)

Air Transportation, Scheduled (1.52%)
Federal Express Corp. 1994 Pass
Through Cert., Series A310-A3;
8.40%; 3/23/2010 $1,500,000 $ 1,727,070
Federal Express Corp. Pass Through
Cert.; 7.58%; 7/2/2019 1,000,000 1,053,140
------------
2,780,210
Aircraft & Parts (0.59%)
Textron, Inc. Medium-Term
Notes, Series C;
9.80%; 1/11/2000 500,000 525,083
9.55%; 3/19/2001 500,000 547,864
------------
1,072,947
Beverages (1.23%)
Joseph E. Seagram & Sons
Guaranteed Debentures;
8.38%; 2/15/2007 1,000,000 1,096,735
8.88%; 9/15/2011 1,000,000 1,145,888
------------
2,242,623
Cable & Other Pay TV Services (2.56%)
CSC Holdings, Inc. Senior Notes;
7.25%; 7/15/2008 2,000,000 1,952,500
Tele-Communications, Inc.
Notes; 7.25%; 8/1/2005 2,000,000 2,157,958
Senior Debentures; 7.88%; 8/1/2013 500,000 574,273
------------
4,684,731
Cash Grains (1.46%)
Aktiebolaget SKF Senior Notes;
7.63%; 7/15/2003 2,500,000 2,662,782

Combination Utility Services (3.43%)
MidAmerican Energy Co.
Medium-Term Notes;
6.38%; 6/15/2006 3,000,000 3,103,770
PG Energy, Inc. First Mortgage
Bonds; 8.38%; 12/1/2002 500,000 548,778
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/2009 1,250,000 1,483,441
Puget Sound Power & Light Co.
1st Mortgage Medium-Term Notes,
Series A; 7.75%; 2/1/2007 1,000,000 1,126,546
------------
6,262,535
Commercial Banks (2.51%)
NationsBank Corp. Subordinated
Notes; 6.38%; 2/15/2008 4,500,000 4,584,298

Computer & Office Equipment (1.64%)
Seagate Technology, Inc. Senior Notes;
7.37%; 3/1/2007 3,000,000 2,992,296

Construction & Related
Machinery (0.72%)
Caterpillar, Inc. Global Debentures;
9.38%; 8/15/2011 $1,000,000 $ 1,309,876

Consumer Products (0.86%)
Philip Morris Cos. Notes;
6.80%; 12/1/2003 500,000 527,894
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/2004 1,000,000 1,039,660
------------
1,567,554
Copper Ores (1.91%)
Asarco, Inc.
Debentures; 7.88%; 4/15/2013 2,000,000 2,232,498
Notes; 7.38%; 2/1/2003 1,200,000 1,254,737
------------
3,487,235
Crude Petroleum & Natural Gas (0.30%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/2001 500,000 545,423

Department Stores (2.97%)
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/2000 400,000 416,543
Fred Meyer, Inc. Senior Notes;
7.38%; 3/1/2005 2,000,000 2,107,422
J.C. Penney Co., Inc. Debentures;
7.13%; 11/15/2023 1,000,000 994,879
Sears Roebuck Co.
Medium-Term Notes;
9.05%; 2/6/2012 500,000 631,657
9.12%; 2/13/2012 1,000,000 1,269,854
------------
5,420,355
Drug Stores & Proprietary
Stores (1.11%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/2013 2,000,000 2,030,400

Electric Services (2.89%)
Commonwealth Edison Co.
Debentures; 6.95%; 7/15/2018 1,000,000 994,401
Ohio Edison Co. First Mortgage
Bonds; 8.25%; 4/1/2002 2,000,000 2,167,752
Southern California Edison Co.
Notes; 6.38%; 1/15/2006 1,000,000 1,047,965
Toledo Edison Co. Debentures;
8.70%; 9/1/2002 1,000,000 1,078,551
------------
5,288,669
Engines & Turbines (0.57%)
Brunswick Corp. Debentures;
7.38%; 9/1/2023 1,000,000 1,047,797

Fabricated Rubber Products,
NEC (0.96%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/2003 1,500,000 1,751,452

Farm & Garden Machinery (1.48%)
Case Corp. Notes; 7.25%; 1/15/2016 1,000,000 1,066,703
Tenneco, Inc. Notes;
10.08%; 2/1/2001 500,000 550,446
8.08%; 10/1/2002 1,000,000 1,088,692
------------
2,705,841
Federal & Federally Sponsored
Credit (4.25%)
Fannie Mae Benchmark Notes;
5.75%; 4/15/2003 $2,500,000 $ 2,593,278
5.75%; 6/15/2005 5,000,000 5,166,290
------------
7,759,568
General Government, NEC (2.58%)
Ontario Hydro Debentures;
7.45%; 3/31/2013 2,000,000 2,307,420
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/2013 2,000,000 2,410,320
------------
4,717,740
General Industrial Machinery (0.56%)
Timken Company Medium-Term
Notes; 6.20%; 1/15/2008 1,000,000 1,030,679

Gold & Silver Ores (0.68%)
Placer Dome, Inc. Notes;
7.13%; 6/15/2007 1,250,000 1,239,191

Grain Mill Products (0.58%)
Ralston Purina Co. Debentures;
7.75%; 10/1/2015 1,000,000 1,068,831

Grocery Stores (2.74%)
American Stores Co. Bond;
8.00%; 6/1/2026 2,500,000 2,727,230
Food Lion, Inc.
Medium-Term Notes;
8.67%; 8/28/2006 1,000,000 1,173,464
Notes; 7.55%; 4/15/2007 1,000,000 1,103,438
------------
5,004,132
Highway & Street Construction (1.33%)
Foster Wheeler Corp. Notes;
6.75%; 11/15/2005 2,500,000 2,423,840

Household Furniture (1.27%)
Masco Corp. Debentures;
7.13%; 8/15/2013 2,000,000 2,328,388

Industrial Inorganic Chemicals (1.60%)
Dow Chemical Co.
Debentures; 7.38%; 3/1/2023 1,000,000 1,033,692
Medium-Term Notes;
7.75%; 9/15/2020 1,000,000 1,108,036
FMC Corp. Senior Notes;
6.38%; 9/1/2003 750,000 777,000
------------
2,918,728
Life Insurance (1.43%)
John Hancock Mutual Life Insurance
Co. Surplus Notes; 7.38%; 2/15/2024 2,500,000(a) 2,616,117

Machinery, Equipment, & Supplies (0.14%)
AAR Corp. Notes; 7.25%; 10/15/2003 250,000 262,699

Management & Public Relations (0.57%)
Servicemaster Co. Ltd. Notes;
6.95%; 8/15/2007 1,000,000 1,050,249

Millwork, Plywood & Structural
Members (0.41%)
Georgia-Pacific Corp.
Debentures; 9.50%; 12/1/2011 $ 600,000 $ 741,187

Miscellaneous Amusement, Recreation
Service (1.01%)
Circus Circus Enterprises Senior
Notes; 6.45%; 2/1/2006 2,000,000 1,854,484

Miscellaneous Chemical
Products (1.85%)
Ferro Corp. Senior Debentures;
7.63%; 5/1/2013 1,100,000 1,254,591
Smith International, Inc. Senior
Notes; 7.00%; 9/15/2007 2,025,000 2,134,615
------------
3,389,206
Miscellaneous Investing (2.57%)
BRE Properties, Inc. Notes;
7.20%; 6/15/2007 2,000,000 1,859,490
First Industrial LP Medium-Term
Notes; 7.00%; 12/1/2006 1,500,000 1,521,584
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/2005 1,250,000 1,312,487
------------
4,693,561
Miscellaneous Metal Ores (1.02%)
Cyprus Amax Minerals Notes;
7.38%; 5/15/2007 1,100,000 1,126,989
Cyprus Minerals Co. Notes;
10.13%; 4/1/2002 650,000 734,176
------------
1,861,165
Motor Vehicles & Equipment (1.91%)
Ford Motor Co. Debentures;
7.50%; 8/1/2026 1,000,000 1,083,040
8.90%; 1/15/2032 1,000,000 1,266,700
General Motors Corp. Global
Medium-Term Notes;
8.88%; 5/15/2003 1,000,000 1,135,622
------------
3,485,362
Newspapers (1.36%)
News America Holdings, Inc.
Guaranteed Senior Notes;
8.50%; 2/15/2005 2,250,000 2,486,373

Oil & Gas Field Services (1.72%)
Petroleum Geo-Services ASA Notes;
7.50%; 3/31/2007 2,500,000 2,651,430
R&B Falcon Senior Notes;
6.75%; 4/15/2005 500,000 496,301
------------
3,147,731
Operative Builders (1.34%)
Pulte Corp.
Senior Notes; 8.38%; 8/15/2004 500,000 534,255
Notes; 7.63%; 10/15/2017 2,000,000 1,922,658
------------
2,456,913
Paper & Paper Products (1.55%)
Boise Cascade Office Products Corp.;
7.05%; 5/15/2005 3,000,000 2,827,413

Paper Mills (3.37%)
Bowater, Inc. Debentures;
9.50%; 10/15/2012 $1,000,000 $ 1,283,206
9.38%; 12/15/2021 1,500,000 1,876,892
Champion International Corp.
Notes; 9.88%; 6/1/2000 750,000 795,869
Chesapeake Corp. Notes;
9.88%; 5/1/2003 1,000,000 1,161,728
James River Corp. Notes;
6.70%; 11/15/2003 1,000,000 1,040,837
------------
6,158,532
Paperboard Mills (0.99%)
Federal Paper Board Co., Inc.
Debentures; 8.88%; 7/1/2012 1,500,000 1,808,773

Personal Credit Institutions (3.46%)
Commercial Credit Co. Notes;
6.75%; 7/1/2007 2,000,000 2,097,726
General Motors Acceptance Corp.
Global Notes; 8.50%; 1/1/2003 2,000,000 2,220,296
Household Finance Corp. Notes
5.88%; 11/1/2002 2,000,000 2,004,206
------------
6,322,228
Petroleum & Petroleum
Products (2.19%)
Enron Corp. Notes; 9.13%; 4/1/2003 3,500,000 3,993,213

Petroleum Refining (5.59%)
Ashland, Inc. Medium-Term Notes;
7.71%; 5/11/2007 500,000 547,940
Ashland Oil, Inc. Medium-Term Notes;
7.73%; 7/15/2013 750,000 840,044
7.72%; 7/15/2013 1,000,000 1,119,109
Mapco, Inc. Medium-Term Notes;
8.48%; 8/5/2013 1,000,000 1,215,732
Sun Co., Inc.
Debentures; 9.00%; 11/1/2024 2,000,000 2,466,540
Notes; 7.13%; 3/15/2004 300,000 319,688
Tosco Corp. Notes; 7.25%; 1/1/2007 2,500,000 2,600,445
Ultramar Credit Corp. Guaranteed
Notes; 8.63%; 7/1/2002 1,000,000 1,107,646
------------
10,217,144
Plastic Materials & Synthetics (0.29%)
Geon Co. Notes; 6.88%; 12/15/2005 500,000 526,310

Pulp Mills (1.57%)
ITT Rayonier, Inc. Notes;
7.50%; 10/15/2002 1,875,000 2,013,248
International Paper Co.
Medium-Term Notes;
9.70%; 8/15/2000 800,000 860,503
------------
2,873,751
Railroads (1.92%)
Union Pacific Corp.
Debentures; 7.00%; 2/1/2016 2,500,000 2,443,493
Notes; 7.25%; 11/1/2008 1,000,000 1,064,144
------------
3,507,637
Real Estate Operators & Lessor (0.67%)
First Industrial, L.P. Notes;
7.60%; 5/15/2007 $1,250,000 $ 1,216,978

Refrigeration & Service
Machinery (0.87%)
Westinghouse Electric Corp.
Global Notes; 8.88%; 6/1/2001 1,500,000 1,590,775

Rental of Railroad Cars (1.50%)
GATX Capital Corp. Medium-Term Notes;
Series B; 9.50%; 1/10/2002 1,500,000 1,676,900
Series C; 6.86%; 10/13/2005 1,000,000 1,063,177
------------
2,740,077
Rubber & Plastics Footwear (1.40%)
Reebok International Ltd. Debentures;
6.75%; 9/15/2005 2,500,000 2,562,185

Sanitary Services (1.87%)
Laidlaw, Inc.
Notes; 7.70%; 8/15/2002 1,000,000 1,050,411
Senior Notes; 7.88%; 4/15/2005 750,000 805,202
WMX Technologies, Inc. Notes;
7.00%; 10/15/2006 1,500,000 1,568,724

3,424,337
Security Brokers & Dealers (2.77%)
Bear Stearns Cos., Inc.
Senior Notes; 7.00%; 3/1/2007 2,500,000 2,546,030
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.38%; 1/15/2007 2,545,000 2,524,518
------------
5,070,548
Telephone Communication (5.59%)
Airtouch Communications, Inc. Notes;
6.65%; 5/1/2008 2,500,000 2,574,360
GTE Corp. Notes; 6.36%; 4/15/2006 2,500,000 2,621,327
Sprint Corp. Notes; 8.13%; 7/15/2002 1,500,000 1,647,923
Worldcom, Inc. Notes;
7.75%; 4/1/2007 3,000,000 3,372,759
------------
10,216,369
Variety Stores (0.70%)
Dayton-Hudson Corp. Debentures;
9.25%; 8/15/2011 1,000,000 1,272,728
------------

Total Bonds 175,302,166

Asset-Backed Securities (1.72%)

Security Brokers & Dealers (1.72%)
Merrill Lynch Mortgage Investors, Inc.
Collateralized Mortgage-Backed
Security, Series 95-C3, 7.37%*
Class C; 12/26/2025 3,000,000 3,150,900

Commercial Paper (0.56%)

Personal Credit Institutions (0.56%)
Investment in Joint Trade Account;
Associates Corp.; 5.72%; 11/2/1998 1,019,410 1,019,410
------------
Total Portfolio Investments (98.21%) 179,472,476

- --------------------------------------------------------------------------------
Value
- --------------------------------------------------------------------------------

Cash and receivables, net of liabilities (1.79%) $ 3,270,188
------------
Total Net Assets (100.00%) $182,742,664
------------
------------

(a)Restricted security - See Note 4 to the financial statements.
* Variable rate (monthly)

PRINCIPAL GOVERNMENT SECURITIES INCOME
FUND, INC.

- --------------------------------------------------------------------------------
Description of Issue
- ------------------------------------------ Principal
Type Rate Maturity Amount Value
- --------------------------------------------------------------------------------
Government National Mortgage Association (GNMA)
Certificates (101.50%)

GNMA I 6.00% 10/15/2023-1/20/2028 $14,658,308 $ 14,523,206
GNMA I 6.50 9/15/2023-12/1/2028 71,781,437 72,574,692
GNMA I 7.00 10/15/2022-5/15/2028 78,090,120 79,924,836
GNMA I 7.25 9/15/2025-10/15/2025 4,468,787 4,569,960
GNMA I 7.50 4/15/2017-10/15/2027 41,113,811 42,373,522
GNMA I 8.00 8/15/2016-2/15/2022 9,279,703 9,685,315
GNMA II 6.00 1/20/2024-8/20/2028 51,693,537 50,848,092
GNMA II 6.50 3/20/2024-3/20/2027 13,679,743 13,729,548
------------

Total GNMA Certificates 288,229,171

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Federal Agency Short-Term Obligation (1.31%)
Investment in Joint Trade Account;
Federal National Mortgage
Association; 5.45%; 11/2/1998 $3,723,535 $ 3,723,535
------------

Total Portfolio Investments (102.81%) 291,952,706

Liabilities, net of cash, receivables and
other assets (-2.81%) (7,971,330)
------------

Total Net Assets (100.00%) $283,981,376
------------
------------

PRINCIPAL HIGH YIELD FUND, INC.

