PRINCIPAL MONEY MARKET FUND INC, PRES14A, 1997-07-07

PRINCIPAL MONEY MARKET FUND INC
PRES14A, 1997-07-07

Previous: SCUDDER FUND INC, 485BPOS, 1997-07-07

Next: JMB MORTGAGE PARTNERS LTD, 10-K405, 1997-07-07

SCHEDULE 14A INFORMATION

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

Filed by the Registrant
Filed by a party other than the Registrant
Check the appropriate box:

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

Principal Money Market 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>

LOGO

July 30, 1997

Dear Contract Owner,

The contributions to your variable life policy or variable annuity contract are
allocated to the Divisions of Principal Mutual Life Insurance Company Separate
Accounts. These Divisions then invest in shares of various mutual funds
sponsored by Principal Mutual Life. Those funds will hold shareholder meetings
on September 16, 1997 at the Home Office of Principal Mutual Life.

Principal Mutual Life is the only shareholder of these Funds and owns shares of
the Funds for both its general and its separate accounts. However, you have the
right to instruct the Company as to how the shares that represent your account
value are to be voted. Principal will vote, in accordance with your
instructions, the number of Fund shares which represent that portion of your
account value invested in each of the Funds as of July 22, 1997. The number of
fund shares that represent your voting interest is shown on the enclosed Voting
Instruction Form.

We are asking you to provide us with voting instructions on important issues
affecting the Funds in which you have a voting interest. The proposed changes
will give the Funds additional flexibility needed in today's competitive market.
The Board of Directors of each Fund unanimously believes that these changes are
in the best interest of the Funds. On the following pages you will find a brief
overview of these changes, the Notice of Meeting and complete Proxy Statement.
The Proxy Statement explains the issues which are to be voted on at the
shareholder meeting.

It is important that you take time to read the Proxy Statement and complete and
mail the Voting Instruction Form(s) as soon as you can. If you have investments
in more than one Division, you will receive multiple Voting Instruction Forms.

Thank you for responding to these important matters.

Sincerely,

/s/ David J. Drury

David J. Drury
Chairman and Chief Executive Officer

<PAGE>

OVERVIEW

Please read the complete Proxy Statement. For your convenience, we are providing
a brief overview of the matters being voted upon at the Shareholder Meetings.
Not all issues apply to each Fund.

Q. Why are you receiving this Proxy Statement?

A. Federal securities laws require a vote by each Fund's shareholders on
certain important issues. As owner of a contract which invests in the
Principal Funds, you are entitled to give the shareholder of the Funds
(Principal Mutual Life Insurance Company) instructions as to how shares
that correspond to your indirect ownership in the Fund(s) should be voted.
Shareholders of all Funds are being asked to elect the Board of Directors,
ratify the Board's selection of independent public auditors, and change the
structure of the Funds.

In addition, there are issues that affect only certain Funds (Capital
Accumulation, Growth, Government Securities and Money Market). The Proxy
Statement explains changes to certain investment policies that are being
recommended by Management.

Q. Why are the Funds reorganizing?

A. The Boards of all Funds are proposing the Plan of Reorganization to combine
the corporate operations of eleven separate funds into one in order to
achieve certain economies of scale and to establish a more flexible
structure for future development. The investment portfolios of the Funds
will not change under the new structure. An account of the new Principal
Variable Contracts Fund, Inc. will purchase the assets and assume the
liabilities of each Fund. Each Fund will then dissolve. Other than one time
expenses associated with the reorganization itself, the proposal plan does
not increase any existing fee or expense paid by any of the Funds or their
shareholders.

Q. Why do the Capital Accumulation, Growth, Government Securities and Money
Market Funds want to have the ability to buy shares of other investment
companies and participate in joint trading accounts?

A. These are two additional methods by which the Funds can invest any excess
cash that may accumulate. All other Principal Funds presently have this
flexibility.

Q. What impact will changing the investment restriction regarding the purchase
of illiquid securities and repurchase agreements have on the Capital
Accumulation Fund?

A. The proposed modifications merely allow the Fund to enjoy the flexibility
permitted by federal securities laws. All other Principal Funds presently
have this flexibility.

Q. How does the change to the investment restriction permitting the Government
Securities Fund to purchase securities in addition to government securities
affect it?

A. The proposal permits the Fund to purchase short-term debt securities not
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The proposed restriction is more flexible than the
Fund's current investment restrictions, and allows the portfolio manager to
choose investments from a broader range of short-term investments.

Q. What effect do the proposed modifications have on the Money Market Fund?

A. Rules under federal securities law permit a greater degree of investment
flexibility than the Fund currently has. The proposals bring the Fund's
restrictions in line with current rules and allow the Fund to operate under
guidelines adopted by many of its competitors.

Q. How will these changes affect your account?

A. You can expect the same level of management expertise and high-quality
service you have received in the past. The proposals are designed to
increase flexibility for management of the Funds.

Q. Do the Boards of Directors have recommendations with regard to these issue?

A. After careful consideration of each issue, the Board of Directors of each
Fund unanimously recommends a vote "For" all the proposals.

Q. Will your instructions make a difference?

A. Your instructions are needed to ensure that Principal Mutual Life Insurance
Company represents your wishes when it casts votes at the shareholder
meeting.
<PAGE>
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 16, 1997

<TABLE>
<S> <C>
Principal Aggressive Growth Fund, Inc. Principal Government Securities Fund, Inc.
Principal Asset Allocation Fund, Inc. Principal Growth Fund, Inc.
Principal Balanced Fund, Inc. Principal High Yield Fund, Inc.
Principal Bond Fund, Inc. Principal Money Market Fund, Inc.
Principal Capital Accumulation Fund, Inc. Principal World Fund, Inc.
Principal Emerging Growth Fund, Inc.
</TABLE>

A meeting of Shareholders of each of the Principal Funds will be held at the
offices of The Principal Financial Group, 801 Grand Avenue, Des Moines, Iowa on
September 16, 1997, at 1:00 p.m. 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 the Board of Directors (all Funds)

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

3. Approval of change of fund structure (all Funds)

4. Approval of elimination of the fundamental investment restriction
regarding the purchase of shares of other investment companies
(Capital Accumulation, Growth, Government Securities and Money Market
Funds only)

5. Approval of elimination of the fundamental investment restriction
prohibiting joint participation in any securities trading account
(Capital Accumulation, Growth, Government Securities and Money Market
Funds only)

6. Approval of the change from fundamental to non-fundamental investment
restriction, expansion of limitation of purchases of illiquid
securities and purchases of repurchase agreements (Capital
Accumulation Fund only)

7. Approval of change to the fundamental investment restriction with
respect to purchase of securities other than government securities
(Government Securities Fund only)

8. Approval of change to the fundamental investment restriction with
respect to diversification requirements (Money Market Fund only)

9. Approval of change to the fundamental investment restriction with
respect to purchase of securities of a single issuer (Money Market
Fund only)

10. Approval of change to the fundamental investment restriction
prohibiting the purchase of restricted securities (Money Market Fund
only)

The close of business on July 22, 1997, is the record date for the Meeting and
any adjournment(s). 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 REVIEW THE
MATERIALS AND VOTE TODAY. If you own shares in more than one fund, you need to
return ALL of the proxy ballots.

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

Dated: July ____, 1997

PROXY STATEMENT

Each of the Principal Mutual Funds (the "Funds") will hold a special
shareholder's meeting on September 16, 1997, at 1:00 p.m. At the meeting,
shareholders will vote on the issues described below. Each share of a Fund is
entitled to one vote on each matter submitted to the shareholders of that Fund.
The enclosed proxy ballot(s) is being solicited by the Board of Directors (the
"Board") of each Fund. The shares will be voted as you indicate in the boxes on
the enclosed 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 (attn: Proxy
Balloting) at The Principal Financial Group, Des Moines, Iowa 50392-0200.

Proxies will be solicited primarily by mail. Additional solicitations may be
made by telephone, facsimile or personal contact by officers or employees of
each Fund or Princor Management Corporation (the "Manager" of the Funds) who
will not be specially compensated for these services. The Funds will hold their
shareholder meetings simultaneously. The expense of the meeting will be paid by
the Funds. A portion of the total expense will be paid by each Fund. Each Fund's
portion will equal the ratio of that Fund's assets to the total assets of all
the Funds determined as of July 22, 1997.

This proxy statement and the enclosed proxy ballot are first being sent to
security holders on or about July 31, 1997. Only security holders of record at
the close of business on July 22, 1997, (the "Record Date") are entitled to
vote. The table below shows outstanding shares of each Fund as of the Record
Date.

<TABLE>
<CAPTION>
Number of Shares
Allocated to
Registered
Fund Separate Account General Account Total

<S> <C> <C> <C>
Principal Aggressive Growth 88,888,888.888 88,888,888.888 88,888,888.888
Principal Asset Allocation
Principal Balanced
Principal Bond
Principal Capital Accumulation
Principal Emerging Growth
Principal Government Securities
Principal Growth
Principal High Yield
Principal Money Market
Principal World
</TABLE>

All of the outstanding shares of the Funds are owned by Principal Mutual Life
Insurance Company ("PML") and its Separate Accounts B and C and Variable Life
Separate Account.

PML will vote all Fund shares. It will vote the shares allocated to each of its
separate accounts registered under the Investment Company Act of 1940, as
amended (the"'40Act"), and attributable to variable annuity contracts and
variable life policies in accordance with instructions received from
contractholders, policyholders, participants or annuitants. It will vote the
shares allocated to those accounts for which it does not receive instructions
and the shares allocated to its general account in proportion to the
instructions received. Abstentions are counted for purposes of determining
whether a quorum is present but do not represent votes cast with respect to any
matter. PML may use this proxy statement in soliciting voting instructions.

