PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC
485APOS, 1999-12-30
Previous: BROCKER TECHNOLOGY GROUP LTD, 20FR12G, 1999-12-30
Next: EDIETS COM INC, SB-2, 1999-12-30



                                                                    333-86149

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    --------

                       POST-EFFECTIVE AMENDMENT NO. 1 TO

                                    FORM N-1A

                             REGISTRATION STATEMENT

                                      under

                           THE SECURITIES ACT OF 1933

                                       and

                             REGISTRATION STATEMENT

                                      under

                       THE INVESTMENT COMPANY ACT OF 1940
                                    --------

                 PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
                Exact name of Registrant as specified in Charter)

                          The Principal Financial Group
                             Des Moines, Iowa 50392
                    (Address of principal executive offices)
                                    --------

                         Telephone Number (515) 248-3842
                                    --------

MICHAEL D. ROUGHTON                      Copy to:
The Principal Financial Group            JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa  50392                  Suite 405 West
                                         1025 Thomas Jefferson Street, N.W.
                                         Washington, DC  20007-0805

                     (Name and address of agent for service)
                                   ----------

It is  proposed that this filing will become effective (check appropriate box)

      _____   immediately upon filing pursuant to paragraph (b) of Rule 485
      _____   on (date) pursuant to paragraph (b) of Rule 485
      __X__   60 days after filing  pursuant to  paragraph  (a)(1) of Rule 485
      _____   on (date) pursuant  to  paragraph (a)(1) of Rule 485
      _____   75 days  after  filing pursuant  to  paragraph  (a)(2) of Rule 485
      _____   on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

      _____   This post-effective  amendment designates a new effective date for
              a previously filed post-effective amendment.
                                   ----------



                             PRINCIPAL MUTUAL FUNDS




DOMESTIC GROWTH-ORIENTED FUNDS

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.

INTERNATIONAL GROWTH-ORIENTED FUNDS

Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.

PARTNERS FUNDS

Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.

INCOME-ORIENTED FUNDS

Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.

MONEY MARKET FUND

Principal Cash Management Fund, Inc.


This  Prospectus  describes  mutual funds  organized by Principal Life Insurance
Company.  The Funds provide a choice of investment  objectives  through Domestic
Growth-Oriented  Funds,  International  Growth-Oriented  Funds,  Income-Oriented
Funds and a Money Market Fund.




                The   date   of   this    Prospectus    is  ____________.



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

                                                 TABLE OF CONTENTS

Fund Descriptions..............................................4
   Domestic Growth-Oriented Funds..............................6
     Balanced Fund.............................................6
     Blue Chip Fund............................................8
     Capital Value Fund.......................................10
     Growth Fund .............................................12
     LargeCap Stock Index Fund................................20
     MidCap Fund..............................................14
     Real Estate Fund.........................................16
     SmallCap Fund............................................18
     Utilities Fund...........................................20

   International Growth-Oriented Funds........................22
     International Emerging Markets Fund......................22
     International Fund.......................................24
     International SmallCap Fund..............................26

   Income Funds...............................................28
     Bond Fund................................................28
     Government Securities Income Fund........................30
     High Yield Fund..........................................32
     Limited Term Bond Fund...................................34
     Tax-Exempt Bond Fund.....................................36

   Money Market Fund..........................................38
     Cash Management Fund.....................................38

   Partners Funds.............................................28
     Partners Aggressive Growth Fund..........................16
     Partners LargeCap Growth Fund............................16
     Partners MidCap Growth Fund..............................16

The Costs of Investing.........................................7

Certain Investment Strategies and Related Risks...............13

Management, Organization and Capital Structure................15

Pricing of Fund Shares........................................16

Dividends and Distributions...................................16

How To Buy Shares.............................................17

How To Redeem (Sell) Shares...................................19

How To Exchange Shares Among Principal Mutual Funds...........21

General Information about a Fund Account......................22

Financial Highlights..........................................63

FUND DESCRIPTIONS.

The   Principal   Mutual  Funds  have  four   categories   of  funds:   domestic
growth-oriented  funds,  international  growth-oriented  funds,  income-oriented
funds and Partners Funds (sub-advised by investment professionals not affiliated
with the Principal  Financial  Group).  Principal  Management  Corporation,  the
Manager  of each of the  Funds,  selects  Sub-Advisors  based  on the  advisor's
investment  philosophy.  The Manager seeks to provide a full range of investment
approaches through the Principal Mutual Funds.

     Fund                                                   Sub-Advisor
     Balanced, Blue Chip, Capital Value,                    Invista Capital
     Government Securities Income, Growth,                  Management, LLC
     International, International Emerging Markets,         ("Invista")
     International SmallCap, LargeCap Stock Index,
     Limited Term Bond, MidCap, SmallCap and Utilities

     Partners Aggressive Growth                             Morgan Stanley
                                                            Asset Management
                                                           ("Morgan Stanley")

     Partners LargeCap Growth                               Duncan-Hurst
                                                            Capital Management
                                                            Inc.("Duncan-Hurst")

     Partners MidCap Growth                                 Turner Investment
                                                            Partners, Inc.
                                                            ("Turner")

Three  classes  of each  of  these  Funds  shares  are  available  through  this
Prospectus:
o    Class A shares are  generally  sold with a sales  charge that is a variable
     percentage based on the amount of the purchase;
o    Class B shares are not  subject to a sales  charge at the time of  purchase
     but are subject to a contingent  deferred  sales charge  ("CDSC") on shares
     redeemed within six years of purchase; and
o    Class C shares are sold  without a sales charge at the time of purchase but
     are subject to a CDSC on shares redeemed within one year of purchase.

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

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

Annual operating expenses
Annual operating expenses for each Fund are deducted from Fund assets (stated as
a  percentage  of Fund  assets)  and are shown as of the end of the most  recent
fiscal year  (estimates  of expenses are shown for the new Funds).  Examples are
provided  which are  intended  to help you compare  the cost of  investing  in a
particular  fund with the cost of investing in other mutual funds.  The examples
assume you invest  $10,000 in a Fund for the time periods  indicated.  The first
three lines of each example assume that you redeem all of your shares at the end
of those time  periods.  The second  three  assume  that you do not redeem  your
shares at the end of the periods.  The examples also assume that your investment
has a 5% return each year and that the Fund's operating expenses are the same as
the most recent fiscal year  expenses.  Although your actual costs may be higher
or lower, based on these assumptions, your costs would be as shown.

Day-to-day fund management
The investment  professionals who manage the assets of each Fund are listed with
each  Fund.  Backed by their  staff of  experienced  securities  analysts,  they
provide the Funds with professional investment management.



Fund Performance

As certain  Funds have not been offered  before,  no historical  information  is
available  for  those  Funds.  If  historical  data  is  available,  the  Fund's
description includes a set of tables and a bar chart.

The bar  chart is  included  to  provide  you with an  indication  of the  risks
involved when you invest. The chart shows changes in the Fund's performance from
year to year.  The  performance  reflected in the chart does not include a sales
charge,  which would make the  returns  less than those  shown.  Fund shares are
generally sold subject to a sales charge.

One of the tables compares the Fund's average annual returns with:

o    a broad-based  securities  market index (An index measures the market price
     of a specific group of securities in a particular market of securities in a
     market sector.  You cannot invest  directly in an index.  An index does not
     have an investment adviser and does not pay any commissions or expenses. If
     an index had expenses, its performance would be lower.); and

o    an  average  of  mutual  funds  with a  similar  investment  objective  and
     management style. The averages used are prepared by independent statistical
     services.

The other table provides the highest and lowest quarterly rate of return for the
Fund's Class A shares over a given period.

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

You may call Principal  Mutual Funds  (1-800-247-4123)  to get the current 7-day
yield for the Cash Management Fund.

NOTE:     Investments  in these  Funds  are not  deposits  of a bank and are not
          insured or guaranteed by the Federal Deposit Insurance  Corporation or
          any other government agency.

         No  salesperson,  dealer or any  other  person  is  authorized  to give
         information  or make  representations  about a Fund  other  than  those
         contained  in this  Prospectus.  Information  or  representations  from
         unauthorized  parties  may not be relied  upon as having been made by a
         Fund, the Manager or any Sub-Advisor.


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL BALANCED FUND, INC.
The Fund  seeks to  generate a total  investment  return  consisting  of current
income and capital  appreciation while assuming  reasonable risks in furtherance
of the investment objective.

Main Strategies
The Fund invests  primarily in common  stocks and corporate  bonds.  It may also
invest in other equity  securities,  government bonds and notes  (obligations of
the U.S.  government or its agencies) and cash.  Though the  percentages in each
category are not fixed,  common  stocks  generally  represent  40% to 70% of the
Fund's  assets.  The  remainder  of the Fund's  assets are invested in bonds and
cash.

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

The Fund generates  interest  income by investing in bonds and notes.  Bonds and
notes are also purchased for capital  appreciation  purposes when Invista thinks
that  declining  interest rates may increase  market value.  Deep discount bonds
(those  which sell at a  substantial  discount  from their face amount) are also
purchased to generate  capital  appreciation.  The Fund may invest in bonds with
speculative  characteristics  but does not intend to invest  more than 5% of its
assets in  securities  rated  below BBB by S&P or Baa by Moody's.  Fixed  income
securities  that are not  investment  grade are  commonly  referred  to as "junk
bonds" or high yield  securities.  These  securities  offer a higher  yield than
other, higher rated securities,  but they carry a greater degree of risk and are
considered speculative by the major credit rating agencies.

Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
reflect the  activities of individual  companies and general market and economic
conditions.  In the short  term,  stock  prices can  fluctuate  dramatically  in
response to these factors.

Bond values change daily. Their prices reflect changes in interest rates, market
conditions  and   announcements  of  other  economic,   political  or  financial
information.  When  interest  rates  fall,  the  price of a bond  rises and when
interest rates rise, the price declines.  As with all mutual funds, the value of
the Fund's  assets may rise or fall. If you sell your shares when their value is
less than the price you paid, you will lose money.


Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
but who are  uncomfortable  accepting the risks of investing  entirely in common
stocks.


