PRINCIPAL GROWTH FUND INC /MD/, PRES14A, 1999-08-24

PRINCIPAL GROWTH FUND INC /MD/
PRES14A, 1999-08-24

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ___)

___XX__ Filed by the Registrant
_______ Filed by a party other than the Registrant

Check the appropriate box:

___XX___ Preliminary Proxy Statement
________ Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e) (2))
________ Definitive Proxy Statement
________ Definitive Additional Materials
________ Soliciting Material Pursuant to 240.14a-12
<PAGE>

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal International Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.

(Name of Registrant as Specified In Its Charter)

Name Of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

X No fee required

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

Fee paid previously with preliminary materials.
<PAGE>
Principal
Mutual
Funds

September 13, 1999

Dear Shareholder:

Your Board of Directors has scheduled a shareholder meeting for November 2, 1999
to vote on important issues affecting your Fund(s). The changes proposed will
provide additional flexibility needed in today's competitive market.The Board of
each Fund believes that the changes proposed for the Fund are in the best
interest of the Fund and its shareholders. On the following pages you will find
a brief overview of these changes, the Notice of Meeting and a complete Proxy
Statement.

No matter how many shares you own, it is important that you take time to read
the Proxy Statement and vote as soon as possible.If you have more than one
account in one Fund or are a shareholder in more than one Fund, you will receive
multiple proxy ballots. Please return all of the proxy ballots. If votes are not
cast, the Fund(s) may have to incur the expense of follow-up solicitations to
achieve a quorum. All shareholders benefit from the speedy return of ballots.

Thank you for responding to these important matters. If you have questions
regarding the proxy or the voting process, please call our proxy solicitor, D.F.
King & Co., Inc., at 1-800-628-8536. If you have questions concerning your
account, please call our shareholder services department at 1-800-247-4123.

Sincerely,

/s/ Ralph C. Eucher

Ralph C. Eucher
President
Principal Mutual Funds

OVERVIEW

For your convenience, we are providing a brief overview of the proposals to be
voted upon at the November 2, 1999 shareholder meeting. Please note that not all
issues apply to each fund. This overview should be read in conjunction with the
complete proxy statement.

1. I'm a small investor. Why should I bother to vote?

Whether you are a large or small investor, your vote makes a difference. If
numerous shareholders fail to vote their proxies, the Fund may not receive
enough votes to go forward with its meeting. If this happens, we will need
to mail proxies again. Further solicitation can be costly to your fund. We
encourage you to participate in this very important voting process.

2. How do I vote my shares?

Please see the attached insert for direction in voting your shares. We have
provided various ways for you to vote including internet and telephone
voting.

3. Who should I call for further information regarding the proxy?

Our proxy solicitor, D.F. King & Co., Inc., will be available to answer
questions relating to the proxy from 8:00 a.m. to 10:00 p.m. E.T. If you
have any questions regarding the proxy or the voting process, please call
D.F. King at 1-800-628-8536.

If you have questions concerning your account, please call Principal Mutual
Funds' shareholder services department at 1-800-247-4123.

4. What are the issues being proposed at the shareholder meeting?

From time to time your board seeks shareholder approval of certain issues
by means of a proxy solicitation. Your vote is important. This year,
because of the death of one of the members of your board of directors, the
boards of all Funds are asking shareholders to elect a replacement as well
as re-elect the remaining board members. In addition, the boards of the
Funds are asking shareholders to approve modifications of the management
agreement including a modification of the investment management fee.
Several other issues of administrative nature are on the ballot for certain
of the Funds. All issues are discussed in detail in the following pages.

5. What are the administrative issues that are on the ballot?

The board of each Fund is asking shareholders to ratify the selection of
Ernst & Young as independent auditors. In addition, the board of each Fund
is asking shareholders to approve the removal from the management agreement
of the provision addressing transfer agent services in favor of a separate
agreement specific to these services. Principal Management Corporation will
continue to provide these services under the separate agreement. Your board
is asking shareholders of the Principal Capital Value, Cash Management and
Growth Funds to approve certain changes to investment restrictions that
bring these Funds in line with similar practices of the other Principal
Funds, and the industry generally. An issue for all Funds is to more clearly
establish Principal Management Corporation's responsibility for investment
management in situations where a sub-advisory relationship has been
established.

6. Why is a modification of the investment management fee being proposed for
certain Funds?

Principal Growth and Capital Value were organized in 1969, Principal
International in 1983, Principal MidCap in 1988 and Principal Blue Chip in
1991. Since their organization, these Funds have paid the same investment
management fee even though costs attributable to the investment management
function have increased significantly. The fee modification, as proposed, is
designed to partially offset the impact of increased costs.

7. How will the investment management fee be modified?

The actual amount paid by a Fund for investment management is determined by
applying an annual percentage rate against specific levels of assets in the
Funds. The annual percentage rate decreases as assets in the Fund increase.
As explained in detail in the following pages, the proposal includes an
increase in the annual percentage rate and a broadening of the asset base
against which it is applied. As an example, on a $10,000 account, at
current asset levels of the Funds for which a modification is proposed, the
annual fee increase would be between $12 and $18, depending on which Fund
you own.

8. How will shareholders benefit from a modification in the investment
management fee?

Through the proposed modification, Principal Management Corporation will be
in a stronger position to compete for experienced, top-notch investment
analysts, portfolio managers and other professional staff so as to deliver
competitive investment returns to shareholders. Further, a strengthened
financial position will make the advisor more able to develop new products
and services that can benefit current and future shareholders.

9. How do the Principal Funds compare with similar funds as to investment
management fees and total operating expenses? Will a fee modification alter
this positioning?

Investment management fees for the Principal Funds for which a modification
is proposed are lower than the average fees of specific comparison universes
developed by an independent consultant in connection with the board of
directors' consideration of the fee modification proposal. Total operating
expenses follow the same pattern for all except Principal Blue Chip Fund,
where total expenses are somewhat above the comparative group average. These
same relationships will continue following the fee modification. However,
contingent on the adoption of the modified fee schedule for Principal Blue
Chip, Principal Management Corporation intends to reduce its management fee
to the extent necessary so that the Fund is able to maintain an annual
operating expense ratio of 1.20%.

10. What steps did the boards of directors follow in considering the fee
proposal?

Each Fund board appointed a committee of independent directors to consider
the proposal and prepare a recommendation. For professional assistance the
independent directors engaged the services of a private consultant. Among
the issues considered by the independent directors were investment
performance relative to comparable portfolios, fees charged by advisors of
similar funds for comparable services and the expense ratios of those funds,
the profitability of Principal Management Corporation's relationship with
the Funds, the reasonableness of expecting Principal Management to continue
its investment advisory relationship indefinitely under the current
arrangement, and other factors relating to the nature, quality and extent of
the services provided by Principal Management. At the conclusion of these
deliberations the independent directors were unanimous in endorsing the fee
modification proposal and recommending its adoption by shareholders.

11. Do the boards of directors have recommendations with regard to the
modification of the investment advisory agreement and other ballot issues?

After careful consideration of each issue, the board members of each Fund
unanimously recommend a "Yes" vote on all proposals.

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.

Notice of Special Meeting of Shareholders

To the Shareholders:

A meeting of shareholders of each of the Funds will be held at 680 8th Street,
Des Moines, Iowa 50392-0200 on November 2, 1999, at 2:00 p.m. C.S.T. The
meetings will be held simultaneously. The meetings are being held to consider
and vote on the following matters as well as any other issues that properly come
before the meeting and any adjournments:

1. Election of Board of Directors. (all Funds)

2. Ratification of selection of Ernst & Young LLP as independent auditors.
(all Funds)

3. Amend Management Agreement to:

3A. Provide transfer agency services through a separate agreement.
(all Funds)

3B. Clarify changes to delegation provision. (all Funds)

3C. Modify management fee schedule. (only applies to Blue Chip,
Capital Value, Growth, International, and MidCap Funds)

4. Approval of changes to fundamental investment restrictions regarding:

4A. Financial Futures and Options (only applies to Capital Value and
Growth Funds)

4B. Short Sales (only applies to Capital Value and Growth Funds)

4C. Lending of Portfolio Securities (only applies to Capital Value,
Cash Management and Growth Funds).

4D. Diversification (only applies to Balanced, Blue Chip, Bond,
Capital Value, Growth, High Yield, International, Limited Term
Bond, MidCap, Real Estate, SmallCap,Tax-Exempt Bond and Utilities
Funds)

The close of business on August 27, 1999 is the record date for the meeting and
any adjournments. Shareholders as of that date are entitled to notice of and to
vote at the meeting.

Your vote is important. No matter how many shares you own, please vote. If you
own shares in more than one Fund, you need to return all of the proxy ballots.
To save your Fund(s) from incurring the cost of additional solicitations, please
review the materials and vote today.

For the Board of Directors
A.S. Filean
Vice President and Secretary

Dated: September 13, 1999

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.

PROXY STATEMENT

As a shareholder of one or more of the Principal Mutual Funds (the "Funds,"
or "we"), you are invited to attend a special meeting of shareholders. Each Fund
will hold a meeting on November 2, 1999, at 2:00 p.m. C.S.T. at 680 8th Street,
Des Moines, Iowa 50392-0200. The Funds will hold their shareholder meetings
simultaneously. At the meetings, shareholders will vote on the proposals
described below.

We expect to begin sending the Proxy Statement and form of proxy ballot to
shareholders on or around September 13, 1999.

You may vote in one of the following ways:

-- by mail with the enclosed proxy ballot;
-- by telephone; or
-- through the internet

Please refer to the enclosed proxy information for the telephone number and
internet address. If you own more than one Fund, it is important that you vote
for each Fund.