Each Fund has entered into a Management Agreement with the Manager. The Manager
has entered into agreements with Invista Capital Management, Inc. ("Invista")
under which Invista has agreed to provide investment advisory services for the
Balanced, Growth and World Funds and with Morgan Stanley Asset Management Inc.
("MSAM") under which MSAM has agreed to provide investment advisory services for
the Aggressive Growth and Asset Allocation Funds. Each Fund, except the
Aggressive Growth and Asset Allocation Funds, has entered into an Investment
Service Agreement with the Manager and PML which provides that PML will furnish
at cost certain personnel, services and facilities required by the Manager.
Invista is also a party to the Investment Services Agreements entered into by
the Capital Accumulation, Emerging Growth and Government Securities Funds. The
Manager and Invista are indirect, wholly-owned subsidiaries of PML. The address
for the Manager and PML is The Principal Financial Group, Des Moines, Iowa
50392, for Invista is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa 50309, and
for MSAM is 1221 Avenue of the Americas, New York, New York 10020.

A shareholder that has an issue that it would like to have included in the
agenda at a shareholder meeting should send the proposal to the Principal Mutual
Funds (attn: Corporate Secretary) at Principal Financial Group, Des Moines, Iowa
50392-0200. To be considered for presentation at a shareholder's meeting, the
proposal must be received a reasonable time before solicitation is made for such
meeting. Timely submission of a proposal does not necessarily mean that such
proposal will be included.

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

ISSUES FOR EACH OF THE FUNDS

1. ELECTION OF BOARD OF DIRECTORS

The Board of each Fund has set the number of Directors at nine. 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 nine nominees listed below. The affirmative vote of the holders
of a plurality of the shares represented 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. All Directors hold
similar positions with twenty-five mutual funds sponsored by PML. In addition,
Directors Davis, Ferguson, Griswell, Jones and Lukavsky serve on the Board of
one other Fund sponsored by PML.

The Directors have no reason to believe that any of the nominees will become
unavailable for election as a Director. However, if that should occur before the
Shareholder Meeting, your proxy will be voted for the individuals recommended by
the Directors.

Each Fund has an Audit and Nominating Committee, the members of which are
identified below. The committee reviews activities of the Funds 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 each Fund. The committee also
nominates candidates when necessary to fill Board vacancies of directors who are
not "interested persons" (as defined in the '40 Act).

During the last fiscal year, each Fund held four Board meetings and one meeting
of its Audit and Nominating Committee.

<TABLE>
<CAPTION>
NOMINEES FOR BOARD OF DIRECTORS

Nominees for Director
Name/Age/Position Director
with each Fund Principal Occupation Since1

<S> <C> <C>
James D. Davis Attorney. Vice President, Deere and Company, Retired. 1974
(63) Director

* Roy W. Ehrle Retired. Vice Chairman, Principal Mutual Life Insurance Company 1992 to 1993. 1971
(69) Director

@ Pamela A. Ferguson President and Professor of Mathematics, Grinnell College since 1991. 1993
(54) Director

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

*%J. Barry Griswell Executive Vice President, Principal Mutual Life Insurance Company since 1995. 1995
(48) Director and Senior Vice President 1991 to 1995. Director and Chairman of the Board, Princor
Chairman of the Board Financial Services Corporation and Princor Management Corporation.

*%Stephan L. Jones Vice President, Principal Mutual Life Insurance Company since 1986. Director and 1988
(61) Director and President, Princor Financial Services Corporation and Princor Management
President Corporation.

* Ronald E. Keller Executive Vice President, Principal Mutual Life Insurance Company since 1992. 1993
(61) Director

@ Barbara A. Lukavsky President & CEO, LuSan ELITE USA, L.C. 1987
(56) Director

% Richard G. Peebler Dean and Professor Emeritus, Drake University, College of Business and Public 1969
(67) Director Administration since 1996. Prior thereto, Professor, Drake University, College of
Business and Public Administration.

<FN>
* Considered to be "Interested Persons," as defined in the Investment Company
Act of 1940, as amended, because of current or former affiliation with the
Manager or PML.
@ Member of Audit and Nominating Committee.
% Member of the Executive Committee. The Executive Committee is elected by
the Board of Directors and may exercise all the powers of the Board of
Directors, except those which by statute may not be delegated, when the
Board is not in session and shall report its actions to the Board.
1 Since Fund's inception, if later.
</FN>
</TABLE>

The Funds pay no salaries or other compensation to the directors other than
director's fees. Only directors who are not currently affiliated with the
Manager or PML receive an annual retainer of $600 per Fund and a fee of $150 for
each Board or committee meeting attended.

<PAGE>

DIRECTOR COMPENSATION*
(fiscal year ended December 31, 1996)

Compensation From Total From
Director Each Fund Fund Complex
James D. Davis $1,200 $32,100
Roy W. Ehrle $1,200 $30,900
Pamela A Ferguson 1 $1,350 $35,850
Richard W. Gilbert 1 $1,200 $33,000
J. Barry Griswell** none none
Stephan L. Jones** none none
Ronald E. Keller** none none
Barbara A. Lukavsky 1 $1,350 $35,850
Richard G. Peebler 2 $1,350 $33,525

* None of the Funds provide retirement benefits for any of the Directors.
** Affiliated with the Manager or PML and, accordingly, received no
compensation from the Funds 1 Received an additional $150 from each Fund for
service on Audit Committee
2Received an additional $150 from the Aggressive Growth, Asset Allocation,
Balanced, Capital Accumulation, Emerging Growth and Growth Funds for
service on Executive Committee.

2. RATIFICATION OF SELECTION OF ERNST & YOUNG LLP AS INDEPENDENT PUBLIC
AUDITORS

The Board of each Fund has selected Ernst & Young LLP as the independent
auditors for the Fund. This selection was made unanimously by the members of the
Board, including those who are not interested persons. The selection is to be
ratified at the meeting.

Ernst & Young LLP has been the auditor for the Funds since each was organized.
They also serve as auditor for the Manager and other members of The Principal
Financial Group. The audit services Ernst & Young LLP provide 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. No
representative of Ernst & Young LLP is expected to be at the shareholder
meetings.

Ratification for each Fund requires the affirmative vote of the majority of the
votes cast with respect to that Fund. Your proxy will be voted in favor of
ratification unless you express a contrary choice.

3. APPROVAL OF CHANGE OF FUND STRUCTURE

At meetings held on June 9, 1997, the Board of Directors of each Fund
unanimously approved, subject to shareholder approval, an Agreement and Plan of
Reorganization and Liquidation (the "Plan" (Exhibit A)). The proposed Plan calls
for all of the Funds, each of which is a Maryland corporation, to transfer their
assets to a new Maryland corporation, Principal Variable Contracts Fund, Inc.
(the "Series Fund"), which will assume all the existing Funds' obligations and
liabilities. The new Series Fund will be authorized to issue a single class of
shares divisible into an indefinite number of series.

If the Plan is implemented, each existing Fund will become one of the series (to
be identified as "Accounts") of the Series Fund.

Current Fund Account

Principal Aggressive Growth Aggressive Growth Account
Principal Asset Allocation Asset Allocation Account
Principal Balanced Balanced Account
Principal Bond Bond Account
Principal Capital Accumulation Capital Value Account*
Principal Emerging Growth MidCap Account**
Principal Government Securities Government Securities Account
Principal Growth Growth Account
Principal High Yield High Yield Account
Principal Money Market Money Market Account
Principal World International Account*

* The names of these accounts better describe the investment strategies
employed by the Funds in pursuit of their respective investment objectives.
The Capital Accumulation Fund follows a value-oriented investment strategy
and the World Fund invests in securities of non-U.S. companies.

** The Emerging Growth Fund feels the Fund's strategy of investing in securities
of small companies is unduly restrictive in today's market as larger
companies offer the Fund attractive opportunities to achieve its investment
objective. The Fund plans to invest in securities of medium-sized ("midcap")
companies. Naming the Account "MidCap" will better describe this strategy.

The Series Fund will simplify the operation of and provide greater flexibility
in managing the investment medium used to fund the variable contracts that
invest in the Funds. For example, when a decision is made to add an investment
choice to a variable contract, the current structure requires that a new
corporation be organized under State law and a new registration statement be
filed with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933 (the "1933 Act") to cover the shares to be issued by the
new fund. Under the proposed structure, the Series Fund would implement a
decision to add a new investment choice by establishing a new Account, creating
a new series of shares to be issued by that Account and filing an amendment to
its 1933 Act registration statement. By implementing the Plan, the number of
corporations and SEC registration statements required to provide current
investment choices under variable contracts would be reduced from eleven to one.

Adopting the name "Principal Variable Contracts Fund, Inc." clearly designates
the Series Fund as a fund used with variable life and variable annuity
contracts. This type of identification is quite common in the securities
industry and more clearly associates these funds with the variable contracts
which invest in them. Naming each portfolio an Account allows easy reference to
the investment choices.

To implement the Plan, on December 31, 1997, each Fund will transfer all of its
assets and liabilities to the Series Fund in exchange for a number of shares of
its corresponding Account equal to the number of shares it then has outstanding.
Each Fund will then distribute the shares of this Account to its shareholders of
record as of December 31, 1997 by instructing the Series Fund to record on its
books a number of shares of the new Account equal to the number of shares of the
existing Fund held by each shareholder. As soon as practicable after December
31, 1997, the existing Funds will completely dissolve by terminating their legal
existence under Maryland law.

The expenses of the reorganization contemplated by the Plan will be borne by the
Funds and, if the Plan is implemented, will be assumed by the Series Fund. It is
estimated that such expenses will be approximately $33,000. Expenses will be
allocated among the Funds and the Accounts of the Series Fund in proportion to
the ratio of the assets of each Fund to the assets of all the Funds determined
as of July 22, 1997.

Comparison of the existing structure and the proposed structure

Currently, each of the eleven Funds is a separate corporation that issues its
own shares. Shareholders of a particular Fund are the only persons entitled to
vote at shareholder meetings of that Fund. Issues that come before shareholder
meetings include: changes in fundamental investment policies and restrictions of
the Fund, ratification of the selection of the independent auditor, approval of
advisory agreements, election of directors and other matters as required by law.

Under the proposal, there will be only one corporation which will issue several
series of its shares. At the effective time of the reorganization, the
shareholders of an existing Fund will receive the series of shares issued by the
Series Fund in respect of the Account which corresponds to the existing Fund.
Because there will be only one corporation, the shareholders of all the series
of shares issued by the Series Fund will vote together unless the issue to be
voted upon affects less than all the Accounts in which case only the
shareholders of series of shares issued in respect of the affected Account or
Accounts will be eligible to vote. The issues that must come before shareholder
meetings do not change under the new structure. Generally, the shareholders of
all series will vote for the election of directors and the ratification of the
selection of independent auditor, and the shareholders of each affected Account
will vote with respect to changes in fundamental investment policies and
restrictions and the approval of advisory agreements that apply to that Account.