The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -5.18
"1991"  31.72
"1992"  10.47
"1993"  9.01
"1994"  -3.38
"1995"  23.39
"1996"  13
"1997"  17.29
"1998"  11.2
"1999"

Calendar Years Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

        Highest      .% (quarter ended )
        Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>               <C>      <C>      <C>       <C>                                                <C>      <C>       <C>
     Class A      %        %        %         S&P 500  Stock  Index                              %        %         %
     Class B               *        --        Lehman  Brothers Government/Corporate  Bond Index
     Class C      **                          Lipper  Balanced Fund Average *

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

                                    Class A   Class B  Class C
     Management Fees................   %        %         %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %         %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                           1 Year  3 Years  5 Years 10 Years
  ----------------------------------------------------------
       Class A                 $        $       $         $
       Class B
       Class C
    You would pay the  following  expenses if you did not redeem your shares:
       Class A
       Class B
       Class C

                           Day-to-day Fund Management


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

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

Since April 1993          Co-Manager: Judith A. Vogel, CFA. Portfolio Manager of Invista Capital Management,
                          LLC since 1987.
</TABLE>



DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL BLUE CHIP FUND, INC.
The Fund seeks to achieve  growth of capital  and growth of income by  investing
primarily in common stocks of well capitalized, established companies.

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

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

Invista  may invest up to 35% of Fund  assets in equity  securities,  other than
common  stocks,  issued  by blue chip  companies  and in  equity  securities  of
companies that do not fit the blue chip definition.  It may also invest up to 5%
of Fund assets in securities of unseasoned  issuers,  which are more speculative
than blue chip company securities.  While small,  unseasoned companies may offer
greater   opportunities  for  capital  growth  than  larger,   more  established
companies, they also involve greater risks and should be considered speculative.

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

Main Risks
The value of the stocks owned by the Fund changes on a daily basis.  The current
price  reflects the  activities of individual  companies and general  market and
economic conditions.  In the short term, stock prices can fluctuate dramatically
in response to these factors. Because of these fluctuations,  as with all mutual
funds,  the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are  willing to accept the risks of  investing  in common  stocks but prefer
investing in larger, established companies.

The Fund's past  performance is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns
"1992"  6.09
"1993"  2.62
"1994"  3.36
"1995"  33.19
"1996"  16.78
"1997"  26.25
"1998"  16.55
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31,1 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>      <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %       %*             S&P 500 Stock Index                            %        %        %
     Class B             **       --             Lipper Large-Cap Value Fund Average
     Class C     ***

<FN>
     *    Period from March 1, 1991,  date Class A shares  first  offered to the
          public,  through  December 31, 1999.  ** Period from December 9, 1994,
          date Class B shares first offered to the public,  through December 31,
          1999. *** Period from June 30, 1999, date Class C shares first offered
          to the public, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*


                                  Class A   Class B Class C
   Management Fees**.............   %         %       %
   12b-1 Fees....................
   Other Expenses................

       Total Fund Operating Expenses %        %       %

   * Total Fund  Operating  Expenses  for Class A and Class B shares are for the
     period  ended  October 31,  1999.  Expenses  for Class C shares are for the
     period from June 30, 1999 through December 31, 1999

   **The  Manager  has  agreed to waive a portion  of its fee for the Fund.  The
     Manager  intends to continue  the waiver and, if  necessary,  pay  expenses
     normally  payable by the Fund through the period  ending  October 31, 2000.
     The waiver will  maintain a total level of operating  expenses a (expressed
     as percent of average net assets  attributable  to a Class on an annualized
     basis) not to exceed:  1.20% for Class A Shares;  1.95% for Class B Shares;
     and 1.95% for Class C shares. Theeffect of the waiver
      is to reduce the Fund's annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years
 ---------------------------------------------------------
     Class A                 $       $         $        $
     Class B
     Class C
  You would  pay the  following  expenses  if you did not  redeem  your shares:
     Class A
     Class B
     Class C



                           Day-to-day Fund Management

Since March 1991    Mark T. Williams, CFA. Portfolio Manager of Invista Capital
(Fund's inception)  Management, LLC  since 1991.

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL CAPITAL VALUE FUND, INC.
The  Fund  seeks  to  achieve  primarily  long-term  capital   appreciation  and
secondarily growth of investment income through the purchase primarily of common
stocks, but the Fund may invest in other securities.

Main Strategies
The Fund invests  primarily in common stocks. It may also invest in other equity
securities.  To achieve its  investment  objective,  the  Sub-Advisor,  Invista,
invests primarily in securities that have "value" characteristics.  This process
is known as "value investing." Value stocks tend to have higher yields and lower
price to earnings (P/E) ratios than other stocks.

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

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

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

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

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

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

Main Risks
The value of the stocks owned by the Fund changes on a daily basis.  The current
price  reflects the  activities of individual  companies and general  market and
economic conditions.  In the short term, stock prices can fluctuate dramatically
in response to these factors.  As with all mutual funds, the value of the Fund's
assets may rise or fall.  If you sell your  shares when their value is less than
the price you paid, you will lose money.

Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth,
and are  willing  to accept  the risks of  investing  in common  stocks but also
prefer investing in companies that appear to be considered  undervalued relative
to similar companies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -10.64
"1991"  37.21
"1992"  9.09
"1993"  7.56
"1994"  0.21
"1995"  31.9
"1996"  23.42
"1997"  28.69
"1998"  12.13
"1999"

  Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>     <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %        %             S&P 500 Stock Index                            %        %        %
     Class B              *       --             Lipper Large-Cap Value Fund Average
     Class C     **

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public,  through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses*

                                      Class A  Class B  Class C

   Management Fees...............      %        %        %
   12b-1 Fees....................
   Other Expenses................

    Total Fund Operating Expenses        %        %        %

     *    Total Fund  Operating  Expenses for Class A and Class B shares are for
          the year ended  October 31, 1999.  Expenses for Class C shares are for
          the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then  redeem all of your shares at the end of  thoseperiods.  The
Examples also assume that your  investment has a 5% returneach year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years
   Class A                 $       $    $             $
   Class B
   Class C
 You would pay the following expenses if you did not redeem your shares:
   Class A
   Class B
   Class C

                           Day-to-day Fund Management

Since November 1996   Catherine A. Zaharis, CFA. Portfolio Manager of Invista
                      Capital Management, LLC since 1987.


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL GROWTH FUND, INC.
The Fund seeks  growth of  capital  through  the  purchase  primarily  of common
stocks, but the Fund may invest in other securities.

Main Strategies
In seeking  the Fund's  objective  of capital  growth,  the Fund's  Sub-Advisor,
Invista,  uses an approach described as "fundamental  analysis." The basic steps
involved in this analysis are:

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

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

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

Main Risks
These  securities  present greater  opportunities  for capital growth because of
high  potential  earnings  growth,  but  may  also  involve  greater  risk  than
securities which do not have the same potential.  The companies may have limited
product  lines,  markets  or  financial  resources,  or may  depend on a limited
management  group.  Their  securities  may trade less  frequently and in limited
volume.  As a result,  these  securities  may change in value more than those of
larger, more established companies. As the value of the stocks owned by the Fund
changes,  the Fund share price  changes.  In the short term, the share price can
fluctuate dramatically. As with all mutual funds, the value of the Fund's assets
may rise or fall.  If you sell your  shares  when  their  value is less than the
price you paid, you will lose money.

Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth.
Additionally,  you must be willing to accept  the risks of  investing  in common
stocks that may have greater risks than stocks of companies with lower potential
for earnings growth.

The Fund's past  performance is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -1.41
"1991"  56.61
"1992"  10.16
"1993"  7.51
"1994"  3.21
"1995"  33.47
"1996"  12.23
"1997"  28.41
"1998"  20.37
"1999"

Calendar Years Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares form June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>     <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %        %             S&P 500 Stock Index                            %        %        %
     Class B              *       --             Lipper Multi-Cap Core Fund Average
     Class C    **

<FN>
          *    Period from  December 9, 1994,  date Class B shares first offered
               to the public, through December 31, 1999.
          **   Period from June 30, 1999,  date Class C shares first  offered to
               the public, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses*

                                    Class A  Class B  Class C
   Management Fees.............        %        %        %
   12b-1 Fees..................
   Other Expenses..............

   Total Fund Operating Expenses       %        %        %

   * Total Fund Operating Expenses for Class A and Class B shares are for
     the year ended October 31, 1999. Expenses for Class C shares are for
     the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual  costsmay be
higher or lower, based on these assumptions your cost would be:

                              1 Year  3 Years  5 Years 10 Years

          Class A              $567    $763    $  976   $1,586
          Class B               563     795     1,035    1,543
          Class C               270     517       892    1,944
     You would pay the following expenses if you did not redeem your shares:
          Class A               567     763       976    1,586
          Class B               149     462       797    1,543
          Class C               167    517        892    1,944

                           Day-to-day Fund Management


Since __________



DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL LARGECAP STOCK INDEX FUND, INC.
The LargeCap Stock Index Fund seeks long-term growth of capital.

Main Strategies
Under normal market  conditions,  the Fund invests at least 80% of its assets in
common  stocks of  companies  that  compose the  Standard & Poor's*  ("S&P") 500
Index.  The  Sub-advisor,   Invista,  will  attempt  to  mirror  the  investment
performance  of the index by allocating the Fund's assets in  approximately  the
same weightings as the S&P 500. Over the long-term,  Invista seeks a correlation
between performance of the Fund, before expenses, and that of the S&P 500. It is
unlikely that a perfect correlation of 100 will be achieved.

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

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

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

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

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

Investor Profile
The Stock Index 500 Fund is generally a suitable  investment  if you are seeking
long-term  growth and are  willing to accept  the risks of  investing  in common
stocks and prefer a passive rather than active management style.

*    Standard & Poor's  Corporation is not affiliated  with the Principal  Stock
     Index 500 Fund,  Inc.,  Invista  Capital  Management  LLC or Principal Life
     Insurance Company.


As the inception date of the Fund is ____________,  historical  performance data
is not available. Estimated annual Fund operating expenses are as follows:

                            Fund Operating Expenses*

                                   Class A  Class B  Class C
   Management Fees**...........        %        %        %
   12b-1 Fees..................
   Other Expenses..............

   Total Fund Operating Expenses       %        %        %

     *    Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  0.80% for Class A Shares; ____% for Class B Shares; and ____%
          for Class C shares.  The  effect of the waiver is to reduce the Fund's
          annual operating expenses.