The sponsor of the Funds is Principal Life Insurance Company ("Principal
Life"), the investment adviser is Principal Management Corporation (the
"Manager") and the principal underwriter is Princor Financial Services
Corporation ("Princor"). Principal Life, an insurance company organized in 1879
under the laws of the state of Iowa, the Manager and Princor are indirect,
wholly-owned subsidiaries of Principal Mutual Holding Company. Their address is
the Principal Financial Group, Des Moines, Iowa 50392-0200.

SUMMARY OF PROPOSALS

The Funds whose
Proposal Shareholders will
Number Proposal Vote on the Proposal

1 Election of Board of Directors. All Funds

2 Ratification of the selection of Ernst & All Funds
Young LLP as the independent auditors.

3 Amendment of Management Agreement to:

A. Provide transfer agency services All Funds
through a separate agreement.

B. Clarify changes to delegation All Funds
provision.

C. Modify management fee schedule. Blue Chip, Capital Value,
Growth, International and
MidCap Funds

4 Approval of changes to fundamental
investment restrictions regarding:

A. Financial Futures and Options Capital Value and
Growth Funds

B. Short Sales Capital Value and
Growth Funds

C. Lending of Portfolio Securities Capital Value,
Cash Management and
Growth Funds

D. Diversification Balanced,Blue Chip, Bond,
Capital Value, Growth,
High Yield,International,
Limited Term Bond,MidCap,
Real Estate, SmallCap,
Tax-Exempt Bond and
Utilities Funds

VOTING INFORMATION

Voting procedures. We are furnishing this Proxy Statement to you in
connection with the solicitation on behalf of the Board of Directors of each of
the Funds of proxies to be used at the meeting of that Fund. If you are not able
to attend the meeting, the Board of each Fund is asking permission to vote for
you. If you complete and return the enclosed proxy ballot, the persons named on
the ballot as proxies will vote your shares as you indicate on the proxy ballot
or for approval of each matter for which there is no indication. If you change
your mind after you send in the ballot, you may change or revoke your vote by
writing to the Principal Mutual Funds at the Principal Financial Group, Des
Moines, Iowa 50392-0200.

Voting rights. Only shareholders of record at the close of business on
August 27, 1999 (the "Record Date") are entitled to vote. The shareholders of
all classes of shares of each of the Funds will vote together as one class on
each proposal that we intend to submit to the shareholders of that Fund. You are
entitled to one vote on each proposal submitted to the shareholders of a Fund
for each share of the Fund which you hold. Certain of the proposals require for
approval the vote of a "majority of the outstanding voting securities," which is
a term defined in the Investment Company Act of 1940 (the "1940 Act") to mean
the affirmative vote of the lesser of (1) 67% or more of the voting securities
of a Fund present at the meeting of that Fund, if the holders of more than 50%
of the outstanding voting securities of the Fund are present in person or by
proxy, or (2) more than 50% of the outstanding voting securities of the Fund.

Quorum requirements. A quorum must be present at the meeting for the
transaction of business. The presence in person or by proxy of one-third of the
shares of a Fund outstanding at the close of business on the Record Date
constitutes a quorum for the meeting of that Fund. Abstentions and broker
non-votes (proxies from brokers or nominees indicating that they have not
received instructions from the beneficial owners on an item for which the broker
or nominee does not have discretionary power) are counted toward a quorum but do
not represent votes cast for any issue. Under the 1940 Act, the affirmative vote
necessary to approve certain of the proposals may be determined with reference
to a percentage of votes present at the meeting, which would have the effect of
treating abstentions as if they were votes against a proposal.

If a quorum is not present at the meeting of a Fund, or if a quorum is
present at the meeting of a Fund but sufficient votes to approve one or more of
the proposals for that Fund have not been received, the persons named as proxies
may agree to one or more adjournments of the meeting to permit further
solicitation of proxies. A shareholder vote may be taken on one or more of the
proposals prior to an adjournment if sufficient votes have been received and it
is otherwise appropriate. Any adjournment will require the affirmative vote of a
majority of the shares cast at the meeting in person or by proxy. The persons
named as proxies will vote for or against any adjournment in their discretion.
The meetings of the other Funds will continue as scheduled.

Solicitation procedures. We intend to solicit proxies primarily by mail.
Officers or employees of each Fund, the Manager or their affiliates may make
additional solicitations by telephone, internet, facsimile or personal contact.
They will not be specially compensated for these services. In addition, each of
the Funds has retained D.F. King & Co., Inc. to solicit proxies for estimated
fees and expenses of $275,000 for the services it provides for all of the Funds.

Expenses of the meetings. Except as noted below, each Fund will pay the
expenses of its meeting, including those associated with the preparation and
distribution of proxy materials, the solicitation of proxies, and the fees and
expenses of D.F. King & Co., Inc. The Funds will also reimburse brokers and
other nominees for their reasonable expenses in communicating with shareholders
for whom they hold shares of the Funds. To avoid the cost of further
solicitation, it is important for you to vote promptly. The Manager has agreed
to pay one-half of the costs incurred by the Blue Chip, Capital Value, Growth,
International and MidCap Funds in connection with their meetings.

Shareholder proposals. If you would like to include a proposal on the
agenda at a shareholder meeting, you should send the proposal to the Principal
Mutual Funds at the Principal Financial Group, Des Moines, Iowa 50392-0200. To
consider your proposal for presentation at a shareholders meeting, we must
receive it a reasonable time before we begin a solicitation for that meeting.
Timely submission of a proposal does not necessarily mean that such proposal
will be included.

Fund reports. You may obtain a copy of each Fund's most recent annual and
semiannual reports without charge. Send your request to the Principal Mutual
Funds at the Principal Financial Group, Des Moines, Iowa 50392-0200 or call
1-800-247-4123.

PROPOSAL 1

ELECTION OF THE BOARD OF DIRECTORS

(All Funds)

The Board of each Fund has set the number of Directors at eight. Each
Director will serve until the next meeting of shareholders or until a successor
is elected and qualified. Unless you do not authorize it, your proxy will be
voted in favor of the eight nominees listed below.

The affirmative vote of the holders of a plurality of the shares voted at
the meeting of each Fund is required for the election of a director for that
Fund.

Each nominee has agreed to be named in this proxy statement and to serve if
elected. The Board has no reason to believe that any of the nominees will become
unavailable for election as a Director. However, if that should occur before the
meeting, your proxy will be voted for the individuals recommended by the Board
to fill the vacancies.

Each Fund has an Audit and Nominating Committee. Its members are identified
below. The committee reviews activities of the Fund and reports filed with the
Securities and Exchange Commission ("SEC") and then takes appropriate action. It
meets with the independent auditors to discuss results of the audits and reports
to the full Board of the Fund. The committee also nominates candidates when
necessary to fill Board vacancies of directors who are not "interested persons"
(as defined in the 1940 Act).

During the last fiscal year of each Fund, its Board held four meetings and
its Audit and Nominating Committee held one meeting. The Directors of each Fund
attended 100% of the meetings of the Board and of the committees of which they
are members.

All Directors hold similar positions with 18 funds sponsored by Principal
Life. If elected,_______________ will also hold similar positions with 18 funds
sponsored by Principal Life. Directors Davis, Eucher, Ferguson, Griswell and
Lukavsky also serve on the Board of one other mutual fund sponsored by Principal
Life.

Nominees for Director
Name/Age/Position Director
with Each Fund Principal Occupation Since

* John E. Aschenbrenner Senior Vice-President, Principal Life 1998
(50) Director Insurance Company, since 1996.

@ James D. Davis Attorney. Vice-President, Deere and 1974
(65) Director Company, Retired.

*& Ralph C. Eucher Vice President, Principal Life 1999
(47) Director and Insurance Company, since 1999.
President Director and President, Principal
Management Corporation and Princor
Financial Services Corporation.

Pamela A. Ferguson Professor of Mathematics, Grinnell 1993
(56) Director College, since 1998. Prior thereto,
President, Grinnell College.

@ Richard W. Gilbert President, Gilbert Communications, Inc., 1985
(59) Director since 1993. Prior thereto, President and
Publisher, Pioneer Press.

*& J. Barry Griswell President, Principal Life Insurance 1995
(50) Director and Company, since 1998; Executive Vice-
Chairman of the Board President, 1996-1998; Senior Vice-
President, 1991-1996. Director and
Chairman of the Board, Principal
Management Corporation and Princor
Financial Services Corporation.

Barbara A. Lukavsky President and CEO, Barbican Enterprises, 1987
(58) Director Inc., since 1997; President and CEO,
Lu San ELITE USA, L.C., 1985-1998.

[Number Eight]

* Considered to be "Interested Persons" as defined in the 1940 Act because of
current affiliation with the Manager or Principal Life.

@ Member of Audit and Nominating Committee

& Member of Executive Committee (which is selected by the Board and which may
exercise all the powers of the Board, with certain exceptions, when the
Board is not in session. The Committee must report its actions to the
Board.)

The following table provides information regarding the compensation
received by all directors of the Funds from each of the Funds and from the Fund
Complex during the fiscal year ended October 31, 1998. On that date, there were
20 funds in the Fund Complex. None of the Funds provide retirement benefits to
any of the directors.

Director

James D. Pamela A. Richard W. Barbara A.
Fund Davis Ferguson Gilbert Lukavsky

Real Estate and SmallCap $ 675 $ 600 $ 675 $ 675
Each of the Others 1,425 1,200 1,425 1,425

Fund Complex $50,775 $43,950 $48,825 $50,775

PROPOSAL 2

RATIFICATION OF SELECTION OF ERNST & YOUNG LLP
AS INDEPENDENT AUDITORS FOR THE FUNDS

(All Funds)

The Board of each Fund has selected Ernst & Young LLP as the independent
auditor for the Fund. The members of the Board, including those who are not
interested persons, made the selection unanimously and are asking shareholders
to ratify the selection at the meeting.