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Bonds (95.07%)

Advertising (3.57%)
Lamar Advertising Co.
Senior Subordinated Notes;
9.63%; 12/1/2006 $1,500,000 $ 1,597,500

Aircraft & Parts (1.72%)
BE Aerospace Senior Subordinated
Notes; 9.50%; 11/1/2008 $ 750,000(a) $ 768,750

Cable & Other Pay TV Services (10.28%)
CSC Holdings, Inc. Senior Notes;
7.25%; 7/15/2008 1,500,000 1,464,375
Century Communications Senior Notes;
8.75%; 10/1/2007 900,000 929,250
Fox/Liberty Networks LLC Senior Notes;
8.88%; 8/15/2007 1,500,000 1,451,250
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/2002 700,000 756,000
-----------
4,600,875
Cogeneration - Small Power
Producer (3.50%)
AES Corp. Senior Subordinated
Notes; 8.38%; 8/15/2007 800,000 744,000
Calpine Corp. Senior Notes;
8.75%; 7/15/2007 800,000 820,000
-----------
1,564,000
Communications Equipment (3.10%)
FWT, Inc. Senior Subordinated
Notes; 9.88%; 11/15/2007 800,000 466,000
Qwest Communications International
Senior Notes; 7.50%; 11/1/2008 900,000(a) 920,250
-----------
1,386,250
Communication Services, NEC (2.73%)
Level 3 Communications, Inc.
Senior Notes; 9.13%; 5/1/2008 1,300,000 1,222,000

Computer & Data Processing
Services (2.01%)
DecisionOne Corp. Senior Subordinated
Notes; 9.75%; 8/1/2007 1,500,000 900,000

Crude Petroleum & Natural Gas (4.61%)
Chesapeake Energy Corp. Senior
Notes, Series A; 9.63%; 5/1/2005 1,500,000 1,275,000
Ocean Energy, Inc. Senior Subordinated
Notes; 8.88%; 7/15/2007 800,000 788,000
-----------
2,063,000
Eating & Drinking Places (5.07%)
Cafeteria Operators L. P. Senior Secured
Notes; 12.00%; 12/31/2001 1,500,000 1,413,750
Foodmaker, Inc. Senior Subordinated
Notes; 8.38%; 4/15/2008 900,000 852,750
-----------
2,266,500
Electric Services (1.89%)
York Power Funding Ltd. Senior Secured
Bonds; 12.00%; 10/30/2007 900,000 843,750

Finance Services (1.70%)
DVI, Inc. Senior Notes;
9.88%; 2/1/2004 800,000 760,000

Forest Products (1.11%)
Doman Industries Ltd. Senior Notes;
8.75%; 3/15/2004 700,000 497,000

Fuel Dealers (1.50%)
Petroleum Heat & Power Co., Inc.
Senior Subordinated Debentures;
12.25%; 2/1/2005 700,000 672,000

Funeral Service & Crematories (0.62%)
Loewen Group International, Inc.;
8.25%; 10/15/2003 $ 350,000 $ 276,500

Grocery Stores (1.75%)
Marsh Supermarkets Senior
Subordinated Notes;
8.88%; 8/1/2007 800,000 784,000

Heavy Construction, Except
Highway (3.12%)
Mastec, Inc. Senior Subordinated
Notes; 7.75%; 2/1/2008 1,500,000 1,395,000

Hotels & Motels (2.97%)
HMH Properties, Inc. Senior Notes;
7.88%; 8/1/2008 750,000 725,625
John Q. Hammons Hotels, L.P. &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/2004 700,000 602,000
-----------
1,327,625
Industrial Inorganic Chemicals (0.30%)
PT. Tri Polyta Indonesia TBK
Guaranteed Secured Notes;
11.38%; 12/1/2003 800,000(b) 136,000

Men's & Boys' Clothing Stores (0.95%)
Edison Brothers Stores, Inc. Senior
Notes; 11.00%; 9/26/2007 700,000 427,000

Miscellaneous Amusement, Recreation
Service (3.49%)
Rio Hotel & Casino, Inc. Senior
Subordinated Notes;
9.50%; 4/15/2007 700,000 759,500
Station Casinos, Inc. Senior
Subordinated Notes, Series B;
9.63%; 6/1/2003 800,000 800,000
-----------
1,559,500
Miscellaneous Equipment Rental &
Leasing (3.14%)
Rental Service Corp. Senior Subordinated
Notes; 9.00%; 5/15/2008 1,500,000 1,402,500

Miscellaneous Metal Ores (2.62%)
Glencore Nickel Priority Ltd.
Senior Secured Notes;
9.00%; 12/1/2014 1,500,000 1,170,000

Miscellaneous Shopping Goods
Stores (1.89%)
Zale Corp. Senior Notes;
8.50%; 10/1/2007 900,000 846,000

Newspapers (1.86%)
Hollinger International Publishing, Inc.
Senior Subordinated Notes;
9.25%; 3/15/2007 $ 800,000 $ 834,000

Nursing & Personal Care Facilities (1.63%)
Integrated Health Services, Inc. Senior
Subordinated Notes; 9.25%; 1/15/2008 800,000 728,000

Oil & Gas Field Services (1.56%)
Dawson Production Services
Senior Notes; 9.38%; 2/1/2007 700,000 700,000

Paper Mills (0.96%)
Indah Kiat Finance Mauritius Ltd.
Guaranteed Senior Notes;
10.00%; 7/1/2007 800,000 430,000

Personal Credit Institutions (1.18%)
MacSaver Financial Services, Inc.
Notes; 7.60%; 8/1/2007 800,000 527,793

Petroleum Refining (1.51%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/2005 700,000 677,250

Pulp Mills (1.57%)
Pen-Tab Industries, Inc. Senior
Subordinated Notes; 10.88%; 2/1/2007 800,000 704,000

Radio & Television Broadcasting (1.72%)
Antenna TV S.A. Senior Notes;
9.00%; 8/1/2007 900,000 767,250

Retail Stores, NEC (1.83%)
Cole National Group, Inc.
Senior Subordinated Notes;
9.88%; 12/31/2006 800,000 820,000

Search & Navigation Equipment (0.94%)
AMRESCO, Inc. Senior Subordinated
Notes; 10.00%; 3/15/2004 700,000 420,000

Telephone Communication (13.75%)
Comcast Cellular Holdings Senior Notes;
9.50%; 5/1/2007 1,500,000 1,545,000
Intermedia Communications, Inc. Senior
Notes; 8.50%; 1/15/2008 800,000 756,000
Lenfest Communications Senior Notes;
8.38%; 11/1/2005 800,000 836,000
NEXTLINK Communications, Inc.
Senior Notes; 9.00%; 3/15/2008 800,000 728,000
Rogers Cablesystems, Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/2002 750,000 800,625
Rogers Cantel, Inc. Senior Secured
Debentures; 9.75%; 6/1/2016 700,000 710,500
Vanguard Cellular Systems, Inc. Senior
Debentures; 9.38%; 4/15/2006 700,000 773,500
-----------
6,149,625
Water Transportation of Freight,
NEC (2.92%)
Cenargo International PLC First Mortgage
Notes; 9.75%; 6/15/2008 $1,500,000(a) $ 1,305,000
-----------

Total Bonds 42,528,668

Commercial Paper (6.31%)

Business Credit Institutions (1.41%)
American Express Credit Corp.;
5.05%; 11/2/1998 310,000 309,956
General Electric Capital Corp.;
5.10%; 11/2/1998 320,000 319,955
-----------
629,911
Personal Credit Institutions (4.91%)
Investment in Joint Trade Account,
Associates Corp; 5.72%; 11/2/1998 2,194,868 2,194,868
-----------

Total Commercial Paper 2,824,779
-----------

Total Portfolio Investments (101.38%) 45,353,447

Liabilities, net of cash, receivables and
other assets (-1.38%) (618,645)
-----------

Total Net Assets (100.00%) $44,734,802
-----------
-----------

(a)Restricted security - See Note 4 to the financial statements.
(b)Non-income producing security - Security in default.

PRINCIPAL LIMITED TERM BOND FUND, INC.

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Bonds (61.34%)

Business Credit Institutions (9.36%)
CIT Group Holdings
Senior Medium-Term Notes;
6.38%; 10/1/2002 $1,000,000 $ 1,019,533
Ford Motor Credit Co. Notes;
7.50%; 1/15/2003 1,000,000 1,065,888
Orix Credit Alliance, Inc.
Medium-Term Notes;
6.46%; 5/17/1999 850,000(a) 850,704
-----------
2,936,125
Combination Utility Services (3.53%)
Consolidated Edison Co. Debentures,
Series 93-B; 6.50%; 2/1/2001 824,000 851,245
Pacificorp First Mortgage Medium-Term
Notes; 9.50%; 5/20/1999 250,000 255,550
-----------
1,106,795
Commercial Banks (1.06%)
Lehman Large Loan Class A1,
Series 1997-LLI; 6.79%; 6/12/2004 317,722 331,025

Department Stores (5.25%)
J. C. Penney Co., Inc. Notes;
9.05%; 3/1/2001 $1,000,000 $ 1,077,980
Sears Roebuck Acceptance Corp.
Medium-Term Notes, Series II;
6.69%; 8/13/2001 450,000 466,955
Sears Roebuck Co. Medium-Term
Notes; 6.46%; 5/12/2000 100,000 101,278
-----------
1,646,213
Finance Services (4.87%)
Aetna Services, Inc. Notes;
6.38%; 8/15/2003 500,000 518,663
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.25%; 4/15/2003 1,000,000 1,009,355
-----------
1,528,018
Federal & Federally Sponsored
Credit (0.97%)
Federal Home Loan Mortgage
Corporation Debentures;
6.57%; 2/27/2007 130,000 141,055
Federal National Mortgage
Association Medium-Term Notes;
6.70%; 6/19/2007 150,000 163,837
-----------
304,892
General Industrial Machinery (3.39%)
Timken Co. Medium-Term Notes;
7.30%; 8/13/2002 1,000,000 1,064,405

Miscellaneous Investing (0.96%)
United Dominion Realty Trust
Notes; 7.25%; 4/1/1999 300,000 300,114

Mortgage Bankers & Brokers (2.76%)
Countrywide Funding Corp.
Medium-Term Notes;
6.05%; 3/1/2001 860,000 867,377

Motor Vehicles & Equipment (1.75%)
General Motors Corp. Medium-Term
Notes; 9.20%; 7/2/2001 500,000 548,645

Paper Mills (3.28%)
International Paper Co. Notes;
7.00%; 6/1/2001 1,000,000 1,030,053

Paperboard Mills (3.46%)
Temple-Inland, Inc. Notes;
9.00%; 5/1/2001 1,000,000 1,084,663

Personal Credit Institutions (11.62%)
American General Finance Corp.
Medium-Term Notes, Series D;
7.46%; 3/28/2000 350,000 359,675
Notes; 7.25%; 4/15/2000 701,000 721,253
Associates Corp. of North America
Notes; 5.75%; 10/15/2003 1,000,000 1,004,350
Chrysler Financial Corp.
Medium-Term Notes;
8.45%; 1/28/2000 500,000 517,709
General Motors Acceptance Corp.
Notes; 6.63%; 10/1/2002 1,000,000 1,041,056
-----------
3,644,043
Plumbing & Heating, Except
Electric (3.42%)
Masco Corp. Notes; 6.13%; 9/15/2003 $1,035,000 $ 1,073,625

Security Brokers & Dealers (3.39%)
Merrill Lynch & Co., Inc. Notes;
6.55%; 8/1/2004 1,030,000 1,064,886

Telephone Communication (2.27%)
Nynex Capital Funding Medium-Term
Notes, Series A; 9.40%; 6/1/2000 670,000 711,927
-----------

Total Bonds 19,242,806

- --------------------------------------------------------------------------------
Description of Issue
- ---------------------------------- Principal
Type Rate Maturity Amount Value
- --------------------------------------------------------------------------------

Federal Home Loan Mortgage Corporation (FHLMC)
Certificates (11.71%)

FHLMC 7.00% 12/1/2022 $ 719,438 $ 731,920
FHLMC 7.00 3/1/2028 993,337 1,009,796
FHLMC 7.25 12/1/2007 493,439 499,287
FHLMC 8.00 12/1/2011 242,965 251,502
FHLMC 8.00 10/1/2022 230,115 237,727
FHLMC 8.25 1/1/2012 86,170 88,058
FHLMC 8.50 1/1/2000 437,643 443,529
FHLMC 8.50 4/1/2000 90,095 91,307
FHLMC 9.00 9/1/2009 303,768 320,958
-----------

Total FHLMC Certificates 3,674,084

Federal National Mortgage Association (FNMA)
Certificates (6.81%)

FNMA 6.00 7/1/2028 1,000,000 987,890
FNMA 8.00 10/1/2006 119,371 121,758
FNMA 8.00 5/1/2027 337,982 349,402
FNMA 8.50 5/1/2022 286,588 298,966
FNMA 9.00 2/1/2025 356,057 376,787
-----------

Total FNMA Certificates 2,134,803

Government National Mortgage Association (GNMA)
Certificates (8.95%)

GNMA I 6.50 6/15/2028 991,200 1,002,193
GNMA I 6.50 9/15/2028 998,617 1,009,691
GNMA I 9.00 7/15/2017 76,258 81,600
GNMAII 6.00 7/20/2028 496,764 488,692
GNMAII 8.00 1/20/2016 216,224 224,529

Total GNMA Certificates 2,806,705

Asset-Backed Securities (8.92%)

Motor Vehicles & Equipment (3.15%)
GMAC Commercial Mortgage
Securities, Inc. Mortgage Pass-Through
Certificates, Series 1998-C2, Class C;
6.50%; 8/15/2008 $1,000,000 $ 987,730

Personal Credit Institutions (1.18%)
Union Acceptance Corp. 1996-B Auto
Trust Pass-Through Certificates,
Class A; 6.45%; 7/8/2003 366,453 370,924

Mortgage Pass Thru Securities (4.59%)
J.P. Morgan Commercial Mortgage
Finance Corp. Mortgage
Pass-Through, Series 97-C5,
Class A-2; 7.06%; 9/15/2029 1,360,000 1,441,097
-----------

Total Asset-Backed Securities 2,799,751

Commercial Paper (1.23%)

Personal Credit Institutions (1.23%)
Investment in Joint Trade Account;
Associates Corp.; 5.72%; 11/2/1998 386,355 386,355
-----------

Total Portfolio Investments (98.96%) 31,044,504

Cash, receivables and other assets,
net of liabilities (1.04%) 326,201
-----------

Total Net Assets (100.00%) $31,370,705
-----------
-----------

(a)Restricted security - See Note 4 to the financial statements.

PRINCIPAL TAX-EXEMPT BOND FUND, INC.

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Long-Term Tax-Exempt Bonds (98.09%)

Alabama (2.40%)
Courtland, Alabama IDB IDR Series A
Bonds for Champion International;
7.20%; 12/1/2013 $3,815,000 $ 4,191,731
Phenix County, Alabama IDB
Environmental Improvement Rev.
Bonds, Mead Coated Board, Inc.,
Series B; 5.25%; 4/1/2028 1,000,000 991,250
------------
5,182,981
Arizona (1.97%)
Navajo County, Arizona Pollution
Control Corp. Rev. Ref. Bonds,
Arizona Public Service Co.,
Series 1993A; 5.88%; 8/15/2028 4,100,000 4,264,000

Arkansas (2.54%)
City of Blytheville, Arkansas Solid Waste
Recycling & Sewer Treatment Rev.
Bonds, Series 1992, Nucor Corp.
Project; 6.90%; 12/1/2021 $4,610,000 $ 4,984,563
Little River County Arkansas Rev.
Georgia Pacific Corp. Project;
5.60%; 10/1/2026 500,000 501,250
------------
5,485,813
California (4.58%)
ABAG Finance Authority for Nonprofit
Corp., Cert. of Participation,
Stanford University Hospital;
5.00%; 11/1/2004 750,000 797,813
5.50%; 11/1/2013 1,250,000 1,375,000
5.25%; 11/1/2020 1,750,000 1,824,375
California Pollution Control Funding
Authority Pollution Control Rev. Ref.
Bonds for San Diego Gas & Electric,
Series A; 5.90%; 6/1/2014 1,000,000 1,125,000
California Pollution Control Funding
Authority Rev. Bonds, Atlantic
Richfield Co. Project; 5.00%; 4/1/2008 2,500,000 2,609,375
City of Upland, California San Antonio
Comm. Hospital Cert. of Participation;
5.25%; 1/1/2004 2,080,000 2,173,600
------------
9,905,163
Colorado (2.60%)
City & County of Denver, Colorado
Airport System Rev. Bonds,
Series 1991D; 7.75%; 11/15/2013 3,185,000 4,108,650
Colorado Health Fac. Authority Rev.
Bonds for Sisters of Charity
Healthcare Systems, Series 1994;
5.25%; 5/15/2014 1,500,000 1,524,375
------------
5,633,025
Florida (1.10%)
Nassau County, Florida Pollution
Control Rev. Ref. Bonds; ITT
Rayonier, Inc. Project;
6.10%; 6/1/2005 1,000,000 1,065,000
7.65%; 6/1/2006 1,265,000 1,306,315
------------
2,371,315
Georgia (1.73%)
Fulco, Georgia Hospital Authority Rev.
Anticipation Cert. for St. Joseph's
Hospital of Atlanta, Inc.;
5.50%; 10/1/2014 2,000,000 2,202,500
Municipal Electric Authority of Georgia
Power Rev. Bonds, Series R;
7.30%; 1/1/2009 1,505,000 1,542,098
------------
3,744,598
Illinois (13.55%)
Chicago, Illinois Midway Airport Rev.
Bonds, Series A, MBIA Insured;
5.50%; 1/1/2011 1,500,000 1,603,125
5.50%; 1/1/2013 500,000 533,750
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
American Airlines, Inc. Project-A;
7.88%; 11/1/2025 6,010,000 6,475,775
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
Lufthansa German Airlines Project;
7.13%; 5/1/2018 $1,000,000 $ 1,076,250
City of Chicago, Illinois Adj. Rate Gas
Supply Rev. Bonds, Series 1985A,
Peoples Gas Light & Coke Project;
6.88%; 3/1/2015 2,800,000 3,062,500
Illinois Health Fac. Authority Ref. Rev.
Bonds for OSF Healthcare System;
5.75%; 11/15/2007 1,000,000 1,071,250
6.00%; 11/15/2010 500,000 538,750
6.00%; 11/15/2013 500,000 535,625
Illinois Health Fac. Authority Rev. Bonds,
Northwestern Memorial Hospital,
Series 1994A;
5.60%; 8/15/2006 500,000 539,375
5.75%; 8/15/2008 615,000 664,969
5.80%; 8/15/2009 840,000 906,150
6.10%; 8/15/2014 1,000,000 1,076,250
Illinois Health Fac. Authority Rev.
Bonds for Sarah Bush Lincoln
Health Center;
Series 1992; 7.25%; 5/15/2002 2,950,000 3,344,562
Series 1996B; 6.00%; 2/15/2011 1,000,000 1,087,500
Series 1996B; 5.50%; 2/15/2016 1,000,000 1,015,000
Illinois Health Fac. Authority Rev.
Bonds for South Suburban Hospital,
Series 1992;
7.00%; 2/15/2009 305,000 358,375
7.00%; 2/15/2018 720,000 888,300
Illinois Health Fac. Authority Rev. Ref.
Bonds for Advocate Healthcare,
Series A; 6.75%; 4/15/2012 2,000,000 2,314,950
Regional Transportation Authority,
Illinois General Obligation Bonds,
Series 1994A; 6.25%; 6/1/2015 2,000,000 2,212,500
------------
29,304,956
Indiana (7.52%)
City of Mount Vernon, Indiana
Pollution Control Rev. Bonds for
Southern Indiana Gas & Electric
Co. Project; 7.25%; 3/1/2014 700,000 748,125
City of Petersburg, Indiana Pollution
Control Rev. Bonds, for Indianapolis
Power & Light Co. Project,
Series 1993A; 6.10%; 1/1/2016 4,000,000 4,265,000
Indiana Health Fac. Financing Authority
Hospital Rev. Bonds, Clarian Health
Partners, Inc.; 5.50%; 2/15/2009 2,520,000 2,664,900
Indiana Health Fac. Financing
Authority Hospital Rev. Ref. Bonds,
Schneck Memorial Hospital,
Series 1998;
4.70%; 2/15/2006 500,000 504,375
5.13%; 2/15/2017 500,000 488,125
Indiana Health Fac. Financing
Authority Hospital Rev. Ref. Bonds,
Welborn Memorial Baptist Hospital,
Series 1993; 5.63%; 7/1/2023 1,860,000 1,885,575
Indiana (Continued)
Lawrenceburg, Indiana Pollution
Control Rev. Ref. Bonds, Indiana
Michigan Power Co. Project,
Series D; 7.00%; 4/1/2015 $1,000,000 $ 1,080,000
Series E; 5.90%; 11/1/2019 3,220,000 3,352,825
Warrick County, Indiana
Environmental Improvement Rev.
Bonds, Southern Indiana Gas &
Electric, Series 1993B;
6.00%; 5/1/2023 1,190,000 1,265,862