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual  costsmay be
higher or lower, based on these assumptions your cost would be:

                             1 Year  3 Years  5 Years 10 Years
         Class A              $567    $763    $  976   $1,586
         Class B               563     795     1,035    1,543
         Class C               270     517       892    1,944
    You would pay the  following  expenses if you did not redeem your shares:
         Class A               567     763       976    1,586
         Class B               149     462       797    1,543
         Class C               167     517       892    1,944


                           Day-to-day Fund Management

Since _____________



DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL MIDCAP FUND, INC.
The Fund  seeks to  achieve  capital  appreciation  by  investing  primarily  in
securities of emerging and other growth-oriented companies.

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

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

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

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

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are willing to accept the potential for short-term fluctuations in the value
of your  investments.  It is designed for a portion of your  investments and not
designed for you if you are seeking income or conservation of capital.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -6.33
"1991"  52.83
"1992"  14.81
"1993"  12.29
"1994"  3.03
"1995"  34.2
"1996"  19.13
"1997"  22.94
"1998"  -0.23
"1999"

Calendar Years Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

        Highest      .% (quarter ended )
        Lowest       .% (quarter ended )

      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>     <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %        %             S&P 400 MidCap Index                           %        %        %
     Class B              *       --             S&P 500 Stock Index
     Class C    **                               Lipper Mid-Cap Core Fund Average

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*

                                     Class A   Class B  Class C
     Management Fees................   %        %          %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %          %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $       $         $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C

                           Day-to-day Fund Management


Since ___________

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL  REAL ESTATE  FUND,  INC.
The Fund  seeks to  generate  total  return  by  investing  primarily  in equity
securities of companies principally engaged in the real estate industry.

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

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

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

Main Risks
Securities of real estate  companies  are subject to securities  market risks as
well as risks  similar  to those  of  direct  ownership  of real  estate.  These
include:

     o    declines in the value of real estate
     o    risks related to general and local economic conditions
     o    dependency on management skills
     o    heavy cash flow dependency
     o    possible lack of available mortgage funds
     o    overbuilding
     o    extended vacancies in properties
     o    increases in property taxes and operating expenses
     o    changes in zoning laws
     o    expenses incurred in the cleanup of environmental  problems
     o    casualty or condemnation losses
     o    changes in interest rates

In addition to the risks listed above,  equity REITs are affected by the changes
in the value of the properties  owned by the trust.  Mortgage REITs are affected
by the quality of the credit extended. Both equity and mortgage REITs:

     o    are dependent upon management skills and may not be diversified;
     o    are subject to cash flow dependency and defaults by borrowers; and
     o    could fail to qualify for  tax-free  pass  through of income under the
          Code.

Because of these factors,  the value of the securities  held by the Fund, and in
turn the net asset value of the shares of the Fund change on a daily basis.  The
current share price reflects the activities of individual  companies and general
market and economic  conditions.  In the short term,  share prices can fluctuate
dramatically  in  response  to these  factors.  Because  of these  fluctuations,
principal  values and  investment  returns vary.  As with all mutual funds,  the
value of the Fund's  assets may rise or fall. If you sell your shares when their
value is less than the price you paid, you will lose money.

Investor Profile
The Real  Estate  Fund is  generally  a suitable  investment  if you are seeking
long-term  growth,  want to  invest  in  companies  engaged  in the real  estate
industry and are willing to accept fluctuations in the value of your investment.

The Fund's past  performance is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1998"  -13.62
"1999"

Calendar Year Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

       Highest      .% (quarter ended )
       Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>      <C>           <C>                                            <C>       <C>       <C>
     Class A     %        *                      Morgan Stanley REIT Index                       %         %        %
     Class B              *        --            Lipper Real Estate Fund Average
     Class C    **

<FN>
     *    Period  from  December  31,  1997,  date shares  first  offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*

                                   Class A  Class B  Class C
     Management Fees...............   %        %        %
     12b-1 Fees....................
     Other Expenses................

       Total Fund Operating Expenses   %        %       %

     *    Total Fund  Operating  Expenses for Class A and Class B shares are for
          the year ended  October 31, 1999.  Expenses for Class C shares are for
          the period from June 30, 1999 through December 31, 1999.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  1.90% for Class A Shares; 2.65% for Class B Shares; and 2.65%
          for Class C Shares.  The  effect of the waiver is to reduce the Fund's
          annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $        $        $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C


                           Day-to-day Fund Management

Since December 1997    Kelly D. Rush, CFA. Assistant Director of Commercial Real
(Fund's inception)     Estate, Principal Capital Management LLC since 1996.
                       Senior Administrator - Commercial Real Estate from
                       1993-1996.

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL SMALLCAP FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing  primarily in
equity   securities   of   companies   with    comparatively    smaller   market
capitalizations.

Main Strategies
The  Fund  invests  in  equity   securities   of  companies  in  the  U.S.  with
comparatively smaller market  capitalizations.  Market capitalization is defined
as total current  market value of a company's  outstanding  common stock.  Under
normal  market  conditions,  the Fund  invests  at least  65% of its  assets  in
securities of companies with market capitalizations of $1 billion or less.

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

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

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

Investor  Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are willing to accept the potential for volatile  fluctuations  in the value
of your  investment.  It is not  designed  for you if you are seeking  income or
conservation of capital.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1998"  -5.68
"1999"

Calendar Year Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

       Highest      .% (quarter ended )
       Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>                    <C>                                            <C>
     Class A     %        *                      S&P 500 Stock Index                            %
     Class B              *                      Lipper Small-Cap Core Fund Average
     Class C    **

<FN>
     *    Period  from  December  31,  1997,  date shares  first  offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

                            Fund Operating Expenses*

                                    Class A  Class B  Class C
     Management Fees................   %        %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %        %

     *    Total Fund  Operating  Expenses for Class A and Class B shares are for
          the year ended  October 31, 1999.  Expenses for Class C shares are for
          the period from June 30, 1999 through December 31, 1999.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  1.80% for Class A Shares; 2.55% for Class B Shares; and 2.55%
          for Class C Shares.  The  effect of the waiver is to reduce the Fund's
          annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $        $        $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C



                           Day-to-day Fund Management

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

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

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL UTILITIES FUND, INC.
The Fund seeks to provide high current income and long-term growth of income and
capital.  The Fund seeks to achieve its  objective  by  investing  primarily  in
equity  and  fixed  income  securities  of  companies  in the  public  utilities
industry.

Main Strategies
The Fund  invests in  securities  issued by  companies  in the public  utilities
industry. These companies include:
     o    companies engaged in the manufacture,  production, generation, sale or
          distribution of electric or gas energy or other types of energy, and
     o    companies   engaged  in   telecommunications,   including   telephone,
          telegraph,  satellite,  microwave and other  communications media (but
          not public broadcasting or cable television).
The  Sub-Advisor,  Invista,  considers  a company to be in the public  utilities
industry if, at the time of  investment,  at least 50% of the company's  assets,
revenues or profits are derived from one or more of those industries.

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

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

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

Generally,  the prices  charged by utilities are regulated with the intention of
protecting  the public  while  ensuring  that  utility  companies  earn a return
sufficient to attract capital to grow and provide appropriate services. However,
due to political and regulatory factors, rate changes ordinarily occur following
a change in  financing  costs.  This delay tends to  favorably  affect a utility
company's  earnings and dividends  when costs are  decreasing but also adversely
affects earnings and dividends when costs are rising. In addition,  the value of
the utility  company  bond prices  rise when  interest  rates fall and fall when
interest rates rise.

Certain states are adopting  deregulation plans. These plans generally allow for
the  utility  company to set the  amount of their  earnings  without  regulatory
approval.

The share price of the Fund may  fluctuate  more widely than the value of shares
of a fund  that  invests  in a broader  range of  industries.  Because  of these
fluctuations,  principal values and investment  returns vary. As with all mutual
funds,  the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.

Investor Profile
The  Fund is  generally  a  suitable  investment  if you are  seeking  quarterly
dividends to generate  income or to be reinvested for growth,  want to invest in
companies in the utilities  industry and are willing to accept  fluctuations  in
the value of your investment.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns


"1993"  8.42
"1994"  -11.09
"1995"  33.87
"1996"  4.56
"1997"  29.58
"1998"  22.5
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

       Highest      .% (quarter ended )
       Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                          Past One Past Five Past Ten
                Year     Years    Years                                                               Year     Years    Years

<S>           <C>        <C>      <C>            <C>                                                   <C>       <C>      <C>
     Class A     %        %       %*             S&P 500 Stock Index                                   %         %        %
     Class B             **       --             Dow Jones Utilities Index with Income Fund Average                       --
     Class C   ***                               Lipper Utilities Fund Average

<FN>
     *    Period from  December 16, 1992,  date Class A shares first  offered to
          the public, through December 31, 1999.
     **   Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     ***  Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*

                                    Class A  Class B  Class C
     Management Fees................   %        %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %        %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $       $         $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C

                           Day-to-day Fund Management

Since April 1993      Catherine A. Zaharis, CFA. Portfolio Manager of Invista
(Fund's inception)    Capital Management, LLC since 1987.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing  primarily in
equity securities of issuers in emerging market countries.

Main Strategies
The Fund  seeks to  achieve  its  objective  by  investing  in common  stocks of
companies in emerging market countries. For this Fund, the term "emerging market
country" means any country which is considered to be an emerging  country by the
international   financial  community   (including  the  International  Bank  for
Reconstruction   and  Development  (also  known  as  the  World  Bank)  and  the
International  Financial  Corporation).  These countries generally include every
nation in the world except the United  States,  Canada,  Japan,  Australia,  New
Zealand and most nations located in Western  Europe.  Investing in many emerging
market  countries is not feasible or may involve  unacceptable  political  risk.
Invista,  the  Sub-Advisor,  focuses on those emerging market  countries that it
believes have strongly developing  economies and markets which are becoming more
sophisticated.

Under  normal  conditions,  at least 65% of the Fund's  assets are  invested  in
emerging market country equity securities. The Fund invests in securities of:

     o    companies with their principal  place of business or principal  office
          in emerging market countries;
     o    companies  for which the  principal  securities  trading  market is an
          emerging market country; or
     o    companies,  regardless of where its securities are traded, that derive
          50% or more of their  total  revenue  from  either  goods or  services
          produced in emerging market countries or sales made in emerging market
          countries.