Ernst & Young LLP has been the auditor for each Fund since the Fund was
organized. It also serves as auditor for the Manager and other members of the
Principal Financial Group. The audit services Ernst & Young LLP provides to the
Funds include examination of the annual financial statements and review of the
filings with the SEC. Ernst & Young LLP has no financial interest in the Funds.
We do not expect any representative of Ernst & Young LLP to be at the
shareholder meetings.

The vote required for ratification by each Fund is the affirmative vote of
the majority of the votes cast with respect to that Fund.

The Board of Directors of each Fund recommends that you vote to approve the
proposal.

PROPOSAL 3

AMENDMENTS TO THE RELATIONSHIPS BETWEEN
THE FUNDS AND THE MANAGER

Each of the Funds has entered into a Management Agreement with the Manager.
The Management Agreements have substantially the same terms, except for the
management fee schedule. The Manager was organized on January 10, 1969, and
since that time has managed various mutual funds sponsored by Principal Life.
The Manager and Principal Life are wholly-owned subsidiaries of Principal
Financial Services, Inc., which is a wholly-owned subsidiary of Principal
Financial Group, Inc., which is a wholly-owned subsidiary of Principal Mutual
Holding Company. The address of each of the parents of the Manager is the
Principal Financial Group, Des Moines, Iowa 50392-0200.

At a meeting held on June 14, 1999, the Board of Directors of each of the
Funds approved amendments to the Fund's Management Agreement with the Manager
that would have the effect of transferring the Manager's contractual obligation
to provide transfer agent services to a separate agreement and clarifying
changes to the delegation provision of the Management Agreement. The Boards of
the Blue Chip, Capital Value, Growth, International and MidCap Funds also
approved a modification of the management fee schedule that will result in an
increase in the advisory fees that would be payable to the Manager under the
Fund's Management Agreement. If a Fund's shareholders approve the proposed
amendments, the amended Management Agreement for that Fund will become effective
on January 1, 2000.

The form of amended Management Agreement is included as Appendix A.

Appendix B contains information relating to management fees and other
important information relating to the Management Agreements and the Manager.

PROPOSAL 3A - PROVIDE TRANSFER AGENCY SERVICES
THROUGH A SEPARATE AGREEMENT

(All Funds)

Section 6 of the Management Agreement of each of the Funds is captioned,
"Services Furnished by the Manager." It provides substantially as follows:

"The Manager (in addition to the services to be performed by it pursuant to
Sections 1 and 2 hereof) will:

(a) Act as, and provide all services customarily performed by, the
transfer and paying agent of the Fund, including, without limitation, the
following:

(i) preparation and distribution to shareholders of reports, tax
information, notices, proxy statements and proxies;

(ii)preparation and distribution of dividend and capital gain
payments to shareholders;

(iii)issuance, transfer and registry of shares, and maintenance
of open account system;

(iv) delivery, redemption and repurchase of shares, and
remittances to shareholders; and

(v) communication with shareholders concerning items (i), (ii),
(iii) and (iv) above.

In the carrying out of this function the Manager may contract with
others for data systems, processing services and other administrative
services.

(b) Use its best efforts to qualify the Capital Stock of the Fund for
sale in states and jurisdictions other than those in which initially
qualified, as directed by the Fund; and

The Manager will maintain records in reasonable detail that will
support the amount it charges the Fund for performance of the services set
forth in this Section 6. At the end of each calendar month the Fund will
pay the Manager for its performance of these services."

The Board of Directors of each Fund has approved an amendment to its
Management Agreement that deletes paragraphs (a) and (c) from Section 6 and
otherwise amends that Section so that it would provide as follows:

"The Manager (in addition to the services to be performed by it
pursuant to Sections 1 and 2 hereof) will use its best efforts to qualify
the Capital Stock of the Fund for sale in states and jurisdictions other
than those in which initially qualified, as directed by the Fund.

The amendment also adds a provision to Section 7, which is captioned,
"Expenses Borne by the Fund," so that Section 7 would provide in relevant part
as follows: "The Fund will pay . . . the fees and expenses of transfer and
paying agent and registrar services."

Each Fund would enter into a Transfer Agency Agreement with the Manager
that would be effective simultaneously with the amendment to the Management
Agreement. A copy of the form of Transfer Agency Agreement is included as
Appendix C to this Proxy Statement. Under the Transfer Agency Agreement, the
Manager would provide the services previously specified in paragraphs (a) and
(c) of Section 6 of the Management Agreement and would be compensated by the
Fund in the same manner currently provided for in the last paragraph of Section
6.

Under the terms of that paragraph, the Manager is permitted to provide
transfer agency services at a price which includes a profit. The Manager,
however, has been providing these services at cost, and it has no present
intention of proposing a change in the services it provides or in the
compensation it receives for those services. As a result of the change, however,
the Fund and the Manager could agree in the future on changes in the kinds of
transfer agency and related services to be provided by the Manager or others or
changes in the fees to be paid by the Fund for those kinds of services or both,
without submitting the change to a vote of the Fund's shareholders. The Board of
Directors of each Fund believes that the change will provide it with additional
flexibility in meeting the future needs of the Fund for these kinds of services
and will permit it to meet those needs without the Fund having to incur the
costs of a special shareholders meeting.

The vote required to approve the change for each Fund is a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act).

The Board of Directors of each Fund recommends that you vote to approve the
proposal.

PROPOSAL 3B - CLARIFYING CHANGES TO DELEGATION
PROVISION OF MANAGEMENT AGREEMENT

(All Funds)

Section 3 of the Management Agreement of each of the Funds provides that
the Manager "in assuming responsibility for the various services as set forth in
[the] . . . Agreement reserves the right to enter into agreements with others
for the performance of certain duties and services or to delegate the
performance of some or all of such duties and services to Principal . . . Life
Insurance Company, or an affiliate thereof." The Manager has delegated
responsibilities to Invista Capital Management LLC, an affiliate of the Manager,
and other subadvisers in reliance on this provision.

The Manager and the Boards of Directors believe that the Manager's
delegation of investment management and other responsibilities pursuant to this
paragraph does not relieve it of a duty to review and monitor the performance of
the persons with whom it contracts to the extent provided in the agreements with
such persons or as determined by the Board of Directors of the affected Fund. In
order to clarify the understanding of the parties to the Management Agreements
in this regard, the Board of Directors of each Fund has approved an amendment to
its Management Agreement that would replace the period at the end of Section 3,
as set forth above, with a semi-colon and add the following:

"provided, however, that entry into any such agreements shall not relieve
the Manager of its duty to review and monitor the performance of such
persons to the extent provided in the agreements with such persons or as
determined from time to time by the Board of Directors."

The vote required to approve the change for each Fund is a majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act).

The Board of Directors of each Fund recommends that you vote
to approve the proposal.

PROPOSAL 3C - APPROVAL OF MODIFIED MANAGEMENT FEE SCHEDULE

(Blue Chip, Capital Value, Growth, International and MidCap Funds)

At meetings held on June 14, 1999, the Board of Directors of each indicated
Fund, including all the Directors who are not "interested persons" of the Fund
(the "Independent Directors"), unanimously approved a modified management fee
schedule for the Fund.

The Manager proposed a modified management fee schedule for each of the
Funds because it believed that the management fee schedule currently applicable
to the Fund did not accurately reflect the complexity and related costs of
managing the Fund, including those required to maintain qualified personnel and
sophisticated information systems and other technology, and thus did not reflect
a level of compensation that was fair and reasonable.

The Independent Directors considered the proposal at meetings held over the
course of several months before it was formally presented to the Board. They
were assisted in their consideration by an independent consultant retained to
advise them. The directors, including the Independent Directors, requested and
were provided substantial information to assist them in their evaluation of the
proposal, including studies prepared by Lipper, Inc., an independent statistical
service, at the direction of the consultant. The Lipper data showed that the
current investment management fee ratios of the Funds are lower than the average
and median investment management fee ratios of a group of mutual funds
identified by the consultant as the Funds' comparison group. The Lipper data
also showed that, with the exception of the Blue Chip Fund, the same is true for
each Fund's total operating expense ratio.

After consideration of all of the data and information provided to them and
after meeting separately to evaluate the new management fee schedule proposed by
the Manager, the Independent Directors unanimously approved and recommended to
the Board of Directors, and the Board approved, the modified management fee
schedule set forth below. In making their decisions, the Independent Directors
and the Board considered among other factors:

o their favorable experience in overseeing, on an ongoing basis, the
nature, quality and extent of the Manager's investment management
services to the Fund;

o the necessity of the Manager maintaining and enhancing its ability to
retain and attract capable personnel to serve the Fund;

o current and developing conditions in the financial services industry,
including the presence of large and highly capitalized companies which
are spending, and appear to be prepared to continue to spend,
substantial sums to engage personnel and to provide services to
competing investment companies;

o the complexity of research and investment activities in the securities
market;

o the investment record of the Manager in managing the Fund and other
similar investment companies for which it acts as investment adviser;

o the Manager's level of overall profitability in connection with its
activities on behalf of the Fund;

o the effect of the proposed investment advisory fee increase on the
expense ratio of the Fund;

o possible economies of scale;

o data as to investment performance, advisory fees and expense ratios of
other investment companies not advised by the Manager but believed to
be generally comparable to the Fund;

o other benefits to the Manager from serving as investment adviser to
the Fund, as well as benefits to its affiliates serving as principal
underwriter of the Fund or providing other services to the Fund and
its shareholders; and

o the desirability of appropriate incentives to assure that the Manager
will continue to furnish high quality services to the Fund.

