PRINCIPAL VARIABLE CONTRACTS FUND INC, 497, 2000-02-10

PRINCIPAL VARIABLE CONTRACTS FUND INC
497, 2000-02-10

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SUPPLEMENT DATED FEBRUARY 8, 2000
TO THE PRINCIPAL VARIABLE CONTRACTS FUND, INC. PROSPECTUS
DATED MAY 1, 1999

Effective January 26, 2000, the Prospectus for the Principal Variable Contracts
Fund, Inc. is amended by deleting Denise Higgins and Stephen Rich as co-managers
of the SmallCap Value Account. The new co-managers are as follows:

Marina U. Pardo, Managing Director of J.P. Morgan Investment
Management Inc. since 1998. Ms. Pardo is a senior portfolio manager in
the Small Cap Equity Group at J.P. Morgan. She has been at J.P. Morgan
since 1968, except for 5 months in 1998 when she was president of a
small investment management firm. During her career at J.P. Morgan,
she has managed small and large cap equity portfolios, convertible
funds, and several institutional portfolios. Ms. Pardo has a BA from
Barnard College.

Leon Roisenberg, Vice President of J.P. Morgan Investment Management
Inc. since 1996. Mr. Roisenberg is a portfolio manager in the Small
Cap Equity Group at J.P. Morgan. Prior to joining J.P. Morgan, Mr.
Roisenberg worked as an analyst and portfolio manager at Bankers
Trust. He earned his MBA from Columbia University and received his BS
degree from MIT.

LV10 S-4

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ACCOUNTS OF THE FUND

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

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

The date of this Prospectus is May 1, 1999.

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

TABLE OF CONTENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

GROWTH-ORIENTED ACCOUNT

Aggressive Growth Account

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

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

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

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

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

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

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

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

Account Performance Information

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

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

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

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

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

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

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

GROWTH-ORIENTED ACCOUNT

Asset Allocation Account

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

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

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

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

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

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

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

Account Performance Information

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

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

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

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

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

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

GROWTH-ORIENTED ACCOUNT

Balanced Account

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

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

The 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
-----------------------------------------------------

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

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

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

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

INCOME-ORIENTED ACCOUNT

Bond Account

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

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

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

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

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

Account Performance Information

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

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

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

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

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

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

GROWTH-ORIENTED ACCOUNT

Capital Value Account

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

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

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

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

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

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

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

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

Account Performance Information

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

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

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

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

INCOME -ORIENTED ACCOUNT

Government Securities Account

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

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

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

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

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

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

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

Growth Account

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

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

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

International Account

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

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

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

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

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

International SmallCap Account

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

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

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

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

MicroCap Account

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

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

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

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

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

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

Account Performance Information

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

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

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

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

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

GROWTH-ORIENTED ACCOUNT

MidCap Account

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

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

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

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

MidCap Growth Account

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

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

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

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

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

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

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

Account Performance Information

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

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

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

Money Market Account

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

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

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

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

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

Account Performance Information

Annual Total Returns

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

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

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

GROWTH-ORIENTED ACCOUNT

Real Estate Account

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

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

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

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

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

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

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

Account Performance Information

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

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

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

GROWTH-ORIENTED ACCOUNT

SmallCap Account

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

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

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

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

SmallCap Growth Account

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

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

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

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

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

Account Performance Information

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

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

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

GROWTH-ORIENTED ACCOUNT

SmallCap Value Account

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

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

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

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

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

Stock Index 500 Account

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

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

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

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

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

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

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

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

Account Performance Information

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

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

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

GROWTH-ORIENTED ACCOUNT

Utilities Account

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

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

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

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

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

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

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

Account Performance Information

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

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

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

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

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

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

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

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

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

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

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

Each of the Accounts, except the Capital Value and Money Market Accounts, may
lend its portfolio securities to unaffiliated broker-dealers and other
unaffiliated qualified financial institutions.

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

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

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

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

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

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

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

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

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

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

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

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

Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Account's investment in foreign securities
may also result in higher custodial costs and the costs associated with currency
conversions.

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

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

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

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

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

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

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

PRICING OF ACCOUNT SHARES

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

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

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

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

DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

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

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

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

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

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

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

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

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

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

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

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

Management Other Total Operating
Account Fees Expenses Expenses

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

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

MANAGERS' COMMENTS

Principal Management Corporation and its Sub-Advisors are staffed with
investment professionals who manage each individual Account. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and results of each Account for 1998. The accompanying graphs display
results for the past 10 years or the life of the Account, whichever is shorter.
Average Annual Total Return figures provided for each Account in the graphs
reflect all expenses of the Account and assume all distributions are reinvested
at net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.