At the effective time of implementation of the Plan, the Series Fund will assume
all the assets and liabilities of each Fund and carry on the business and
operations of that Fund through a corresponding Account of the Series Fund with
the same investment advisory arrangements and investment objectives, policies
and restrictions as the Fund has in effect at the effective time. Changes in
certain fundamental investment restrictions are being separately proposed for
approval at the meetings of certain Funds (see Items 4 and 5 below); if and to
the extent approved, such changes will be part of the Fund's fundamental
investment restrictions at the effective time. Upon completion of the
reorganization, each shareholder of a Fund at the effective time will be the
owner of an equal number of full and fractional shares of the series of shares
issued in respect of the corresponding Account, having an equal net asset value,
as the shareholder owned in the Fund immediately prior to the effective time.
The Series Fund has been newly organized for purposes of the reorganization. It
is contemplated that the persons who serve as the directors of the Funds will
serve as directors of the Series Fund, that the persons who serve as officers of
the Funds will become officers of the Series Fund with comparable
responsibilities and that the Manager, sub-advisors, independent auditor and
custodian for the existing Funds will serve in the same capacities for the
Series Fund. Other than the initial expense of reorganization, the proposed plan
will not establish a new fee or expense or increase any existing fee or expense
to be paid by any of the Funds or their shareholders. The Series Fund will have
a December 31 fiscal year, the same as the Funds. If the Plan is not approved by
the shareholders of one or more Funds, those Funds will continue to operate as a
separate entities, and the Plan will be implemented as to the remaining Funds.

Income Tax Consequences

The proposed reorganization is intended to qualify as a tax-free reorganization
under United States federal tax laws (Section 368(a)(1)(F) of the Internal
Revenue Code of 1986, as amended). If the reorganization qualifies, no gain or
loss would be recognized for federal income tax purposes by the Funds, the
existing Funds' shareholders or the Series Fund. Each shareholder will have an
adjusted basis in the shares of the new Series Fund which is the same as the
basis in the corresponding Fund shares. In addition, each shareholder's holding
period for Series Fund shares will include the holding period for the
corresponding Fund shares.

Under the Plan, the existing Funds and the Series Fund will receive opinions of
counsel that the Plan qualifies as a tax-free reorganization. Although the Funds
are not aware of any adverse United States, state or local tax consequences of
the proposed Plan, they have not made any investigations as to such
consequences.

You may wish to consult your own tax advisers with respect to these matters.

Related authorizations

Prior the effective time, the Series Fund will issue one share of each series of
shares to the corresponding Fund for such series. By approving the Plan, the
shareholders of a Fund will be authorizing that Fund as the sole shareholder of
the corresponding series of shares prior to the reorganization to: 1) elect the
nominees listed in Item 1 above as the directors of the Series Fund; 2) ratify
the selection of Ernst & Young LLP as independent auditors of the Series Fund;
3) approve the Management Agreement, Investment Service Agreement and
Sub-Advisory Agreements for the Series Fund substantially in the forms set forth
in Exhibits B, C, D, and E (these agreements are substantially the same as those
to which the Funds are currently parties; changes as are indicated on the copies
included as Exhibits hereto; additional related information is included on
Exhibit F); and 4) approve the transactions required of the Series Fund to
implement the Plan. The shareholders will also be authorizing the liquidation
and dissolution of the Fund.

The Board of Directors of each Fund recommends approval of the proposal.
Approval of this proposal by each Fund requires the affirmative vote of a
majority of the votes entitled to be cast by shareholders of that Fund. The
effective time for implementing the Plan as to each Fund approving the proposal
will be 11:59 p.m. on December 31, 1997. However, the Plan may be implemented at
another time and date should circumstances so warrant.

ISSUES FOR PRINCIPAL CAPITAL ACCUMULATION,
PRINCIPAL GOVERNMENT SECURITIES AND
PRINCIPAL MONEY MARKET FUNDS ONLY

4. APPROVAL OF ELIMINATION OF THE FUNDAMENTAL INVESTMENT RESTRICTION REGARDING
THE PURCHASE OF SHARES OF OTHER INVESTMENT COMPANIES

Each of Principal Capital Accumulation Fund, Principal Government Securities
Fund and Principal Money Market Fund has a fundamental investment restriction
prohibiting the Fund from purchasing "securities of other investment companies
except in connection with a merger, consolidation or plan of reorganization."
The Boards of these Funds recommend the elimination of the restriction for these
Funds. The other Principal Funds do not have this fundamental restriction.

Each Fund maintains a level of liquidity to meet cash demands for redemptions or
to make long term investments. On occasion, the Funds accumulate excess cash.
Elimination of the restriction increases the Funds' investment flexibility. The
proposal allows the Fund to purchase the shares of other investment companies as
a means of investing its excess cash if other investment options are not
available.

In addition, because the other Principal Funds already have this flexibility,
this proposal provides a standard investment restriction for all the Funds. This
allows the Manager to monitor more easily each Fund's compliance with its
investment policies.

Each Fund has adopted a non-fundamental restriction (one that may be changed by
action of the Board of Directors without shareholder approval) which deals with
the purchase of shares of other investment companies and will become effective
at the effective time of the elimination of the fundamental restriction. This
non-fundamental restriction is the same as that adopted by certain of the other
Funds and provides that a Fund will not:

Invest its assets in the securities of any investment company except that
the Fund may invest not more than 10% of its assets in securities of other
investment companies, invest not more than 5% of its total assets in the
securities of any one investment company, or acquire not more than 3% of
the outstanding voting securities of any one investment company except in
connection with a merger, consolidation or plan of reorganization, and the
Fund may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.

The Board of Directors of each Fund recommends approval of this proposal.
Approval of this proposal by a Fund requires the affirmative vote of the lesser
of 1) 67% of the shares of the Fund present or represented at the meeting if
more than 50% of the shares of the Fund are present or represented by proxy, or
2) more than 50% of the outstanding shares of the Fund. If a Fund approves this
Item, its investment restrictions will be changed effective on the earlier of 1)
the time which is immediately prior to the effectiveness of the reorganization
described in Item 3; and 2) January 1, 1998. The investment restriction of the
corresponding Account of the Series Fund will be the investment restriction of
the Fund as in effect immediately prior the reorganization.

5. APPROVAL OF ELIMINATION OF THE FUNDAMENTAL INVESTMENT RESTRICTION
PROHIBITING JOINT PARTICIPATION IN ANY SECURITIES TRADING ACCOUNT

Each of Principal Capital Accumulation Fund, Principal Government Securities
Fund and Principal Money Market Fund has a fundamental investment restriction
which does not allow the Funds to "participate on a joint or joint and several
basis in any trading account in securities . . ." The Board of each of these
Funds recommends the elimination of the restriction. The other Principal Funds
do not have this fundamental restriction.

Each of the Funds maintains a certain level of short-term liquidity (which
varies by Fund) to meet cash demands for redemptions or pending the selection of
long-term portfolio investments. Currently, each Fund makes short term
investments for its own account based on cash availability and portfolio
requirements. However, savings may be available if those Funds with excess cash
on a given day could invest jointly with the other Principal Funds. The primary
savings would be a lower level of transactions costs because of fewer individual
trades, with the costs incurred being allocated among more than one Fund. A
secondary benefit is that larger investment amounts might command a more
attractive rate of return.

In addition, because the other Principal Funds already have this flexibility,
this proposal would allow all Principal Funds to participate in joint trading.
Participation of all Principal Funds in the joint trading account would permit
the Manager to monitor more easily each Fund's compliance with its investment
policies.

ISSUE FOR PRINCIPAL CAPITAL ACCUMULATION FUND ONLY

6. APPROVAL OF THE CHANGE FROM FUNDAMENTAL TO NON-FUNDAMENTAL INVESTMENT
RESTRICTION, EXPANSION OF LIMITATION OF PURCHASES OF ILLIQUID SECURITIES
AND PURCHASES OF REPURCHASE AGREEMENTS

Principal Capital Accumulation Fund has a fundamental investment restriction
which does not permit the Fund to "purchase securities, including obligations
acquired in private offerings . . . , which are subject to legal or contractual
restrictions upon resale or are otherwise not readily marketable, if the
purchase will cause more than 10% of the value of its assets to be invested in
such securities." The Board of the Fund recommends eliminating this restriction
and in its place adopting a non-fundamental investment restriction (one that may
be changed by action of the Board of Directors without shareholder approval)
that allows the Fund to invest not more than 15% of total Fund assets in
illiquid securities. For this purpose, an illiquid security is a security which
may not be sold or disposed of within seven days at the amount at which the Fund
has valued the investment on its books.

This proposal is more flexible than the current restriction but is permitted by
the current requirements of the '40 Act. By approving this proposal and thereby
establishing a more flexible investment policy, you are providing the Fund with
the maximum flexibility provided by the '40 Act.

The Board also recommends increasing the Fund's investment flexibility by
allowing the Fund to invest in repurchase agreements. Though the other Principal
Funds are able to invest in repurchase agreements, Principal Capital
Accumulation is unable to do so. The Board recommends adoption of a
non-fundamental investment restriction to permit the Fund to invest in
repurchase agreements. Repurchase agreements typically involve the purchase of
debt securities from a selling financial institution such as a bank, savings and
loan association or broker-dealer with a simultaneous agreement that the buyer
will sell the securities back to the seller at a price and time set in the
agreement. A repurchase agreement may be viewed as a loan collateralized by the
underlying securities. This arrangement results in a fixed rate of return that
is not subject to market fluctuation during the Fund's holding period. Although
repurchase agreements involve certain risks not associated with direct
investments in debt securities (default or bankruptcy by a selling financial
institution), the Board will adopt certain procedures designed to minimize such
risks. The procedures will require the Fund to enter into repurchase agreements
only with large, well-capitalized and well-established financial institutions
which have been approved by the Board and which the Manager believes present
minimal credit risks. In addition, the procedures will require that the value of
the underlying securities remain at all times equal to the repurchase price,
plus accrued interest.