16,254,787
Iowa (2.96%)
City of Muscatine, Iowa Electric Rev.
Ref. Bonds, Series 1986;
6.00%; 1/1/2006 150,000 150,386
5.00%; 1/1/2007 1,575,000 1,576,102
Eddyville, Iowa IDR Ref. Bonds,
Cargill, Inc. Project; 5.63%; 12/1/2013 1,000,000(a) 1,050,000
Iowa Finance Authority Hospital Fac.
Ref. Rev. Bonds for Jennie
Edmundson Memorial Hospital;
7.40%; 11/1/2006 550,000 618,062
Iowa Finance Authority Hospital Fac.
Ref. Rev. Bonds, Iowa Health Systems,
Series A, MBIA Insured;
5.13%; 1/1/2028 3,000,000 3,015,000
------------
6,409,550
Kentucky (1.85%)
City of Ashland, Kentucky Sewage
and Solid Waste Rev. Bonds for
Ashland, Inc. Project, Series 1995;
7.13%; 2/1/2022 750,000 842,813
City of Ashland, Kentucky Solid
Waste Rev. Bonds for Ashland
Oil, Inc. Project, Series 1991;
7.20%; 10/1/2020 1,000,000 1,078,750
------------
1,921,563
Louisiana (0.97%)
St. Charles Parish, Louisiana Pollution
Control Rev. Bonds for Louisiana
Power & Light Co. Project;
7.50%; 6/1/2021 1,950,000 2,108,438

Maine (0.98%)
Skowhegan, Maine Pollution Control
Rev. Ref. Bonds for Scott Paper
Co. Project, Series 1993;
5.90%; 11/1/2013 2,000,000 2,122,500

Michigan (3.02%)
Detroit, Michigan LOC Dev. Financing
Authority Ref. Bonds, Senior Series A
Chrysler Corp; 5.20%; 5/1/2010 1,700,000 1,780,750
Michigan State Hospital Financing
Authority Hospital Rev. Bonds for
Detroit Medical Center, Series 1993B;
5.75%; 8/15/2013 $ 600,000 $ 628,500
5.50%; 8/15/2023 2,000,000 2,017,500
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity Hospital;
5.25%; 11/1/2015 1,000,000 1,020,000
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity Natl. Health
System; 5.50%; 11/1/2005 1,000,000 1,082,500
------------
6,529,250
Minnesota (0.73%)
City of Bass Brook, Minnesota Pollution
Control Rev. Ref. Bonds for
Minnesota Power & Light Project;
6.00%; 7/1/2022 1,500,000 1,578,750

Mississippi (0.23%)
Grenada County, Mississippi Rev. Ref.
Bonds, Georgia Pacific Corp. Project;
5.45%; 9/1/2014 500,000 502,500

Missouri (1.14%)
Missouri State Health & Educational
Fac. Authority Health Fac. Rev.
Bonds, BJC Health System,
Series 1994A; 6.75%; 5/15/2012 2,000,000 2,465,000

Montana (0.98%)
Forsyth, Montana Pollution Control
Rev. Ref. Bonds, Montana Power
Co., Colstrip Project, Series 1993A;
6.13%; 5/1/2023 2,000,000 2,127,500

Nebraska (2.20%)
Dawson County, Nebraska Sanitary &
Improvement General Obligation
Ref. Bonds; 5.55%; 2/1/2017 1,000,000 1,042,500
Nebraska Public Power Dist. Power
Supply System Rev. Bonds;
5.30%; 1/1/2002 1,000,000 1,046,250
5.40%; 1/1/2003 1,500,000 1,586,250
5.50%; 1/1/2004 1,000,000 1,077,500
------------
4,752,500
Nevada (1.84%)
Clark County, Nevada IDR Ref.
Bonds, Nevada Power Co. Project,
Series 1992C; 7.20%; 10/1/2022 3,600,000 3,969,000

New Mexico (1.08%)
City of Lordsburg, New Mexico
Pollution Control Rev. Bonds
for Phelps Dodge Corp. Project;
6.50%; 4/1/2013 2,150,000 2,340,813

North Carolina (3.46%)
Martin County, North Carolina
Industrial Fac. & Pollution Control
Finance Authority Solid Waste
Rev. Bonds, Weyerhaeuser;
5.65%; 12/1/2023 1,500,000 1,530,000
6.80%; 5/1/2024 2,000,000 2,230,000
North Carolina Medical Care Hospital
Rev. Bonds for Rex Hospital Project;
5.00%; 6/1/2023 $2,170,000 $ 2,129,312
Wake County, North Carolina
Industrial Fac. & Pollution Control
Finance Authority Rev. Bond,
Carolina Power & Light Co.;
6.90%; 4/1/2009 1,500,000 1,584,375
------------
7,473,687
North Dakota (0.96%)
Mercer County, North Dakota
Pollution Control Rev. Bonds,
Ottertail Power Co. Project,
Series 1991; 6.90%; 2/1/2019 1,950,000 2,086,500

Ohio (4.78%)
Cuyahoga County, Ohio Hospital
Rev. Bonds for Meridia Health
Systems, Series 1991;
7.25%; 8/15/2019 1,445,000 1,566,019
Lorain County, Ohio Hospital Ref.
Bonds, Humility Mary Health
Care, Series A; 5.90%; 12/15/2008 3,270,000 3,547,950
Ohio Air Quality Dev. Rev. Bonds,
Columbus Southern Power Co.
Project, Series 1985B;
6.25%; 12/1/2020 4,900,000 5,218,500
------------
10,332,469
Oklahoma (1.14%)
Tulsa Industrial Authority Rev. Bonds,
St. John Medical Center Project,
Series 1994;
6.25%; 2/15/2014 1,280,000 1,384,000
6.25%; 2/15/2017 1,000,000 1,077,500
------------
2,461,500
Rhode Island (1.44%)
Rhode Island State Industrial Facilities
Corp. Marine Term Rev. Bonds,
Mobil Oil Refining;
6.00%; 11/1/2014 2,900,000 3,113,875

South Carolina (4.68%)
Darlington County, South Carolina
Pollution Control Rev. Bonds for
Carolina Power & Light;
6.60%; 11/1/2010 1,000,000 1,098,750
Greenville Hospital System,
South Carolina Hospital Fac.
Rev. Ref. Bonds; 6.00%; 5/1/2020 230,000 259,037
Series C; 5.50%; 5/1/2016 2,500,000 2,575,000
Oconee County, South Carolina
Pollution Control Rev. Ref. Bonds,
Duke Energy Corp. Project, Series
1993; 5.80%; 4/1/2014 2,000,000 2,127,500
York County, South Carolina Exempt
Fac. Industrial Rev. Bonds for
Hoechst Celanese Project,
Series 1994; 5.70%; 1/1/2024 2,000,000 2,062,500
York County, South Carolina Pollution
Control Rev. Bonds, Bowater, Inc.
Project; 7.63%; 3/1/2006 1,700,000 1,995,375
------------
10,118,162
South Dakota (0.50%)
Pennington County, South Dakota
Pollution Control Rev. Ref. Bonds
for Black Hills Power & Light Co.
Project; 6.70%; 6/1/2010 $1,000,000 $ 1,085,000

Tennessee (0.96%)
County of Louden, Tennessee Industrial
Development Solid Waste;
6.20%; 2/1/2023 1,950,000 2,084,062

Texas (9.07%)
Brazos River Authority, Texas Rev.
Industrial Bonds Project-A Houston
Industries, Inc.; 5.13%; 5/1/2019 2,000,000 2,012,500
Cass County, Texas Industrial
Dev. Corp. Pollution Control
Rev. Bonds for International
Paper Co. - Series B
5.35%; 4/1/2012 3,750,000 3,867,187
Guadalupe-Blanco River Authority,
Texas Industrial Dev. Corp.
Pollution Control Rev. E I Du Pont
1982 Series A; 6.35%; 7/1/2022 2,500,000 2,728,125
IDC Port of Corpus Christi Rev. Ref.
Bonds, Port Fac. Rev. Bonds,
Valero Energy Corp.; 5.13%; 4/1/2009 1,000,000 1,010,000
Matagorda County, Texas
Navigational District No. 1 Pollution
Control Rev. Bonds for Central
Power & Light Co.;
7.50%; 12/15/2014 2,585,000 2,749,794
6.00%; 7/1/2028 1,000,000 1,060,000
Milam County, Texas Industrial Dev.
Corp. Pollution Control Rev. Ref.
Bonds, Alcoa Project;
5.65%; 12/1/2012 2,000,000 2,142,500
Red River Authority, Texas Pollution
Control Rev. Bonds, Hoechst
Celanese Corp. Project;
5.20%; 5/1/2007 2,825,000 2,934,469
Tarrant County, Texas Health Fac.
Dev. Corp., Harris Methodist Health
System Rev. Bonds; 5.90%; 9/1/2006 1,000,000 1,120,000
------------
19,624,575
Utah (0.91%)
Intermountain Power Agency, Utah
Power Supply, Rev. Ref. Bonds,
Series 1996D; 5.00%; 7/1/2021 2,000,000 1,967,500

Virginia (2.78%)
Albemarle County, Virginia IDA
Hospital Rev. Ref. Bonds, Martha
Jefferson Hospital; 5.50%; 10/1/2015 1,900,000 1,959,375
Bedford County, Virginia Industrial Dev.
Nekoosa Packing Corp., Georgia
Pacific; 5.60%; 12/1/2025 2,500,000 2,537,500
Chesapeake, Virginia IDA Rev. Ref.
Bonds for Cargill, Inc. Project;
5.88%; 3/1/2013 1,410,000 1,508,700
------------
6,005,575
Washington (2.96%)
City of Seattle, Washington Municipal
Light and Power Rev. Bonds;
1993; 5.10%; 11/1/2005 $1,950,000 $ 2,076,750
1994; 6.63%; 7/1/2016 1,000,000 1,147,500
1998; 4.88%; 6/1/2021 1,500,000 1,456,875
Washington Health Care Fac.
Authority Rev. Bonds; Series 1989,
Sisters of Providence;
7.88%; 10/1/1999 1,650,000 1,738,374
------------
6,419,499
West Virginia (6.69%)
Braxton County, West Virginia Solid
Waste Disposal Rev. Weyerhaeuser
Co.; 5.40%; 5/1/2025 2,000,000 2,015,000
Marshall County, West Virginia
Pollution Control Rev. Bonds
for Ohio Power Co. Project;
Series C; 6.85%; 6/1/2022 1,200,000 1,306,500
Series D; 5.90%; 4/1/2022 4,500,000 4,798,125
Pleasants County, West Virgina
Pollution Control Rev. Bonds
for Potomac Edison Co.;
6.15%; 5/1/2015 2,000,000 2,172,500
Putnam County, West Virginia
Pollution Control Rev. Bonds for
Appalachian Power Co. Project,
Series C; 6.60%; 7/1/2019 3,875,000 4,170,469
------------
14,462,594
Wisconsin (2.75%)
Kaukauna, Wisconsin Pollution
Control Rev. Ref. Bonds for
International Paper Co. Project,
Series A; 5.40%; 5/1/2004 3,610,000 3,772,450
Wisconsin Health & Educational
Fac. Authority Rev. Bonds;
Series 1995; Franciscan Skemp
Medical Center, Inc.;
5.88%; 11/15/2010 1,000,000 1,086,250
6.13%; 11/15/2015 1,000,000 1,085,000
------------
5,943,700
------------

Total Portfolio Investments (98.09%) 212,152,700

Cash, receivables and other assets,
net of liabilities (1.91%) 4,131,205
------------

Total Net Assets (100.00%) $216,283,905
------------
------------

(a)Restricted security - See Note 4 to the financial statements.

FINANCIAL HIGHLIGHTS

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.44 $11.17 $11.42 $10.27 $11.75
Income from Investment Operations:
Net Investment Income(b).............................. .71 .75 .76 .78 .78
Net Realized and Unrealized Gain (Loss) on Investments .16 .33 (.25) 1.16 (1.47)
------ ------ ------ ------ ------
Total from Investment Operations .87 1.08 .51 1.94 (.69)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.72) (.81) (.76) (.78) (.78)

Distributions from Capital Gains...................... -- -- -- (.01) (.01)
------ ------ ------ ------ ------
Total Dividends and Distributions (.72) (.81) (.76) (.79) (.79)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $11.59 $11.44 $11.17 $11.42 $10.27
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c).......................................... 7.76% 10.15% 4.74% 19.73% (6.01)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $148,081 $126,427 $113,437 $106,962 $88,801
Ratio of Expenses to Average Net Assets(b)............ .95% .95% .95% .94% .95%
Ratio of Net Investment Income to Average Net Assets.. 6.19% 6.70% 6.85% 7.26% 7.27%
Portfolio Turnover Rate............................... 15.2% 12.8% 3.4% 5.1% 8.9%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.42 $11.15 $11.41 $10.19
Income from Investment Operations:
Net Investment Income(b).............................. .63 .67 .67 .63
Net Realized and Unrealized Gain (Loss) on Investments .16 .31 (.25) 1.19
------ ------ ------ ------
Total from Investment Operations .79 .98 .42 1.82
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.63) (.71) (.68) (.60)
Distributions from Capital Gains...................... -- -- -- --
------ ------ ------ ------
Total Dividends and Distributions (.63) (.71) (.68) (.60)
------ ------ ------ ------
Net Asset Value, End of Period........................... $11.58 $11.42 $11.15 $11.41
------ ------ ------ ------
------ ------ ------ ------
Total Return(c).......................................... 7.04% 9.20% 3.91% 17.98%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $22,466 $13,403 $7,976 $2,708
Ratio of Expenses to Average Net Assets(b)............ 1.67% 1.70% 1.69% 1.59%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.45% 5.92% 6.14% 6.30%(e)
Portfolio Turnover Rate............................... 15.2% 12.8% 3.4% 5.1%(e)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.43 $11.16 $11.27
Income from Investment Operations:
Net Investment Income(b).............................. .63 .71 .51
Net Realized and Unrealized Gain (Loss) on Investments .16 .30 (.13)
------ ------ ------
Total from Investment Operations .79 1.01 .38
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.63) (.74) (.49)
Distributions from Capital Gains...................... -- -- --
------ ------ ------
Total Dividends and Distributions (.63) (.74) (.49)
------ ------ ------
Net Asset Value, End of Period........................... $11.59 $11.43 $11.16
------ ------ ------
------ ------ ------
Total Return(c).......................................... 7.05% 9.49% 3.75%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $12,196 $5,976 $525
Ratio of Expenses to Average Net Assets(b)............ 1.45% 1.45% 1.28%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.66% 6.11% 6.51%(e)
Portfolio Turnover Rate............................... 15.2% 12.8% 3.4%(e)

See accompanying notes.
</TABLE>

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.51 $11.26 $11.31 $10.28 $11.79
Income from Investment Operations:
Net Investment Income................................. .70 .70 .70 .71 .69
Net Realized and Unrealized Gain (Loss) on Investments .12 .29 (.05) 1.02 (1.40)
------ ------ ------ ------ ------
Total from Investment Operations .82 .99 .65 1.73 (.71)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.70) (.74) (.70) (.70) (.68)
Distributions from Capital Gains...................... -- -- -- -- (.12)
------ ------ ------ ------ ------
Total Dividends and Distributions (.70) (.74) (.70) (.70) (.80)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $11.63 $11.51 $11.26 $11.31 $10.28
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c).......................................... 7.38% 9.23% 6.06% 17.46% (6.26)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $251,455 $249,832 $259,029 $261,128 $249,438
Ratio of Expenses to Average Net Assets............... .86% .84% .81% .87% .95%
Ratio of Net Investment Income to Average Net Assets.. 6.07% 6.19% 6.31% 6.57% 6.35%
Portfolio Turnover Rate............................... 17.1% 10.8% 25.9% 10.1% 24.8%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.50 $11.23 $11.29 $10.20
Income from Investment Operations:
Net Investment Income................................. .62 .64 .61 .56
Net Realized and Unrealized Gain (Loss) on Investments .12 .29 (.05) 1.07
------ ------ ------ ------
Total from Investment Operations .74 .93 .56 1.63
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.64) (.66) (.62) (.54)
Distributions from Capital Gains...................... -- -- -- --
------ ------ ------ ------
Total Dividends and Distributions (.64) (.66) (.62) (.54)
------ ------ ------ ------
Net Asset Value, End of Period........................... $11.60 $11.50 $11.23 $11.29
------ ------ ------ ------
------ ------ ------ ------
Total Return(c).......................................... 6.60% 8.65% 5.17% 16.07%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $24,370 $15,431 $11,586 $4,699
Ratio of Expenses to Average Net Assets............... 1.57% 1.39% 1.60% 1.53%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.43% 5.63% 5.53% 5.68%(e)
Portfolio Turnover Rate............................... 17.1% 10.8% 25.9% 10.1%(e)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.42 $11.21 $11.27
Income from Investment Operations:
Net Investment Income................................. .61 .64 .47
Net Realized and Unrealized Gain (Loss) on Investments .13 .24 (.08)
------ ------ ------
Total from Investment Operations .74 .88 .39
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.61) (.67) (.45)
Distributions from Capital Gains...................... -- -- --
------ ------ ------
Total Dividends and Distributions (.61) (.67) (.45)
------ ------ ------
Net Asset Value, End of Period........................... $11.55 $11.42 $11.21
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.66% 8.19% 3.76%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $8,156 $4,152 $481
Ratio of Expenses to Average Net Assets............... 1.64% 1.79% 1.18%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.39% 5.21% 5.84%(e)
Portfolio Turnover Rate............................... 17.1% 10.8% 25.9%(e)

See accompanying notes.
</TABLE>

FINANCIAL HIGHLIGHTS (Continued)

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $8.52 $8.27 $8.06 $7.83 $8.36
Income from Investment Operations:
Net Investment Income................................. .64 .67 .68 .68 .63
Net Realized and Unrealized Gain (Loss) on Investments (.88) .31 .23 .20 (.51)
------ ------ ------ ------ ------
Total from Investment Operations (.24) .98 .91 .88 .12