The following table sets forth each Fund's current management fee schedule:

Net Asset Value of Fund

(in millions)

First Next Next Next Over
Fund $100 $100 $100 $100 $400

Blue Chip, Capital Value and Growth .50% .45% .40% .35% .30%
International .75% .70% .65% .60% .55%
MidCap .65% .60% .55% .50% .45%

The following table sets forth the modified fee schedule that will apply to
each of the Funds if the proposal is approved:

Net Asset Value of Fund

(in millions)

First Next Next Next Over
Fund $250 $250 $250 $250 $1,000

Blue Chip, Capital Value and Growth .60% .55% .50% .45% .40%
International .85% .80% .75% .70% .65%
MidCap .70% .65% .60% .55% .50%

The following table shows:

o the effective rate of management fee that each Fund is currently
obligated to pay the Manager;
o the effective rate of management fee that would currently be payable
by each Fund if the amended Management Agreement were in effect;
o the amount of the management fee that each Fund paid during the fiscal
year ended October 31, 1998; and
o the amount of, and percentage increase in, the management fee that
would have resulted if the amended Management Agreement had been in
effect for that year.

Current Effective Rate of For Fiscal Year Ended October 31, 1998
Management Fee Under Amount of Management Fee Under

Existing Amended Existing Amended
Management Management Management Management
Fund Agreement Agreement Agreement Agreement Increase

Blue Chip 0.48% 0.60% $ 764,784 $ 959,437 25%

Capital Value 0.38 0.56 2,349,118 3,480,075 48

Growth 0.41 0.58 1,863,070 2,645,925 42

International 0.68 0.83 2,492,037 3,068,739 23

MidCap 0.56 0.68 2,548,924 3,105,475 22

Contingent on the adoption of the modified fee schedule for Principal Blue
Chip Fund, the Manager intends to reduce its management fee to the extent
necessary so that the Fund is able to maintain an annual operating expense ratio
of 1.20%. For additional information on the actual operating expenses of the
Funds for the fiscal year ended October 31, 1998 and what those expenses would
have been under the modified management fee schedule, see Appendix D.

The vote required to approve the modification of the management fee
schedule for each indicated Fund is a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act).

The Board of Directors of each Fund recommends that you vote to approve the
proposal.

PROPOSAL 4

APPROVAL OF CHANGES TO INVESTMENT RESTRICTIONS

Certain investment restrictions of the Funds are matters of fundamental
policy and may not be changed without shareholder approval. The Manager has
recommended to the Board of Directors of some of the Funds that certain
fundamental restrictions be amended to update them to current industry practices
and conform them to the investment restrictions applicable to many of the other
Principal Funds. Making common investment restrictions of the Funds consistent
with one another contributes to the efficient administration of the Funds. The
Board of each Fund believes that the proposed amendments will generally increase
investment management opportunities and provide the Fund and the Manager with
greater flexibility in responding to regulatory and/or market developments.

PROPOSAL 4A - FINANCIAL FUTURES AND OPTIONS

(Capital Value and Growth Funds)

All of the growth-oriented Funds, other than the Capital Value and Growth
Funds, may engage in certain investment techniques to attempt to hedge the value
of portfolio securities, to attempt to hedge the portfolios' market and interest
rate risks, and, in certain cases, to attempt to enhance portfolio income. These
investment techniques are: (i) the purchase and sale of options on securities
and securities indices; (ii) the entry into futures contracts on financial
instruments and indices; and (iii) the purchase and sale of options on such
futures contracts.

The Capital Value and Growth Funds may not engage in these techniques. The
futures contracts and options on futures contracts used in these techniques are
commodities contracts, and each of the Funds has a fundamental investment
restriction which provides that the Fund will not "engage in the purchase and
sale of commodities or commodity contracts." Each of the Funds also has a
fundamental restriction which provides that "the Fund will not issue or acquire
put and call options."

The Manager has recommended, and the Boards of Directors of the Capital
Value Fund and the Growth Fund have determined, that the investment techniques
set forth above should also be made available to those two Funds so that they
would have the same investment flexibility as the other growth-oriented Funds.
Accordingly, the Board of each Fund proposes that the Fund:

o delete the two investment restrictions quoted in the preceding
paragraph;

o add in lieu of the first of those restrictions a fundamental
restriction which provides that the Fund may not "Invest in
commodities or commodity contracts, but it may purchase and sell
financial futures contracts and options on such contracts";

o add to the Fund's fundamental restriction that prohibits the purchase
of securities on margin the following clarifying statement: "The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the purchase
of securities on margin";

o add to the Fund's fundamental investment restriction that it "may not
pledge, mortgage, or hypothecate its assets (at value) at an extent
greater than 15% of the gross assets taken at cost" the following
clarifying statement: "The deposit of underlying securities and other
assets in escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options on
futures contracts are not deemed to be pledges or other encumbrances";
and

o add two non-fundamental restrictions which provide that it is contrary
to each Fund's present policy to:

"Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes, not for speculation."

"Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts."

If a Fund's shareholders approve the proposed revisions to the Fund's
investment restrictions, the Fund may enter into transactions in futures
contracts, options on futures contracts and certain options solely for hedging
purposes. The use of such hedging techniques does, however, involve certain
risks. For example, a lack of correlation between the value of an instrument
underlying an options or futures contract and the assets being hedged, or
unexpected adverse price movements, could render the Fund's hedging strategy
unsuccessful and could result in losses. The Fund also may enter into
transactions in certain options, such as those on securities, for other than
hedging purposes, which involves greater risk. In addition, a liquid secondary
market may not exist for any contract purchased or sold, and the Fund may be
required to maintain a position until exercise or expiration, which could result
in losses.

The vote required to approve the change in fundamental investment
restrictions for each Fund is a majority of the outstanding voting securities of
the Fund (as defined in the 1940 Act).

The Board of Directors of each Fund recommends that you vote
to approve the proposal.

PROPOSAL 4B - SHORT SALES

(Capital Value and Growth Funds)

Each indicated Fund's current investment restriction dealing with short
sales is fundamental and states as follows: "The Fund will not effect a short
sale of a security."

If approved by its shareholders, the Fund's fundamental investment
restriction will be deleted and replaced by a fundamental restriction which
states that the Fund may not "sell securities short (except where the Fund holds
or has the right to obtain at no added cost a long position in the securities
sold that equals or exceeds the securities sold short)."

In a short sale, the Fund would sell a borrowed security and have a
corresponding obligation to the lender to return the identical security. In an
investment technique known as short sale "against the box," which would be
permitted by the change in investment restriction, the Fund may sell short while
owning the same securities in the same amount, or having the right to obtain
equivalent securities through, for example, its ownership of options or
convertible bonds.

Specifying that the Fund may sell securities short "against the box" would
permit the Fund to engage in short sales that do not involve the leveraging
risks associated with other short sales. The Board of Directors believes that
permitting the Fund to engage in such transactions when the Manager concludes
that it is advisable is in the interest of the Fund and its shareholders.
Whether or not a specific short sale "against the box" would prove to be
beneficial would depend upon whether the Manager had accurately anticipated
subsequent price movements of the security sold short.

The vote required to approve the change in investment restriction for each
Fund is a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act).

The Board of Directors of each Fund recommends that you vote to approve the
proposal.

PROPOSAL 4C - LENDING OF PORTFOLIO SECURITIES

(Capital Value, Cash Management and Growth Funds)

The current investment restrictions of the indicated Funds dealing with the
lending of portfolio securities are fundamental. The restriction for each of the
Capital Value and Growth Funds states that the Fund may not "make loans except
that the Fund may (i) purchase and hold debt obligations in accordance with its
investment objective and policies, and (ii) enter into repurchase agreements."
The restriction for the Cash Management Fund states that the Fund may not "make
loans to others except through the purchase of debt obligations in which the
Fund is authorized to invest and by entering into repurchase agreements."

If approved by shareholders, each of these fundamental investment
restrictions will be deleted and replaced by a fundamental restriction which
states that the Fund may not "make loans, except that the Fund may (i) purchase
and hold debt obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its portfolio
securities without limitation against collateral (consisting of cash or
securities issued or guaranteed by the United States Government or its agencies
or instrumentalities) equal at all times to not less than 100% of the value of
the securities loaned." The Manager expects that the practice of lending
securities will generate income for the Funds.

None of the Funds intends to lend its portfolio securities if as a result
the aggregate of such Fund's loans would exceed 30% of its total assets. The
Funds may loan portfolio securities to unaffiliated broker-dealers and other
unaffiliated qualified financial institutions provided that such loans are
callable at any time on not more than five business days' notice and that cash
or government securities equal to at least 100% of the market value of the
securities loaned, determined daily, is deposited by the borrower with the Fund
and is maintained each business day in a segregated account. While such
securities are on loan, the borrower pays the Fund any income accruing thereon.
The Fund may invest any cash collateral, thereby earning additional income and
may receive an agreed-upon fee from the borrower. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan belongs to the
Fund and its shareholders. A Fund pays reasonable administrative, custodial and
other fees in connection with such loans and may pay a negotiated portion of the
interest earned on the cash or governmental securities pledged as collateral to
the borrower or placing broker. A Fund does not vote securities that have been
loaned, but it will call loaned securities in anticipation of an important vote.

The vote required to approve the change in investment restriction for each
Fund is a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act).

The Board of Directors of each Fund recommends that you vote
to approve the proposal.