If this Item is approved, the Fund will adopt a non-fundamental restriction to
become effective when the fundamental restriction is eliminated. This
non-fundamental restriction provides that the Fund may not:

Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.

The Board of Directors of the Fund recommends approval of this proposal.
Approval of this proposal by the Fund requires the affirmative vote of the
lesser of 1) 67% of the shares of the Fund present or represented at the meeting
if more than 50% of the shares of the Fund are present or represented by proxy,
or 2) more than 50% of the outstanding shares of the Fund. If the Fund approves
this Item, its investment restrictions will be changed effective on the earlier
of 1) the time which is immediately prior to the effectiveness of the
reorganization described in Item 3; and 2) January 1, 1998. The investment
restriction of the corresponding Account of the Series Fund will be the
investment restriction of the Fund as in effect immediately prior to the
reorganization.

ISSUE FOR PRINCIPAL GOVERNMENT SECURITIES FUND ONLY

7. APPROVAL OF CHANGE TO THE FUNDAMENTAL INVESTMENT RESTRICTION WITH RESPECT
TO PURCHASE OF SECURITIES OTHER THAN GOVERNMENT SECURITIES

Principal Government Securities Fund has a fundamental investment restriction
prohibiting the "purchase of securities other than obligations issued or
guaranteed by the United States Government or its agencies or instrumentalities"
("government securities"). As a result of this restriction, the Fund currently
makes its short-term investments in repurchase agreements collateralized by
government securities. The cost of entering into repurchase agreements sometimes
exceeds the gain otherwise available to the Fund through such transactions.

Management believes the current restriction unnecessarily restricts the daily
operations of the Fund and recommends that this investment restriction be
modified to provide that the Fund may maintain reasonable amounts in cash or
purchase short-term debt securities that are not issued or guaranteed by the U.
S. Government or its agencies or instrumentalities for daily cash management
purposes or pending selection of long-term investments. These securities will
present a risk of loss that is not present with government securities. Under
normal circumstances, the Fund will have at least 65% of the value of its total
assets invested in government securities.

As amended, the Fund's investment restriction will provide that the Fund may
not:

Purchase any securities other than obligations issued or guaranteed by the
U. S. Government or its agencies or instrumentalities, except that the Fund
may maintain reasonable amounts in cash or purchase short-term debt
securities not issued or guaranteed by the U. S. Government or its agencies
or instrumentalities for daily cash management purposes or pending
selection of particular long-term investments. There is no limit on the
amount of its assets which may be invested in the securities of any one
issuer of obligations issued by the U. S. Government or its agencies or
instrumentalities.

ISSUES FOR PRINCIPAL MONEY MARKET FUND ONLY

8. APPROVAL OF CHANGE TO THE FUNDAMENTAL INVESTMENT RESTRICTION WITH RESPECT
TO DIVERSIFICATION REQUIREMENTS

The Principal Money Market Fund has a restriction which prohibits it from
investing more than 5% of its assets in securities of any one issuer (other than
U.S. Government securities). The Board of the Fund recommends a modification to
the restriction which will allow the Fund to invest more than 5% (but not more
than 25%) of total Fund assets in the securities of a single issuer. However,
the securities must be rated by an independent rating service (e.g., Moody's
Investors Service, Inc., Standard & Poor's Corporation) in the highest short
term rating category, issued by entities that receive such a rating for
comparable short-term debt or comparable unrated securities. Each such
investment would be limited to a maximum of three business days.

This proposed change is more flexible than the current restriction but is
permitted by SEC rules adopted under the '40 Act. The Board of the Fund
recommends modification to the restrictions which will allow the Fund to invest
more than 5% (but not more than 25%) of total Fund assets in the securities of a
single issuer in accordance with the rules of the SEC governing money market
funds.

A change to the Fund's fundamental investment restrictions must be approved by
the shareholders. By amending the existing restriction to permit a more flexible
investment policy, you are providing the Fund with the maximum flexibility
permitted by the '40 Act.

As amended, the Fund's investment restriction would provide that the Fund may
not:

Purchase the securities of any issuer if the purchase will cause more than
5% of the value of its total assets to be invested in the securities on any
one issuer (except securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities).

The Board of Directors of the Fund recommends approval of this proposal.
Approval of this proposal by the Fund requires the affirmative vote of the
lesser of 1) 67% of the shares of the Fund present or represented at the meeting
if more than 50% of the shares of the Fund are present or represented by proxy,
or 2) more than 50% of the outstanding shares of the Fund. If the Fund approves
this Item, its investment restrictions will be changed effective on the earlier
of: 1) the time which is immediately prior to the effectiveness of the
reorganization described in Item 3; and 2) January 1, 1998. The investment
restriction of the corresponding Account of the Series Fund will be the
investment restriction of the Fund as in effect immediately prior to the
reorganization.

9. APPROVAL OF CHANGE TO THE FUNDAMENTAL INVESTMENT RESTRICTION WITH RESPECT
TO PURCHASE OF SECURITIES OF A SINGLE ISSUER

Principal Money Market Fund currently has a fundamental investment restriction
prohibiting the purchase of securities of any issuer if the purchase will cause
more than 10% of any class of securities of the issuer to be held by the Fund
(other than securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities). This limitation is more restrictive than the requirement
imposed by the '40 Act. Under the '40 Act, a Fund is limited to purchasing no
more than 10% of the outstanding voting securities of an issuer.

The key difference is the substitution of "voting securities" for "class of
securities." The current restriction prohibits the Fund from purchasing more
than $10 million of a $100 million commercial paper offering (i.e. a class).
Since commercial paper is not a voting security, the '40 Act does not require
the imposition of a $10 million cap. In fact, the '40 Act permits a Fund to
invest up to 5% of its total assets in the securities of a single issuer. If the
Fund's total assets were $300 million, the 5% limitation would permit the Fund
to invest up to $15 million in the $100 million commercial paper offering in
this example. The portfolio managers for the Fund believe the current limitation
unnecessarily restricts the Fund's purchases of certain commercial paper in
which the Fund may otherwise invest.

As amended, the Fund's investment restriction will provide that the Fund may
not:

Purchase the securities of any issuer if the purchase will cause more than
10% of the outstanding voting securities of the issuer to be held by the
Fund (other than securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities).

10. APPROVAL OF CHANGE TO THE FUNDAMENTAL INVESTMENT RESTRICTION PROHIBITING
THE PURCHASE OF RESTRICTED SECURITIES

Principal Money Market Fund has a fundamental investment restriction which does
not permit the Fund to "knowingly purchase any security restricted as to
disposition under the federal securities laws." This requirement is more
restrictive than the current requirements of the '40 Act. The Board of the Fund
recommends eliminating the prohibition against the purchase of restricted
securities and adopting a more flexible restriction that allows the Fund to
invest no more of its total assets in securities not readily marketable than is
allowed by federal securities rules or interpretations.

This proposal would permit the Fund to invest in securities subject to
restrictions upon resale. Under procedures adopted by the Fund's Board, the Fund
could then invest in certain types of short-term commercial paper which,
although restricted as to resale, are liquid enough to warrant investment by the
Fund. Current requirements of the '40 Act would limit purchase of restricted
securities to not more than 10% of the Fund's total assets. By approving this
proposal and establishing more flexible investment restrictions, you are
providing the Fund with the maximum flexibility permitted by the '40 Act.

As amended, the Fund's investment restriction will provide that the Fund may
not:

Invest a greater percentage of its total assets in securities not readily
marketable than is allowed by federal securities rules or interpretations.

11. GENERAL

The Funds 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.

EXHIBIT A

AGREEMENT AND PLAN OF
REORGANIZATION AND LIQUIDATION

This AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION is entered into
this ___ day of ______________________, 1997 by and between Principal Variable
Contract Fund, Inc., a Maryland Corporation (the "Surviving Corporation") and
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc. (individually, a Liquidating Corporation; together the "Liquidating
Corporations").

WHEREAS, The Liquidating Corporations are open-end management investment
companies registered under the Investment Company Act of 1940, as amended (the
"1940 Act");

WHEREAS, The Liquidating Corporations have authorized capital stock
consisting of the following shares of common stock, par value $.01 per share:

Principal Aggressive Growth Fund, Inc. - - 100 Million
Principal Asset Allocation Fund, Inc. - - 100 Million
Principal Balanced Fund, Inc. - - - 100 Million
Principal Bond Fund, Inc. - - 100 Million
Principal Capital Accumulation Fund, Inc. 100 Million
Principal Emerging Growth Fund, Inc. - - 100 Million
Principal Government Securities Fund, Inc. 100 Million
Principal Growth Fund, Inc. - - 100 Million
Principal High Yield Fund, Inc. - - 100 Million
Principal Money Market Fund, Inc. - 500 Million
Principal World Fund, Inc. - - 100 Million

WHEREAS, the Surviving Corporation was organized as a Maryland Corporation
pursuant to Articles of Incorporation and is presently authorized to issue 1.5
billion shares, par value $0.01 per share, of a single class divisible into an
indefinite number of different series and will be operated as a "series company"
as provided by Rule 18f-2 under the 1940 Act;

WHEREAS, Liquidating Corporations desire to reorganize into separate series
of a single corporation through a reorganization within the meaning of Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"); and

WHEREAS, each Liquidating Corporation desires generally to accomplish this
change by transferring all of its assets to the series of Surviving Corporation
corresponding to it in consideration for the assumption by the Surviving
Corporation of all of each Liquidating Corporation's liabilities and the
issuance to each Liquidating Corporation of shares of the series of Surviving
Corporation corresponding to it, which shares each Liquidating Corporation will
thereupon distribute pro rata to its shareholders in complete liquidation, all
in accordance with the procedures and subject to the terms and conditions of
this Agreement;

NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto agree as follows:

1. Plan of Reorganization and Liquidation.

(a) At the Closing each Liquidating Corporation will convey, transfer
and deliver to the Surviving Corporation all of its then existing
assets. In consideration thereof, the Surviving Corporation will
at the Closing (i) assume all of each Liquidating Corporation's
obligations and liabilities then existing, whether absolute,
accrued, contingent or otherwise, including without limitation,
all fees and expenses in connection with the transactions
contemplated hereby, and (ii) deliver to each Liquidating
Corporation a number of full and fractional shares of the
appropriate series of Surviving Corporation equal to the number of
each Liquidating Corporation's full and fractional shares then
outstanding.