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.64) (.73) (.70) (.65) (.65)
Excess Distribution of Net Investment Income(i)....... (.01) -- -- -- --
------ ------ ------ ------ ------
Total Dividends and Distributions (.65) (.73) (.70) (.65) (.65)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $7.63 $8.52 $8.27 $8.06 $7.83
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c).......................................... (3.18)% 12.33% 11.88% 11.73% 1.45%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $33,474 $38,239 $28,432 $23,396 $19,802
Ratio of Expenses to Average Net Assets............... 1.40% 1.22% 1.26% 1.45% 1.46%
Ratio of Net Investment Income to Average Net Assets.. 7.71% 7.99% 8.49% 8.71% 7.82%
Portfolio Turnover Rate............................... 65.9% 39.2% 18.8% 40.3% 27.2%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $8.47 $8.22 $8.05 $7.64
Income from Investment Operations:
Net Investment Income................................. .57 .62 .60 .53
Net Realized and Unrealized Gain (Loss) on Investments (.87) .28 .20 .38
---- ---- ---- ----
Total from Investment Operations (.30) .90 .80 .91

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.57) (.65) (.63) (.50)
Excess Distribution of Net Investment Income(i)....... (.01) -- -- --
---- ---- ---- ----
Total Dividends and Distributions (.58) (.65) (.63) (.50)
---- ---- ---- ----
Net Asset Value, End of Period........................... $7.59 $8.47 $8.22 $8.05
---- ---- ---- ----
---- ---- ---- ----
Total Return(c).......................................... (3.93)% 11.31% 10.46% 12.20%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $8,527 $6,558 $2,113 $633
Ratio of Expenses to Average Net Assets............... 2.34% 2.13% 2.38% 2.10%(e)
Ratio of Net Investment Income to Average Net Assets.. 6.78% 7.03% 7.39% 7.78%(e)
Portfolio Turnover Rate............................... 65.9% 39.2% 18.8% 40.3%(e)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $8.40 $8.20 $8.21
Income from Investment Operations:
Net Investment Income................................. .57 .62 .46
Net Realized and Unrealized Gain (Loss) on Investments (.87) .26 (.03)
------ ------ ------
Total from Investment Operations (.30) .88 .43

Less Dividends and Distributions:
Dividends from Net Investment Income................. (.58) (.68) (.44)
Excess Distribution of Net Investment Income(i)....... (.01) -- --
------ ------ ------
Total Dividends and Distributions (.59) (.68) (.44)
------ ------ ------
Net Asset Value, End of Period........................... $7.51 $8.40 $8.20
------ ------ ------
------ ------ ------
Total Return(c).......................................... (3.97)% 11.14% 5.60%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,734 $1,961 $124
Ratio of Expenses to Average Net Assets............... 2.28% 2.42% 1.59%(e)
Ratio of Net Investment Income to Average Net Assets.. 6.84% 6.70% 7.84%(e)
Portfolio Turnover Rate............................... 65.9% 39.2% 18.8%(e)

See accompanying notes.
</TABLE>

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

<TABLE>
<CAPTION>
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class A shares 1998 1997 1996(h)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $9.88 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .57 .61 .38
Net Realized and Unrealized Gain (Loss) on Investments .06 .03 (.04)
------ ------ ------
Total from Investment Operations .63 .64 .34

Less Dividends from Net Investment Income................ (.58) (.65) (.35)
------ ------ ------
Net Asset Value, End of Period........................... $9.93 $9.88 $9.89
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.57% 6.75% 3.62%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $27,632 $20,567 $17,249
Ratio of Expenses to Average Net Assets(b)............ .82% .90% .89%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.86% 6.20% 6.01%(e)
Portfolio Turnover Rate............................... 23.8% 17.4% 16.5%(e)

PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class B shares 1998 1997 1996(h)
---- ---- ----
Net Asset Value, Beginning of Period..................... $9.90 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .54 .56 .36
Net Realized and Unrealized Gain (Loss) on Investments .06 .04 (.05)
------ ------ ------
Total from Investment Operations .60 .60 .31

Less Dividends from Net Investment Income................ (.52) (.59) (.32)
------ ------ ------
Net Asset Value, End of Period........................... $9.98 $9.90 $9.89
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.24% 6.31% 3.32%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $1,705 $625 $112
Ratio of Expenses to Average Net Assets(b)............ 1.22% 1.24% 1.15%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.44% 5.84% 5.75%(e)
Portfolio Turnover Rate............................... 23.8% 17.4% 16.5%(e)

PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
Net Asset Value, Beginning of Period..................... $9.85 $9.88 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .52 .54 .36
Net Realized and Unrealized Gain (Loss) on Investments .07 .03 (.06)
------ ------ ------
Total from Investment Operations .59 .57 .30

Less Dividends from Net Investment Income................ (.51) (.60) (.32)
------ ------ ------
Net Asset Value, End of Period........................... $9.93 $9.85 $9.88
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.12% 6.01% 3.24%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,034 $606 $83
Ratio of Expenses to Average Net Assets(b)............ 1.44% 1.48% 1.40%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.21% 5.60% 5.64%(e)
Portfolio Turnover Rate............................... 23.8% 17.4% 16.5%(e)

See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $12.38 $12.04 $11.98 $10.93 $12.62
Income from Investment Operations:
Net Investment Income................................. .60 .63 .64 .65 .64
Net Realized and Unrealized Gain (Loss) on Investments .22 .39 .07 1.05 (1.54)
------ ------ ------ ------ ------
Total from Investment Operations .82 1.02 .71 1.70 (.90)

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.61) (.68) (.65) (.65) (.63)
Distributions from Capital Gains...................... -- -- -- -- (.16)
------ ------ ------ ------ ------
Total Dividends and Distributions (.61) (.68) (.65) (.65) (.79)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $12.59 $12.38 $12.04 $11.98 $10.93
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c)......................................... 6.76% 8.71% 6.08% 16.03% (7.41)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $204,865 $193,007 $187,180 $179,715 $171,425
Ratio of Expenses to Average Net Assets............... .83% .79% .78% .83% .91%
Ratio of Net Investment Income to Average Net Assets.. 4.83% 5.14% 5.34% 5.67% 5.49%
Portfolio Turnover Rate............................... 6.6% 8.9% 9.8% 17.6% 20.6%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $12.39 $12.02 $11.96 $10.56
Income from Investment Operations:
Net Investment Income................................. .53 .55 .55 .50
Net Realized and Unrealized Gain (Loss) on Investments .20 .40 .06 1.38
------ ------ ------ ------
Total from Investment Operations .73 .95 .61 1.88
Less Dividends and Distributions:
Dividends from Net Investment Income................. (.53) (.58) (.55) (.48)
Distributions from Capital Gains..................... -- -- -- --
------ ------ ------ ------
Total Dividends and Distributions (.53) (.58) (.55) (.48)
------ ------ ------ ------
Net Asset Value, End of Period........................... $12.59 $12.39 $12.02 $11.96
------ ------ ------ ------
------ ------ ------ ------

Total Return(c).......................................... 6.01% 8.08% 5.23% 17.97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $11,419 $7,783 $5,794 $3,486
Ratio of Expenses to Average Net Assets............... 1.43% 1.45% 1.52% 1.51%(e)
Ratio of Net Investment Income to Average Net Assets.. 4.22% 4.46% 4.59% 4.78%(e)
Portfolio Turnover Rate............................... 6.6% 8.9% 9.8% 17.6%(e)

See accompanying notes.
</TABLE>

Notes to Financial Highlights

(a) Effective January 1, 1998, the following changes were made to the names of
the Income Funds:

<TABLE>
<CAPTION>
Former Fund Name New Fund Name
---------------- -------------
<S> <C>
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
</TABLE>

(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods indicated,
the following funds would have had per share net investment income and the
ratios of expenses to average net assets as shown:
<TABLE>
<CAPTION>
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
------------ -------------- ----------------- --------

Principal Bond Fund, Inc.:
<S> <C> <C> <C> <C>
Class A 1998 $.70 1.04% $121,092
1997 .74 .98 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999

Class B 1998 .62 1.81 26,130
1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(f) .62 1.62(e) 300

Class R 1998 .61 1.72 25,144
1997 .69 1.78 10,427
1996(g) .51 1.28(e) 3

Principal Limited Term Bond Fund, Inc.:
Class A 1998 .55 1.13 76,952
1997 .59 1.15 46,271
1996(h) .37 1.16(e) 22,716

Class B 1998 .47 2.36 11,537
1997 .46 3.82 6,528
1996(h) .34 1.94(e) 259

Class R 1998 .46 2.22 11,781
1997 .43 2.95 6,831
1996(g) .35 1.79(e) 60
</TABLE>

(d) Total return amounts have not been annualized.

(e) Computed on an annualized basis.

(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds' Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Principal
Management Corporation. Additionally, the Income Funds' Class B shares
incurred unrealized losses on investments during the initial interim period
as follows. This represents Class B share activities of each fund prior to
the initial public offering of Class B shares:

Per Share Per Share
Net Investment Unrealized
Income (Loss)
-------------- ----------
Principal Bond Fund, Inc. $.01 $ --
Principal Government Securities Income Fund, Inc. .01 (.02)
Principal High Yield Fund, Inc. .01 (.03)
Principal Tax-Exempt Bond Fund, Inc. -- (.05)

(g) Period from February 29, 1996, date Class R shares first offered to eligible
purchasers, through October 31, 1996. The Income Funds' Class R shares
recognized no net investment income for the period from the initial purchase
by Principal Management Corporation of Class R shares on February 27, 1996
through February 28, 1996. Certain of the Income Funds' Class R shares
incurred unrealized losses on investments during the initial interim period
as follows. This represents Class R share activities of each fund prior to
the initial offering of Class R shares:

Per Share
Unrealized (Loss)
-----------------
Principal Bond Fund, Inc. $(.03)
Principal Government Securities Income Fund, Inc. (.03)
Principal Limited Term Bond Fund, Inc. (.02)

(h) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole shareholder, Principal Life
Insurance Company during the period. Additionally, Class A shares incurred
unrealized losses on investments of $.12 per share during the initial
interim period. With respect to Class B shares, no net investment income was
recognized for the period from initial purchase of shares on February 27,
1996 through February 28, 1996. Additionally, Class B shares incurred
unrealized losses on investments of $.02 per share during the initial
interim period. This represents Class A share and Class B share activities
of the fund prior to the initial public offering of both classes of shares.

(i) Dividends and distributions which exceed investment income and net realized
gains for financial reporting purposes but not for tax purposes are reported
as dividends in excess of net investment income or distributions in excess
of net realized gains on investments. To the extent distributions exceed
current and accumulated earnings and profits for federal income tax
purposes, they are reported as tax return of capital distributions.

October 31, 1998

STATEMENTS OF ASSETS AND LIABILITIES

Principal Cash Principal Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.

<S> <C> <C>
Assets
Investment in securities -- at value
(approximates cost) (Note 1)........... $302,343,330 $25,980,002
Cash............................. 3,612,026 225,388
Receivables:
Interest .............................. 515,251 101,150
Capital Stock sold..................... 4,602,478 99,633
Other assets.............................. 20,112 3,051

Total Assets 311,093,197 26,409,224

Liabilities
Accrued expenses.......................... 325,723 68,910
Payables:
Investment securities purchased........ 891,093 --
Capital Stock reacquired............... 282,796 --
Indebtedness (Note 5)..................... 660,000 --

Total Liabilities 2,159,612 68,910

Net Assets Applicable to
Outstanding Shares ..................... $308,933,585 $26,340,314

Net Assets Consist of:
Capital Stock............................. $ 3,089,336 $ 263,403
Additional paid-in capital................ 305,844,249 26,076,911

Total Net Assets $308,933,585 $26,340,314

Capital Stock (par value: $.01 a share):
Shares authorized......................... 2,000,000,000 1,000,000,000

Net Asset Value Per Share:
Class A: Net Assets....................... $294,917,447 $26,340,314
Shares issued and outstanding.... 294,917,447 26,340,314
Net asset value per share........ $1.000 $1.000

Class B: Net Assets....................... $3,602,364 N/A
Shares issued and outstanding.... 3,602,364 N/A
Net asset value per share(a)..... $1.000 N/A

Class R: Net Assets....................... $10,413,774 N/A
Shares issued and outstanding.... 10,413,774 N/A
Net asset value per share........ $1.000 N/A

<FN>
(a) Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>

Year Ended October 31, 1998

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Principal Cash Principal Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.

<S> <C> <C>
Net Investment Income
Interest income......................... $31,537,294 $2,252,397

Expenses:
Management and investment
advisory fees (Note 3)............ 2,127,595 316,084
Distribution and shareholder
servicing fees (Notes 1 and 3).... 26,477 --
Transfer and administrative
services (Notes 1 and 3).......... 854,575 147,850
Registration fees (Note 1)........... 93,333 21,065
Custodian fees....................... 12,811 7,760
Auditing and legal fees.............. 4,411 8,271
Directors' fees...................... 7,303 7,304
Other................................ 52,070 5,911

Total Gross Expenses 3,178,575 514,245
Less: Management and investment
advisory fees waived.............. 1,343 59,049

Total Net Expenses 3,177,232 455,196

Net Investment Income $28,360,062 $1,797,201

See accompanying notes.
</TABLE>

Years Ended October 31, Except as Noted

STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Cash Principal Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.

1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operations
Net investment income .................. $ 28,360,062 $ 39,246,307 $ 1,797,201 $ 2,962,416

Dividends to Shareholders from Net
Investment Income:
Class A.............................. (28,008,033) (39,078,437) (1,797,101) (2,961,821)
Class B.............................. (70,945) (33,816) (100)(a) (595)
Class R .................... (281,084) (134,054) N/A N/A

Total Dividends (28,360,062) (39,246,307) (1,797,201) (2,962,416)

Capital Share Transactions (Note 4)
Shares sold:
Class A.............................. 2,363,859,504 3,393,711,785 192,888,810 372,738,780
Class B.............................. 5,040,642 3,168,600 -- --
Class R ..................... 11,918,726 6,448,386 N/A N/A

Shares issued in reinvestment of dividends:
Class A.............................. 26,466,497 38,790,163 1,669,792 2,914,790
Class B.............................. 66,630 29,671 85(a) 595
Class R ...................... 273,695 129,398 N/A N/A

Shares redeemed:
Class A.............................. (2,931,480,148) (3,291,392,367) (267,157,398) (375,196,233)
Class B.............................. (2,497,006) (2,725,899) (27,749)(a) --
Class R ............................. (6,074,611) (3,921,162) N/A N/A

Net Increase (Decrease) in Net Assets
from Capital Share Transactions (532,426,071) 144,238,575 (72,626,460) 457,932

Total Increase (Decrease) (532,426,071) 144,238,575 (72,626,460) 457,932

Net Assets
Beginning of year....................... 841,359,656 697,121,081 98,966,774 98,508,842

End of year ............................ $ 308,933,585 $ 841,359,656 $ 26,340,314 $ 98,966,774

<FN>
(a)For the period November 1, 1997 through December 29, 1997 (date Class B
operations ceased).
</FN>

See accompanying notes.
</TABLE>

NOTES TO FINANCIAL STATEMENTS

Principal Cash Management Fund, Inc.
Principal Tax-Exempt Cash Management Fund, Inc.

Note 1 -- Significant Accounting Policies

Principal Cash Management Fund, Inc. and Principal Tax-Exempt Cash Management
Fund, Inc. (the "Money Market Funds") are registered under the Investment
Company Act of 1940, as amended, as open-end diversified management investment
companies and operate in the mutual fund industry.

On December 29, 1997, Principal Tax-Exempt Cash Management Fund, Inc. ceased
offering Class B shares. All outstanding Class B shares were redeemed at that
date.

Effective January 1, 1998, the following changes were made to the names of the
Money Market Funds:
<TABLE>
<CAPTION>
Former Fund Name New Fund Name
<S> <C>
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc. Principal Tax-Exempt Cash Management Fund, Inc.
</TABLE>

A significant portion of the shares issued by Principal Cash Management Fund,
Inc. and Principal Tax-Exempt Cash Management Fund, Inc. Class A shares has been
issued through Principal Financial Securities, Inc. ("PFS"), a previously
affiliated broker-dealer. PFS was sold in January, 1998. Subsequent to the sale,
assets of PFS clients of approximately $536 million and $62 million were
redeemed from Principal Cash Management Fund, Inc. Class A shares and Principal
Tax-Exempt Cash Management Fund, Inc. Class A shares, respectively.

Shares of the Money Market Funds are sold at net asset value; no sales charge
applies to purchases of the Money Market Funds. Certain purchases of Class A
shares of the Money Market Funds may be subject to a contingent deferred sales
charge ("CDSC") if redeemed within eighteen months of purchase. Principal Cash
Management Fund, Inc. Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Principal Cash Management Fund, Inc. Class R shares are sold
without an initial sales charge and are not subject to a CDSC. Class B and Class
R shares bear a higher ongoing distribution fee than Class A shares. Class B
shares automatically convert into Class A shares based on relative net asset
value (without a sales charge) after seven years. Class R shares automatically
convert into Class A shares based on relative net asset value (without a sales
charge) after four years. All classes of the Principal Cash Management Fund,
Inc. represent interests in the same portfolio of investments and will vote
together as a single class except where otherwise required by law or as
determined by each of the Money Market Funds' respective Board of Directors. In
addition, the Board of Directors of each fund declares separate dividends on
each class of shares.

The Money Market Funds allocate daily all income, expenses (other than
class-specific expenses), and realized gains or losses to each class of shares
based upon the relative proportion of the number of settled shares outstanding
of each class. Expenses specifically attributable to a particular class are
charged directly to such class. Class-specific expenses charged to each class
during the periods ended October 31, 1998, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees

Class A Class B Class R Class A Class B Class R Class A Class B Class R

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Cash Management Fund, Inc. N/A $5,456 $21,021 $378,811 $1,048 $4,135 $18,993 $10,330 $8,762
Principal Tax-Exempt Cash Management Fund, Inc. N/A -- N/A 25,610 6 N/A 11,091 933 N/A
</TABLE>

The Money Market Funds value their securities at amortized cost, which
approximates market. Under the amortized cost method, a security is valued by
applying a constant yield to maturity of the difference between the principal
amount due at maturity and the cost of the security to the fund.

