PRINCIPAL VARIABLE CONTRACTS FUND INC, 497, 1999-06-22

PRINCIPAL VARIABLE CONTRACTS FUND INC
497, 1999-06-22

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SUPPLEMENT DATED JUNE 21, 1999
TO THE PROSPECTUS FOR
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
DATED MAY 1, 1999

On June 14, 1999, the Board of Directors of the Principal Variable Contracts
Fund, Inc. approved a proposal to amend the Management Agreement (the
"Agreement") with Principal Management Corporation (the "Manager"). The proposal
contains two sections, the first of which affect each of the Accounts of the
Fund. The second section applies only to certain Accounts. The proposals will be
submitted to shareholders at a meeting scheduled to be held on November 2, 1999.
If approved at that meeting, the following changes will be made to the Agreement
effective January 1, 2000:

1) Add language regarding Sub-Advisor Relationships. Language would be added
to the Agreement making it clear that the Manager is responsible for the
investment management function even if a sub-advisor is contracted to
perform the function.

2) Modify Management Fee Schedules (Capital Value and MidCap Accounts only).
The management fee schedules for these Accounts would be changed as
follows:

o for the Capital Value Account, management fees would be paid at the
annual rate of 0.60% of the first $250 million of average net assets,
0.55% of the next $250 million, 0.50% of the next $250 million, 0.45%
of the next $250 million, and 0.40% of any amount thereafter; and
o for the MidCap Account, management fees would be paid at the annual
rate of 0.70% of the first $250 million of average net assets, 0.65%
of the next $250 million, 0.60% of the next $250 million, 0.55% of the
next $250 million, and 0.50% of any amount thereafter.

During the last fiscal year, these Accounts paid the Manager management fees in
the following amounts (reflected as a percentage of average net assets): Capital
Value - 0.43% and MidCap - 0.61%. If the new schedules had been effect during
the fiscal year ended October 31, 1998, the fees paid to the Manager would have
been as follows:
Capital Value - 0.55% and MidCap - 0.65%.

LV 10 S-2

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.

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

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:

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. 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.

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 that Account's shares during the
last 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.

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

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 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.

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

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....................... 0.57% $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

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 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 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

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%
- --------------------------------------------------------------------------------

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.

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.

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.

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.

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 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 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.

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 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.

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 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.

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.

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: 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.

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
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

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

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.

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.

Important Notes of the Growth-Oriented Accounts:

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 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 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.

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.

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.

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 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 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

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 that 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.

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):

<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%

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>

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

(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.

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