Main Risks
Investments in emerging market countries involve special risks. Certain emerging
market countries have historically experienced,  and may continue to experience,
certain  economic  problems.  These may include:  high rates of inflation,  high
interest rates,  exchange rate  fluctuations,  large amounts of debt, balance of
payments  and trade  difficulties,  and  extreme  poverty and  unemployment.  In
addition,  there are risks involved with any  investment in foreign  securities.
Foreign  stocks  carry  risks  that are not  generally  found in  stocks of U.S.
companies.  These include the risk that a foreign security could lose value as a
result of political,  financial  and economic  events in foreign  countries.  In
addition,  foreign securities may be subject to securities  regulators with less
stringent  accounting  and  disclosure  standards  than  are  required  of  U.S.
companies.

Under  unusual  market or economic  conditions,  the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued  by  domestic  or  foreign  corporations,   governments  or  governmental
agencies,  instrumentalities  or political  subdivisions.  The securities may be
denominated in U.S. dollars or other currencies.

Because the values of the Fund's assets are likely to rise or fall dramatically,
if you sell your shares  when their  value is less than the price you paid,  you
will lose money.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
who want to invest a portion  of their  assets in  securities  of  companies  in
emerging market countries. This Fund is not an appropriate investment if you are
seeking either  preservation of capital or high current income. You must be able
to  assume  the  increased  risks  of  higher  price   volatility  and  currency
fluctuations  associated with investments in international stocks which trade in
non-U.S. currencies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1998"  -17.42
"1999"

Calendar Year Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>      <C>            <C>                                            <C>       <C>       <C>
     Class A     %       %*       --             Morgan Stanley Capital International EMF
     Class B              *       --               (Emerging  Markets  Free)  Index              %         %       --
     Class C     **                              Lipper Emerging Markets Fund Average                              --

<FN>
     *    Period from August 29, 1997,  date shares first offered to the public,
          through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

                            Fund Operating Expenses*

                                     Class A   Class B  Class C
     Management Fees................   %        %          %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %          %

     *    Total Fund  Operating  Expenses for Class A and Class B shares are for
          the year ended  October 31, 1999.  Expenses for Class C shares are for
          the period from June 30, 1999 through December 31, 1999.

     **   The Manager has agreed to waive a portion of its fee for the Fund. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2000.  The waiver will  maintain a total level of  operating  expenses
          (expressed as a percent of average net assets  attributable to a Class
          on an annualized basis) not to exceed: 2.50% for Class A Shares; 3.25%
          for Class B Shares;  and 3.25% for Class C Shares.  The  effect of the
          waiver is to reduce the Fund's annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $       $         $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C



                           Day-to-day Fund Management

Since May 1997        Kurtis D. Spieler, CFA. Portfolio Manager of Invista
(Fund's inception)    Capital Management, LLC since 1995.Portfolio Strategist,
                      1991-1995.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL FUND, INC.
The Fund seeks long-term growth of capital by investing in a portfolio of equity
securities of companies domiciled in any of the nations of the world.

Main Strategies
The Fund invests in common stocks of companies  established  outside of the U.S.
The Fund has no limitation on the  percentage of assets that are invested in any
one country or  denominated  in any one  currency.  However  under normal market
conditions,  the Fund  intends  to have at least 65% of its assets  invested  in
companies in at least three different  countries.  One of those countries may be
the U.S.  though  currently  the Fund  does  not  intend  to  invest  in  equity
securities of U.S. companies.

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

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

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

Under  unusual  market or economic  conditions,  the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued  by  domestic  or  foreign  corporations,   governments  or  governmental
agencies,  instrumentalities  or political  subdivisions.  The securities may be
denominated in U.S. dollars or other currencies.

As with all mutual  funds,  the value of the Fund's  assets may rise or fall. If
you sell your shares when their value is less than the price you paid,  you will
lose money.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and want to  invest  in  non-U.S.  companies.  This  Fund is not an  appropriate
investment  if you are seeking  either  preservation  of capital or high current
income.  You  must be  able to  assume  the  increased  risks  of  higher  price
volatility   and  currency   fluctuations   associated   with   investments   in
international stocks which trade in non-U.S. currencies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -9.51
"1991"  15.25
"1992"  0.81
"1993"  46.34
"1994"  -5.26
"1995"  11.56
"1996"  23.76
"1997"  12.22
"1998"  8.48
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>      <C>             <C>                                          <C>      <C>        <C>
     Class A     %        %        %               Morgan Stanley Capital International EAFE
     Class B              *        --                (Europe,  Australia  and Far East) Index    %         %        %
     Class C     **                --              Lipper  International  Fund  Average

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

                            Fund Operating Expenses*

                                     Class A Class B  Class C
     Management Fees................   %        %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %        %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $       $         $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C

                           Day-to-day Fund Management

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


INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing  primarily in
equity  securities of non-United  States  companies with  comparatively  smaller
market capitalizations.

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

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

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

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

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

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and want to invest a portion of your assets in smaller, non-U.S. companies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1998"  14.4
"1999"

Calendar Year Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>      <C>            <C>                                            <C>       <C>     <C>
     Class A     %       %*       --             Morgan Stanley Capital International EAFE
     Class B              *       --               (Europe,  Australia  and Far  East) Index     %         %      --
     Class C     **                              Lipper  International  Small-Cap  Fund  Average                  --

<FN>
     *    Period from August 29, 1997,  date shares first offered to the public,
          through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*

                                    Class A Class B  Class C
     Management Fees................   %        %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %        %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years

     Class A                 $       $         $        $
     Class B
     Class C
  You would  pay the  following  expenses  if you did not  redeem  your shares:
     Class A
     Class B
     Class C

                           Day-to-day Fund Management

Since May 1997      Darren K. Sleister, CFA. Portfolio Manager of Invista
(Fund's inception)  Capital Management, LLC since 1995. Portfolio Strategist,
                    1993-1995.



PARTNERS FUND

PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
The Fund seeks to provide long-term capital appreciation.

Main Strategies
The Fund seeks to maximize long-term capital appreciation by investing primarily
in the equity  securities of U.S. and, to a limited  extent,  foreign  companies
that exhibit strong or accelerating  earnings  growth.  The universe of eligible
companies generally includes those with market  capitalizations of $1 billion or
more. The Sub-Advisor,  Morgan Stanley, emphasizes individual security selection
and  may  focus  the  Fund's  holdings  within  the  limits  permissible  for  a
diversified fund.

Morgan Stanley  follows a flexible  investment  program in looking for companies
with above average  capital  appreciation  potential.  Morgan Stanley focuses on
companies  with  consistent or rising  earnings  growth  records and  compelling
business  strategies.  Morgan Stanley continually and rigorously studies company
developments,  including  business  strategy,  management  focus  and  financial
results to identify  companies with earnings  growth and business  momentum.  In
addition,  Morgan Stanley closely  monitors  analysts'  expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations.  Valuation is of secondary importance and is viewed in the context
of prospects  for  sustainable  earnings  growth and the  potential for positive
earnings surprises in relation to consensus expectations.

The Fund has a long-term investment approach.  However, Morgan Stanley considers
selling  securities of issuers that no longer meet its  criteria.  To the extent
that the Fund engages in short-term trading,  it may have increased  transaction
costs.

Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
can fluctuate  dramatically  both in the long-term and  short-term.  The current
price  reflects the  activities of individual  companies and general  market and
economic  conditions.  Prices of equity securities tend to be more volatile than
prices of fixed-income securities. The prices of equity securities rise and fall
in response to a number of different  factors.  In particular,  prices of equity
securities  respond to events that affect entire financial markets or industries
(for example changes in inflation or consumer  demand) and to events that affect
particular  issuers  (for  example  news  about the  success or failure of a new
product).

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

At times, the Fund's market sector (mid- to large-capitalization growth-oriented
equity  securities)  may  underperform  relative to other sectors.  The Fund may
purchase  stocks of companies that may have greater risks than other stocks with
lower potential for earnings growth.

As with all mutual funds,  as the value of the Fund's assets rise and fall,  the
Fund's share price changes. If you redeem (sell) your shares when their value is
less than the price you paid, you will lose money.

Investor Profile
The Fund is  generally  a suitable  investment  if you are willing to accept the
risks and uncertainties of investing in equity securities in the hope of earning
superior returns.

As the inception  date of the Fund is November 1, 1999,  historical  performance
data is not available. Estimated annual Fund operating expenses are as follows:

      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's cumulative returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One                                                                       Past One Past Five Past Ten
                Year                                                                            Year     Years    Years

<S>             <C>                              <C>                                            <C>      <C>      <C>
     Class A     %                               S&P 500 Stock Index                            %        %        %
     Class B                                     Lipper Multi-Cap Core Fund Average
     Class C    **

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*

                                     Class A   Class B  Class C
     Management Fees**..............   %         %         %
     12b-1 Fees.....................
     Other Expenses.................


       Total Fund Operating Expenses   %         %         %

     *    Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  1.60% for Class A Shares; 2.35% for Class B Shares; and 2.35%
          for Class C Shares.  The  effect of the waiver is to reduce the Fund's
          annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years
  ---------------------------------------------------------
      Class A                 $        $     N/A       N/A
      Class B                                N/A       N/A
      Class C                                N/A       N/A
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A                                N/A       N/A
      Class B                                N/A       N/A
      Class C                                N/A       N/A



                           Day-to-day Fund Management

Since November 1999
(Fund's  inception)
          Co-Manager,  Philip W. Friedman, Managing Director of Morgan Stanley &
          Co.  Incorporated and Morgan Stanley.  Prior to joining Morgan Stanley
          in 1997, he was the Director of Equity Research,  Morgan Stanley & Co.
          Incorporated  (1995-1997).  Prior  thereto,  he was a member of Morgan
          Stanley & Co. Incorporated's Equity Research team (1990-1995).

          Co-Manager,  William S. Auslander,  Portfolio Manager and Principal of
          Morgan Stanley & Co. Incorporated and Morgan Stanley. Prior to joining
          Morgan  Stanley  in  1995,  he was an  equity  analyst  at Icahn & Co.
          (1986-1995).