(b) Upon consummation of the transactions described in paragraph (a)
of this Section 1, each Liquidating Corporation will liquidate and
the shares of the Surviving Corporation received by each
Liquidating Corporation will be distributed to its shareholders of
record as of the Closing Date, each shareholder to receive a
number of shares equal to the number of share then held by such
shareholder. Such liquidation and distribution will be accompanied
by the establishment of an open account on the share records of
the Surviving Corporation in the name of each shareholder of each
Liquidating Corporation and representing the respective pro rata
number of shares of the Surviving Corporation due such
shareholder.

(c) As soon as practicable after the Closing Date, each Liquidating
Corporation will take, in accordance with the Maryland General
Corporation Law, all steps as shall be necessary and proper to
effect a complete dissolution.

(d) Prior to the Closing and after each Liquidating Corporation has
taken the actions authorized pursuant to Section 3(e) hereof, the
shares of the Surviving Corporation heretofore held by each
Liquidating Corporation will be redeemed and canceled by the
Surviving Corporation.

2. Closing and Closing Date. The Closing will occur at 11:59 p.m. on
December 31, 1997, or at such other time and date as the parties may
mutually agree (the "Closing Date").

3. Conditions Precedent. The obligations of each Liquidating Corporation
and the Surviving Corporation to effectuate the Plan of Reorganization
and Liquidation shall be subject to the satisfaction of each of the
following conditions:

(a) Such authority and orders from the Securities and Exchange
Commission (the "Commission") and state securities commissions as
may be necessary to permit the parties to carry out the
transactions contemplated by this Agreement shall have been
received.

(b) One or more post-effective amendments to the Registration
Statement of Principal Capital Accumulation Fund, Inc. on Form
N-1A under the Securities Act of 1933 and the 1940 Act containing
(i) such amendments to such Registration Statement as are
determined by the Board of Directors of the Surviving Corporation
to be necessary and appropriate as a result of the Plan of
Reorganization and Liquidation and (ii) the adoption by the
Surviving Corporation as its own of such Registration Statement,
as so amended, shall have been filed with the Commission and such
post-effective amendment or amendments to the Registration
Statement shall have become effective, and no stop-order
suspending the effectiveness of the Registration Statement shall
have been issued, and no proceeding for that purpose shall have
been initiated or threatened by the Commission (and not withdrawn
or terminated).

(c) Each party shall have received an opinion of counsel in form and
substance satisfactory to it, relating to its authority to engage
in the transactions contemplated hereby and to the effect that
(i) this Agreement has been duly authorized, executed and
delivered by each Liquidating Corporation and the Surviving
Corporation and constitutes a legal, valid and binding agreement
of each such party in accordance with its terms; (ii) the shares
of the Surviving Corporation to be issued pursuant to the terms
of this Agreement, will be validly issued, fully paid and
non-assessable; and (iii) the Surviving Corporation is duly
organized and validly existing under the laws of the State of
Maryland.

(d) Each party shall have received an opinion of counsel to the
effect that the reorganization contemplated by this Agreement
qualifies as a "reorganization" under Section 368(a)(1)(F) of the
Code.

(e) A vote approving this Agreement and the reorganization
contemplated hereby shall have been adopted by at least a
majority of the outstanding shares of common stock of each
Liquidating Corporation entitled to vote at an annual or special
meeting and the shareholders of each Liquidating Corporation
shall have voted at such meeting to authorize each Liquidating
Corporation to vote, and each Liquidating Corporation shall have
voted, as the sole shareholder of its corresponding series of the
Surviving Corporation, to:

(1) elect the Directors of each Liquidating Corporation as
Directors of the Surviving Corporation;

(2) approve (i) a management agreement between the Surviving
Corporation and Princor Management, Inc. (the "Manager"),
(ii) an Investment Service Agreement between and among the
Manager, Principal Mutual Life Insurance Company ("Principal
Mutual") and the Surviving Corporation (the "Service
Agreement"), (iii) with respect to the Surviving
Corporation's Balanced, Capital Value, Government, Growth,
International and MidCap series, a Subadvisory Agreement
between and among the Manager, Invista Capital Management,
Inc. and the Surviving Corporation, and (iv) with respect to
the Surviving Corporation's Aggressive Growth and Asset
Allocation series, a Subadvisory Agreement between and among
the Manager, Morgan Stanley Asset Management, Inc. and the
Surviving Corporation (together, the "Advisory Agreements");
and

(3) ratify the selection of Ernst & Young as the Surviving
Corporation's independent public accountants for the fiscal
year ending December 31, 1997.

(f) The Directors of the Surviving Corporation (and, to the extent
required by law, the Directors of the Surviving Corporation who
are not "interested persons" of the Surviving Corporation as
defined in the 1940 Act) shall have taken the following actions
at a meeting duly called for such purposes:

(1) approval of the Advisory Agreements;

(2) selection of Ernst & Young as the Surviving Corporation's
independent public accountants for the fiscal year ending
December 31, 1997;

(3) authorization of the issuance by the Surviving Corporation,
prior to the Closing, of a share of the Surviving Corporation
to each Liquidating Corporation in consideration of the
payment of $1.00 per share for the purpose of enabling each
Liquidating Corporation to vote on the matters referred to in
paragraph (e) of this Section 3;

(4) submission of the matters referred to in paragraph (e) of this
Section 3 to each Liquidating Corporation as the sole
shareholder of its corresponding series of the Surviving
Corporation; and

(5) authorization of the issuance by the Surviving Corporation of
shares at the Closing in exchange for the assets of each
Liquidating Corporation pursuant to the terms and provisions
of this Agreement.

At any time prior to the Closing, any of the foregoing conditions may
be waived by the Board of Directors of each Liquidating Corporation on
behalf of such Liquidating Corporation and the Directors of the
Surviving Corporation on behalf of the Surviving Corporation if, in
their judgment, such waiver will not have a material adverse effect on
the interests of the shareholders of such Liquidating Corporation.

4. Amendment. This Agreement may be amended at any time by action of the
Board of Directors of any Liquidating Corporation and the Directors of
the Surviving Corporation, notwithstanding approval thereof by the
shareholders of any Liquidating Corporation, provided that no
amendment shall have a material adverse effect on the interests of the
shareholders of any Liquidating Corporation unless approved by such
shareholders.

5. Termination. The Board of Directors of any Liquidating Corporation and
the Board of Directors of the Surviving Corporation may terminate this
Agreement and abandon the reorganization contemplated hereby,
notwithstanding approval thereof by the shareholders of any
Liquidating Corporation, at any time prior to the Closing, if
circumstances should develop that, in their judgment, make proceeding
with the plan inadvisable.

6. Governing Law. This Agreement shall be construed in accordance with
applicable federal law and the laws of the State of Maryland.

7. Further Assistance. The Liquidating Corporations and the Surviving
Corporation shall take further action as may be necessary or desirable
and proper to consummate the transactions contemplated hereby.

8. Entire Agreement. This Agreement embodies the entire agreement between
the parties and there are no agreements, understandings, restrictions
or warranties among the parties other than those set forth or provided
for herein.

9. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first above written.

By:_________________________________

Title:_______________________________

Principal Variable Contracts Fund, Inc.

By:_________________________________

Title:________________________________

EXHIBIT B

MANAGEMENT AGREEMENT
(marked to show changes)

AGREEMENT to be effective the day of , 1997, by and between PRINCIPAL
VARIABLE CONTRACTS FUND, INC., a Maryland corporation (hereinafter called the
"Fund") and PRINCOR 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, and the Fund's Registration Statement, current
Prospectus and Statement of Additional Information, 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 AND OTHER ADMINISTRATIVE SERVICES AND EXPENSES

The Manager will regularly perform or assume responsibility for general
corporate and all other administrative services and expenses, except as set out
in Section 4 hereof, as follows:

(a) Furnish office space, all necessary office facilities and assume costs
of keeping books of the Fund;

(b) Furnish the services of executive and clerical personnel necessary to
perform the general corporate functions of the Fund;

(c) Compensate and pay the expenses of all officers, and employees of the
Fund, and of all directors of the Fund who are persons affiliated with
the Manager;

(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;

(e) Provide for the organizational expense of the Fund and expenses
incurred with the registration of the Fund and Fund shares with the
federal and state regulatory agencies, including the costs of printing
prospectuses in such number as the Fund shall need for purposes of
registration and for the sale of its shares;

(f) Be responsible for legal and auditing fees and expenses incurred with
respect to registration and continued operation of the Fund;

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

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

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

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

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

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

(h) Prepare stock certificates, and distribute the same requested by
shareholders of the Fund; and

(i) Provide such other services as required by law or considered
reasonable or necessary in the conduct of the affairs of the Fund in
order for it to meet its business purposes.

3. RESERVED RIGHT TO DELEGATE DUTIES AND SERVICES TO OTHERS

The Manager in assuming responsibility for the various services as set
forth in 1 and 2 above, 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 Mutual Life
Insurance Company, or an affiliate thereof.

4. EXPENSES BORNE BY FUND

The Fund will pay, without reimbursement by the Manager, the following
expenses:

(a) Taxes, including in the case of redeemed shares any initial transfer
taxes, and other local, state and federal taxes, governmental fees and
other charges attributable to investment transactions;

(b) Portfolio brokerage fees and incidental brokerage expenses;

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

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

(f) The cost of meetings of shareholders.

5. COMPENSATION OF THE MANAGER BY FUND

For all services to be rendered and payments made as provided in Sections 1
and 2 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
Schedules of Management Fees attached hereto.

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. ASSUMPTION OF EXPENSES BY PRINCIPAL MUTUAL LIFE INSURANCE COMPANY

Although in no way relieving the Manager of its responsibility for the
performance of the duties and services set out in Section 2 hereof, and
regardless of any delegation thereof as permitted under Section 3 hereof, some
or all of the expenses therefore may be voluntarily assumed by Principal Mutual
Life Insurance Company and the Manager may be reimbursed therefor, or such
expenses may be paid directly by Principal Mutual Life Insurance Company.