PROPOSAL 4D - DIVERSIFICATION

(Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield,
International, Limited Term Bond, MidCap, Real Estate, SmallCap,
Tax-Exempt Bond and Utilities Funds)

Under the 1940 Act, a "diversified" fund is permitted to invest, with
respect to 75% of its assets, up to 5% of its assets in one issuer, provided
that the investment represents less than 10% of the issuer's voting securities.
Each of these Funds has fundamental investment restrictions that apply the 5%
per issuer limitation and the 10% voting securities limitation to 100% of the
Fund's assets. The Capital Value and Growth Funds also apply the 10% limitation
to any class of securities of an issuer. The Board of each of these Funds
believes that these restrictions should be standardized and conformed to the
statutory definition of diversification under the 1940 Act in order to enhance
the Fund's ability to pursue its investment objective by investing a larger but
still limited amount of its assets in a single issuer. If approved by
shareholders, the Fund's new policy on diversification will permit the Fund to
invest, with respect to 25% of its assets, more than 5% of its assets in an
issuer and in more than 10% of the voting securities of an issuer. To the extent
that the Fund invests a greater proportion of its assets in a single issuer, it
will be subject to a correspondingly greater degree of risk associated with that
investment. Each of the Funds has a non-fundamental policy which provides that
it will not invest in companies for the purpose of exercising control or
management. The Board of each Fund has no present intention to change this
policy.

If approved by shareholders, the fundamental investment restrictions of
each of these Funds that address the 5% per issuer limitation and the 10% voting
securities limitation will be deleted and replaced by a fundamental investment
restriction which states that the Fund may not:

"Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that these limitations shall apply only with respect to 75% of
the Fund's total assets."

The vote required to approve the change in investment restriction for each
Fund is a majority of the outstanding voting securities of the Fund (as defined
in the 1940 Act).

The Board of Directors of each Fund recommends that you vote
to approve the proposal.

The table below shows outstanding shares of each Fund as of the Record
Date.

Fund Number of Shares Outstanding

Balanced
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International
International Emerging Markets
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities

The following table sets forth information regarding the beneficial
ownership of the shares of each of the Funds as of August 20, 1999 by each
director and nominee for director. investment power with respect to the shares
owned except where otherwise indicated. The address of each person named is the
Principal Financial Group, Des Moines, Iowa 50392-0200 except where otherwise
indicated. The directors and officers of each Fund as a group own less than 1%
of the outstanding shares of the Fund.

Name of No. of
Beneficial Owner Fund Shares

John E. Aschenbrenner Balanced 495.461
Blue Chip 226.669
Bond 171.782
Capital Value 442.591
Cash Management 21,907.670
Growth 226.156
High Yield 1,612.291
International 804.479
MidCap 171.746

James D. Davis Balanced 590.562
Blue Chip 3,997.664
Bond 668.906
Capital Value 406.747
Cash Management 24,726.140
Government Securities Income 641.160
High Yield 831.823
International 838.414
International Emerging Markets 1,031.992
International SmallCap 980.144
MidCap 307.604
Tax-Exempt Bond 542.783
Utilities 5,959.261

Ralph C. Eucher Balanced 1,269.036
Blue Chip 1,305.896
Capital Value 1,039.042
Cash Management 20,012.560
Growth 684.320
International 3,058.104
Limited Term Bond 2,098.077
MidCap 223.115
Utilities 1,098.298

Pamela A. Ferguson Balanced 1,275.872
Blue Chip 1,720.848
Bond 3,778.877
Capital Value 833.543
Government Securities Income 554.961
Growth 649.701
High Yield 4,038.287
International 1,975.931
International Emerging Markets 1,507.553
International SmallCap 932.806
MidCap 835.125
SmallCap 1,126.482
Tax-Exempt Bond 1,119.430
Utilities 2,220.518

Richard W. Gilbert Balanced 37.469
Blue Chip 201.433
Bond 2,920.788
Capital Value 807.634
Cash Management 12,951.950
Government Securities Income 221.519
Growth 901.611
High Yield 425.502
International 2,876.432
MidCap 835.538
Tax-Exempt Bond 2,790.370
Utilities 150.553

J. Barry Griswell Balanced 38.264
Blue Chip 28,730.682
Bond 46.812
Capital Value 213.081
Cash Management 5,350.610
Government Securities Income 45.987
Growth 128.180
High Yield 66.014
International 782.898
MidCap 163.629
Tax-Exempt Bond 1,275.772
Utilities 40.619

Barbara A. Lukavsky Balanced 768.618
Blue Chip 15,047.790
Bond 31,823.880
Capital Value 384.581
Cash Management 57,039.600
Government Securities Income 23,603.549
Growth 7,062.040
High Yield 286.223
International 39,170.454
MidCap 865.943
SmallCap 173.469
Tax-Exempt Bond 1,434.216
Utilities 3,732.334

OTHER BUSINESS

We do not know of any other matter that may properly be brought before the
meeting. However, any other business that does come before the meeting will be
voted upon by the persons named in the proxy ballot according to their best
judgment.

<PAGE>

APPENDIX A

AMENDED MANAGEMENT AGREEMENT

AGREEMENT to be effective January 1, 2000, by and between PRINCIPAL FUND,
INC., a Maryland corporation (hereinafter called the "Fund") and PRINCIPAL
MANAGEMENT CORPORATION, an Iowa corporation (hereinafter called "the Manager").

W I T N E S S E T H:

WHEREAS, The Fund has furnished the Manager with copies properly certified
or authenticated of each of the following:

(a) Certificate of Incorporation of the Fund;

(b) Bylaws of the Fund as adopted by the Board of Directors;

(c) Resolutions of the Board of Directors of the Fund selecting the Manager
as investment adviser and approving the form of this Agreement.

NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as investment
adviser and manager of the Fund, and the Manager agrees to act, perform or
assume the responsibility therefor in the manner and subject to the conditions
hereinafter set forth. The Fund will furnish the Manager from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing, if any.

1. INVESTMENT ADVISORY SERVICES

The Manager will regularly perform the following services for the Fund:

(a) Provide investment research, advice and supervision;

(b) Provide investment advisory, research and statistical facilities and
all clerical services relating to research, statistical and investment
work;

(c) Furnish to the Board of Directors of the Fund (or any appropriate
committee of such Board), and revise from time to time as economic
conditions require, a recommended investment program for the Fund's
portfolio consistent with the Fund's investment objective and policies;

(d) Implement such of its recommended investment program as the Fund shall
approve, by placing orders for the purchase and sale of securities,
subject always to the provisions of the Fund's Certificate of
Incorporation and Bylaws and the requirements of the Investment Company
Act of 1940, as each of the same shall be from time to time in effect;

(e) Advise and assist the officers of the Fund in taking such steps as are
necessary or appropriate to carry out the decisions of its Board of
Directors and any appropriate committees of such Board regarding the
general conduct of the investment business of the Fund; and

(f) Report to the Board of Directors of the Fund at such times and in such
detail as the Board may deem appropriate in order to enable it to
determine that the investment policies of the Fund are being observed.

2. CORPORATE ADMINISTRATIVE SERVICES

In addition to the investment advisory services set forth in Section 1, the
Manager will perform the following corporate administrative services:

(a) Furnish the services of such of the Manager's officers and employees as
may be elected officers or directors of the Fund, subject to their
individual consent to serve and to any limitations imposed by law;

(b) Furnish office space, and all necessary office facilities and
equipment, for the general corporate functions of the Fund (i.e.,
functions other than (i) underwriting and distribution of Fund shares;
(ii) custody of Fund assets, and (iii) transfer and paying agency
services); and

(c) Furnish the services of the supervisory and clerical personnel
necessary to perform the general corporate functions of the Fund.

(d) Determine the net asset value of the shares of the Fund's Capital Stock
as frequently as the Fund shall request, or as shall be required by
applicable law or regulations.

3. RESERVED RIGHT TO DELEGATE DUTIES AND SERVICES TO OTHERS

The Manager in assuming responsibility for the various services as set
forth in this Agreement reserves the right to enter into agreements with others
for the performance of certain duties and services or to delegate the
performance of some or all of such duties and services to Principal Life
Insurance Company, or an affiliate thereof; provided, however, that entry into
any such agreements shall not relieve the Manager of its duty to review and
monitor the performance of such persons to the extent provided in the agreements
with such persons or as determined from time to time by the Board of Directors.

4. EXPENSES BORNE BY THE MANAGER

The Manager will pay:

(a) The compensation and expenses of all officers and executive employees
of the Fund;

(b) The compensation and expenses of all directors of the Fund who are
persons affiliated with the Manager; and

(c) The expenses of the organization of the Fund, including its
registration under the Investment Company Act of 1940, and the initial
registration and qualification of its Capital Stock for sale under the
Securities Act of 1933 and the Blue Sky laws of the states in which it
initially qualifies.

5. COMPENSATION OF THE MANAGER BY FUND

For all services to be rendered and payments made as provided in Sections
1, 2 and 4 hereof, the Fund will accrue daily and pay the Manager within five
days after the end of each calendar month a fee based on the average of the
values placed on the net assets of the Fund as of the time of determination of
the net asset value on each trading day throughout the month in accordance with
the following schedule.

[See Attachment A to Appendix A for the schedule that will apply to each of the
Funds.]

Net asset value shall be determined pursuant to applicable provisions of
the Certificate of Incorporation of the Fund. If pursuant to such provisions the
determination of net asset value is suspended, then for the purposes of this
Section 5 the value of the net assets of the Fund as last determined shall be
deemed to be the value of the net assets for each day the suspension continues.

The Manager may, at its option, waive all or part of its compensation for
such period of time as it deems necessary or appropriate.

6. SERVICES FURNISHED BY THE MANAGER

The Manager (in addition to the services to be performed by it pursuant to
Sections 1 and 2 hereof) will use its best efforts to qualify the Capital Stock
of the Fund for sale in states and jurisdictions other than those in which
initially qualified, as directed by the Fund.

The Manager will maintain records in reasonable detail that will support
the amount it charges the Fund for performance of the services set forth in this
Section 6. At the end of each calendar month the Fund will pay the Manager for
its performance of these services.