          Co-Manager,  Margaret K. Johnson,  Portfolio  Manager and Principal of
          Morgan  Stanley & Co.  Incorporated  and Morgan  Stanley.  Ms. Johnson
          joined Morgan Stanley in 1984. PARTNERS FUND

PRINCIPAL PARTNERS LARGECAP GROWTH FUND, INC.
The Fund seeks  long-term  growth of capital by  investing  primarily  in common
stocks of larger capitalization domestic companies.

Main Strategies
The  Fund is a  non-diversified  fund  that  invests  in  equity  securities  of
companies in the U.S. with comparatively larger market  capitalizations.  Market
capitalization  is  defined  as  total  current  market  value  of  a  company's
outstanding common stock.  Under normal market  conditions,  the Fund invests at
least 75% of its total assets in domestic companies with market  capitalizations
in excess of $10  billion.  In  addition,  the Fund may  invest up to 25% of its
assets in securities of foreign issuers.

In selecting securities for investment, the Sub-Advisor,  Duncan-Hurst, looks at
stocks it believes  have  prospects  for  above-average  growth over an extended
period of time.  Duncan-Hurst  seeks to  identify  companies  with  accelerating
earnings growth and positive company  fundamentals.  While economic  forecasting
and industry sector analysis play a part in its research effort,  Duncan-Hurst's
stock selection process begins with individual  company analysis.  This is often
referred to as a bottom-up approach to investing. From a group of companies that
meet Duncan-Hurst's standards, it selects the securities of those companies that
it believes will have earnings growth at an  above-average  rate. In making this
determination,  Duncan-Hurst  considers certain  characteristics of a particular
company  including new product  development,  management  change and competitive
market dynamics.

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

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

The Fund  anticipates  that its portfolio  turnover rate will  typically  exceed
150%.  Turnover rates in excess of 100% generally  result in higher  transaction
costs and a possible increase in short-term capital gains (or losses).

The Fund is a non-diversified  company, as defined in the Investment Company Act
of 1940,  as amended  (the "1940  Act"),  which  means  that a  relatively  high
percentage of assets of the Fund may be invested in the obligations of a limited
number of issuers.  The value of the shares of the Fund may be more  susceptible
to a single  economic,  political or regulatory  occurrence than the shares of a
diversified investment company would be.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are willing to accept the potential for volatile  fluctuations  in the value
of your investment.  This Fund is designed as a long-term investment with growth
potential  for  diversification  of  your  investment   portfolio.   It  is  not
appropriate if you are seeking income or conservation of capital.

As  the  inception  date  of  the  Fund  is   ____________________,   historical
performance data is not available.  Estimated annual Fund operating expenses are
as follows:

                            Fund Operating Expenses*

                                     Class A   Class B  Class C
     Management Fees**..............   %         %         %
     12b-1 Fees.....................
     Other Expenses.................


       Total Fund Operating Expenses   %         %         %

     *    Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  ____% for Class A Shares; ____% for Class B Shares; and ____%
          for Class C Shares.  The  effect of the waiver is to reduce the Fund's
          annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $        $     N/A       N/A
      Class B                                N/A       N/A
      Class C                                N/A       N/A
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A                                N/A       N/A
      Class B                                N/A       N/A
      Class C                                N/A       N/A



                           Day-to-day Fund Management

     Since _____
     (Fund's inception)

PARTNERS FUND

PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC.
The Fund seeks to provide  long-term  capital  growth by investing  primarily in
medium capitalization U.S. companies with strong earnings growth potential.

Main Strategies
The Fund invests  primarily in common stocks and other equity securities of U.S.
companies.  Under normal market conditions, the Fund invests at least 65% of its
assets in  companies  with  market  capitalizations  in the $1  billion  and $10
billion range.

The Fund invests in securities of companies that are diversified across economic
sectors. It attempts to maintain sector concentrations that approximate those of
its current  benchmark,  the Russell MidCap Index. The Fund is not an index fund
and does not limit its  investment  to the  securities of issuers in the Russell
MidCap Index.

The  Sub-Advisor,  Turner,  selects stocks that it believes have strong earnings
growth potential. Turner invests in companies with strong earnings dynamics, and
sells those with deteriorating earnings prospects. Turner believes forecasts for
market timing and sector rotation are unreliable,  and introduce an unacceptable
level of risk.  As a result,  under normal market  conditions  the Fund is fully
invested.

Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax.

Main Risks
Because it  purchases  equity  securities,  the Fund is subject to the risk that
stock  prices  will fall over  short or  extended  periods  of time.  Individual
companies may report poor results or be negatively  affected by industry  and/or
economic  trends  and  developments.  The  price of  securities  issued  by such
companies may suffer a decline in response.  These  factors  contribute to price
volatility, which is the principal risk of investing in the Fund.

In addition,  the Fund is subject to the risk that its principal market segment,
medium  capitalization  growth stocks, may underperform compared to other market
segments or to the equity markets as a whole.  Because of this  volatility,  the
value of the Fund's  equity  securities  may  fluctuate on a daily basis.  These
fluctuations  may reduce your principal  investment and lead to varying returns.
If you sell your shares  when their  value is less than the price you paid,  you
will lose money.

The medium  capitalization  companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established  companies.
In  particular,  these  mid-size  companies  may pose greater risk due to narrow
product  lines,  limited  financial  resources,  less depth in  management  or a
limited trading market for their securities.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
of capital and are willing to accept the potential for  short-term  fluctuations
in the  value of your  investment.  This  Fund is not  designed  for  income  or
conservation of capital.

As  the  inception  date  of  the  Fund  is   ____________________,   historical
performance data is not available.  Estimated annual Fund operating expenses are
as follows:

                            Fund Operating Expenses*

                                     Class A   Class B  Class C
     Management Fees**..............   %         %         %
     12b-1 Fees.....................
     Other Expenses.................


       Total Fund Operating Expenses   %         %         %

     *    Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  ____% for Class A Shares; ____% for Class B Shares; and ____%
          for Class C Shares.  The  effect of the waiver is to reduce the Fund's
          annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $        $     N/A       N/A
       Class B                                N/A       N/A
      Class C                                N/A       N/A
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A                                N/A       N/A
      Class B                                N/A       N/A
      Class C                                N/A       N/A



                           Day-to-day Fund Management

     Since _____
     (Fund's inception)


INCOME-ORIENTED FUND

PRINCIPAL BOND FUND, INC.
The Fund  seeks to  provide  as high a level of  income  as is  consistent  with
preservation of capital and prudent investment risk.

Main Strategies
The Fund invests in fixed-income  securities.  Generally,  the Fund invests on a
long-term basis but may make short-term investments. Longer maturities typically
provide  better yields but expose the Fund to the  possibility of changes in the
values of its  securities  as interest  rates change.  Generally,  when interest
rates fall, the price per share rises,  and when rates rise, the price per share
declines.

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

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

During the fiscal year ended  October  31,  1999,  the  average  ratings of this
Fund's  assets  based on market  value at each  month-end,  were as follows (all
ratings are by Moody's):
                          Aaa                    0.05%
                          Aa                     2.90%
                          A                     21.87%
                          Baa                   66.11%
                          Ba                     9.06%

Under unusual market or economic  conditions,  the Fund may invest up to 100% of
its assets in cash and cash equivalents.

Main Risks
When  interest  rates fall,  the price of a bond rises and when  interest  rates
rise, the price declines. In addition,  the value of securities held by the Fund
may be affected by factors  such as credit  rating of the entity that issued the
bond and  effective  maturities of the bond.  Lower quality and longer  maturity
bonds will be subject to greater credit risk and price  fluctuations than higher
quality and shorter maturity bonds.

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income or to be reinvested in additional  Fund shares to help achieve
modest  growth  objectives  without  accepting  the risks of investing in common
stocks.  As with all mutual  funds,  if you sell your shares when their value is
less than the price you paid, you will lose money.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  4.64
"1991"  17.45
"1992"  8.61
"1993"  12.77
"1994"  -4.35
"1995"  22.28
"1996"  2.27
"1997"  10.96
"1998"  7.14
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>     <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %        %             Lehman Brothers BAA Corporate Index            %        %        %
     Class B              *       --             Lipper Corporate Debt BBB Rated Fund Average
     Class C    **                --

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

                            Fund Operating Expenses*

                                    Class A  Class B  Class C
     Management Fees................   %        %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %        %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $       $         $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C

                           Day-to-day Fund Management

Since November 1996   Scott A. Bennett, CFA. Assistant Director - Securities
                      Investment of Principal Capital Management, LLC
                      since 1996. Investment Manager of Investment Securities
                      from 1991-1996.



INCOME-ORIENTED FUND

PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.
The Fund seeks a high level of current income, liquidity and safety of principal
by purchasing  obligations  issued or guaranteed by the United States Government
or its  agencies,  with emphasis on Government  National  Mortgage  Associations
Certificates.  The  guarantees by the United States  Government  extends only to
principal and interest. There are certain risks unique to GNMA Certificates.

Main Strategies
The Fund invests in U.S. Government securities, which include obligations issued
or guaranteed by the U.S. Government or its agencies or  instrumentalities.  The
Fund may invest in securities supported by:
     o    full faith and credit of the U.S. Government (e.g. GNMA certificates);
          or
     o    credit of the  instrumentality  (e.g. bonds issued by the Federal Home
          Loan  Bank).
In addition, the Fund may invest in money market instruments.

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

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

Main Risks
Although  some of the  securities  the Fund  purchases  are  backed  by the U.S.
government  and its  agencies,  shares  of the  Fund  are not  guaranteed.  When
interest rates fall, the value of the Fund's shares rises,  and when rates rise,
the value  declines.  Because of the fluctuation in values of the Fund's shares,
if you sell your shares  when their  value is less than the price you paid,  you
will lose money

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

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

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

Investor Profile
The Fund is generally a suitable investment if you who want monthly dividends to
provide  income or to be reinvested in additional  Fund shares to produce growth
and  prefer to have the  repayment  of  principal  and  interest  on most of the
securities  in which the Fund invests to be back by the U.S.  Government  or its
agencies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  9.52
"1991"  16.83
"1992"  6.13
"1993"  9.16
"1994"  -4.89
"1995"  19.19
"1996"  3.85
"1997"  9.69
"1998"  7.19
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>     <C>            <C>                                            <C>     <C>       <C>
     Class A     %        %        %             Lehman Brothers GNMA Index                     %        %        %
     Class B              *       --             Lipper GNMA Fund Average
     Class C    **

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

                            Fund Operating Expenses*

                                    Class A Class B  Class C
     Management Fees................   %        %       %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %       %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years

     Class A                 $       $         $        $
     Class B
     Class C
  You would  pay the  following  expenses  if you did not  redeem  your shares:
     Class A
     Class B
     Class C

                           Day-to-day Fund Management

Since May 1985       Martin J. Schafer, Portfolio Manager of Invista Capital
(Fund's inception)   Management, LLC  since 1992.