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

Growth-Oriented Accounts

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

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

Capital Value Account
(Catherine A. Zaharis)

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

Growth Account
(Michael R. Hamilton)

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

International Account
(Scott D. Opsal)

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

International SmallCap Account
(Darren K. Sleister)

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

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

MidCap Account
(Michael R. Hamilton)

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

MidCap Growth Account
(John O'Toole)

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

Real Estate Account
(Kelly D. Rush)

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

* - Since Inception Date 5/1/98

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

SmallCap Growth Account
(Amy K. Selner)

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

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

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

SmallCap Value Account
(Stephen Rich and Denise Higgins)

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

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

Utilities Account
(Catherine A. Zaharis)

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

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

Important Notes of the Growth-Oriented Accounts:

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

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

Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 409 mutual funds.

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

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

Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average currently contains 768 funds.

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

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

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

Lipper Mid-Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 327 funds.

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

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

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

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

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

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

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

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

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

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

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

Income-Oriented Accounts:

Bond Account
(Scott A. Bennett)

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

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

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

Note: Past performance is not predictive of future performance.

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

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

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

Government Securities Account
(Martin J. Schafer)

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

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

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

Note: Past performance is not predictive of future performance.

Interest rates declined significantly over the last twelve months, with medium
and long rates down about 1%. Bond prices, which move in the opposite direction
of interest rates, moved up, which led to another very strong year for the
Government Securities Account. The Account outperformed both the Lehman Brothers
MBS Index as well as the Lipper U.S. Mortgage Fund Average, mostly due to its
slightly longer duration.

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

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

Important Notes of the Income-Oriented Accounts:

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

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

Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 99 mutual funds.

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

Note: Mutual fund data from Lipper Inc.

GENERAL INFORMATION ABOUT AN ACCOUNT

Eligible Purchasers
Only certain eligible purchasers may buy shares of the Accounts. Eligible
purchasers are limited to 1) separate accounts of Principal Life Insurance
Company or of other insurance companies, 2) Principal Life Insurance Company or
any of its subsidiaries or affiliates, 3) trustees of other managers of any
qualified profit sharing, incentive or bonus plan established by Principal Life
Insurance Company or any of its subsidiaries or affiliates for employees of such
company, subsidiary or affiliate. Such trustees or managers may buy Account
shares only in their capacities as trustees or managers and not for their
personal accounts. The Board of Directors of the Fund reserves the right to
broaden or limit the designation of eligible purchaser.

Each Account serves as the underlying investment vehicle for variable annuity
contracts and variable life insurance policies that are funded through separate
accounts established by Principal Life. It is possible that in the future, it
may not be advantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Accounts at the same time.
Although neither Principal Life nor the Fund currently foresees any such
disadvantage, the Fund's Board of Directors monitors events in order to identify
any material conflicts between such policy owners and contract holders. Material
conflict could result from, for example 1) changes in state insurance laws, 2)
changes in Federal income tax law, 3) changes in the investment management of an
Account, or 4) differences in voting instructions between those given by policy
owners and those given by contract holders. Should it be necessary, the Board
would determine what action, if any, should be taken. Such action could include
the sale of Account shares by one or more of the separate accounts which could
have adverse consequences.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

<TABLE>

FINANCIAL HIGHLIGHTS

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

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

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

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

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

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

See accompanying notes.

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

<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(e).......... (.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>

FINANCIAL HIGHLIGHTS (Continued)

<TABLE>
PRINCIPAL VARIABLE CONTRACTS FUND, INC.

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

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

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

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

See accompanying notes.

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

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

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

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

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

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

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

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

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

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

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

See accompanying notes.

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

<TABLE>

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

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

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

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

FINANCIAL HIGHLIGHTS (Continued)

<TABLE>
PRINCIPAL VARIABLE CONTRACTS FUND, INC.

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

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

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

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

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

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

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

See accompanying notes.

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

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

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

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

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

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

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

FINANCIAL HIGHLIGHTS (Continued)

Notes to Financial Highlights

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

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

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

(d) Computed on an annualized basis.

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

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

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

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

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

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

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

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

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

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