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 25, 2000, the Prospectus for the Principal Variable Contracts
Fund, Inc. is amended by deleting Michael M. Kassen as co-manager of the MidCap
Value Account. Robert I. Gendelman and S. Basu Mullick remain as the co-managers
for this Account.

RF668 S-2

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

ACCOUNTS OF THE FUND

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

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

The date of this Prospectus is May 1, 1999.

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

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

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

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

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

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

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

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

ACCOUNT DESCRIPTIONS

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

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

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

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

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

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

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

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

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

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

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

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

GROWTH-ORIENTED ACCOUNT

Blue Chip Account

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

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

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

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

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

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

Account Performance Information

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

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

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

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

INCOME-ORIENTED ACCOUNT

Bond Account

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

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

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

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

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....................... 0.49% $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.

GROWTH-ORIENTED ACCOUNT

International Account

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

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.

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.

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

LargeCap Growth Account

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

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

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

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

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

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

Account Performance Information

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

- --------------------------------------------------------------------------------
*Estimated (Manager has agreed to reimburse
operating expenses so that total Account
operating expenses will not be greater than
1.20% for 1999.)

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

GROWTH-ORIENTED ACCOUNT

MidCap Account

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

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

Account Performance Information

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

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

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

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

GROWTH-ORIENTED ACCOUNT

MidCap Growth Account

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.

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....................... 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.

GROWTH-ORIENTED ACCOUNT

MidCap Value Account

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

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

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

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

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

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

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

Account Performance Information

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

Total Account Operating Expenses 1.35%*

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

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

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

Money Market Account

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

The 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 to invest without incurring much principal risk or for short-term needs.

Account Performance Information

Annual Total Returns

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

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

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 Index. Investments in
companies with small market capitalizations carry their own risks. Historically,
small company securities have been more volatile in price than larger company
securities, especially over the short-term. Smaller companies may be developing
or marketing new products or services for which markets are not yet established
and may never become established. While small companies may offer greater
opportunities for capital growth than larger, more established companies, they
also involve greater risks and should be considered speculative.

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 has a growing market share in larger, fragmented industries.
While these companies may present above average risk, Berger believes that they
may have the potential to achieve long-term earnings growth substantially above
the earnings growth of other companies.

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

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

Stock Index 500 Account

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

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.

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

<PAGE>

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

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.

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

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

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

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

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

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

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

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

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

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

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

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.

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.):
International Account - 100%;
LargeCap Growth and SmallCap Growth Accounts - 25%;
Blue Chip, Bond, Capital Value and SmallCap Accounts - 20%.
MidCap, MidCap Growth, MidCap Value and Stock Index 500 Accounts - 10%.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MANAGERS' COMMENTS

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

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.

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, EAFE and Lipper International Fund Average

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

Note: Past performance is not predictive of future performance.

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.

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.

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.

Important Notes of the Growth-Oriented Accounts:

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 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 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.

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.

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

Standard & Poor's 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 Average
----------- ------- ------ --------
10,000 10,000 10,000
1989 11,386 11,366 11,064
1990 11,980 11,966 11,698
1991 13,982 14,277 13,780
1992 15,294 15,619 14,916
1993 17,078 17,638 16,753
1994 16,583 17,074 16,006
1995 20,259 20,953 19,219
1996 20,738 21,795 19,832
1997 22,935 24,215 21,831
1998 24,698 24,525 23,195

Note: Past performance is not predictive of future performance.

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.

Important Notes of the Income-Oriented Accounts:

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

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

Note: Mutual fund data from Lipper Inc.

GENERAL INFORMATION ABOUT AN ACCOUNT

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

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

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

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

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

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

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

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

Purchase of Account Shares
Shares are purchased from Princor Financial Services Corporation, the Fund's
principal underwriter. There are no sales charges on shares of the Accounts.
There are no 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 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 the transfer agent system has renovated its code.
Client testing will occur in the first and second quarters of 1999. The
service provider is also participating in a securities industry wide
testing program;
o the securities pricing system has renovated its code and conducted client
testing in June 1998; o Facilities Management of Principal Life has
identified non-systems issues (heat, lights, water, phone, etc.) and is
working with these service providers to ensure continuity of service; and
o the Manager and other areas of Principal Life have contacted all vendors
with which they do business to receive assurances that they are able to
deal with any Year 2000 problems and continue to work with the vendors to
identify any areas of risk.

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

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

FINANCIAL HIGHLIGHTS

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

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

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

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

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

See accompanying notes.
<TABLE>

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

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

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

FINANCIAL HIGHLIGHTS (Continued)

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

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

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

Total from Investment Operations (.29)

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

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

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

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

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

See accompanying notes.

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

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

Total from Investment Operations (2.06)

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

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

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

Total from Investment Operations .26

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

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

FINANCIAL HIGHLIGHTS (Continued)

Notes to Financial Highlights

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

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

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

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

(d) Total return amounts have not been annualized.

(e) Computed on an annualized basis.

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

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

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

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