The Money Market Funds record investment transactions generally on the trade
date. The identified cost basis has been used in determining the net realized
gain or loss from investment transactions. Interest income is recognized on an
accrual basis.

The Money Market Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the Money Market Funds' cash balances to be
deposited into a single joint account along with the cash of other registered
investment companies managed by Principal Management Corporation (formerly known
as Princor Management Corporation) (the "Manager"). These balances may be
invested in one or more short-term instruments.

The Money Market Funds declare all net investment income and any realized gains
and losses from investment transactions as dividends daily to shareholders of
record as of that day. Dividends and distributions to shareholders from net
investment income and net realized gain from investments are determined in
accordance with federal income tax regulations, which may differ from generally
accepted accounting principles. Permanent book and tax basis differences are
reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification.
Reclassifications made for the years ended October 31, 1998 and 1997 were not
material.

The Money Market Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.

Note 2 -- Federal Income Taxes

Note 3 -- Management Agreement and Transactions With Affiliates

The Money Market Funds have agreed to pay investment advisory and management
fees to Principal Management Corporation [wholly owned by Princor Financial
Services Corporation, a subsidiary of Principal Life Insurance Company (formerly
known as Principal Mutual Life Insurance Company)] computed at an annual
percentage rate of each fund's average daily net assets. The annual rate used in
this calculation for the Money Market Funds are as follows:

<TABLE>
Net Asset Value of Funds
(in millions)
<CAPTION>
First Next Next Next Over
$100 $100 $100 $100 $400

<S> <C> <C> <C> <C> <C>
Principal Cash Management Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Tax-Exempt Cash Management Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
</TABLE>

The Money Market Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.

Note 3 -- Management Agreement and Transactions With Affiliates (Continued)

The Manager voluntarily waived a portion of its fee for the Money Market Funds.
The waivers are in amounts that maintain total operating expenses for each fund
within certain limits. The limits are expressed as a percentage of average net
assets attributable to each class on an annualized basis during the reporting
period. The amounts waived and the operating expense limits which were
maintained at or below those shown, are as follows:
<TABLE>
Amount
Waived
<CAPTION>

Year
Ended
October 31, 1998, Year Ended Expense
Except as Noted October 31, 1997 Limit
<S> <C> <C> <C>
Principal Cash Management Fund, Inc.
Class A $ -- (a) $ -- 0.75%
Class B 1,343(a) 5,492 1.50
Class R -- (a) 2,441 1.25(b)
Principal Tax-Exempt Cash Management Fund, Inc.
Class A 58,145 27,978 0.75
Class B 904(c) 5,807 1.50(c)

<FN>
(a) For the period November 1, 1997 through February 28, 1998 (date waivers
ceased).
(b) For the period March 1, 1996 through March 2, 1997, the expense limit was
1.50%.
(c) For the period November 1, 1997 through December 29, 1997 (date Class B
operations ceased).
</FN>
</TABLE>

The manager ceased its waiver of expenses for Principal Cash Management Fund,
Inc. on March 1, 1998. The manager ceased its waiver of expenses for Principal
Tax-Exempt Cash Management Fund, Inc. on October 31, 1998.

Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. The aggregate amount of these charges retained by
Princor Financial Services Corporation for the year ended October 31, 1998, was
$1,646 and $17,525 for Principal Cash Management Fund, Inc. for Class A and
Class B shares, respectively. There were no charges retained by Princor
Financial Services Corporation for Principal Tax-Exempt Cash Management Fund,
Inc.

No brokerage commissions were paid by the Money Market Funds to affiliated
broker dealers during the year.

Principal Cash Management Fund, Inc. adopted a distribution plan with respect to
Class B shares that provides for distribution and shareholder servicing fees
computed at an annual rate of up to 1.00% of the average daily net assets
attributable to Class B shares of the fund. The Fund also adopted a distribution
plan with respect to Class R shares that provides for distribution and
shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of the fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to Principal Cash
Management Fund, Inc. There are no distribution or shareholder servicing fees
with respect to Class A shares.

At October 31, 1998, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company, benefit plans sponsored on behalf of Principal Life
Insurance Company and several joint ventures (in each of which a subsidiary of
Principal Life Insurance Company is a participant) owned shares of the Money
Market Funds as follows:
<TABLE>
<CAPTION>
Class A Class B Class R
<S> <C> <C> <C>
Principal Cash Management Fund, Inc. 29,297,308 30,462 28,126
Principal Tax-Exempt Cash Management Fund, Inc. 1,028,457 N/A N/A
</TABLE>

Note 4 -- Capital Share Transactions

Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Cash Principal Tax-Exempt
Management Cash Management
Fund, Inc. Fund, Inc.
<S> <C> <C>
Periods Ended October 31, 1998:
Shares sold:
Class A .......................................... 2,363,859,504 192,888,810
Class B ......................................... 5,040,642 --
Class R .......................................... 11,918,726 N/A
Shares issued in reinvestment of dividends:
Class A ........................................... 26,466,497 1,669,792
Class B ........................................... 66,630 85
Class R .......................................... 273,695 N/A
Shares redeemed:
Class A ......................................... (2,931,480,148) (267,157,398)
Class B ......................................... (2,497,006) (27,749)
Class R .......................................... (6,074,611) N/A

Net Decrease (532,426,071) (72,626,460)

Year Ended October 31, 1997:
Shares sold:
Class A .......................................... 3,393,711,785 372,738,780
Class B ......................................... 3,168,600 --
Class R .......................................... 6,448,386 N/A
Shares issued in reinvestment of dividends:
Class A ........................................... 38,790,163 2,914,790
Class B ........................................... 29,671 595
Class R .......................................... 129,398 N/A
Shares redeemed:
Class A ......................................... (3,291,392,367) (375,196,233)
Class B ......................................... (2,725,899) --
Class R .......................................... (3,921,162) N/A

Net Increase 144,238,575 457,932
</TABLE>

Note 5 -- Line of Credit

The Money Market Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, Principal Cash Management Fund,
Inc. had an outstanding borrowing of $660,000 at an annual rate of 5.93%.

Note 6 -- Year 2000 Problem (Unaudited)

Like other mutual funds, financial and business organizations and individuals
around the world, the Money Market Funds could be adversely affected if the
computer systems used by the Manager and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Manager is
taking steps it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems it uses and to obtain reasonable
assurances that comparable steps are being taken by each fund's other major
service providers. At this time, however there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the funds.

SCHEDULES OF INVESTMENTS

PRINCIPAL CASH MANAGEMENT FUND, INC.

Principal
Amount Value

Commercial Paper (88.64%)

Asset-Backed Securities (15.46%)
CXC, INC.;
5.47%; 11/16/1998 $2,750,000 $ 2,743,732
5.50%; 11/23/1998 4,250,000 4,235,715
5.15%; 12/9/1998 1,800,000 1,790,215
5.18%; 1/25/1999 6,000,000 5,926,617
Ciesco L.P.;
5.43%; 11/2/1998 2,750,000 2,749,585
5.38%; 12/9/1998 1,500,000 1,491,490
Corporate Asset Funding Co.;
5.49%; 11/6/1998 5,000,000 4,996,188
5.35%; 11/19/1998 2,100,000 2,094,383
5.23%; 11/25/1998 5,300,000 5,281,432
Corporate Receivables Corp.;
5.45%; 11/4/1998 2,300,000 2,298,964
5.25%; 12/3/1998 5,000,000 4,976,666
5.55%; 12/17/1998 5,000,000 4,966,458
Receivables Capital Corp.;
5.30%; 11/12/1998 4,175,000 4,168,239

47,719,684

Business Credit Institutions (8.23%)
Aon Corp.;
5.32%; 11/2/1998 3,300,000 3,299,512
5.38%; 11/6/1998 2,500,000 2,498,132
5.53%; 11/9/1998 1,025,000 1,023,740
5.45%; 11/16/1998 3,900,000 3,891,144
CIT Group Holding, Inc.;
5.18%; 12/31/1998 4,000,000 3,965,467
General Electric Capital Corp.;
5.07%; 12/31/1998 1,700,000 1,685,635
5.44%; 1/15/1999 1,500,000 1,483,000
5.43%; 2/19/1999 1,000,000 983,408
5.45%; 3/8/1999 825,000 809,138
5.44%; 3/9/1999 1,100,000 1,078,724
5.42%; 3/12/1999 2,500,000 2,450,693
5.45%; 3/19/1999 1,100,000 1,077,019
5.42%; 4/16/1999 1,225,000 1,194,385

25,439,997
Combination Utility Services (0.55%)
Citizens Utilities Co.;
5.25%; 11/24/1998 1,700,000 1,694,298

Commercial Banks (5.54%)
J.P. Morgan & Co., Inc.;
5.47%; 11/10/1998 4,000,000 3,994,530
5.42%; 11/18/1998 3,500,000 3,491,042
5.25%; 12/7/1998 4,500,000 4,476,375
5.25%; 12/8/1998 2,225,000 2,212,994
5.50%; 12/21/1998 500,000 496,181
Norwest Corp.;
5.20%; 12/16/1998 2,450,000 2,434,075

17,105,197
Crude Petroleum & Natural Gas (1.22%)
Chevron Oil Funance Co.;
5.20%; 11/4/1998 $ 825,000 $ 824,643
Chevron U.K. Investment PLC;
4.90%; 3/18/1999 3,000,000 2,944,058

3,768,701
Cutlery, Handtools &
Hardware (0.32%)
Stanley Works; 5.49%;
11/19/1998 1,000,000 997,255

Department Stores (4.65%)
Sears Roebuck Acceptance Corp.;
5.51%; 11/23/1998 2,000,000 1,993,266
5.40%; 12/11/1998 2,250,000 2,236,500
5.38%; 12/16/1998 1,500,000 1,489,913
5.38%; 12/18/1998 1,700,000 1,688,059
5.17%; 1/22/1999 2,300,000 2,272,915
5.12%; 1/29/1999 3,250,000 3,208,862
5.10%; 2/1/1999 1,500,000 1,480,450

14,369,965
Drugs (2.88%)
Receivables Capital Corp.;
5.37%; 11/3/1998 786,000 785,766
5.36%; 11/9/1998 1,775,000 1,772,886
5.22%; 11/25/1998 700,000 697,564
5.15%; 1/13/1999 4,250,000 4,205,617
5.21%; 1/21/1999 1,468,000 1,450,791

8,912,624
Electric Services (1.51%)
CommEd Fuel Co., Inc.;
5.30%; 11/17/1998 3,625,000 3,616,461
Tampa Electric Co.;
5.22%; 12/14/1998 1,050,000 1,043,453

4,659,914
Insurance Agents, Brokers &
Services (1.32%)
Marsh & McLennan Cos.;
5.45%; 2/26/1999 4,150,000 4,076,493

Investment Offices (4.83%)
Morgan Stanley Group, Inc.;
5.50%; 11/20/1998 4,240,000 4,227,692
5.20%; 1/22/1999 2,000,000 1,976,311
5.30%; 2/25/1999 2,775,000 2,727,609
4.90%; 3/26/1999 2,000,000 1,960,528
4.93%; 4/1/1999 2,500,000 2,448,303
4.84%; 4/23/1999 1,625,000 1,587,204

14,927,647
Life Insurance (2.09%)
American General Corp.;
5.42%; 11/18/1998 1,500,000 1,496,161
5.08%; 12/08/1998 2,000,000 1,989,558
5.06%; 12/14/1998 3,000,000 2,981,868

6,467,587
Miscellaneous Electrical Equipment &
Supplies (0.63%)
General Electric Co.;
5.09%; 11/30/1998 1,950,000 1,942,004

Miscellaneous Investing (4.65%)
Delaware Funding Corp.;
5.19%; 11/17/1998 $3,500,000 $ 3,491,927
5.20%; 11/18/1998 2,175,000 2,169,659
5.45%; 11/20/1998 3,000,000 2,991,371
5.24%; 12/1/1998 2,750,000 2,737,992
5.15%; 12/22/1998 3,000,000 2,978,112

14,369,061
Miscellaneous Manufacturers (3.25%)
Dover Corp.;
5.45%; 11/13/1998 4,750,000 4,741,371
5.47%; 11/13/1998 3,500,000 3,493,618
5.22%; 1/14/1999 1,810,000 1,790,579

10,025,568
Mortgage Bankers & Brokers (3.61%)
Countrywide Home Loan, Inc.;
5.48%; 11/24/1998 4,500,000 4,484,245
5.45%; 11/30/1998 2,750,000 2,737,927
5.22%; 2/12/1999 4,000,000 3,940,260

11,162,432
Personal Credit Institutions (16.57%)
Associates First Capital Corp.;
5.42%; 11/4/1998 400,000 399,819
5.25%; 11/5/1998 1,975,000 1,973,848
5.30%; 11/5/1998 975,000 974,426
5.29%; 12/1/1998 3,000,000 2,986,775
5.20%; 12/23/1998 5,500,000 5,458,689
Avco Financial Services, Inc.;
5.25%; 12/21/1998 1,750,000 1,737,240
Comoloco, Inc.;
5.46%; 12/18/1998 1,500,000 1,489,308
5.47%; 12/18/1998 1,000,000 992,859
5.44%; 1/15/1999 1,000,000 988,667
5.51%; 1/25/1999 1,000,000 986,990
5.53%; 2/9/1999 1,500,000 1,476,958
5.50%; 2/23/1999 1,500,000 1,473,875
5.44%; 3/8/1999 1,000,000 980,809
5.42%; 5/14/1999 1,200,000 1,164,951
4.72%; 5/20/1999 2,500,000 2,434,444
4.62%; 7/23/1999 1,250,000 1,207,650
Ford Motor Credit Co.;
5.16%; 12/4/1998 1,925,000 1,915,895
General Motors Acceptance Corp.;
5.51%; 11/6/1998 2,600,000 2,598,010
5.11%; 1/15/99 1,350,000 1,335,628
Household Finance Corp.;
5.10%; 11/3/1998 700,000 699,802
5.10%; 11/9/1998 1,075,000 1,074,694
5.15%; 12/30/1998 3,000,000 2,974,679
5.08%; 2/26/1999 2,000,000 1,966,980
Norwest Financial, Inc.;
5.10%; 2/2/1999 4,375,000 4,317,359
5.14%; 2/5/1999 500,000 493,147
5.07%; 3/12/1999 1,525,000 1,496,865
5.45%; 4/5/1999 1,000,000 976,535
5.40%; 5/7/1999 1,500,000 1,457,925
Transamerica Finance Corp.;
5.50%; 11/10/1998 3,175,000 3,170,634

51,205,461
Retail Stores, NEC (0.84%)
Toys 'R' Us, Inc.;
5.20%; 11/25/1998 2,600,000 2,590,986

Security Brokers & Dealers (10.49%)
Bear Stearns Cos., Inc.;
5.51%; 11/19/1998 $5,625,000 $ 5,609,503
5.14%; 12/2/1998 5,000,000 4,977,869
Goldman Sachs Group L.P.;
5.50%; 11/20/1998 2,850,000 2,841,727
5.50%; 11/24/1998 1,625,000 1,619,290
5.10%; 3/19/1999 2,500,000 2,451,125
Merrill Lynch & Co., Inc.;
5.09%; 12/4/1998 3,900,000 3,881,826
5.11%; 12/10/1998 6,150,000 6,115,981
5.48%; 2/9/1999 1,000,000 984,778
5.45%; 2/23/1999 1,000,000 982,742
5.46%; 4/1/1999 2,000,000 1,954,197
5.45%; 4/9/1999 1,000,000 975,929

32,394,967

Total Commercial Paper 273,829,841

Bonds (9.23%)

Beverages (0.12%)
Pepsico, Inc. Debentures;
7.63%; 11/1/1998 375,000 375,000

Business Credit Institutions (2.53%)
American Express Credit Corp.
Debentures; 8.50%; 6/15/1999 490,000 497,865
CIT Group Holdings, Inc.
Medium-Term Notes;
5.88%; 11/9/1998 750,000 750,014
Senior Notes;
6.38%; 5/21/1999 1,000,000 1,003,097
John Deere Capital Corp.
Notes; 6.30%; 6/1/1999 800,000 802,071
Ford Motor Credit Co.
Debentures; 8.88%; 6/15/1999 500,000 509,150
Notes; 5.63%; 12/15/1998 2,000,000 1,999,621
5.63%;1/15/1999 540,000 539,750
8.00%; 1/15/1999 200,000 200,835
7.25%; 5/15/1999 1,500,000 1,510,879

7,813,282
Consumer Products (0.57%)
Philip Morris Co., Inc. Notes;
7.75%; 5/1/1999 1,735,000 1,753,203

Department Stores (0.16%)
Sears Roebuck Acceptance Corp.
Medium-Term Notes;
6.38%; 2/16/1999 500,000 500,839

Electric Services (0.42%)
Southern California Edison Co.
1st Ref. Mortgage Bonds;
7.50%; 4/15/1999 1,300,000 1,311,608

Life Insurance (1.42%)
Transamerica Financial Corp.
Senior Notes;
6.80%; 3/15/1999 4,365,000 4,381,222

Miscellaneous Equipment Rental &
Leasing (0.63%)
International Lease Finance Corp. Notes;
5.75%; 1/15/1999 $1,205,000 $ 1,205,504
7.50%; 3/1/1999 750,000 753,985

1,959,489
Mortgage Bankers & Brokers (0.11%)
Xerox Credit Corp. Debentures;
10.00%; 4/1/1999 325,000 330,394

Motor Vehicles & Equipment (0.69%)
General Motors Acceptance Corp.
Debentures; 8.40%; 10/15/1999 1,690,000 1,739,239
Notes; 8.63%; 6/15/1999 400,000 407,610

2,146,849
Personal Credit Institutions (2.58%)
American General Finance Corp.
Notes; 7.70%; 10/15/1999 475,000 486,205
Senior Notes; 6.88%; 7/1/1999 400,000 402,753
Associates Corp. of North America
Senior Notes;
6.25%; 3/15/1999 1,250,000 1,252,128
7.25%; 9/1/1999 315,000 318,791
Avco Financial Services, Inc.
Senior Notes;
7.25%; 7/15/1999 2,560,000 2,585,558
8.50%; 10/15/1999 650,000 668,461
Household Finance Corp. Notes;
7.75%; 6/1/1999 1,200,000 1,213,045
8.95%; 9/15/1999 250,000 257,888
Norwest Financial, Inc. Senior Notes;
6.25%; 3/15/1999 755,000 756,774

7,941,603

Total Bonds 28,513,489

Total Portfolio Investments (97.87%) 302,343,330

Cash, receivables and other assets,
net of liabilities (2.13%) 6,590,255

Total Net Assets (100.00%) $308,933,585

PRINCIPAL TAX-EXEMPT CASH MANAGEMENT
FUND, INC.