7. 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.

8. 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.

9. COPIES OF CORPORATE DOCUMENTS

The Fund will furnish the Manager promptly with properly certified or
authenticated copies of amendments or supplements to its articles or bylaws.
Also, the Fund will furnish the Manager financial and other corporate
information as needed, and otherwise cooperate fully with the Manager in its
efforts to carry out its duties and responsibilities under this Agreement.

10. DURATION AND TERMINATION OF THIS AGREEMENT

This Agreement shall remain in force until the conclusion of 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 Mutual 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 Mutual 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 VARIABLE CONTRACTS FUND, INC.

By ____________________________________________
Arthur S. Filean, Vice President

PRINCOR MANAGEMENT CORPORATION

By ____________________________________________
Stephan L. Jones, President

SCHEDULE 1
MANAGEMENT FEES
Aggressive Growth and
Asset Allocation Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------------------------------------------------------------
First $100,000,000 .80%
Next 100,000,000 .75%
Next 100,000,000 .70%
Next 100,000,000 .65%
Amount Over 400,000,000 .60%

SCHEDULE 2
MANAGEMENT FEES
International Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------------------------------------------------------------
First $100,000,000 .75%
Next 100,000,000 .70%
Next 100,000,000 .65%
Next 100,000,000 .60%
Amount Over 400,000,000 .55%

SCHEDULE 3
MANAGEMENT FEES
MidCap Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------------------------------------------------------------
First $100,000,000 .65%
Next 100,000,000 .60%
Next 100,000,000 .55%
Next 100,000,000 .50%
Amount Over 400,000,000 .45%

SCHEDULE 4
MANAGEMENT FEES
High Yield and
Balanced Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
--------------------------------------------------------------------
First $100,000,000 .60%
Next 100,000,000 .55%
Next 100,000,000 .50%
Next 100,000,000 .45%
Amount Over 400,000,000 .40%

SCHEDULE 5
MANAGEMENT FEES
Bond, Capital Value, Government Securities,
Growth and Money Market Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
--------------------------------------------------------------------
First $100,000,000 .50%
Next 100,000,000 .45%
Next 100,000,000 .40%
Next 100,000,000 .35%
Amount Over 400,000,000 .30%

EXHIBIT C
(FOR ALL ACCOUNTS OF THE FUND)

INVESTMENT SERVICE AGREEMENT

THIS INVESTMENT SERVICE AGREEMENT, to be effective the _______day of
___________, ____, by and between PRINCIPAL VARIABLE CONTRACTS FUND, INC. (the
"Fund"), an open-end investment company formed under the laws of Maryland,
PRINCOR MANAGEMENT CORPORATION ("Manager"), an Iowa corporation, and PRINCIPAL
MUTUAL LIFE INSURANCE COMPANY, a specially chartered Iowa life insurance
company.

W I T N E S S E T H:

WHEREAS, Principal Mutual Life Insurance Company has organized the Manager
to serve as investment adviser and is the owner (through its subsidiaries) of
all of the outstanding stock of the Manager; and

WHEREAS, the Manager and the Fund have entered into a Management Agreement
effective as of ____________________ whereby the Manager undertakes to furnish
the Fund with investment advisory services and certain other services; and

WHEREAS, the Manager has the right under the Management Agreement to
appoint one or more sub-advisors to furnish such services to the Fund; and

WHEREAS, Principal Mutual Life Insurance Company is willing to make
available to the Manager on a part-time basis certain employees and services of
Principal Mutual Life Insurance Company and its subsidiaries for the purpose of
better enabling the Manager to fulfill its investment advisory obligations under
the Management Agreement, provided that the Manager bears all costs allocable to
the time spent by them on the affairs of the Manager, and the Manager and the
Fund believe that such an arrangement will be for their mutual benefit:

NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:

1. The Manager shall have the right to use, on a part-time basis, and
Principal Mutual Life Insurance Company shall make available on such basis, such
employees of Principal Mutual Life Insurance Company and its subsidiaries and
for such periods as may be agreed upon by the Manager and Principal Mutual Life
Insurance Company and its subsidiaries, as reasonably needed by the Manager in
the performance of its investment advisory services (but not its administrative,
transfer and paying services) under the Management Agreement. It is anticipated
that such employees will be persons employed in the Investment Department of
Principal Mutual Life Insurance Company or its subsidiaries. Principal Mutual
Life Insurance Company will also make available to the Manager or the Fund such
clerical, stenographic and administrative services as the Manager may reasonably
request to facilitate its performance of such investment advisory services.

2. The employees of Principal Mutual Life Insurance Company and its
subsidiaries in performing services for the Manager hereunder may, to the full
extent that they deem appropriate, have access to and utilize statistical and
economic data, investment research reports and other material prepared for or
contained in the files of the Investment Department of Principal Mutual Life
Insurance Company or its subsidiaries which is relevant to making investments
for the Fund, and may make such materials available to the Manager, provided,
that any such materials prepared or obtained in connection with a private
placement or other non-public transaction need not be made available to the
Manager if Principal Mutual Life Insurance Company or its subsidiaries deem such
materials confidential.

3. Employees of Principal Mutual Life Insurance Company or its subsidiaries
performing services for the Manager pursuant hereto shall report and be
responsible solely to the officers and directors of the Manager or persons
designated by them. Principal Mutual Life Insurance Company or its subsidiaries
shall have no responsibility for investment recommendations and decisions of the
Manager based upon information or advice given or obtained by or through such
Principal Mutual Life Insurance Company employees or employees of Principal
Mutual Life Insurance Company subsidiaries.

4. Principal Mutual Life Insurance Company will, to the extent requested by
the Manager, supply to employees of the Manager (including part-time employees
of Principal Mutual Life Insurance Company or its subsidiaries serving the
Manager) such clerical, stenographic and administrative services and such office
supplies and equipment as may be reasonably required in order that they may
properly perform their respective functions on behalf of the Manager in
connection with its performance of its investment advisory services under the
Management Agreement.

5. The obligation of performance under the Management Agreement is solely
that of the Manager, and Principal Mutual Life Insurance Company and its
subsidiaries undertake no obligation in respect thereto, except as otherwise
expressly provided herein.

6. In consideration of the services to be rendered by Principal Mutual Life
Insurance Company or its subsidiaries and their employees pursuant to this
Investment Service Agreement, the Manager agrees to reimburse Principal Mutual
Life Insurance Company or its subsidiaries for such costs, direct and indirect,
as may be fairly attributable to the services performed for the Manager. Such
costs shall include, but not be limited to, an appropriate portion of:

(a) salaries;

(b) employee benefits;

(d) supplies and equipment; and

(e) a charge in the nature of rent for the cost of space in Principal
Mutual Life Insurance Company offices fairly allocable to
activities of the Manager under the Management Agreement.

In the event of disagreement between the Manager and Principal Mutual Life
Insurance Company and its subsidiaries as to a fair basis for allocating or
apportioning costs, such basis shall be fixed by the public accountants for the
Fund.

7. This Investment Service Agreement shall remain in force until the
conclusion of 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 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 vote of a majority of the outstanding voting securities of the Fund
and in either event such continuance shall be approved by the vote of a majority
of the directors who are not interested persons of the Manager, Principal Mutual
Life Insurance Company or its subsidiaries or the Fund cast in person at a
meeting called for the purpose of voting on such approval. This Investment
Service 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, by the
Manager or Principal Mutual Life Insurance Company. This Investment Service
Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 7, the definitions contained in
Section 2(a) of the Investment Company Act of 1940 (particularly the definitions
of "interested persons", "assignment" and "voting securities") shall be applied.

8. Any notice under this Investment Service Agreement shall be in writing,
addressed and delivered or mailed postage prepaid to the other parties at such
addresses as such other parties may designate for the receipt of such notices.
Until further notice it is agreed that the address of the fund, that of the
Manager and that of Principal Mutual Life Insurance Company and its subsidiaries
for this purpose shall be The Principal Financial Group, Des Moines, Iowa 50392.

IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in three counterparts by their duly authorized officers the day and
year first above written.

PRINCIPAL VARIABLE CONTRACTS FUND, INC.

By ______________________________________________

PRINCOR MANAGEMENT CORPORATION

By ______________________________________________

PRINCIPAL MUTUAL LIFE INSURANCE COMPANY

By ______________________________________________

EXHIBIT D
(FOR BALANCED, CAPITAL VALUE, GOVERNMENT SECURITIES,
GROWTH, INTERNATIONAL AND MIDCAP ACCOUNTS)

SUB-ADVISORY AGREEMENT

AGREEMENT executed as of the _____________________, 1997, by and between
PRINCOR MANAGEMENT CORPORATION, an Iowa Corporation (hereinafter called "the
Manager") and INVISTA CAPITAL MANAGEMENT, INC. (hereinafter called "Invista").

W I T N E S S E T H:

WHEREAS, the Manager is the manager and investment adviser to Principal
Variable Contracts Fund, Inc., (the "Fund"), an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and

WHEREAS, the Manager desires to retain Invista to furnish certain portfolio
selection and related research and statistical services in connection with the
investment advisory services which the Manager has agreed to provide to the
Fund, and Invista desires to furnish such services; and

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

(a) Management Agreement (the "Management Agreement") with the Fund;

(b) Copies of the registration statement of the Fund as filed pursuant to
the federal securities laws of the United States, including all
exhibits and amendments;

NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, it is agreed as follows:

1. Appointment of Invista

In accordance with and subject to the Management Agreement, the Manager
hereby appoints Invista to perform portfolio selection services described in
Section 2 below for investment and reinvestment of the securities and other
assets of certain series of the Fund (see Schedule A), subject to the control
and direction of the Fund's Board of Directors, as well as to assume other
obligations as specified in Section 2 below, for the period and on the terms
hereinafter set forth. Invista accepts such appointment and agrees to furnish
the services hereinafter set forth for the compensation herein provided. Invista
shall for all purposes herein be deemed to be an independent contractor and
shall, except as expressly provided or authorized, have no authority to act for
or represent the Fund or the Manager in any way or otherwise be deemed an agent
of the Fund or the Manager.