INCOME-ORIENTED FUND

PRINCIPAL HIGH YIELD FUND, INC.
The Fund seeks high current income primarily by purchasing high yielding,  lower
or non-rated  fixed income  securities  which are believed not to involve  undue
risk to income  or  principal.  Capital  growth is a  secondary  objective  when
consistent with the objective of high current income.

Main Strategies
The Fund invests in high yield, lower or unrated fixed income securities.  Fixed
income  securities  that  are  commonly  known  as "junk  bonds"  or high  yield
securities.  These  securities  offer a higher  yield than other,  higher  rated
securities  but they  carry a greater  degree of risk and are  considered  to be
speculative  with  respect to the  issuer's  ability to pay  interest  and repay
principal.

The Fund invests its assets in  securities  rated Ba1 or lower by Moody's or BB+
or lower by S&P.  The Fund may also  invest  in  unrated  securities  which  the
Manager  believes  to be of  comparable  quality.  The Fund  does not  invest in
securities rated below Caa (Moody's) or below CCC (S&P) at the time of purchase.
The SAI contains descriptions of the securities rating categories.

During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets,  based on market value at each  month-end,  were as follows (all ratings
are by Moody's):
     0.74% in securities rated A       46.72% in securities rated Ba
     2.64% in securities rated C        2.62% in securities rated Baa
    52.59% in securities rated B        0.10% in securities rated D
The  above  percentage  for  securities  rated  Ba  includes  2.89%  of  unrated
securities and securities  rated B includes  2.52% of unrated  securities  which
have been determined by the Manager to be of comparable quality.

Main Risks

Investors  assume special risks when  investing in the Fund.  Compared to higher
rated securities, lower rated securities may:
     o    have a more  volatile  market  value,  generally  reflecting  specific
          events affecting the issuer;
     o    be subject to greater  risk of loss of income and  principal  (issuers
          are generally not as financially secure);
     o    have a lower volume of trading,  making it more  difficult to value or
          sell the security; and
     o    be more susceptible to a change in value or liquidity based on adverse
          publicity  and  investor  perception,  whether or not based on factual
          analysis.

The market for higher-yielding, lower-rated securities has not been tested by an
economic  recession.  An economic  downturn may severely  disrupt the market for
these  securities.  This could cause financial  stress to the issuer  negatively
affecting the issuer's  ability to pay  principal  and  interest.  This may also
negatively affect the value of the Fund's securities.  In addition, if an issuer
defaults  the Fund may  have  additional  expenses  if it tries to  recover  the
amounts due it.

Some securities the Fund buys have call provisions.  A call provision allows the
issuer of the  security  to redeem it before  its  maturity  date.  If a bond is
called in a declining  interest  rate market,  the Fund would have to replace it
with  a  lower  yielding  security.  This  results  in a  decreased  return  for
investors.  In addition,  in a rising  interest rate market,  a higher  yielding
security's  value  decreases.  This is  reflected in a lower share price for the
Fund.

The Fund tries to minimize the risks of investing in lower rated  securities  by
diversification,  investment  analysis and attention to current  developments in
interest rates and economics  conditions.  Although the Fund's Manager considers
securities  ratings  when  making  investment  decisions,  it  performs  its own
investment  analysis.  This  analysis  includes  traditional  security  analysis
considerations such as:
     o    experience and managerial strength
     o    changing financial condition
     o    borrowing requirements or debt maturity schedules
     o    responsiveness to changes in business conditions
     o    relative value based on anticipated cash flow
     o    earnings prospects

The  Manager  continuously  monitors  the  issuers of the Fund's  securities  to
determine  if the  issuers  will have  sufficient  cash flow and profits to meet
required  principal  and interest  payments.  It also  monitors each security to
assure the security's  liquidity so the Fund can meet requests for sales of Fund
shares.

For defensive purposes, the Fund may invest in other securities.  During periods
of adverse market  conditions,  the Fund may invest in all types of money market
instruments,  higher  rated fixed-income  securities  or any other fixed-income
securities  consistent  with the  temporary  defensive  strategy.  The  yield to
maturity on these  securities  is generally  lower than the yield to maturity on
lower rated fixed-income  securities.

Investor  Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to provide income or to be reinvested in Fund shares for growth.  However, it is
suitable only for that portion of your  investments for which you are willing to
accept  potentially  greater risk. You should carefully consider your ability to
assume the risks of this Fund  before  making an  investment  and be prepared to
maintain  your   investment  in  the  Fund  during  periods  of  adverse  market
conditions.  This Fund  should  not be relied  on to meet  short-term  financial
needs.  As with all mutual  funds,  the value of the  Fund's  assets may rise or
fall.  If you sell your shares when their value is less than the price you paid,
you will lose money.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annaul Total Returns

"1990"  -11.66
"1991"  28.74
"1992"  13.09
"1993"  12.1
"1994"  -0.65
"1995"  15.61
"1996"  12.54
"1997"  9.68
"1998"  -1.28
"1999"

Calendar Years Ended December 31




The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>     <C>          <C>                                               <C>      <C>      <C>
     Class A     %        %        %           Lehman Brothers High Yield Composite Bond Index   %        %        %
     Class B              *       --           Lipper High Current Yield Fund Average
     Class C    **

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

                            Fund Operating Expenses*

                                    Class A Class B  Class C
     Management Fees................   %        %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %        %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years
  --------------------------------------------------------
     Class A                 $       $         $        $
     Class B
     Class C
  You would  pay the  following  expenses  if you did not  redeem  your shares:
     Class A
     Class B
     Class C

                           Day-to-day Fund Management

Since April 1998   Mark P. Denkinger, CFA. Assistant Director - Securities
                   Investment of Principal Capital Management, LLC
                   since 1998. Investment Manager from 1993-1998.


INCOME-ORIENTED FUND

PRINCIPAL LIMITED TERM BOND FUND, INC.
The Fund seeks a high level of current income  consistent with a relatively high
level of principal  stability by investing in a portfolio of  securities  with a
dollar weighted average matruity of five years or less.

Main Strategies
The Fund  invests  in high  grade,  short-term  debt  securities.  Under  normal
circumstances, it invests at least 80% of its assets in:
     o    securities issued or guaranteed by the U.S. Government or its agencies
          or instrumentalities;
     o    debt  securities of U.S.  issuers rated in the three highest grades by
          S&P or Moody's; or
     o    if  unrated,   are  of  comparable  quality  in  the  opinion  of  the
          Sub-Advisor, Invista.

The rest of the Fund's assets are invested in  securities in the fourth  highest
rating category or their  equivalent.  Securities in the fourth highest category
are "investment  grade." While they are considered to have adequate  capacity to
pay  interest and repay  principal,  they do have  speculative  characteristics.
Changes in economic and other  conditions  are more likely to impact the ability
of the issuer to make  principal  and  interest  payments  than is the case with
higher rated securities.

Main Risks
The Fund may invest in corporate debt securities and mortgage-backed securities.
When  interest  rates fall,  the price of a bond rises and when  interest  rates
rise,  the  price  declines.  In  addition,  the  value  of the  corporate  debt
securities  held by the Fund may be affected by factors such as credit rating of
the entity  that issued the bond and  effective  maturities  of the bond.  Lower
quality  and longer  maturity  bonds will be subject to greater  credit risk and
price fluctuations than higher quality and short maturity bonds.

Mortgage backed  securities are subject to prepayment  risk. When interest rates
decline,  significant unscheduled prepayments may result. These prepayments must
then be  reinvested at lower rates.  Prepayments  may also shorten the effective
maturities of these securities,  especially during periods of declining interest
rates.  On the other hand,  during periods of rising interest rates, a reduction
in  prepayments  may  increase the  effective  maturities  of these  securities,
subjecting  them to the risk of decline in market  value in  response  to rising
interest. This may increase the volatility of the Fund.

Under  normal  circumstances,  the  Fund  maintains  a  dollar-weighted  average
maturity of not more than five years. In determining the average maturity of the
Fund's  assets,  the maturity date of callable or prepayable  securities  may be
adjusted to reflect Invista's  judgment regarding the likelihood of the security
being called or prepaid.

Under unusual market or economic  conditions,  for temporary  defensive purposes
the Fund may invest up to 100% of its assets in the cash or cash equivalents.

As with all mutual  funds,  the value of the Fund's  assets may rise or fall. If
you sell your shares when their value is less than the price you paid,  you will
lose money.


Investor Profile
The Fund is generally a suitable investment if you who want monthly dividends to
generate income or to reinvest for modest growth.  You must be willing to accept
some  volatility  in the  value  of your  investment  but do not  want  dramatic
volatility.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1997"  6.63
"1998"  6.7
"1999"

Calendar Years Ended December


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                            Past One Past Five Past Ten
                Year     Years    Years                                                                 Year     Years    Years

<S>             <C>      <C>       <C>       <C>                                                          <C>     <C>       <C>
     Class A     %       %*        --        Lehman Brothers Intermediate Government/Corporate Index      %        %        --
     Class B              *        --        Lipper Short-Intermediate Investment Grade Debt
     Class C    **                             Fund Average                                                       --

<FN>
     *    Period  from  February  29,  1996,  date shares  first  offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*

                                    Class A Class B  Class C
     Management Fees................   %        %       %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %       %

     *    Total Fund  Operating  Expenses for Class A and Class B shares are for
          the year ended  October 31, 1999.  Expenses for Class C shares are for
          the period from June 30, 1999 through December 31, 1999.