Principal
Amount Value

Short-Term Tax-Exempt Bonds (98.63%)

Alaska (3.13%)
Alaska Industrial Dev. & Export
Authority, IDB Current Ref. Bonds,
Series 1988A; LOC Bank of America;
Lot #6; 3.20%; 11/8/1998*; 7/1/2001 $380,000 $380,002
Lot #7; 3.20%; 11/8/1998*; 7/1/2001 95,000 95,000
Lot #8; 3.20%; 11/8/1998*; 7/1/2005 145,000 145,000
Lot #9; 3.20%; 11/8/1998*; 7/1/2005 205,000 205,000

825,002
Arizona (3.80%)
Chandler County, Arizona, IDA, F/R
Monthly IDR, Parsons Municipal
Services, Series 1983; LOC
Bank of America;
3.45%; 11/15/1998*; 12/15/2009 1,000,000 1,000,000

Colorado (4.36%)
City of Thornton, Colorado, F/R
Monthly IDR, Service Merchandise
Co., Inc., Series 1984; LOC CIBC;
3.40%; 11/15/1998*; 12/15/1999 100,000 100,000
South Denver Metropolis District,
City & County of Denver, Colorado,
General Obligation Bonds, Series
1985; LOC Barclays Bank;
3.70%; 11/30/1998**; 12/1/2005 1,050,000 1,050,000

1,150,000
Georgia (4.55%)
Hapeville, Georgia, Dev. Authority,
Adj. Tender IDR Bonds, Hapeville
Hotel Ltd., Partnership Project
Series 1985; LOC Deutch Bank
Corp.; 3.70%; 11/2/1998*; 11/1/2015 1,200,000 1,200,000

Illinois (11.01%)
City of Burbank, Illinois, F/R Monthly
IDR, Service Merchandise Co., Inc.,
Series 1984; LOC CIBC;
3.40%; 11/15/1998*; 9/15/2024 1,000,000 1,000,000
City of Galesburg, Illinois, Knox College
Project, Series 1996; LOC LaSalle
National Bank;
3.10%; 11/8/1998*; 3/1/2031 600,000 600,000
City of Naperville, Illinois, Economic
Dev. Rev. Bonds, Service Merchandise
Co., Inc.; LOC CIBC;
3.40%; 11/15/1998*; 11/30/2024 1,300,000 1,300,000

2,900,000
Iowa (9.87%)
City of Storm Lake, Iowa, Private
College Rev. Bonds, Buena Vista
College, Series 1993; LOC Norwest
Bank Minnesota, N. A.;
3.20%; 11/8/1998*; 12/1/2003 $ 500,000 $ 500,000
Iowa Finance Authority Housing H/Care,
Rev. Bonds, Wesley Project, Series 1997;
LOC Norwest Bank Minnesota, N.A.;
3.20%; 11/8/1998*; 4/1/2005 500,000 500,000
Iowa Higher Education Loan Authority
Fac., Rev. Bonds, St. Ambrose, Series
1997; LOC Norwest Bank Minnesota,
N.A.; 3.20%; 11/8/1998* 2/1/2007 500,000 500,000
Woodbury County, Iowa, Education Fac.
Rev. Bonds, Siouxland, Series 1996;
LOC Firstar Bank Milwaukee, N.A.;
3.15%; 11/8/1998*; 11/1/2016 500,000 500,000
Woodbury County, Iowa, Education Fac.
Rev. Bonds, Siouxland, Series 1997;
LOC Norwest Bank Minnesota, N.A.;
3.20%; 11/8/1998*; 5/1/2016 600,000 600,000

2,600,000
Louisiana (3.80%)
Jefferson Parish, Louisiana, IDB Rev.
Ref. Bonds, George J. Achel, Sr.
Project, Series 1986; LOC Barclays
Bank; 3.20%; 11/8/1998*; 12/1/20041,000,000 1,000,000

Maryland (0.49%)
Montgomery County, Maryland, F/R
Monthly IDA, Information Systems
& Networks; LOC NationsBank, N.A.;
3.65%; 11/8/1998*; 4/1/2014 130,000 130,000

Michigan (1.12%)
Township of Cornell, Michigan,
The Economic Dev. Corp.,
Environmental Improvement
Rev. Ref. Bonds, Series 1986,
Mead Escanaba Paper Co. Project;
LOC Bank of America;
3.60%; 11/2/1998*; 11/1/2016 295,000 295,000

Minnesota (3.80%)
City of Coon Rapids, Minnesota
Rev. Bonds for Health Central
System, Series 1985; LOC Norwest
Bank Minnesota, N.A.;
3.15%; 11/8/1998*; 8/1/2015 500,000 500,000
City of Rochester, Minnesota, Health Care
Fac. Rev. Bonds, Mayo Foundation/
Mayo Medical Center, Adj. Tender,
Series 1992C;
3.35%; 11/16/1998**; 11/15/2021 250,000 250,000
3.50%; 12/8/1998**; 11/15/2021 250,000 250,000

1,000,000
Nebraska (3.80%)
Lincoln Electric System
Commercial Paper Notes;
3.35%; 11/3/1998 500,000 500,000
3.35%; 1/22/1999 500,000 500,000

1,000,000
New Hampshire (3.80%)
New Hampshire IDA, F/R Monthly 1983
Hudson, Oerlikon-Buhrle USA/Balzers;
LOC UBS AG;
3.50%; 11/8/1998*; 7/1/2013 $1,000,000 $1,000,000

New York (6.64%)
New York State Energy Research &
Dev. Authority for New York State
Electric & Gas Corp.; Series 1985-D;
LOC UBS AG;
3.80%; 12/1/1998**; 12/1/2015 750,000 750,000
New York State Energy Research &
Dev. Authority Pollution Control
Rev. Bonds, Long Island Lighting
Co.; Series 1985B; LOC Deutsche
Bank; 3.58%; 3/1/1999**; 3/1/2016 1,000,000 1,000,000

1,750,000
North Carolina (4.21%)
University of North Carolina
Foundation, Inc., Series 1989;
LOC NationsBank, N.A.;
3.15%; 11/8/1998*; 10/1/2009 1,110,000 1,110,000

Ohio (4.94%)
Toledo-Lucas County, Ohio, Port
Fac. Ref. Rev. Bonds, CSX
Transport Project, Series 1992;
LOC Bank of Nova Scotia;
3.25%; 11/6/1998**; 12/15/2021 500,000 500,000
3.15%; 1/19/1999**; 12/15/2021 500,000 500,000
Village of Evendale, Ohio, SHV Real
Estate Income Project;
LOC ABN-AMRO;
3.00%; 11/8/1998*; 9/1/2015 300,000 300,000

1,300,000
Pennsylvania (6.07%)
Bucks County, Pennsylvania, IDA SHV
Real Estate, Inc. Project, Series 1985;
LOC ABN-AMRO Bank;
3.15%; 11/8/1998*; 7/1/2015 600,000 600,000
Delaware County, Pennsylvania, Fac.
Rev. Tax & Rev. Anticipation Notes,
Series 1985; Guaranteed by United
Parcel Service;
3.60%; 11/2/1998*; 12/1/2015 1,000,000 1,000,000

1,600,000
Tennessee (1.90%)
Knox, Tennessee, IDB F/R Monthly
IDR 1983, Service Merchandise Co.,
Inc.; LOC CIBC;
3.40%; 11/15/1998*; 12/15/2008 500,000 500,000

Texas (14.12%)
Coppell, Texas, Industrial Dev. Corp.,
IDA 1984, Minyard Properties
Project; LOC Citibank;
3.30%; 11/8/1998*; 12/1/2001 870,000 870,000
Grapevine, Texas, Industrial Dev. Corp.,
American Airlines;
LOC Morgan Guaranty;
Series 1984 B3;
3.65%; 11/2/1998*; 12/1/2024 $ 800,000 $ 800,000
Series 1984 B4;
3.65%; 11/2/1998*; 12/1/2024 400,000 400,000
3.65%; 11/2/1998*; 12/1/2024 100,000 100,000
Lone Star Airport Improvement Authority,
American Airlines, Series 1984;
LOC Royal Bank of Canada;
Series 1984 A2;
3.65%; 11/2/1998*; 12/1/2014 100,000 100,000
Series 1984 A5;
3.65%; 11/2/1998*; 12/1/2014 100,000 100,000
Series 1984 B1;
3.65%; 11/2/1998*; 12/1/2014 800,000 800,000
Series 1984 B5;
3.65%; 11/2/1998*; 12/1/2014 400,000 400,000
Montgomery County, Texas, Industrial
Dev. Corp. Ref. Bonds,
Series 1986A; Dal-Tile Corp.
Project; LOC Credit Suisse;
3.20%; 11/8/1998*; 12/1/2003 150,000 150,000

3,720,000
West Virginia (3.80%)
Putnam County, West Virginia, F/R
Monthly IDR 1981, FMC Corp.
Project; LOC Bank of New York;
3.60%; 11/8/1998*; 10/1/2011 1,000,000 1,000,000

Wyoming (3.42%)
Lincoln County, Wyoming, Pollution
Control Ref. Bonds, Pacificorp
Project, Series 1991; LOC
UBS AG;
3.35%; 11/5/1998**; 1/1/2016 500,000 500,000
3.20%; 3/11/1999**; 1/1/2016 400,000 400,000

900,000

Total Portfolio Investments (98.63%) 25,980,002

Cash, receivables and other assets,
net of liabilities (1.37%) 360,312

Total Net Assets (100.00%) $26,340,314

* Demand Date
** Put Date

FINANCIAL HIGHLIGHTS

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .051 .050 .049 .052 .033
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --

Total from Investment Operations .051 .050 .049 .052 .033

Less Dividends From Net Investment Income............... (.051) (.050) (.049) (.052) (.033)

Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000 $1.000

Total Return(c)......................................... 5.10% 4.96% 5.00% 5.36% 2.67%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $294,918 $836,072 $694,962 $623,864 $332,346
Ratio of Expenses to Average Net Assets(b)........... .56%(e) .63% .66% .72% .70%
Ratio of Net Investment Income to Average Net Assets. 5.12% 4.98% 4.88% 5.24% 3.27%

PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class B shares 1998 1997 1996 1995(g)
- -------------------------------------------------------- ---- ---- ---- ----
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .042 .041 .041 .041
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- --

Total from Investment Operations .042 .041 .041 .041

Less Dividends from Net Investment Income............... (.042) (.041) (.041) (.041)

Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000

Total Return(c)......................................... 4.25% 4.05% 4.13% 4.19%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $3,602 $992 $520 $208
Ratio of Expenses to Average Net Assets(b)........... 1.41%(e) 1.47% 1.50% 1.42%(f)
Ratio of Net Investment Income to Average Net Assets. 4.23% 4.08% 4.08% 4.50%(f)

PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class R shares 1998 1997 1996(h)
- -------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .046 .044 .030
Net Realized and Unrealized Gain (Loss) on Investments -- -- --

Total from Investment Operations .046 .044 .030

Less Dividends from Net Investment Income............... (.046) (.044) (.030)

Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000

Total Return(c)......................................... 4.56% 4.16% 2.97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $10,414 $4,296 $1,639
Ratio of Expenses to Average Net Assets(b)........... 1.05%(e) 1.26% .99%(f)
Ratio of Net Investment Income to Average Net Assets. 4.62% 4.40% 4.41%(f)

See accompanying notes.
</TABLE>

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31:
<TABLE>
<CAPTION>

PRINCIPAL TAX-EXEMPT CASH MANAGEMENT FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000

Net Investment Income from Operations(b)................ .028 .029 .029 .032 .021

Less Dividends from Net Investment Income............... (.028) (.029) (.029) (.032) (.021)

Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000 $1.000

Total Return(c)......................................... 2.89% 2.89% 2.92% 3.24% 2.11%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $26,340 $98,939 $98,482 $99,887 $79,736
Ratio of Expenses to Average Net Assets(b)........... .72% .70% .71% .69% .67%
Ratio of Net Investment Income to Average Net Assets. 2.84% 2.93% 2.87% 3.19% 2.08%

See accompanying notes.
</TABLE>

Notes to Financial Highlights

(a) Effective January 1, 1998, the following changes were made to the names of
the Money Market Funds:

<TABLE>
<CAPTION>
Former Fund Name New Fund Name
<S> <C>
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc. Principal Tax-Exempt Cash Management Fund, Inc.
</TABLE>

(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the Money Market Funds would have had per share net investment
income and the ratios of expenses to average net assets as shown:

<TABLE>
<CAPTION>
Year Ended Ratio of
October 31, Per Share Expenses
Except Net Investment to Average Amount
as Noted Income Net Assets Waived
<S> <C> <C> <C> <C>
Principal Cash Management Fund, Inc.:
Class A 1998(e) $.051 .56% $ --
1997 .050 .63 --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343

Class B 1998(e) .041 1.49 1,343
1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(g) .041(f) 1.63(f) 104

Class R 1998(e) .046 1.05 --
1997 .043 1.34 2,441

Principal Tax-Exempt Cash Management Fund, Inc.:
Class A 1998 .026 .81 58,145
1997 .029 .73 27,978
1996 .028 .77 69,107
1995 .031 .84 138,574
1994 .019 .85 150,515
</TABLE>

(d) Total return amounts have not been annualized.

(e) Management fee waivers apply to November 1, 1997 through February 28, 1998.

(f) Computed on an annualized basis.

(g) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995.

(h) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996.

The Boards of Directors and Shareholders
Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Tax-Exempt Cash Management Fund, Inc.

We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of The Principal Domestic Growth Funds
(comprising, respectively, Principal Balanced Fund, Inc., Principal Blue Chip
Fund, Inc., Principal Capital Value Fund, Inc., Principal MidCap Fund, Inc.,
Principal Growth Fund, Inc., Principal Real Estate Fund, Inc., Principal
SmallCap Fund, Inc. and Principal Utilities Fund, Inc.), The Principal
International Growth Funds (comprising, respectively, Principal International
Emerging Markets Fund, Inc., Principal International Fund, Inc. and Principal
International SmallCap Fund, Inc.), The Principal Income Funds (comprising,
respectively, Principal Bond Fund, Inc., Principal Government Securities Income
Fund, Inc., Principal High Yield Fund, Inc., Principal Limited Term Bond Fund,
Inc. and Principal Tax-Exempt Bond Fund, Inc.) and The Principal Money Market
Funds (comprising, respectively, Principal Cash Management Fund, Inc. and
Principal Tax-Exempt Cash Management Fund, Inc.) as of October 31, 1998, and the
related statements of operations, statements of changes in net assets and
financial highlights for each of the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1998, by correspondence with the custodians
and brokers. As to securities relating to uncompleted transactions, we performed
other audit procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective funds constituting The Principal Domestic Growth Funds, The
Principal International Growth Funds, The Principal Income Funds and The
Principal Money Market Funds at October 31, 1998, and the results of their
operations, the changes in their net assets and the financial highlights for
each of the periods indicated therein, in conformity with generally accepted
accounting principles.

/S/ ERNST & YOUNG LLP

Des Moines, Iowa
November 25, 1998

Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
<TABLE>
<CAPTION>

Periods Ended October 31, 1998

Per Share Per Share
Income Dividend Distributions Capital Gain Distributions

Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions

Principal Balanced
Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A Shares 12/24/97 $.0850 23.48% 12/04/97 $ .7849 $.2432
3/24/98 .0900 25.92%
6/24/98 .0950 25.36%
9/24/98 .1050 26.71%
$.3750 $1.0281 $1.4031
B Shares 12/24/97 $.0548 23.48% 12/04/97 $ .7849 $.2432
3/24/98 .0595 25.92%
6/24/98 .0646 25.36%
9/24/98 .0776 26.71%
$.2565 $1.0281 $1.2846
R Shares 12/24/97 $.0610 23.48% 12/04/97 $ .7849 $.2432
3/24/98 .0672 25.92%
6/24/98 .0724 25.36%
9/24/98 .0841 26.71%
$.2847 $1.0281 $1.3128

Principal Blue Chip
Fund, Inc.
A Shares 12/24/97 $.0500 76.14% 12/04/97 $2.0241 .0569
3/24/98 .0475 87.31%
6/24/98 .0107 75.81%
9/24/98 .0100 79.61%
$.1182 $2.081 $ 2.6267
B Shares 12/24/97 $.0133 76.14% 12/04/97 $2.0241 .0569
3/24/98 .0089 87.31%
6/24/98 -- 00.00%
9/24/98 -- 00.00%
$.0222 $2.081 $ 2.1032
R Shares 12/24/97 $.0226 76.14% 12/04/97 $2.0241 .0569
3/24/98 .0190 87.31%
6/24/98 -- 00.00%
9/24/98 -- 00.00%
$.0416 $2.081 $ 2.1226

Principal Capital
Value Fund, Inc.
A Shares 12/24/97 $.2665 93.49% 12/04/97 $2.0601 $.4121
6/24/98 .2600 92.93%
$.5265 $2.4722 $2.9987
B Shares 12/24/97 $.1388 93.49% 12/04/97 $2.0601 $.4121
6/24/98 .1187 92.93%
$.2575 $2.4722 $2.7297
R Shares 12/24/97 $.1557 93.49% 12/04/97 $2.0601 $.4121
6/24/98 .1363 92.93%
$.2920 $2.4722 $2.7642

Principal Growth
Fund, Inc.
A Shares 12/24/97 $.1825 55.31% 12/04/97 $1.4891
6/24/98 .1600 44.42%
$.3425 $ 1.4891 $ 1.8316
B Shares 12/24/97 $.0593 55.31% 12/04/97 $1.4891
06/24/98 .0297 44.42%
$.0890 $ 1.4891 $ 1.5781
R Shares 12/24/97 $.0154 55.31% 12/04/97 $1.4891
06/24/98 -- 00.00%
$.0154 $ 1.4891 $ 1.5045

Principal
International
Fund, Inc.
A Shares 12/24/97 $.1030 00.00% 12/04/97 $.2006 $.0000
$.1030 $ .2006 $ .3036
B Shares 12/24/97 $.0347 00.00% 12/04/97 $.2006 $.0000
$.0347 $ .2006 $ .2353
R Shares 12/24/97 $.0421 00.00% 12/04/97 $.2006 $.0000
$.0421 $ .2006 $ .2427

Principal MidCap
Fund, Inc.
A Shares 12/04/97 $1.0450 $.0540
$1.0990 $1.0990
B Shares 12/04/97 $1.0450 $.0540
$1.0990 $1.0990
R Shares 12/04/97 $1.0450 $.0540
$1.0990 $1.0990

Principal Real
Estate Fund, Inc.
A Shares 3/24/98 $.0550 00.00%
6/24/98 .0700 00.00%
9/24/98 .0800 00.00%
$.2050 $.2050
B Shares 3/24/98 $.0513 00.00%
6/24/98 .0651 00.00%
9/24/98 .0755 00.00%
$.1919 $.1919
R Shares 3/24/98 $.0530 00.00%
6/24/98 .0686 00.00%
9/24/98 .0809 00.00%
$.2025 $.2025
</TABLE>

Foreign Taxes Paid

Principal International Fund, Inc. makes an election under the Internal
Revenue Code Section 853 to pass through foreign taxes paid by the fund to
its shareholders. The total amount of foreign taxes passed through to
shareholders for the year ended October 31, 1998 totals $0.0290 per share for
Principal International Fund, Inc. This information is given to meet certain
requirements of the Internal Revenue Code and should not be used by
shareholders for preparing their income tax returns. For tax return
preparation purposes, please refer to the information supplied with the 1099
form you receive from the fund's transfer agent.