2. Obligations of and Services to be Provided by Invista

(a) Invista shall provide with respect to those Accounts of the Fund
described in Schedule 1 hereto (the "Accounts") all services and
obligations of the Manager described in Section 1, Investment
Advisory Services, of the Management Agreement.

(b) Invista shall use the same skill and care in providing services to
the Accounts as it uses in providing services to fiduciary
accounts for which it has investment responsibility. Invista will
conform with all applicable rules and regulations of the
Securities and Exchange Commission.

3. Compensation

As full compensation for all services rendered and obligations assumed by
Invista hereunder with respect to the Accounts, the Manager shall pay Invista
within 10 days after the end of each calendar month, or as otherwise agreed, an
amount representing Invista's actual cost of providing such services and
assuming such obligations.

4. Duration and Termination of This Agreement

This Agreement shall become effective as to an Account on the latest of (i)
the date of its execution, (ii) the date of its approval by a majority of the
directors of the Fund, including approval by the vote of a majority of the
directors of the Fund who are not interested persons of the Manager, Principal
Mutual Life Insurance Company, Invista or the Fund cast in person at a meeting
called for the purpose of voting on such approval and (iii) the date of its
approval by a majority of the outstanding voting securities of the Account. 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 Account and in either event by vote of a majority of the
directors of the Fund who are not interested persons of the Manager, Principal
Mutual Life Insurance Company, Invista 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 as to an Account 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 Account, Invista or by the
Manager. This Agreement shall automatically terminate in the event of its
assignment. In interpreting the provisions of this Section 4, 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.

5. Amendment of this Agreement

No amendment of this Agreement as to an Account shall be effective until
approved by vote of the holders of a majority of the outstanding voting
securities of the Account and by vote of a majority of the directors of the Fund
who are not interested persons of the Manager, Invista, Principal Mutual Life
Insurance Company or the Fund cast in person at a meeting called for the purpose
of voting on such approval.

6. General Provisions

(a) Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Iowa. The
captions in this Agreement are included for convenience only and
in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.

(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such
address as such other party may designate for the receipt of such
notices. Until further notice to the other party, it is agreed
that the address of Invista and of the Manager for this purpose
shall be The Principal Financial Group, Des Moines, Iowa
50392-0200.

(c) Invista agrees to notify the Manager of any change in Invista's
officers and directors within a reasonable time after such change.

IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.

PRINCOR MANAGEMENT CORPORATION

By __________________________________________
Stephan L. Jones, President

INVISTA CAPITAL MANAGEMENT, INC.

By __________________________________________
Craig R. Barnes, President

SCHEDULE A

Invista serves as Sub-Advisor for:

Balanced Account
Capital Value Account
Government Securities Account
Growth Account
International Account
MidCap Account

EXHIBIT E
(FOR AGGRESSIVE GROWTH AND ASSET ALLOCATION ACCOUNTS)

PRINCIPAL VARIABLE CONTRACTS FUND, INC.
SUB-ADVISORY AGREEMENT

AGREEMENT executed as of the _____ day of _____________, 1997, by and between
PRINCOR MANAGEMENT CORPORATION, an Iowa Corporation (hereinafter called "the
Manager") and MORGAN STANLEY ASSET MANAGEMENT INC. (hereinafter called "the
Sub-Advisor").

W I T N E S S E T H:

WHEREAS, the Manager desires to retain the Sub-Advisor to furnish it with
certain portfolio selection and related research and statistical services in
connection with the investment advisory services which the Manager has agreed to
provide to the Fund, and the Sub-Advisor desires to furnish such services; and

WHEREAS, The Manager has furnished the Sub-Advisor with copies properly
certified or authenticated of each of the following and will promptly provide
the Sub-Advisor with copies properly certified or authenticated of any amendment
or supplement thereto:

(a) Management Agreement (the "Management Agreement") with the Fund;

(b) The Fund's registration statement as filed with the Securities and
Exchange Commission;

NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, the parties agree as follows:

1. Appointment of Sub-Advisor

In accordance with and subject to the Management Agreement, the Manager
hereby appoints the Sub-Advisor to perform the services described in Section 2
below for investment and reinvestment of the securities and other assets of
certain series of the Fund (Appendix A), subject to the control and direction of
the Fund's Board of Directors, for the period and on the terms hereinafter set
forth. The Sub-Advisor accepts such appointment and agrees to furnish the
services hereinafter set forth for the compensation herein provided. The
Sub-Advisor shall for all purposes herein be deemed to be an independent
contractor and shall, except as expressly provided or authorized, have no
authority to act for or represent the Fund or the Manager in any way or
otherwise be deemed an agent of the Fund or the Manager.

2. Obligations of and Services to be Provided by the Sub-Advisor

(a) Provide investment advisory services, including but not limited to
research, advice and supervision, for the Accounts of the Fund
identified on Appendix A hereto (the "Accounts")

(b) 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 portfolio
of each Account consistent with the Account's investment objective and
policies.

(c) Implement such of its recommended investment program as the Board of
Directors (or any appropriate committee of the Board) 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, as each of the same
shall be from time to time in effect.

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

(e) 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 Accounts are being
observed.

(f) Provide determinations of the fair value of certain securities when
market quotations are not readily available for purposes of calculating
net asset value in accordance with procedures and methods established
by the Fund's Board of Directors.

(g) Furnish, at its own expense, (i) all necessary investment and
management facilities, including salaries of clerical and other
personnel required for it to execute its duties faithfully, and (ii)
administrative facilities, including bookkeeping, clerical personnel
and equipment necessary for the efficient conduct of the investment
advisory affairs of the Accounts.

(h) Select brokers and dealers to effect all transactions for the Accounts,
place all necessary orders with brokers, dealers, or issuers, and
negotiate brokerage commissions if applicable.

(i) Maintain all accounts, books and records with respect to the Accounts
as are required of an investment advisor of a registered investment
company pursuant to the Investment Company Act of 1940 (the "Investment
Company Act") and Investment Advisers Act of 1940 (the "Investment
Advisors Act") and the rules thereunder.

3. Compensation

As full compensation for all services rendered and obligations assumed by
the Sub-Advisor hereunder with respect to the Accounts, the Manager shall pay
the compensation specified in Appendix B to this Agreement.

4. Liability of Sub-Advisor

Neither the Sub-Advisor nor any of its directors, officers or employees
shall be liable to the Manager or the Fund for any loss suffered by the Manager
or the Fund resulting from any error of judgment made in the good faith exercise
of the Sub-Advisor's investment discretion in connection with selecting Fund
investments except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of the
Sub-Advisor or any of its directors, officers or employees.

5. Supplemental Arrangements

The Sub-Advisor may enter into arrangements with other persons affiliated
with the Sub-Advisor to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Sub-Advisor.

6. Regulation

The Sub-Advisor shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body may request or
require pursuant to applicable laws and regulations.

7. Duration and Termination of This Agreement

This Agreement shall remain in force until the conclusion of 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 Mutual Life Insurance Company,
the Sub-Advisor or the Fund cast in person at a meeting called for the purpose
of voting on such approval.

If the shareholders of the Fund fail to approve the Agreement or any
continuance of the Agreement, the Sub-Advisor will continue to act as
Sub-Advisor with respect to the Fund pending the required approval of the
Agreement or its continuance or of any contract with the Sub-Advisor or a
different manager or sub-advisor or other definitive action; provided, that the
compensation received by the Sub-Advisor in respect to the Fund during such
period is in compliance with Rule 15a-4 under the Investment Company Act.

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, the
Sub-Advisor or the Manager, or by vote of a majority of the outstanding voting
securities of the Fund This Agreement shall automatically terminate in the event
of its assignment. In interpreting the provisions of this Section 7, the
definitions contained in Section 2(a) of the Investment Company Act of 1940
(particularly the definitions of "interested person," "assignment" and "voting
security") shall be applied.

8. Amendment of this Agreement

No amendment of this Agreement as to an Account shall be effective until
approved by vote of the holders of a majority of the outstanding voting
securities of the Account and by vote of a majority of the directors of the Fund
who are not interested persons of the Manager, the Sub-Advisor, Principal Mutual
Life Insurance Company or the Fund cast in person at a meeting called for the
purpose of voting on such approval.

9. General Provisions

(a) Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof. This
Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Iowa. The captions in this
Agreement are included for convenience only and in no way define or
delimit any of the provisions hereof or otherwise affect their
construction or effect.

(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such address
as such other party may designate for the receipt of such notices.
Until further notice to the other party, it is agreed that the address
of the Manager for this purpose shall be The Principal Financial Group,
Des Moines, Iowa 50392-0200, and the address of the Sub-Advisor shall
be 1221 Avenue of the Americas, New York, New York 10020.

(1) the Sub-Advisor fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any
jurisdiction in which the Sub-Advisor is required to be registered
as an investment advisor in order to perform its obligations under
this Agreement.

(2) the Sub-Advisor is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or in
equity, before or by any court, public board or body, involving
the affairs of the Fund.

(d) This Agreement contains the entire understanding and agreement of the
parties.

IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.

PRINCOR MANAGEMENT CORPORATION

By ____________________________________________
Stephan L. Jones, President

MORGAN STANLEY ASSET MANAGEMENT INC.

By ____________________________________________

APPENDIX A

The Sub-Advisor shall serve as investment sub-advisor for Aggressive Growth
and Asset Allocation Accounts of the Fund. With respect to such Account, the
Manager will pay the Sub-Advisor, as full compensation for all services provided
under this Agreement, a fee computed at an annual rate as follows (the
"Sub-Advisor Percentage Fee"):

First $ 40,000,000 of Assets...............................0.45%
Next $160,000,000 of Assets...............................0.30%
Next $100,000,000 of Assets...............................0.25%
Assets above $300,000,000..................................0.20%

The Sub-Advisor Percentage Fee shall be accrued for each calendar day and
the sum of the daily fee accruals shall be paid monthly to the Sub-Advisor. The
daily fee accruals will be computed by multiplying the fraction of one over the
number of calendar days in the year by the applicable annual rate described
above and multiplying this product by the net assets of the Fund as determined
in accordance with the Fund's prospectus and statement of additional information
as of the close of business on the previous business day on which the Fund was
open for business.