     **   The Manager has agreed to waive a portion of its fee for the Fund. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2000.  The waiver will  maintain a total level of  operating  expenses
          (expressed as a percent of average net assets  attributable to a Class
          on an annualized basis) not to exceed: 1.00% for Class A Shares; 1.35%
          for Class B Shares;  and 1.35% for Class C Shares.  The  effect of the
          waiver is to reduce the Fund's annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years
   --------------------------------------------------------
      Class A                 $       $         $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C


                           Day-to-day Fund Management

Since February 1996   Martin J. Schafer, Portfolio Manager of Invista Capital
(Fund's inception)    Management, LLC  since 1992.


INCOME-ORIENTED FUND

PRINCIPAL TAX-EXEMPT BOND FUND, INC.
The Fund seeks as high a level of current  income exempt from federal income tax
as is consistent  with  preservation  of capital.  The Fund seeks to achieve its
objective primarily through the purchase of investment grade quality, tax-exempt
fixed-income obligations.

Main Strategies and Risks
The Fund invests in a diversified portfolio of securities issued by or on behalf
of state or local  governments and other public  authorities.  In the opinion of
the issuer's bond counsel,  interest on these obligations is exempt from federal
income  tax.  Investment  in  the  Fund  is not  appropriate  for  IRA or  other
tax-advantaged accounts.

Under normal market  conditions,  the Fund invests at least 80% of its assets in
municipal  obligations.  At the time these  securities are purchased,  they are:
municipal bonds which are rated in the four highest grades by Moody's; municipal
notes rated in the highest grade by Moody's; municipal commercial paper rated in
the highest grade by Moody's or S&P; or if unrated, are of comparable quality in
the opinion of the Manager.  During normal market conditions,  the Fund will not
invest more than 20% of its assets in:  securities that do not meet the criteria
stated above; taxable securities; or municipal obligations the interest on which
is treated as a tax  preference  item for  purposes of the  federal  alternative
minimum  tax.  The Fund may also invest in taxable  securities  which mature one
year or less from the time of purchase.  These taxable investments are generally
made  for  liquidity  purposes  or as a  temporary  investment  of cash  pending
investment  in  municipal   obligations.   Under  unusual   market  or  economic
conditions,  for temporary  defensive purposes the Fund may invest more than 20%
of its assets in taxable securities.

Up to 20% of Fund assets may be invested in debt securities rated lower than BBB
by S&P or Baa by Moody's. The Fund will not purchase municipal bonds rated lower
than B by Moody's or S&P.  It also will not buy  municipal  notes or  commercial
paper which are unrated or are not  comparable  in quality to rated  securities.
During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets,  based on  market  value at each  month-end,  were (all  ratings  are by
Standard  & Poor's):  % rated  AAA;  % rated AA; % rated A and % rated BBB.  The
above percentages  includes unrated  securities which the Manager has determined
to be of comparable quality: % rated AAA; % rated AAA; % rated AA; % rated A and
% rated BBB.

Main Risks
The Fund may not invest more than 5% of its assets in the  securities of any one
issuer (except the U.S.  Government) but may invest without limit in obligations
of issuers  located in the same state.  It may also  invest in debt  obligations
which are  repayable  out of  revenue  from  economically  related  projects  or
facilities.  This  represents a risk to the Fund since an economic,  business or
political development or change affecting one security could also affect others.

The Fund may purchase industrial  development bonds. These securities are issued
by industrial development authorities. They may only be backed by the assets and
revenues of the industrial  corporation  which uses the facility financed by the
bond.

Fixed income  securities that are not investment grade are commonly  referred to
as "junk bonds" or high yield securities.  These securities offer a higher yield
than other, higher rated securities, but they carry a greater degree of risk and
are considered speculative by the major credit rating agencies.

When  interest  rates fall,  the price of a bond rises and when  interest  rates
rise, the price  declines.  The value of debt securities may also be affected by
factors such as credit  rating of the entity that issued the bond and  effective
maturities of the bond.  Lower quality and longer maturity bonds will be subject
to greater  credit risk and price  fluctuations  than  higher  quality and short
maturity bonds.

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income without incurring much principal risk or for short-term needs.
As with all mutual  funds,  the value of the Fund's  assets may rise or fall. If
you sell your shares when their value is less than the price you paid,  you will
lose money.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  5.08
"1991"  12.07
"1992"  9.62
"1993"  12.44
"1994"  -9.44
"1995"  20.72
"1996"  4.6
"1997"  9.19
"1998"  5.08
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is -----%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>             <C>       <C>     <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %        %             Lehman Brothers Municipal Bond Index           %        %        %
     Class B              *       --             Lipper General Municipal Debt Fund Average
     Class C    **

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.
</FN>
</TABLE>

                            Fund Operating Expenses*

                                     Class A Class B  Class C
     Management Fees................   %        %        %
     12b-1 Fees.....................   None     %
     Other Expenses.................   %        %

       Total Fund Operating Expenses   %        %        %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years

      Class A                 $       $         $        $
      Class B
      Class C
   You would  pay the  following  expenses  if you did not  redeem  your shares:
      Class A
      Class B
      Class C

                           Day-to-day Fund Management

Since July 1991   Daniel J. Garrett, CFA. Assistant Director - Securities
                  Investment of Principal Capital Management LLC since 1994.


MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND, INC.

The Fund seeks as high a level of income available from short-term securities as
is considered  consistent  with  preservation  of principal and  maintenance  of
liquidity by investing in a portfolio of money market instruments.

Main Strategies
The Fund seeks as high a level of income available from short-term securities as
is considered  consistent  with  preservation  of principal and  maintenance  of
liquidity by investing in a portfolio of money market instruments.

The Fund  invests its assets in a portfolio  of money  market  instruments.  The
investments are U.S. dollar  denominated  securities  which the Manager believes
present minimal credit risks.  At the time the Fund purchases each security,  it
is an  "eligible  security"  as  defined  in the  regulations  issued  under the
Investment Company Act of 1940.

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

It is the policy of the Fund to be as fully  invested  as  possible  to maximize
current income. Securities in which the Fund invests include:

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

Main Risks
As with all  mutual  funds,  the value of the  Fund's  assets  may rise or fall.
Although  the Fund seeks to  preserve  the value of an  investment  at $1.00 per
share,  it is possible to lose money by  investing  in the Fund if you sell your
shares when their value is less than the price you paid.  An  investment  in the
Fund is not insured or guaranteed by the Federal Deposit  Insurance  Corporation
or any other government agency.

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce  income without  incurring  much  principal  risk or your  short-term
needs.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

 Annual Total Returns

"1990"  7.63
"1991"  5.8
"1992"  3.38
"1993"  2.63
"1994"  3.77
"1995"  5.44
"1996"  4.96
"1997"  4.88
"1998"  5.15
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class B shares is _____%. The cumulative return for Class C shares from June
30, 1999 through December 31, 1999 is _____%. To obtain the Fund's current yield
information, please call 1-800-247-4123.


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

              Past One Past Five Past Ten
                Year     Years    Years
     Class A     %        %        %
     Class B              *        --
     Class C    **

     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 1999.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 1999.


                            Fund Operating Expenses*

                                     Class A Class B  Class C
     Management Fees................   %        %       %
     12b-1 Fees.....................   None     %
     Other Expenses.................   %        %

       Total Fund Operating Expenses   %        %       %

     * Total Fund Operating Expenses for Class A and Class B shares are for
       the year ended October 31, 1999. Expenses for Class C shares are for
       the period from June 30, 1999 through December 31, 1999.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years

     Class A                 $       $         $        $
     Class B
     Class C
  You would  pay the  following  expenses  if you did not  redeem  your shares:
     Class A
     Class B
     Class C

                           Day-to-day Fund Management

Since March 1983    Michael R. Johnson. Assistant Director - Securities Trading
                    of Principal Capital Management, LLC since 1994.

Since ______        Alice Robertson


THE COSTS OF INVESTING

Fees and Expenses of the Funds

This table  describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.

<TABLE>
                                                 Shareholder Fees
                                     (fees paid directly from your investment)

<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                          Class A Shares                    Class B Shares                      Class C Shares

                                                                                                               Maximum Deferred
                                       Maximum Sales Charge          Maximum Deferred Sales Charge             Sales Charge on
                                           on Purchases            (as a percentage of the lower of            Purchases (as a
                                        (as a percentage of           the original purchase price               percentage of
                                          offering price)              or current market value)                 offering price)


                                                                          Redemptions During                  Redemptions During
                                                                                 Year                               Year 1

<S>                                            <C>            <C>    <C>   <C>    <C>   <C>    <C>    <C>           <C>
                                                                1      2     3      4     5      6     7
                                                 -------------------------------------------------------
   All Funds except LargeCap Stock Index,
     Limited Term Bond
     and Cash Management Funds                 4.75%           4%     4%    3%     3%    2%     1%    0%            1.00%
   LargeCap Stock Index and
     Limited Term Bond Funds                   1.50%          1.25%  1.25% .75%   .75%  .50%   .25%   0%            .50%
   Cash Management Fund                        None            4%     4%    3%     3%    2%     1%    0%            1.00%

<FN>
   Notes:
   o Shares do not have an exchange or redemption fee.
   o A wire charge of $6.00 will be deducted for all wire transfers.
   o Class A shares have no deferred sales charge on sales of less than $1 million.
   o Class B and Class C shares have no front-end sales charge.
</FN>
</TABLE>

Fees and expenses are important because they lower your earnings.  However,  low
costs do not guarantee  higher earnings.  For example,  a fund with no front-end
sales  charge may have  higher  ongoing  expenses  than a fund with such a sales
charge.  Before  investing,  you  should be sure you  understand  the  nature of
different costs. Your Registered Representative can help you with this process.

One-time fees.  You may pay a one-time  sales charge for each purchase  (Class A
shares)  or  redemption  (Class B or Class C  shares).

o    Class A shares may be purchased at a price equal to the share price plus an
     initial sales charge.
o    Investments  of $1 million  or more of Class A shares  are sold  without an
     initial  sales  charge but may be subject to a  contingent  deferred  sales
     charge (CDSC) at the time of redemption.
o    Class B and Class C shares have no initial  sales charge but may be subject
     to a CDSC.  If you sell  (redeem)  shares and the CDSC is imposed,  it will
     reduce the amount of sales proceeds.

Choosing a Share Class
You may purchase Class A, Class B or Class C shares of each Fund.  Your decision
to purchase a particular class depends on a number of factors including:
o    the dollar amount you are investing;
o    the amount of time you plan to hold the investment; and
o    any plans to make additional investments in the Principal Mutual Funds.