7. EXPENSES BORNE BY FUND

The Fund will pay:

(a) Taxes,including in case of redeemed shares any initial transfer taxes,
and governmental fees (except with respect to the Fund's organization
and the initial qualification and registration of its Capital Stock);

(b) Portfolio brokerage fees and incidental brokerage expenses;

(d) The fees of its independent auditor and its legal counsel, incurred
subsequent to the Fund's organization and the initial qualification
and registration of its Capital Stock;

(e) The fees and expenses of the Custodian of its assets;

(f) The fees and expenses of all directors of the Fund who are not persons
affiliated with the Manager;

(g) The cost of meetings of shareholders; and

(h) The fees and expenses of transfer and paying agent and registrar
services.

8. AVOIDANCE OF INCONSISTENT POSITION

In connection with purchases or sales of portfolio securities for the
account of the Fund, neither the Manager nor any of the Manager's directors,
officers or employees will act as a principal or agent or receive any
commission.

9. LIMITATION OF LIABILITY OF THE MANAGER

The Manager shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the Fund in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Manager's part in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
Agreement.

10. DURATION AND TERMINATION OF THIS AGREEMENT

This Agreement shall remain in force until the first meeting of the
shareholders of the Fund and if it is approved by a vote of a majority of the
outstanding voting securities of the Fund it shall continue in effect thereafter
from year to year provided that the continuance is specifically approved at
least annually either by the Board of Directors of the Fund or by a vote of a
majority of the outstanding voting securities of the Fund and in either event by
vote of a majority of the directors of the Fund who are not interested persons
of the Manager, Principal Life Insurance Company, or the Fund cast in person at
a meeting called for the purpose of voting on such approval. This Agreement may,
on sixty days written notice, be terminated at any time without the payment of
any penalty, by the Board of Directors of the Fund, by vote of a majority of the
outstanding voting securities of the Fund, or by the Manager. This Agreement
shall automatically terminate in the event of its assignment. In interpreting
the provisions of this Section 10, the definitions contained in Section 2(a) of
the Investment Company Act of 1940 (particularly the definitions of "interested
person," "assignment" and "voting security") shall be applied.

11. AMENDMENT OF THIS AGREEMENT

No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no amendment of this Agreement shall be effective until approved by
vote of the holders of a majority of the Fund's outstanding voting securities
and by vote of a majority of the directors who are not interested persons of the
Manager, Principal Life Insurance Company or the Fund cast in person at a
meeting called for the purpose of voting on such approval.

12. ADDRESS FOR PURPOSE OF NOTICE

Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notices. Until further notice
to the other party, it is agreed that the address of the Fund and that of the
Manager for this purpose shall be the Principal Financial Group, Des Moines,
Iowa 50392.

13. MISCELLANEOUS

The captions in this Agreement are included for convenience of reference
only, and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.

PRINCIPAL FUND, INC.

By
Arthur S. Filean, Vice President

PRINCIPAL MANAGEMENT CORPORATION

By
Ralph C. Eucher, President

ATTACHMENT A

Net Asset Value of Fund

(in millions)

First Next Next Next Over
Fund $250 $250 $250 $250 $1,000

Blue Chip, Capital Value and Growth .60% .55% .50% .45% .40%
International .85% .80% .75% .70% .65%
MidCap .70% .65% .60% .55% .50%

Net Asset Value of Fund

(in millions)

First Next Next Next Over
Fund $100 $100 $100 $100 $400

Balanced, High Yield and Utilities .60% .55% .50% .45% .40%
International Emerging Markets 1.25% 1.20% 1.15% 1.10% 1.05%
International SmallCap 1.20% 1.15% 1.10% 1.05% 1.00%
Real Estate .90% .85% .80% .75% .70%
SmallCap .85% .80% .75% .70% .65%
All Other .50% .45% .40% .35% .30%

APPENDIX B

ADDITIONAL INFORMATION REGARDING THE MANAGEMENT
AGREEMENTS AND THE MANAGER

Services provided by the Manager. The Management Agreements currently in
effect between the Manager and each of the Funds are substantially the same in
all respects except for the fees that are payable to the Manager for investment
advisory services and corporate administrative services. These services include
providing portfolio management; clerical, recordkeeping and bookkeeping
services; and keeping the financial and accounting records required by the
Funds. The Manager has entered into sub-advisory agreements with Invista Capital
Management, LLC ("Invista"), which is a wholly-owned subsidiary of Principal
Life, under which Invista provides portfolio management functions for certain of
the Funds. The Manager or Invista provides the Board of Directors of each Fund a
recommended investment program. Each program must be consistent with the Fund's
investment objectives and policies. Within the scope of the approved investment
program, the Manager or Invista advises each Fund on its investment policies and
determines which securities are bought and sold, and in what amounts. The
Manager is paid a fee by each Fund for its services and it compensates Invista
for its sub-advisory services. The Manager also furnishes certain additional
services, including transfer agency services to the Funds, for which it is
separately compensated.

Fund expenses. The Manager pays the compensation and expenses of all
officers and executive employees of each Fund and of all directors of the Fund
who are affiliated with the Manager. The Manager also pays the expenses of the
organization of the Fund, including its registration under the 1940 Act, and the
initial registration and qualification of its shares for sale under applicable
securities laws.

Each Fund pays all the other expenses incurred in the operation of the Fund
and the continuous public offering of its shares, except for selling expenses.
These expenses include taxes (if any); brokerage commissions on portfolio
transactions, interest, costs of stock issue and transfer; dividend disbursement
and administration of shareholder accounts, custodial fees, expenses of
registering and qualifying shares for sale after the initial registration;
auditing and legal expenses; fees and expenses of unaffiliated directors; and
costs of shareholder meetings. The Manager pays most of these expenses in the
first instance and is reimbursed for them by the Fund as provided in the
Management Agreement. The Manager performs certain of these functions, such as
share transfer, dividend disbursement and administration of shareholder
accounts, and each Fund compensates the Manager for performing these functions.

Management fees and cost reimbursements. The following table shows the rate
of management fees that the Funds pay to the Manager under the terms of the
Management Agreements. The fees are computed and accrued daily and paid monthly
at the annual rates shown in the table. The rates shown are current rates; they
do not reflect the proposed increases described in this Proxy Statement.

Net Asset Value of Fund

(in millions)

First Next Next Next Over
Fund $100 $100 $100 $100 $400

Balanced, High Yield and Utilities .60% .55% .50% .45% .40%
International .75 .70 .65 .60 .55
International Emerging Markets 1.25 1.20 1.15 1.10 1.05
International SmallCap 1.20 1.15 1.10 1.05 1.00
MidCap .65 .60 .55 .50 .45
Real Estate .90 .85 .80 .75 .70
SmallCap .85 .80 .75 .70 .65
All Other .50 .45 .40 .35 .30

The following table shows the net assets of each Fund at October 31, 1998
and, for the fiscal year ended October 31, 1998, the effective rate and amount
of the management fee which each Fund paid to the Manager and the amount which
the Fund reimbursed the Manager for certain costs:
Cost
Management Fee Reimbursement

Fund Net Assets Rate Amount Amount

Balanced $142,777,667 .59% $ 750,616 $ 521,852
Blue Chip 193,834,531 .48 764,784 832,394
Bond 182,742,664 .48* 782,241* 482,817
Capital Value 647,492,207 .38 2,349,118 1,247,865
Cash Management 308,933,585 .38* 2,127,595* 854,575
Government Securities Income 283,981,376 .46 1,239,644 499,207
Growth 491,320,149 .41 1,863,070 1,421,948
High Yield 44,734,802 .60 287,858 217,020
International 362,172,335 .68 2,492,037 1,168,106
International Emerging Markets 12,789,905 1.25 157,324 119,948
International SmallCap 21,667,242 1.20 242,403 153,320
Limited Term Bond 31,370,705 .50* 133,825* 90,187
MidCap 424,839,839 .56 2,548,924 1,840,474
Real Estate 11,537,737 .89 87,653(1) 76,546(1)
SmallCap 29,776,443 .75 147,083(1) 199,807(1)
Tax-Exempt Bond 216,283,905 .47 974,740 199,780
Utilities 98,928,795 .60* 531,644* 304,813

* Before waiver.
(1) Period from December 11, 1997 (Date Operations Commenced) through October
31, 1998.

For the period ended October 31, 1998, the Manager waived $100,270 of its
fee for the Limited Term Bond Fund, $172,366 of its fee for the Bond Fund,
$1,343 of its fee for the Cash Management Fund, and $82,515 of its fee for the
Utilities Fund.

Approvals. Each Management Agreement continues in effect from year to year
only so long as such continuation is specifically approved at least annually
either by the Board of Directors of the Fund or by vote of a majority of the
outstanding voting securities of the Fund, provided that in either case such
continuation shall be approved by vote of a majority of the Directors who are
not "interested persons" (as defined in the 1940 Act) of the Manager, Principal
Life or the Fund, cast in person at a meeting called for the purpose of voting
on such approval. Each agreement may be terminated at any time on 60 days
written notice by the Board of Directors of the Fund, by a vote of a majority of
outstanding voting securities of the Fund or by the Manager. Each agreement will
automatically terminate if it is assigned.