EXHIBIT F

Each of the Funds has entered into a Management Agreement with the Manager under
which the Manager provides investment advisory and administrative services to
the Fund. The fees which each Fund has agreed to pay the Manager for these
services are the same as those set forth for the corresponding Account of the
Series fund in the Schedules to Exhibit B (Management Agreement) to this proxy
statement. The Manager has entered into Sub-Advisory Agreements with Invista
under which Invista has assumed the obligations of the Manager to provide
investment advisory services for the Balanced, Growth and World Funds. The
Manager reimburses Invista for the cost of providing these services. The Manager
has also entered into Sub-Advisory Agreements with MSAM under which MSAM has
agreed to assume the obligations of the Manager to provide investment advisory
services for the Aggressive Growth and Asset Allocation Funds. The Manager pays
MSAM a fee for providing these services. The fees payable to MSAM for each Fund
for which it serves as sub-advisor are the same as those set forth for the
corresponding Account of the Series Fund in Appendix A to Exhibit E
(Sub-Advisory Agreement) to this proxy statement. The Manager and each of the
Funds, except the Aggressive Growth and Asset Allocation Funds, have entered
into an Investment Services Agreement with PML under which PML has agreed to
furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its responsibilities under its Management Agreement with
the Fund. The Manager reimburses PML for the cost of providing these services.
The continuance of the Management Agreements, Sub-Advisory Agreements and
Investment Services Agreements was last approved by each Fund's Board of
Directors on September 9, 1996. The Series Fund proposes to enter into a
Management Agreement with the Manager and an Investment Services Agreement with
the Manager and PML and the Manager intends to enter into Sub-Advisory
Agreements with Invista and MSAM substantially in the forms set forth as
Exhibits B, C, D and E to this proxy statement (the "Series Fund Agreements").
The terms of the Series Fund Agreements are substantially the same as those of
the current, comparable agreements to which the Manager and the Funds are
parties. The Exhibits have been marked to show changes in relation to the
current agreements. In voting to approve the Plan, the shareholders of a Fund
will also be authorizing the Fund to take action to approve the Series Fund
Agreements. Further information concerning the Funds' investment advisory
arrangement is set forth below.

1. The management fee as applied to the net asset value of each Fund for the
fiscal year ending December 31, 1996, was:

Management Fee
Net Assets as of For Year Ended
Fund December 31, 1996 December 31, 1996
Aggressive Growth $ 90,105,549 .80%
Asset Allocation 61,631,138 .80
Balanced 93,157,669 .60
Bond 63,386,561 .50
Capital Accumulation 205,018,528 .48
Emerging Growth 137,160,881 .64
Government Securities 85,099,858 .50
Growth 99,611,910 .50
High Yield 13,740,343 .60
Money Market 46,244,249 .50
World 71,682,015 .75

2. Fees paid by each Fund for investment management services were as follows:

Management Fees
For Year Ended
Fund December 31, 1996
Aggressive Growth $491,699
Asset Allocation 425,427
Balanced 420,010
Bond 260,242
Capital Accumulation 816,437
Emerging Growth 606,697
Government Securities 360,968
Growth 357,833
High Yield 75,111
Money Market 208,822
World 376,123

3. Directors and Executive Officers of the Manager

The Manager serves as the investment advisor for the Funds. Invista Capital
Management, Inc. ("Invista") acts as sub-advisor for the Balanced Fund,
Growth Fund and World Fund. The principal executive officers and directors
of the Manager and Invista are listed below. The address of all directors
is The Principal Financial Group, Des Moines, Iowa 50392. The address of
the Manager and Invista are set forth in the proxy statement.

<TABLE>
Office Held With Office Held With
Name Each Fund The Manager/Invista
<CAPTION>
<S> <C> <C>
Craig L. Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Vice President and Chief Operating Officer
(Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Ernest H. Gillum Assistant Secretary Assistant Vice President, Registered
Products (Manager)
J. Barry Griswell Director and Chairman Director and Chairman of the Board
of the Board (Manager)
Stephan L. Jones Director and President Director and President (Manager)
Ronald E. Keller Director Director (Manager); Director and Chairman
of the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
</TABLE>

4. The Manager serves as investment advisor for 26 mutual funds sponsored by
Principal Mutual Life Insurance Company.

Management Fee
Net Assets as of For Fiscal Year Ended
Fund October 31, 1996 October 31, 1996
Princor Balanced $ 77,658,393 .60%
Princor Blue Chip 52,490,401 .50
Princor Bond 121,938,969 .49*
Princor Capital Accumulation 447,201,123 .43
Princor Cash Management 697,121,081 .37*
Princor Emerging Growth 259,960,901 .62
Princor Government Securities Income 271,095,796 .46
Princor Growth 254,393,295 .46
Princor High Yield 30,669,461 .60
Princor Limited Term Bond 17,444,164 .11*
Princor Tax-Exempt Bond 192,973,655 .48
Princor Tax-Exempt Cash Management 98,508,842 .43*
Princor Utilities 72,212,558 .60*
Princor World 189,078,438 .73

Management Fee
Net Assets as of For Fiscal Year Ended
Fund December 31, 1996 December 31, 1996
Principal Aggressive Growth $ 90,105,549 .80%
Principal Asset Allocation 61,631,138 .80
Principal Balanced 93,157,669 .60
Principal Bond 63,386,561 .50
Principal Capital Accumulation 205,018,528 .48
Principal Emerging Growth 137,160,881 .64
Principal Government Securities 85,099,858 .50
Principal Growth 99,611,910 .50
Principal High Yield 13,740,343 .60
Principal Money Market 46,244,249 .50
Principal World 71,682,015 .75
Principal Special Markets Fund
International Securities Portfolio 28,160,624 .90
Mortgage-Backed Securities 14,968,258 .45

* Before waiver.

5. Brokerage on Purchases and Sales of Securities

Brokerage commissions paid to affiliated brokers during the year ended
December 31, 1996 were as follows:

Commissions Paid to Principal Financial Securities, Inc.
Total Dollar As Percent of
Fund Amount Total Commissions
Capital Accumulation $6,612 3.61%
Growth 438 .97

Principal Financial Securities, Inc. is an indirect, wholly-owned
subsidiary of PML.

Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of
Fund Amount Total Commissions
Balanced $1,300 2.80%
Capital Accumulation 3,650 1.99
World 3,176 2.02

Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management,
Inc., which acts as a sub-advisor to two mutual funds included in the Fund
complex.
<PAGE>

Voting Instruction Form for the Special Meeting of Shareholders to be held on
September 16, 1997.

The Board of Directors is soliciting instructions for voting shares of the above
named Fund held by Principal Mutual Life Insurance Company at the Special
Meeting of the Principal Funds to be held on September 16, 1997 at 1:00 p.m.,
and at any adjournments thereof, on the issues listed on the reverse side of
this form. In the discretion of Principal Mutual Life Insurance Company, votes
will also be authorized for such other matters as may properly come before the
meeting.

Check the appropriate boxes on the reverse side of this form, 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 July __, 1997. If
you complete and sign the form, Principal Mutual Life Insurance Company will
vote as you have instructed. If you simply sign the form, it will be voted FOR
electing the Directors and FOR the other proposals. If no instructions are
received, votes will be cast in proportion to the instructions received from all
contracts investing in this division.

NOTE: PLEASE SIGN EXACTLY AS YOUR NAME
APPEARS. PLEASE MARK, SIGN, DATE AND
MAIL YOUR VOTING INSTRUCTION FORM IN
THE ENCLOSED POSTAGE-PAID ENVELOPE. If
shares are held jointly, both parties must 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)

_______________________________,1997
Date

<PAGE>

The Directors recommend that you vote FOR the following proposals. Please make
your choices below (for the Fund listed on the reverse side of this form) in
blue or black ink. Not all issues apply to each Fund. Example: [X] Sign the Form
on the reverse side and return as soon as possible in the enclosed envelope.
<TABLE>
<CAPTION>
1. Elect Board of Directors -- IF YOU WISH TO WITHHOLD AUTHORITY FOR ANY
PARTICULAR NOMINEE, MARK THE "FOR ALL EXCEPT" BOX AND STRIKE A LINE THROUGH THE
NOMINEE'S NAME. (All Funds)

<S> <C> <C> <C> <C> <C> <C> <C>
FOR WITHHOLD FOR ALL EXCEPT
J.D. Davis R.W. Ehrle P.A. Ferguson J.B. Griswell R.W. Gilbert
S.L. Jones R.E. Keller B.A. Lukavsky R.G. Peebler [__] [__] [__]
</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FOR AGAINST ABSTAIN
2. Ratify selection of Ernst & Young LLP as independent auditors. (All Funds) [__] [__] [__]

3. Approve change of Fund structure (All Funds) [__] [__] [__]

Amend fundamental investment restriction with regard to:
4. Purchasing shares of other investment companies (Only applies to [__] [__] [__]
Capital Accumulation, Government Securities & Money Market Funds)

5. Participation in joint trading account (Only applies to [__] [__] [__]
Capital Accumulation, Government Securities & Money Market Funds)

6. Purchasing illiquid securities and repurchase agreements [__] [__] [__]
(Only applies to Capital Accumulation Fund)

7. Purchasing other than government securities [__] [__] [__]
(Only applies to Government Securities Fund)

8. Diversification requirements (Only applies to Money Market Fund) [__] [__] [__]

9. Purchasing securities of single issuer (Only applies to Money Market Fund) [__] [__] [__]

10. Purchasing restricted securities (Only applies to Money Market Fund) [__] [__] [__]

</TABLE>
Proxy for the Special Meeting of Shareholders to be held on September 16, 1997.

Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.

This proxy is solicited on behalf of the Directors of the Fund. The undersigned
shareholder appoints Arthur S. Filean, Ernest H. Gillum, and Stephan L. Jones,
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 card, at
the meeting of shareholders of the above named Fund to be held on September 16,
1997 at 1:00 p.m., 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 the reverse side of this card, 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 July 30, 1997.
Shares will be voted as you instruct. If no direction is made, the proxy will be
voted FOR all proposals lised on the reverse side. 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. PLEASE MARK, SIGN, DATE
AND MAIL YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If shares are
held jointly, both parties must 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)

_______________________________,1997
Date
<PAGE>