<TABLE>
<CAPTION>
Period Ended October 31, 1998

Per Share Per Share
Income Dividend Distributions Capital Gain Distributions
Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions

Principal Utilities
Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A Shares 12/24/97 $.1350 95.80%
3/24/98 .1100 95.72%
6/24/98 .1000 98.75%
9/24/98 .0900 91.87%
$.4350 $ .4350
B Shares 12/24/97 $.1091 95.80%
3/24/98 .0836 95.72%
6/24/98 .0727 98.75%
9/24/98 .0629 91.87%
$.3283 $ .3283
R Shares 12/24/97 $.1097 95.80%
3/24/98 .0826 95.72%
6/24/98 .0719 98.75%
9/24/98 .0621 91.87%
$.3263 $ .3263

<FN>
* Percent qualifying for deduction by shareholders who are corporations.
** Taxable as long-term capital gain.
*** Taxable at ordinary income rates.
</FN>
</TABLE>

Ordinary Income Dividends

The Funds paid the following per share income dividends on the dates indicated:

Per Share Dividends/Payable Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Fund 11/24/97 12/24/97 1/23/98 2/24/98 3/24/98 4/24/98 5/22/98 6/24/98 7/24/98 8/24/98 9/24/98 10/23/98

Principal Bond Fund, Inc.
Class A $.0613 $.0613 $.0588 $.0588 $.0588 $.0588 $.0588 $.0588 $.0600 $.0600 $.0600 $.0600
Class B .0537 .0537 .0514 .0514 .0514 .0514 .0514 .0514 .0529 .0529 .0529 .0529
Class R .0542 .0542 .0512 .0512 .0512 .0512 .0512 .0512 .0533 .0533 .0533 .0533

Principal Government
Securities Income
Fund, Inc.
Class A .0575 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588
Class B .0507 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535
Class R .0500 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510

Principal High Yield
Fund, Inc.
Class A .0563 .0563 .0563 .0563 .0550 .0550 .0550 .0525 .0525 .0525 .0513 .0513
Class B .0500 .0500 .0500 .0489 .0489 .0489 .0489 .0466 .0466 .0466 .0456 .0456
Class R .0517 .0517 .0517 .0497 .0497 .0497 .0497 .0472 .0472 .0472 .0456 .0456

Principal Limited Term Bond
Fund, Inc.
Class A .0500 .0500 .0500 .0500 .0500 .0475 .0475 .0475 .0475 .0475 .0475 .0450
Class B .0452 .0452 .0452 .0452 .0452 .0425 .0425 .0425 .0425 .0425 .0425 .0401
Class R .0462 .0462 .0431 .0431 .0431 .0410 .0410 .0410 .0410 .0410 .0410 .0390

Principal Tax-Exempt Bond
Fund, Inc.*
Class A .0513 .0513 .0513 .0513 .0513 .0513 .0513 .0500 .0500 .0500 .0500 .0500
Class B .0446 .0446 .0446 .0446 .0446 .0446 .0446 .0437 .0437 .0437 .0437 .0437

<FN>
* Dividends from the Principal Tax-Exempt Bond Fund, Inc. were exempt from
federal income taxation for non-corporate shareholders.
</FN>
</TABLE>

FEDERAL INCOME TAX INFORMATION (Continued)

Ordinary Income Dividends

The Funds paid the following per share income dividends on the dates indicated:
<TABLE>
<CAPTION>

Per Share Dividends/Payable Date

Fund 11/20/97 12/19/97 1/20/98 2/20/98 3/20/98 4/20/98 5/20/98 6/19/98 7/20/98 8/20/98 9/18/98 10/20/98

Principal Cash Management
Fund, Inc.
Class A $.0043 $.0044 $.0043 $.0046 $.0040 $.0040 $.0041 $.0043 $.0040 $.0043 $.0043 $.0042
Class B .0036 .0037 .0036 .0038 .0033 .0031 .0034 .0037 .0034 .0035 .0036 .0035
Class R .0038 .0039 .0038 .0041 .0035 .0036 .0037 .0039 .0036 .0040 .0040 .0038

Principal Tax-Exempt Cash
Management Fund, Inc.*
Class A .0026 .0026 .0024 .0024 .0019 .0023 .0026 .0026 .0022 .0023 .0023 .0023
Class B** .0019 .0019 .0005*** -- -- -- -- -- -- -- -- --

<FN>
* Dividends from Principal Tax-Exempt Cash Management Fund, Inc. were exempt
from federal income taxation for non-corporate shareholders.

** On December 29, 1997, Principal Tax-Exempt Cash Management Fund, Inc.
ceased offering Class B shares. All outstanding Class B shares were
redeemed at that date.

*** Dividends declared on Principal Tax-Exempt Cash Management Fund, Inc. Class
B shares from December 21, 1997 through December 29, 1997 (date operations
ceased).
</FN>
</TABLE>

PRINCIPAL MUTUAL FUNDS

Principal Life Insurance Company has sponsored the development of a number of
mutual funds. The funds which make up the Principal Mutual Funds and a brief
description of their respective investment objectives are provided below. For
more complete information about any of the funds, including charges and
expenses, obtain a prospectus from Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200 (telephone
1-800-247-4123). Please read it carefully before you invest or send money.

DOMESTIC GROWTH FUNDS INVESTMENT OBJECTIVE

Principal Balanced Fund, Inc. To seek the generation of a total
return consisting of current
income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.

Principal Blue Chip Fund, Inc. To seek growth of capital and growth
of income by investing primarily in
common stocks of well capitalized,
established companies.

Principal Capital Value Fund, Inc. To seek long-term capital
appreciation and a secondary
objective of growth of investment
income.

Principal Growth Fund, Inc. To seek growth of capital with
realization of current income
incidental to the objective of growth
of capital.

Principal MidCap Fund, Inc. To seek capital appreciation by
investing primarily in securities
of emerging and other growth-oriented
companies.

Principal Real Estate Fund, Inc. To seek the generation of total
return by investing primarily in
equity securities of companies
principally engaged in the real
estate industry.

Principal SmallCap Fund, Inc. To seek long-term growth of capital
by investing primarily in equity
securities of companies with
comparatively smaller market
capitalizations.

Principal Utilities Fund, Inc. To seek current income and long-term
growth of income and capital by
investing primarily in equity and
fixed income securities of companies
in the public utilities industry.

INTERNATIONAL GROWTH FUNDS

Principal International To seek long-term growth of capital
Emerging Markets by investing primarily in equity
Fund, Inc. securities of issuers in emerging
market countries.

Principal International Fund, Inc. To seek long-term growth of capital
by investing in a portfolio of equity
securities of companies domiciled in
any of the nations of the world.

Principal International SmallCap To seek long-term growth of capital
Fund, Inc. by investing primarily in equity
securities of non-United States
companies with comparatively
smaller market capitalizations.

INCOME FUNDS

Principal Bond Fund, Inc. To seek as high a level of income as
is consistent with preservation of
capital and prudent investment risk.

Principal Government Securities To seek a high level of current
Income Fund, Inc. income, liquidity and safety of
principal.

Principal High Yield Fund, Inc. To seek high current income.
Capital growth is a secondary
objective when consistent with
seeking high current income.

Principal Limited Term Bond To seek a high level of current
Fund, Inc. income consistent with a relatively
high level of principal stability by
investing in a portfolio of
securities with a dollar weighted
average maturity of five years or
less.

Principal Tax-Exempt Bond To seek as high a level of current
Fund, Inc. income exempt from federal taxation
as is consistent with preservation
of capital.

MONEY MARKET FUNDS

Principal Cash Management To seek as high a level of current
Fund, Inc. income available from short-term
securities as is considered
consistent with preservation of
principal and maintenance of
liquidity by investing in a portfolio
of money market instruments.

Principal Tax-Exempt Cash To seek, through investment in a
Management Fund, Inc. professionally-managed portfolio of
high quality short-term Municipal
Obligations, as high a level of
current interest income exempt from
federal income tax as is consistent
with stability of principal and
maintenance of liquidity.

ERNST & YOUNG LLP Suite 3400 Phone: 515 243 2727
801 Grand Avenue
Des Moines, Iowa 50309-2764

Consent of Independent Auditors

We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectuses in Part A and in Part B and to the incorporation
by reference in Part B of our report dated January 22, 1999 on the financial
statements and the financial highlights of Principal Variable Contracts Fund,
Inc. in this Post Effective Amendment No. 44 to Form N-1A Registration Statement
under the Securities Act of 1933 (No. 02-35570) and related Prospectuses of
Principal Variable Contracts Fund, Inc.