The Management Agreements were last approved by the Board of Directors for
each of the Funds on September 14, 1998. The following table provides
information with respect to the approval of the Management Agreement of each
Fund by its shareholders:

Date of Date Last
Management Submitted to Vote Purpose of Such
Fund Agreement of Shareholders Submission

Balanced 1/1/98 9/16/97 Modification
Blue Chip 1/1/98 9/16/97 Modification
Bond 1/1/98 9/16/97 Modification
Capital Value 1/1/98 9/16/97 Modification
Cash Management 1/1/98 9/16/97 Modification
Government Securities Income 1/1/98 9/16/97 Modification
Growth 1/1/98 9/16/97 Modification
High Yield 1/1/98 9/16/97 Modification
International 1/1/98 9/16/97 Modification
International Emerging Markets 7/1/97 8/21/97 Initial Approval
International SmallCap 7/1/97 8/21/97 Initial Approval
Limited Term Bond 1/1/98 9/16/97 Modification
MidCap 1/1/98 9/16/97 Modification
Real Estate 12/1/97 12/15/97 Initial Approval
SmallCap 12/1/97 12/15/97 Initial Approval
Tax-Exempt Bond 1/1/98 9/16/97 Modification
Utilities 1/1/98 9/16/97 Modification

The Manager. The following table shows the name and principal occupation of
the principal executive officer and each director of the Manager and of each
other person who is an officer or employee of the Manager and also an officer or
director of a Fund. The address for each of the persons named is the Principal
Financial Group, Des Moines, Iowa 50392-0200.

Position with the Manager
Name Position with the Funds and Principal Occupation

John E. Aschenbrenner Director Director; Senior Vice
President, Principal Life

David J. Drury Director; Chairman and CEO,
Principal Life

Ralph C. Eucher Director and President Director and President;
Vice President, Principal Life

Dennis P. Francis Director; Senior Vice
President; Principal Life

Thomas J. Graf Director; Senior Vice
President, Principal Life

J. Barry Griswell Director and Chairman of Director and Chairman of the
the Board Board; President, Principal
Life

Ellen Z. Lamale Director; Senior Vice
President, Principal Life

Julia M. Lawler Director; Vice President,
Principal Life

Gregg R. Narber Director; Senior Vice
President & General Counsel,
Principal Life

Richard L. Prey Director; Senior Vice
President, Principal Life

Craig L. Bassett Treasurer Treasurer; Second Vice
President and Treasurer,
Principal Life

Michael J. Beer Financial Officer Executive Vice President

Arthur S. Filean Vice President and Vice President
Secretary

Ernest H. Gillum Assistant Secretary Vice President - Compliance
and Product Development

Michael D. Roughton Counsel Counsel; Vice President and
Senior Securities Counsel,
Principal Life

The Manager serves as the investment adviser for the following accounts or
portfolios of registered investment companies which have investment objectives
similar to the investment objectives of the Blue Chip, Capital Value, Growth,
International and MidCap Funds. The following table shows the name of each
account or portfolio, net assets as of December 31, 1998 and the annual
effective management fee for the year then ended as a percentage of average net
assets.

Annual Effective
Net Assets as of Management Fee
December 31, 1998 as a Percentage of
Account/Portfolio (in thousands) Average Net Assets

Principal Variable Contracts Fund, Inc.
Capital Value Account $385,724 0.43%
Growth Account 259,828 0.47
International Account 153,588 0.73
MidCap Account 259,470 0.61
Principal Special Markets Fund, Inc.
International Securities Portfolio 47,912 0.90

In addition, the Blue Chip Account of Principal Variable Contracts Fund,
Inc., which commensed operations on April 15, 1999, had net assets of $5,259,289
as of July 31, 1999 and paid an annualized management fee for 1999 of 0.60%.

Affiliated brokers. During the fiscal year ended October 31, 1998, each of
Goldman Sachs Co., J.P. Morgan Securities and Morgan Stanley & Co. may be deemed
to have been an affiliated broker of the Funds because it, or an affiliate,
served as subadviser to one or more of the Funds in the Fund Complex. The
following table provides information regarding brokerage commissions for
portfolio transactions paid by each Fund to each of those brokers for the fiscal
year ended October 31, 1998.

Commissions Paid to Goldman Sachs Co.

Total Dollar As Percent of Total
Fund Amount Commissions

Balanced $2,950 4.20%
Growth 5,000 1.81
International 41,600 5.48
International Emerging Markets 662 1.28
International SmallCap 2,326 2.29
SmallCap 210 0.45
Utilities 1,500 3.80

Commissions Paid to J.P. Morgan Securities

Total Dollar As Percent of Total
Fund Amount Commissions

Balanced $ 500 0.71%
Blue Chip 1,950 4.75
Capital Value 18,935 5.72
Growth 1,250 0.45
International 17,961 2.37
International Emerging Markets 2,570 4.96
Real Estate 3,205 7.86

Commissions Paid to Morgan Stanley & Co.

Total Dollar As Percent of Total
Fund Amount Commissions

Balanced $ 2,630 3.74%
Blue Chip 365 0.89
Capital Value 13,740 4.15
Growth 12,500 4.53
International 78,938 10.40
International Emerging Markets 1,499 2.89
International SmallCap 4,284 4.22
MidCap 7,716 3.18
Real Estate 11,540 28.29
SmallCap 840 1.79
Utilities 1,735 4.40

APPENDIX C

TRANSFER AGENCY AGREEMENT AND
SHAREHOLDER SERVICES AGREEMENT

AGREEMENT to be effective January 1, 2000, by and between PRINCIPAL
_______________ FUND, INC., a Maryland corporation (hereinafter called the
"Fund") and PRINCIPAL MANAGEMENT CORPORATION, an Iowa corporation (hereinafter
called "the Manager").

W I T N E S S E T H:

WHEREAS, The Fund has furnished the Manager with copies properly certified
or authenticated of each of the following:

(a) Certificate of Incorporation of the Fund;

(b) Bylaws of the Fund as adopted by the Board of Directors;

(c) Resolutions of the Board of Directors of the Fund selecting the Manager
as transfer and shareholder servicing agent and approving the form of
this Agreement.

WHEREAS, the Manager is registered as a transfer agent under Section 17A of
the Securities Exchange Act of 1934, as amended (the "1934 Act");

NOW, THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as transfer and
shareholder servicing agent of the Fund, and the Manager agrees to act, perform
or assume the responsibility therefor in the manner and subject to the
conditions hereinafter set forth. The Fund will furnish the Manager from time to
time with copies, properly certified or authenticated, of all amendments of or
supplements to the foregoing, if any.

1. SERVICES FURNISHED BY THE MANAGER

The Manager will act as, and provide all services customarily performed by,
the transfer and paying agent of the Fund including, without limitation, the
following:

(a) preparation and distribution to shareholders of reports, tax
information, notices, proxy statements and proxies;

(b) preparation and distribution of dividend and capital gain payments to
shareholders;

(d) delivery, redemption and repurchase of shares, and remittances to
shareholders; and

(e) communication with shareholders concerning items (a), (b), (c) and (d)
above.

In the carrying out of this function, the Manager may contract with others
for data systems, processing services and other administrative services.
The Manager may at any time or times in its discretion appoint (and may at
any time remove) other parties as its agent to carry out such provisions of
the Agreement as the Manager may from time to time direct; provided,
however, that the appointment of any such agent shall not relieve the
Manager of any of its responsibilities or liabilities hereunder.

The Manager will maintain records in reasonable detail that will support
the amount it charges the Fund for performance of the services set forth in this
Section 1. At the end of each calendar month the Fund will pay the Manager for
its performance of these services.

2. LIMITATION OF LIABILITY OF THE MANAGER

3. DURATION AND TERMINATION OF THIS AGREEMENT

This Agreement may, on sixty days written notice, be terminated at any time
without the payment of any penalty, by the Board of Directors of the Fund, by
vote of a majority of the outstanding voting securities of the Fund, or by the
Manager.

4. AMENDMENT OF THIS AGREEMENT

5. ADDRESS FOR PURPOSE OF NOTICE

6. MISCELLANEOUS

The captions in this Agreement are included for convenience of reference
only, and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.

PRINCIPAL FUND, INC.

By
Arthur S. Filean, Vice President

PRINCIPAL MANAGEMENT CORPORATION

By
Ralph C. Eucher, President

<PAGE>

APPENDIX D

FEE TABLE

(Blue Chip, Capital Value, Growth, International and MidCap Funds)

The following tables show: (i) the actual operating expenses incurred by
each of the Class A, Class B and Class R shares of the Funds during the fiscal
year ended October 31, 1998; (ii) the estimated operating expenses for the Class
C shares for the current fiscal year; and (iii) what those expenses would have
been if the amended Management Agreement had been in effect. The accompanying
examples illustrate the expenses on an investment in the indicated class of
shares of a Fund under the management fee schedules in the existing and the
amended Management Agreements, assuming 1) an investment of $10,000, 2) a 5%
annual return and 3) expenses the same as the most recent fiscal year expenses
for Class A, Class B and Class R shares and the current fiscal year estimated
expenses for Class C shares.

Blue Chip Class A Class B Class C Class R

ctualPro Forma Actual Pro Forma ActualPro Forma Actual Pro Forma

Fund Operating
Expenses

Management Fees0.48% 0.60% 0.48% 0.60% 0.48% 0.60% 0.48% 0.60%
12b-1 Fees 0.25 0.25 0.91 0.91 1.00 1.00 0.75 0.75
Other Expenses 0.58 0.58 0.63 0.63 0.49 0.49 0.62 0.62

Total 1.31% 1.43% 2.02% 2.14% 1.97% 2.09% 1.85% 1.97%

Examples

If you redeem your shares at the end of:
1 Year $602 $ 614 $ 617 $ 629 $ 301 $ 315 $ 188 $ 200
3 Years 870 906 961 996 612 655 582 618
5 Years 1,159 1,219 1,320 1,379 1,052 1,124 939 1,001
10 Years 1,979 2,107 2,080 2,207 2,275 2,421 1,782 1,913
If you do not
redeem your
shares:
1 Year $602 $ 614 $ 205 $ 217 $ 198 $ 212 $ 188 $ 200
3 Years 870 906 634 670 612 655 582 618
5 Years 1,159 1,219 1,088 1,149 1,052 1,124 939 1,001
10 Years 1,979 2,107 2,080 2,207 2,275 2,421 1,782 1,913

Capital Value Class A Class B Class C Class R

ActualPro Forma Actual Pro Forma ActualPro Forma Actual Pro Forma

Fund Operating
Expenses

Management Fees0.38% 0.56% 0.38% 0.56% 0.38% 0.56% 0.38% 0.56%
12b-1 Fees 0.14 0.14 0.79 0.79 1.00 1.00 0.75 0.75
Other Expenses 0.22 0.22 0.35 0.35 0.19 0.19 0.37 0.37

Total 0.74% 0.92% 1.52% 1.70% 1.57% 1.75% 1.50% 1.68%

Examples

If you redeem your shares at the end of:
1 Year $547 $ 564 $ 569 $ 586 $ 262 $ 281 $ 153 $ 171
3 Years 700 754 813 866 493 551 474 530
5 Years 867 960 1,066 1,158 850 949 730 825
10 Years 1,350 1,553 1,503 1,704 1,856 2,062 1,222 1,429
If you do not
redeem your
shares:
1 Year $547 $ 564 $ 155 $ 173 $ 159 $ 178 $ 153 $ 171
3 Years 700 754 480 536 493 551 474 530
5 Years 867 960 829 923 850 949 730 825
10 Years 1,350 1,553 1,503 1,704 1,856 2,062 1,222 1,429

Growth Class A Class B Class C Class R

ActualPro Forma Actual Pro Forma ActualPro Forma Actual Pro Forma

Fund Operating
Expenses

Management Fees 0.41% 0.58% 0.41% 0.58% 0.41% 0.58% 0.41% 0.58%
12b-1 Fees 0.21 0.21 0.65 0.65 1.00 1.00 0.75 0.75
Other Expenses 0.33 0.33 0.40 0.40 0.26 0.26 0.43 0.43

Total 0.95% 1.12% 1.46% 1.63% 1.67% 1.84% 1.59% 1.76%

Examples

If you redeem your shares at the end of:
1 Year $567 $ 584 $ 563 $ 579 $ 270 $ 290 $ 162 $ 179
3 Years 763 814 795 846 517 579 502 554
5 Years 976 1,063 1,035 1,123 892 995 792 881
10 Years 1,586 1,773 1,543 1,733 1,944 2,159 1,417 1,609
If you do not
redeem your
shares:
1 Year $567 $ 584 $ 149 $ 166 $ 167 $ 187 $ 162 $ 179
3 Years 763 814 462 514 517 579 502 554
5 Years 976 1,063 797 887 892 995 792 881
10 Years 1,586 1,773 1,543 1,733 1,944 2,159 1,417 1,609

International Class A Class B Class C Class R

ActualPro Forma Actual Pro Forma ActualPro Forma Actual Pro Forma

Fund Operating
Expenses

Management Fees0.68% 0.83% 0.68% 0.83% 0.68% 0.83% 0.68% 0.83%
12b-1 Fees 0.19 0.19 0.74 0.74 1.00 1.00 0.75 0.75
Other Expenses 0.38 0.38 0.49 0.49 0.41 0.41 0.58 0.58

Total 1.25% 1.40% 1.91% 2.06% 2.09% 2.24% 2.01% 2.16%

Examples

If you redeem your shares at the end of:
1 Year $596 $ 611 $ 606 $ 621 $ 314 $ 330 $ 204 $ 219
3 Years 853 897 929 973 652 700 630 676
5 Years 1,129 1,204 1,264 1,340 1,119 1,200 997 1,074
10 Years 1,915 2,075 1,981 2,142 2,410 2,575 1,798 1,961
If you do not
redeem your
shares:
1 Year $596 $ 611 $ 194 $ 209 $ 211 $ 227 $ 204 $ 219
3 Years 853 897 600 646 652 700 630 676
5 Years 1,129 1,204 1,032 1,108 1,119 1,200 997 1,074
10 Years 1,915 2,075 1,981 2,142 2,410 2,575 1,798 1,961

MidCap Class A Class B Class C Class R

ActualPro Forma Actual Pro Forma ActualPro Forma Actual Pro Forma

Fund Operating
Expenses

Management Fees0.56% 0.68% 0.56% 0.68% 0.56% 0.68% 0.56% 0.68%
12b-1 Fees 0.24 0.24 0.70 0.70 1.00 1.00 0.74 0.74
Other Expenses 0.42 0.42 0.47 0.47 0.41 0.41 0.59 0.59

Total 1.22% 1.34% 1.73% 1.85% 1.97% 2.09% 1.89% 2.01%

Examples

If you redeem your shares at the end of:
1 Year $593 $ 605 $ 589 $ 601 $ 303 $ 315 $ 192 $ 204
3 Years 844 879 875 911 618 655 594 630
5 Years 1,113 1,174 1,173 1,234 1,062 1,124 945 1,007
10 Years 1,882 2,011 1,843 1,974 2,296 2,421 1,731 1,863
If you do not
redeem your
shares:
1 Year $593 $ 605 $ 176 $ 188 $ 200 $ 212 $ 192 $ 204
3 Years 844 879 545 582 618 655 594 630
5 Years 1,113 1,174 939 1,001 1,062 1,124 945 1,007
10 Years 1,882 2,011 1,843 1,974 2,296 2,421 1,731 1,863

The examples assume reinvestment of all dividends and distributions. The
examples should not be considered a representation of future expenses or annual
return; actual expenses or annual returns may be greater or less than those
shown. The purpose of these tables is to assist you in understanding the
expenses an investor in each of the Funds will bear. Contingent on the adoption
of the modified fee schedule for Principal Blue Chip Fund, the Manager intends
to reduce its management fee to the extent necessary so that the Fund is able to
maintain an annual operating expense ratio of 1.20%.
<PAGE>

Principal Balanced Fund, Inc
Des Moines, Iowa 50392-0200

PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS
November 2, 1999

This proxy is solicited on behalf of the Board of Directors of the Fund. The
undersigned shareholder appoints Ralph C. Eucher, Arthur S. Filean and Ernest H.
Gillum and each of them separately, Proxies, with power of substitution, and
authorizes them to represent and to vote as designated on the reverse side of
this ballot, at the meeting of shareholders of the Fund to be held on November
2, 1999 at 2:00 p.m. C.S.T., and at any adjournments thereof, all the shares of
the Fund that the undersigned shareholder would be entitled to vote if
personally present.

Check the appropriate boxes on this ballot, date this form and sign exactly as
your name appears. Your signature acknowledges receipt of Notice of Special
Meeting of Shareholders and Proxy Statement dated September 13, 1999. Shares
will be voted as you instruct. If no direction is made, the proxy will be voted
FOR all proposals listed on this ballot. In their discretion, the Proxies will
also be authorized to vote upon such other matters that may properly come before
the meeting.

NOTE: Please sign exactly as your name appears on this ballot. Please mark,
sign, date and mail your ballot in the enclosed postage paid envelope.
If shares are held jointly, either party may sign. If executed by a
corporation, an authorized officer must sign. Executors,
administrators and trustees should so indicate when signing.

Signature Signature (if held jointly)

, 1999
Date

<PAGE>

The Board of Directors of the Fund recommends that you vote FOR the following
proposals.

Please mark your choices by filling in the appropriate boxes below.

Sign and return the ballot as soon as possible in the enclosed envelope, or if
more convenient, vote by phone or via the internet.

<TABLE>
<CAPTION>
1. Elect Members of Board of Directors.
<S> <C> <C> <C>
For Withhold For all except
J. E. Aschenbrenner J. D. Davis R. C. Eucher
P. A. Ferguson R. W. Gilbert J. B. Griswell
B. A. Lukavsky Number Eight ____ _______ _______

To withhold authority to vote for any particular nominee, mark the "for all
except" box and strike a line through the nominee's name.

For Against Abstain
2. Ratify selection of Ernst & Young LLP as independent auditors ____ _______ _______
of the Fund.

For Against Abstain
3. Approve modification of Management Agreement to:

3A. Provide transfer agency services through a separate agreement. ____ _______ _______

3B. Clarify changes to delegation provision. ____ _______ _______

3C. Modify management fee schedule. (not applicable to this Fund)

For Against Abstain
4. Amend fundamental investment restriction with regard to:

4A. Financial Futures and Options (not applicable to this Fund)

4B. Short Sales (not applicable to this Fund)

4C. Lending of Portfolio Securities (not applicable to this Fund)

4D. Diversification ____ _______ _______
</TABLE>

<PAGE>

Principal Blue Chip Fund, Inc
Des Moines, Iowa 50392-0200

PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS
November 2, 1999

Signature Signature (if held jointly)

, 1999
Date

<PAGE>

The Board of Directors of the Fund recommends that you vote FOR the following
proposals.

Please mark your choices by filling in the appropriate boxes below.

Sign and return the ballot as soon as possible in the enclosed envelope, or if
more convenient, vote by phone or via the internet.

To withhold authority to vote for any particular nominee, mark the "for all
except" box and strike a line through the nominee's name.

For Against Abstain
2. Ratify selection of Ernst & Young LLP as independent auditors
of the Fund. ____ _______ _______

For Against Abstain
3. Approve modification of Management Agreement to:

3A. Provide transfer agency services through a separate agreement. ____ _______ _______

3B. Clarify changes to delegation provision. ____ _______ _______

3C. Modify management fee schedule. ____ _______ _______

For Against Abstain
4. Amend fundamental investment restriction with regard to:

4A. Financial Futures and Options (not applicable to this Fund)

4B. Short Sales (not applicable to this Fund)

4C. Lending of Portfolio Securities (not applicable to this Fund)

4D. Diversification ____ _______ _______

</TABLE>

<PAGE>

Principal Bond Fund, Inc
Des Moines, Iowa 50392-0200