/s/ Ernst & Young LLP

Des Moines, Iowa
April 19, 1999

Ernst & Young LLP is a member of Ernst & Young International, Ltd.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 71,049,361
<INVESTMENTS-AT-VALUE> 79,912,171
<RECEIVABLES> 928,410
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 3,535,835
<TOTAL-ASSETS> 84,376,416
<PAYABLE-FOR-SECURITIES> 212,354
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 74,777
<TOTAL-LIABILITIES> 287,131
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 74,769,781
<SHARES-COMMON-STOCK> 6,836,518
<SHARES-COMMON-PRIOR> 6,434,402
<ACCUMULATED-NII-CURRENT> 43,376
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 413,318
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,862,810
<NET-ASSETS> 84,089,285
<DIVIDEND-INCOME> 927,631
<INTEREST-INCOME> 1,838,721
<OTHER-INCOME> 0
<EXPENSES-NET> (721,278)
<NET-INVESTMENT-INCOME> 2,045,074
<REALIZED-GAINS-CURRENT> 2,109,740
<APPREC-INCREASE-CURRENT> 2,810,389
<NET-CHANGE-FROM-OPS> 6,965,203
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,028,007)
<DISTRIBUTIONS-OF-GAINS> (2,641,599)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,198,581
<NUMBER-OF-SHARES-REDEEMED> (1,080,275)
<SHARES-REINVESTED> 283,810
<NET-CHANGE-IN-ASSETS> 7,284,841
<ACCUMULATED-NII-PRIOR> 26,450
<ACCUMULATED-GAINS-PRIOR> 945,536
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 650,963
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 721,278
<AVERAGE-NET-ASSETS> 81,566,841
<PER-SHARE-NAV-BEGIN> 11.94
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .76
<PER-SHARE-DIVIDEND> (.31)
<PER-SHARE-DISTRIBUTIONS> (.40)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.30
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 183,100,669
<INVESTMENTS-AT-VALUE> 224,139,620
<RECEIVABLES> 3,030,281
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1,920,891
<TOTAL-ASSETS> 229,090,792
<PAYABLE-FOR-SECURITIES> 4,737,499
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 295,227
<TOTAL-LIABILITIES> 5,032,726
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 182,115,651
<SHARES-COMMON-STOCK> 12,224,216
<SHARES-COMMON-PRIOR> 9,153,229
<ACCUMULATED-NII-CURRENT> 11,545
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 891,919
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41,038,951
<NET-ASSETS> 224,058,066
<DIVIDEND-INCOME> 1,573,929
<INTEREST-INCOME> 302,158
<OTHER-INCOME> 0
<EXPENSES-NET> (1,459,994)
<NET-INVESTMENT-INCOME> 416,093
<REALIZED-GAINS-CURRENT> 8,924,147
<APPREC-INCREASE-CURRENT> 21,906,942
<NET-CHANGE-FROM-OPS> 31,247,182
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (414,827)
<DISTRIBUTIONS-OF-GAINS> (10,737,997)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,174,437
<NUMBER-OF-SHARES-REDEEMED> (1,736,629)
<SHARES-REINVESTED> 633,179
<NET-CHANGE-IN-ASSETS> 74,876,063
<ACCUMULATED-NII-PRIOR> 10,859
<ACCUMULATED-GAINS-PRIOR> 2,706,343
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,436,590
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,459,994
<AVERAGE-NET-ASSETS> 186,898,607
<PER-SHARE-NAV-BEGIN> 16.30
<PER-SHARE-NII> .04
<PER-SHARE-GAIN-APPREC> 2.99
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> (.96)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.33
<EXPENSE-RATIO> .78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 115,199,389
<INVESTMENTS-AT-VALUE> 119,543,178
<RECEIVABLES> 2,433,178
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 50,000
<TOTAL-ASSETS> 122,026,356
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 53,581
<TOTAL-LIABILITIES> 53,581
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 117,597,325
<SHARES-COMMON-STOCK> 10,145,370
<SHARES-COMMON-PRIOR> 6,955,978
<ACCUMULATED-NII-CURRENT> 132,464
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (100,803)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,343,789
<NET-ASSETS> 121,972,775
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,809,666
<OTHER-INCOME> 0
<EXPENSES-NET> (499,313)
<NET-INVESTMENT-INCOME> 6,310,353
<REALIZED-GAINS-CURRENT> 171,543
<APPREC-INCREASE-CURRENT> 665,410
<NET-CHANGE-FROM-OPS> 7,147,306
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,229,921)
<DISTRIBUTIONS-OF-GAINS> (64,690)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,555,266
<NUMBER-OF-SHARES-REDEEMED> (885,965)
<SHARES-REINVESTED> 520,091
<NET-CHANGE-IN-ASSETS> 40,052,107
<ACCUMULATED-NII-PRIOR> 52,223
<ACCUMULATED-GAINS-PRIOR> (207,656)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 488,898
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 499,313
<AVERAGE-NET-ASSETS> 98,655
<PER-SHARE-NAV-BEGIN> 11.78
<PER-SHARE-NII> .66
<PER-SHARE-GAIN-APPREC> .25
<PER-SHARE-DIVIDEND> (.66)
<PER-SHARE-DISTRIBUTIONS> (.01)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.02
<EXPENSE-RATIO> .51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 180,402,688
<INVESTMENTS-AT-VALUE> 200,947,155
<RECEIVABLES> 1,639,532
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 52,531
<TOTAL-ASSETS> 202,639,218
<PAYABLE-FOR-SECURITIES> 3,935,756
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100,168
<TOTAL-LIABILITIES> 4,035,924
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 176,262,044
<SHARES-COMMON-STOCK> 12,221,316
<SHARES-COMMON-PRIOR> 8,628,659
<ACCUMULATED-NII-CURRENT> 72,566
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,724,217
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,544,467
<NET-ASSETS> 198,603,294
<DIVIDEND-INCOME> 1,793,161
<INTEREST-INCOME> 4,750,511
<OTHER-INCOME> 0
<EXPENSES-NET> (971,703)
<NET-INVESTMENT-INCOME> 5,571,969
<REALIZED-GAINS-CURRENT> 6,127,300
<APPREC-INCREASE-CURRENT> 6,919,746
<NET-CHANGE-FROM-OPS> 18,619,015
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,549,524)
<DISTRIBUTIONS-OF-GAINS> (6,200,923)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,640,419
<NUMBER-OF-SHARES-REDEEMED> (780,615)
<SHARES-REINVESTED> 732,853
<NET-CHANGE-IN-ASSETS> 64,776,187
<ACCUMULATED-NII-PRIOR> 95,943
<ACCUMULATED-GAINS-PRIOR> 1,798,281
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 958,526
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 971,703
<AVERAGE-NET-ASSETS> 165,843,466
<PER-SHARE-NAV-BEGIN> 15.51
<PER-SHARE-NII> .49
<PER-SHARE-GAIN-APPREC> 1.33
<PER-SHARE-DIVIDEND> (.49)
<PER-SHARE-DISTRIBUTIONS> (.59)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.25
<EXPENSE-RATIO> .59
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 303,531,858
<INVESTMENTS-AT-VALUE> 395,755,832
<RECEIVABLES> 15,147,330
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 80,003
<TOTAL-ASSETS> 410,983,165
<PAYABLE-FOR-SECURITIES> 25,057,619
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 201,753
<TOTAL-LIABILITIES> 25,259,372
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 288,672,327
<SHARES-COMMON-STOCK> 10,372,811
<SHARES-COMMON-PRIOR> 8,242,195
<ACCUMULATED-NII-CURRENT> 151,505
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,675,987
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 92,223,974
<NET-ASSETS> 385,723,793
<DIVIDEND-INCOME> 7,755,471
<INTEREST-INCOME> 722,422
<OTHER-INCOME> 0
<EXPENSES-NET> (1,492,021)
<NET-INVESTMENT-INCOME> 6,985,872
<REALIZED-GAINS-CURRENT> 16,930,138
<APPREC-INCREASE-CURRENT> 17,291,388
<NET-CHANGE-FROM-OPS> 41,207,398
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,911,025)
<DISTRIBUTIONS-OF-GAINS> (13,164,503)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,141,605
<NUMBER-OF-SHARES-REDEEMED> (558,554)
<SHARES-REINVESTED> 547,565
<NET-CHANGE-IN-ASSETS> 100492,584
<ACCUMULATED-NII-PRIOR> 76,658
<ACCUMULATED-GAINS-PRIOR> 910,613
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,480,275
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,492,021
<AVERAGE-NET-ASSETS> 337,816,633
<PER-SHARE-NAV-BEGIN> 34.61
<PER-SHARE-NII> .71
<PER-SHARE-GAIN-APPREC> 3.94
<PER-SHARE-DIVIDEND> (.71)
<PER-SHARE-DISTRIBUTIONS> (1.36)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 37.19
<EXPENSE-RATIO> .44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 186,398,324
<INVESTMENTS-AT-VALUE> 260,951,527
<RECEIVABLES> 754,821
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 50,460
<TOTAL-ASSETS> 261,756,808
<PAYABLE-FOR-SECURITIES> 1,799,551
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 129,644
<TOTAL-LIABILITIES> 1,929,195
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 183,908,525
<SHARES-COMMON-STOCK> 12,700,511
<SHARES-COMMON-PRIOR> 9,769,331
<ACCUMULATED-NII-CURRENT> 45,662
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,320,223
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 74,553,203
<NET-ASSETS> 259,827,613
<DIVIDEND-INCOME> 2,099,468
<INTEREST-INCOME> 1,540,032
<OTHER-INCOME> 0
<EXPENSES-NET> (1,002,103)
<NET-INVESTMENT-INCOME> 2,637,397
<REALIZED-GAINS-CURRENT> 3,840,296
<APPREC-INCREASE-CURRENT> 33,717,501
<NET-CHANGE-FROM-OPS> 40,195,194
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,591,736)
<DISTRIBUTIONS-OF-GAINS> (2,466,719)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,240,321
<NUMBER-OF-SHARES-REDEEMED> (562,472)
<SHARES-REINVESTED> 253,331
<NET-CHANGE-IN-ASSETS> 91,667,220
<ACCUMULATED-NII-PRIOR> 3,164
<ACCUMULATED-GAINS-PRIOR> (53,127)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 989,512
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,002,103
<AVERAGE-NET-ASSETS> 211,398,071
<PER-SHARE-NAV-BEGIN> 17.21
<PER-SHARE-NII> .21
<PER-SHARE-GAIN-APPREC> 3.45
<PER-SHARE-DIVIDEND> (.21)
<PER-SHARE-DISTRIBUTIONS> (.20)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.46
<EXPENSE-RATIO> .48
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 135,528,077
<INVESTMENTS-AT-VALUE> 141,284,092
<RECEIVABLES> 1,663,794
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 50,871
<TOTAL-ASSETS> 142,998,757
<PAYABLE-FOR-SECURITIES> 1,603,661
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77,870
<TOTAL-LIABILITIES> 1,681,531
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 135,790,643
<SHARES-COMMON-STOCK> 12,837,749
<SHARES-COMMON-PRIOR> 8,800,476
<ACCUMULATED-NII-CURRENT> 156,200
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (385,632)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,756,015
<NET-ASSETS> 141,317,226
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,808,045
<OTHER-INCOME> 0
<EXPENSES-NET> (590,287)
<NET-INVESTMENT-INCOME> 7,217,758
<REALIZED-GAINS-CURRENT> (13,992)
<APPREC-INCREASE-CURRENT> 2,037,737
<NET-CHANGE-FROM-OPS> 9,241,503
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7,115,164)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,214,130
<NUMBER-OF-SHARES-REDEEMED> (820,547)
<SHARES-REINVESTED> 643,690
<NET-CHANGE-IN-ASSETS> 46,994,766
<ACCUMULATED-NII-PRIOR> 53,935
<ACCUMULATED-GAINS-PRIOR> (371,640)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 576,926
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 590,287
<AVERAGE-NET-ASSETS> 117,584,017
<PER-SHARE-NAV-BEGIN> 10.72
<PER-SHARE-NII> .60
<PER-SHARE-GAIN-APPREC> .28
<PER-SHARE-DIVIDEND> (.59)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.01
<EXPENSE-RATIO> .50
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 14,389,360
<INVESTMENTS-AT-VALUE> 13,586,549
<RECEIVABLES> 320,767
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 144,433
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<TOTAL-LIABILITIES> 9,117
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 15,609,269
<SHARES-COMMON-STOCK> 1,743,204
<SHARES-COMMON-PRIOR> 1,779,603
<ACCUMULATED-NII-CURRENT> 24,710
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (788,536)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (802,811)
<NET-ASSETS> 14,042,632
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,368,381
<OTHER-INCOME> 0
<EXPENSES-NET> (98,893)
<NET-INVESTMENT-INCOME> 1,269,488
<REALIZED-GAINS-CURRENT> (124,849)
<APPREC-INCREASE-CURRENT> (1,237,225)
<NET-CHANGE-FROM-OPS> (92,586)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,258,071)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 59,266
<NUMBER-OF-SHARES-REDEEMED> (251,388)
<SHARES-REINVESTED> 155,723
<NET-CHANGE-IN-ASSETS> (1,794,151)
<ACCUMULATED-NII-PRIOR> 13,326
<ACCUMULATED-GAINS-PRIOR> (729,898)
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 87,806
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 98,893
<AVERAGE-NET-ASSETS> 14,704,841
<PER-SHARE-NAV-BEGIN> 8.90
<PER-SHARE-NII> .80
<PER-SHARE-GAIN-APPREC> (.85)
<PER-SHARE-DIVIDEND> (.79)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.06
<EXPENSE-RATIO> .68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 13,472,896
<INVESTMENTS-AT-VALUE> 12,729,834
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<TOTAL-LIABILITIES> 15,740
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14,137,618
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<ACCUMULATED-NII-CURRENT> 1,409
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (321,166)
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<ACCUM-APPREC-OR-DEPREC> (742,709)
<NET-ASSETS> 13,075,152
<DIVIDEND-INCOME> 91,438
<INTEREST-INCOME> 51,036
<OTHER-INCOME> 0
<EXPENSES-NET> (105,420)
<NET-INVESTMENT-INCOME> 37,054
<REALIZED-GAINS-CURRENT> (321,166)
<APPREC-INCREASE-CURRENT> (742,709)
<NET-CHANGE-FROM-OPS> (1,026,821)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (35,645)
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<NUMBER-OF-SHARES-SOLD> 1,487,078
<NUMBER-OF-SHARES-REDEEMED> (35,567)
<SHARES-REINVESTED> 1,240
<NET-CHANGE-IN-ASSETS> 13,075,152
<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 94,388
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 105,420
<AVERAGE-NET-ASSETS> 11,092,000
<PER-SHARE-NAV-BEGIN> 9.97
<PER-SHARE-NII> .01
<PER-SHARE-GAIN-APPREC> (.95)
<PER-SHARE-DIVIDEND> (.03)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.00
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 137,036,257
<INVESTMENTS-AT-VALUE> 153,136,025
<RECEIVABLES> 590,812
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 45,597
<TOTAL-ASSETS> 153,772,434
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 184,519
<TOTAL-LIABILITIES> 184,519
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 134,141,387
<SHARES-COMMON-STOCK> 10,585,657
<SHARES-COMMON-PRIOR> 9,016,636
<ACCUMULATED-NII-CURRENT> 98,613
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,286,505
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,061,410
<NET-ASSETS> 153,587,915
<DIVIDEND-INCOME> 3,127,596
<INTEREST-INCOME> 526,821
<OTHER-INCOME> 0
<EXPENSES-NET> (1,092,306)
<NET-INVESTMENT-INCOME> 2,562,111
<REALIZED-GAINS-CURRENT> 8,234,283
<APPREC-INCREASE-CURRENT> 1,259,587
<NET-CHANGE-FROM-OPS> 12,055,981
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,463,498)
<DISTRIBUTIONS-OF-GAINS> (5,106,126)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,812,604
<NUMBER-OF-SHARES-REDEEMED> (770,282)
<SHARES-REINVESTED> 526,699
<NET-CHANGE-IN-ASSETS> 28,299,141
<ACCUMULATED-NII-PRIOR> 61,967
<ACCUMULATED-GAINS-PRIOR> 243,370
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,045,627
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,092,306
<AVERAGE-NET-ASSETS> 142,721
<PER-SHARE-NAV-BEGIN> 13.90
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> 1.11
<PER-SHARE-DIVIDEND> (.25)
<PER-SHARE-DISTRIBUTIONS> (.51)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.51
<EXPENSE-RATIO> .77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 5,311,580
<INVESTMENTS-AT-VALUE> 4,571,917
<RECEIVABLES> 43,220
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 802,429
<TOTAL-ASSETS> 5,417,566
<PAYABLE-FOR-SECURITIES> 25,602
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 8,365
<TOTAL-LIABILITIES> 33,967
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,405,079
<SHARES-COMMON-STOCK> 658,550
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 254
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (282,071)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (739,663)
<NET-ASSETS> 5,383,599
<DIVIDEND-INCOME> 14,649
<INTEREST-INCOME> 58,830
<OTHER-INCOME> 0
<EXPENSES-NET> (49,819)
<NET-INVESTMENT-INCOME> 23,660
<REALIZED-GAINS-CURRENT> (282,071)
<APPREC-INCREASE-CURRENT> (739,663)
<NET-CHANGE-FROM-OPS> (998,074)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (23,406)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 685,987
<NUMBER-OF-SHARES-REDEEMED> (28,122)
<SHARES-REINVESTED> 685
<NET-CHANGE-IN-ASSETS> 5,383,599
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36,591
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 49,819
<AVERAGE-NET-ASSETS> 5,022,518
<PER-SHARE-NAV-BEGIN> 10.04
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> (1.86)
<PER-SHARE-DIVIDEND> (.04)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.17
<EXPENSE-RATIO> 1.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 218,884,350
<INVESTMENTS-AT-VALUE> 262,516,978
<RECEIVABLES> 438,193
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 50,000
<TOTAL-ASSETS> 263,005,171
<PAYABLE-FOR-SECURITIES> 3,367,533
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 167,430
<TOTAL-LIABILITIES> 3,534,963
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 210,231,753
<SHARES-COMMON-STOCK> 7,548,803
<SHARES-COMMON-PRIOR> 6,333,224
<ACCUMULATED-NII-CURRENT> 54,439
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,551,388
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 43,632,628
<NET-ASSETS> 259,470,208
<DIVIDEND-INCOME> 1,611,521
<INTEREST-INCOME> 1,456,505
<OTHER-INCOME> 0
<EXPENSES-NET> (1,516,537)
<NET-INVESTMENT-INCOME> 1,551,489
<REALIZED-GAINS-CURRENT> 19,861,967
<APPREC-INCREASE-CURRENT> (14,225,511)
<NET-CHANGE-FROM-OPS> 7,187,945
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,523,502)
<DISTRIBUTIONS-OF-GAINS> (14,343,647)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,146,275
<NUMBER-OF-SHARES-REDEEMED> (419,667)
<SHARES-REINVESTED> 488,971
<NET-CHANGE-IN-ASSETS> 34,840,569
<ACCUMULATED-NII-PRIOR> 26,884
<ACCUMULATED-GAINS-PRIOR> 36,630
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,504,567
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,516,537
<AVERAGE-NET-ASSETS> 247,177,104
<PER-SHARE-NAV-BEGIN> 35.47
<PER-SHARE-NII> .22
<PER-SHARE-GAIN-APPREC> .94
<PER-SHARE-DIVIDEND> (.22)
<PER-SHARE-DISTRIBUTIONS> (2.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 34.37
<EXPENSE-RATIO> .62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 7,115,840
<INVESTMENTS-AT-VALUE> 7,985,058
<RECEIVABLES> 76,494
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 626,936
<TOTAL-ASSETS> 8,688,488
<PAYABLE-FOR-SECURITIES> 144,813
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,164
<TOTAL-LIABILITIES> 154,977
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,398,394
<SHARES-COMMON-STOCK> 883,925
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (734,101)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 869,218
<NET-ASSETS> 8,533,511
<DIVIDEND-INCOME> 38,365
<INTEREST-INCOME> 10,727
<OTHER-INCOME> 0
<EXPENSES-NET> (51,870)
<NET-INVESTMENT-INCOME> (2,788)
<REALIZED-GAINS-CURRENT> (734,101)
<APPREC-INCREASE-CURRENT> 869,218
<NET-CHANGE-FROM-OPS> 132,339
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 902,426
<NUMBER-OF-SHARES-REDEEMED> (18,501)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,533,511
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36,858
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 51,870
<AVERAGE-NET-ASSETS> 5,941,999
<PER-SHARE-NAV-BEGIN> 9.94
<PER-SHARE-NII> (.01)
<PER-SHARE-GAIN-APPREC> (.28)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.65
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 80,479,277
<INVESTMENTS-AT-VALUE> 80,479,277
<RECEIVABLES> 2,820,059
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 15,718
<TOTAL-ASSETS> 83,315,054
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 52,232
<TOTAL-LIABILITIES> 52,232
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,262,822
<SHARES-COMMON-STOCK> 83,262,822
<SHARES-COMMON-PRIOR> 47,314,918
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 83,262,822
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,422,636
<OTHER-INCOME> 0
<EXPENSES-NET> (321,831)
<NET-INVESTMENT-INCOME> 3,100,805
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3,100,805
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,100,805)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 130,878,349
<NUMBER-OF-SHARES-REDEEMED> (97,982,858)
<SHARES-REINVESTED> 3,052,413
<NET-CHANGE-IN-ASSETS> 35,947,904
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 306,233
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 321,831
<AVERAGE-NET-ASSETS> 61,516,326
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> .051
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.051)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> .52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 11,643,889
<INVESTMENTS-AT-VALUE> 10,786,039
<RECEIVABLES> 123,600
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 9,002
<TOTAL-ASSETS> 10,918,641
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,885
<TOTAL-LIABILITIES> 9,885
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,891,862
<SHARES-COMMON-STOCK> 1,203,354
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 46,645
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (171,901)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (857,850)
<NET-ASSETS> 10,908,756
<DIVIDEND-INCOME> 327,291
<INTEREST-INCOME> 131,242
<OTHER-INCOME> 0
<EXPENSES-NET> (71,756)
<NET-INVESTMENT-INCOME> 386,777
<REALIZED-GAINS-CURRENT> (171,901)
<APPREC-INCREASE-CURRENT> (857,850)
<NET-CHANGE-FROM-OPS> (642,974)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (340,132)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,203,458
<NUMBER-OF-SHARES-REDEEMED> (6,214)
<SHARES-REINVESTED> 6,110
<NET-CHANGE-IN-ASSETS> 10,908,756
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 64,493
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 71,756
<AVERAGE-NET-ASSETS> 10,384,635
<PER-SHARE-NAV-BEGIN> 10.01
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> (.97)
<PER-SHARE-DIVIDEND> (.29)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.07
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 13,478,578
<INVESTMENTS-AT-VALUE> 11,884,832
<RECEIVABLES> 332,246
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 50,424
<TOTAL-ASSETS> 12,267,502
<PAYABLE-FOR-SECURITIES> 162,250
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 10,947
<TOTAL-LIABILITIES> 173,197
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 13,758,756
<SHARES-COMMON-STOCK> 1,473,324
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 455
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (71,160)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,593,746)
<NET-ASSETS> 12,094,305
<DIVIDEND-INCOME> 38,923
<INTEREST-INCOME> 33,075
<OTHER-INCOME> 0
<EXPENSES-NET> (70,382)
<NET-INVESTMENT-INCOME> 1,616
<REALIZED-GAINS-CURRENT> (71,160)
<APPREC-INCREASE-CURRENT> (1,593,746)
<NET-CHANGE-FROM-OPS> (1,663,290)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,161)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,487,369
<NUMBER-OF-SHARES-REDEEMED> (14,091)
<SHARES-REINVESTED> 46
<NET-CHANGE-IN-ASSETS> 12,094,305
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 60,975
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 70,382
<AVERAGE-NET-ASSETS> 9,849,699
<PER-SHARE-NAV-BEGIN> 10.27
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (2.06)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.21
<EXPENSE-RATIO> .98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 6,187,503
<INVESTMENTS-AT-VALUE> 7,498,780
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<ASSETS-OTHER> 0
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<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,890,529
<SHARES-COMMON-STOCK> 837,627
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (739,178)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,311,277
<NET-ASSETS> 8,462,628
<DIVIDEND-INCOME> 608
<INTEREST-INCOME> 23,508
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<EXPENSES-NET> (54,365)
<NET-INVESTMENT-INCOME> (30,249)
<REALIZED-GAINS-CURRENT> (739,178)
<APPREC-INCREASE-CURRENT> 1,311,277
<NET-CHANGE-FROM-OPS> 541,850
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 856,088
<NUMBER-OF-SHARES-REDEEMED> (18,461)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,462,628
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42,319
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 54,365
<AVERAGE-NET-ASSETS> 5,680,013
<PER-SHARE-NAV-BEGIN> 9.84
<PER-SHARE-NII> (.04)
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.10
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 6,930,474
<INVESTMENTS-AT-VALUE> 6,617,308
<RECEIVABLES> 40,072
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<OTHER-ITEMS-ASSETS> 575,884
<TOTAL-ASSETS> 7,233,264
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<PAID-IN-CAPITAL-COMMON> 7,705,283
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<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,269
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (499,000)
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<ACCUM-APPREC-OR-DEPREC> (313,166)
<NET-ASSETS> 6,895,386
<DIVIDEND-INCOME> 75,151
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<EXPENSES-NET> (59,560)
<NET-INVESTMENT-INCOME> 29,302
<REALIZED-GAINS-CURRENT> (499,000)
<APPREC-INCREASE-CURRENT> (313,166)
<NET-CHANGE-FROM-OPS> (782,864)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (27,033)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 847,411
<NUMBER-OF-SHARES-REDEEMED> (22,210)
<SHARES-REINVESTED> 1,312
<NET-CHANGE-IN-ASSETS> 6,895,386
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 42,234
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 59,560
<AVERAGE-NET-ASSETS> 5,413,541
<PER-SHARE-NAV-BEGIN> 9.84
<PER-SHARE-NII> .03
<PER-SHARE-GAIN-APPREC> (1.50)
<PER-SHARE-DIVIDEND> (.03)
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<PER-SHARE-NAV-END> 8.34
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<ARTICLE> 6

<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>