In addition, you might consider:
o    Class A shares if you are making an investment that qualifies for a reduced
     sales charge;
o    Class B shares if you  prefer not to pay an  initial  sales  charge and you
     plan to hold your investment for at least six years; or
o    Class C shares if you  prefer not to pay an  initial  sales  charge and you
     plan to hold your investment for only a few years.

The  difference  between the share Classes is their  expenses.  Because of their
expenses,  Class A shares  tend to  outperform  Class C shares  when the  amount
invested is higher  and/or the money is invested for a longer period of time. If
you plan on purchasing shares, but are unsure which Class to select,  this table
may assist you. Class A shares may be advantageous over Class C shares when:

           The amount invested is        The holding period of the investment is

       Less than $50,000                           Greater than 5 years
       $50,000 but less than $100,000              Greater than 5 years
       $100,000 but less than $250,000             Greater than 4 years
       $250,000 but less than $500,000             Greater than 4 years
       $500,000 but less than $1,000,000           Greater than 1 year

Class A Shares.
o    You generally pay a sales charge on an investment in Class A shares.
o    Class A shares generally have lower annual operating  expenses than Class B
     or Class C shares.
o    If you invest $50,000 or more, the sales charge is reduced.
o    You are not  assessed a sales  charge on  purchases of Class A shares of $1
     million or more.  A deferred  sales charge may be imposed if you sell those
     shares within eighteen months of purchase.

Class B Shares
o    You do not pay a sales charge on an investment in Class B shares.
o    If you sell your Class B shares within six years from the date of purchase,
     you may pay a deferred sales charge.
o    If you keep  your  Class B shares  for  seven  years,  your  Class B shares
     automatically convert to Class A shares without a charge.
o    Class B shares generally have higher annual operating expenses than Class A
     shares.

Class C Shares
o    You do not pay a sales charge on an investment in Class C shares.
o    If you sell your Class C shares  within one year from the date of purchase,
     you pay a deferred sales charge.
o    Class C shares generally have higher annual operating expenses than Class A
     or Class B shares.

Front-end sales charge: Class A shares
There is no sales charge on  purchases of Class A shares of the Cash  Management
Fund.  Class A shares of the other Funds are purchased  with a sales charge that
is a variable percentage based on the amount of the purchase.  There is no sales
charge  on  shares  of a Fund  purchased  with  reinvested  dividends  or  other
distributions.  Your  sales  charge  may be  reduced  for  larger  purchases  as
indicated below.

<TABLE>
                                         All Funds (Except           Sales Charge for
                                          LargeCap Stock             LargeCap Stock
                                      Index and Limited Term      Index and Limited Term          Sales Charge for
                                            Bond Funds)                 Bond Funds              Dealers Allowance as
                                       Sales Charge as % of:       Sales Charge as % of:         % of Offering Price

<CAPTION>
                                                                                           All Funds Except   LargeCap Stock
                                                                                            LargeCap Stock       Index and
                                      Offering    Net Amount      Offering    Net Amount       Index and       Limited Term
           Amount invested              Price      Invested         Price      Invested    Limited Term Bond       Bond

<S>            <C>                      <C>          <C>            <C>          <C>            <C>                <C>
     Less than $50,000                  4.75%        4.99%          1.50%        1.52%          4.00%              1.25%
     $50,000 but less than $100,000     4.25%        4.44%          1.25%        1.27%          3.75%              1.00%
     $100,000 but less than $250,000    3.75%        3.90%          1.00%        1.10%          3.25%              0.75%
     $250,000 but less than $500,000    2.50%        2.56%          0.75%        0.76%          2.00%              0.50%
     $500,000 but less than $1,000,000  1.50%        1.52%          0.50%        0.50%          1.25%              0.25%
     $1,000,000 or more                   0            0              0            0            0.75%              0.25%
</TABLE>

The  front-end  sales charge is waived on an investment of $1 million or more in
Class A  shares.  There  may be a CDSC on  shares  sold  within 18 months of the
purchase  date.  The CDSC  does not apply to shares  purchased  with  reinvested
dividends or other distributions.  The CDSC is calculated as 0.75% of the lesser
of the current  market value or the initial  purchase  price of the shares sold.
The CDSC is waived on shares  sold to fund a  Principal  Mutual  Fund  401(a) or
Principal Mutual Fund 401(k) retirement plan,  except  redemptions which are the
result of  termination  of the plan or transfer of all plan assets.  The CDSC is
also waived:
o    on shares sold to satisfy IRS minimum distribution rules; and
o    using a periodic  withdrawal  plan. (You may sell up to 10% of the value of
     the shares subject to a CDSC without paying the CDSC.)

In the case of selling some but not all of the shares in an account,  the shares
not subject to a sales charge are redeemed  first.  Other shares are redeemed in
the order purchased (first in, first out).  Shares subject to the CDSC which are
exchanged into another  Principal Mutual Fund continue to be subject to the CDSC
until the CDSC expires.

Broker-dealers that sell Principal Mutual Funds are paid a certain percentage of
the sales  charge in  exchange  for their  services.  At the  option of  Princor
Financial Services Corporation,  the amount paid to a dealer may be more or less
than that shown in the chart  above.  The amount  paid  depends on the  services
provided.  Amounts paid to dealers on purchases without a front-end sales charge
are determined by and paid for by Princor.

SALES CHARGE WAIVER OR REDUCTION (Class A shares)

Class A shares  of the  Funds may be  purchased  without a sales  charge or at a
reduced  sales  charge.  The Funds  reserve the right to change or stop offering
shares in this  manner at any time for new  accounts  and with 60 days notice to
shareholders of existing accounts.

Waiver of sales charge (Class A shares)
A Fund's Class A shares may be purchased without a sales charge:
o    by its Directors,  Principal Life and its subsidiaries and their employees,
     officers,  directors  (active or  retired),  brokers  or agents.  This also
     includes their immediate family members and trusts for the benefit of these
     individuals;
o    by the Principal Employees' Credit Union;
o    by  non-ERISA  clients of Invista  Capital  Management,  LLC and  Principal
     Capital Management LLC;
o    by any employee or Registered  Representative  (and their  employees) of an
     authorized broker-dealer;
o    through   broker-dealers,   investment   advisors   and   other   financial
     institutions  that  have  entered  into an  agreement  with  Princor  which
     includes a requirement  that such shares be sold for the benefit of clients
     participating  in a "wrap  account" or similar  program under which clients
     pay  a  fee  to  the   broker-dealer,   investment   advisor  or  financial
     institution;
o    by unit  investment  trusts  sponsored by Principal Life Insurance  Company
     and/or its subsidiaries or affiliates;
o    by certain  employee  welfare benefit plan customers of Principal Life with
     Plan Deposit Accounts;
o    by participants who receive  distributions  from certain annuity  contracts
     offered by Principal Life;
o    to the extent the investment  represents the proceeds of a total  surrender
     of certain  Principal Life issued  unregistered  group annuity contracts if
     Principal  Life  waives any  applicable  CDSC or other  contract  surrender
     charge;
o    using  cash  payments  received  from the  Principal  Bank under its awards
     program;
o    to the extent the investment  represents  redemption  proceeds from certain
     unregistered  group annuity  contracts  issued by Principal Life to fund an
     employer's  401(a) plan where such proceeds are used to fund the employer's
     401(a) plan; and
o    to the  extent  the  purchase  proceeds  represent  a  distribution  from a
     terminating  401(a) plan if the employer or plan trustee has entered into a
     written  agreement  with  Princor  permitting  the  group  solicitation  of
     employees/participants.  Such  purchases  are  subject  to the  CDSC  which
     applies to purchases of $1 million or more as described above.

Class A shares may also be purchased  without a sales charge if your  Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met:
o    your  purchase of Class A shares must take place  within the first 180 days
     of  your  Registered  Representative's   affiliation  with  the  authorized
     broker-dealer;
o    your  investment  must  represent the sales proceeds from other mutual fund
     shares (you must have paid a front-end sales charge or a CDSC) and the sale
     must occur within the 180 day period; and
o    you must indicate on your Principal  Mutual Fund  application  that you are
     eligible for waiver of the front-end sales charge.
o    You must send us either:
     o   the check for the sales proceeds(endorsed to Principal Mutual Funds) or
     o   a copy of the confirmation statement from the other mutual fund showing
         the sale  transaction.  If you place your order to buy Principal Mutual
         Fund  shares  on  the  telephone,  you  must  send  us a  copy  of  the
         confirmation  within 21 days of placing the order. If we do not receive
         the  confirmation  within 21 days,  we will sell enough of your Class A
         shares to pay the sales charge that otherwise would have been charged.

     NOTE:    Please be aware that the sale of your other mutual fund shares may
              be subject to federal (and state) income taxes.  In addition,  you
              may pay a surrender charge to the other mutual fund.

Reduction of sales charge (Class A shares)
1)   Dollar  amount of purchase.  The sales charge  varies with the size of your
     purchase.  Reduced  charges  apply to the total of Principal  Mutual Funds'
     (excluding the Principal Cash Management  Fund,  Inc.) shares  purchased at
     one time by any "Qualified  Purchaser." A Qualified  Purchaser  includes an
     individual  and his/her  spouse and their  children  under the age of 25, a
     trust  primarily  for  such  persons,  and a  trustee  or  other  fiduciary
     purchasing for a single trust estate or single  fiduciary  account.  If the
     total amount being  invested in the Principal  Mutual Funds is near a sales
     charge breakpoint,  you should consider  increasing amount invested to take
     advantage  of a lower  sales  charge.  A  purchase  made by or  through  an
     employer  on behalf of an  employee  or  employees  (including  independent
     contractors) is also considered a purchase by a Qualified Purchaser.

2)   Statement of intention (SOI). Qualified Purchasers may obtain reduced sales
     charges  by  signing  an SOI.  The SOI is a  nonbinding  obligation  on the
     Qualified  Purchaser to purchase the full amount  indicated in the SOI. The
     sales  charge is based on the total  amount  to be  invested  in a 13 month
     period (24 months if the intended  investment is $1 million or more).  Upon
     your request,  we will set up a 90-day  lookback  period to include earlier
     purchases - the 13 (24) month  period then begins on the date of your first
     purchase during the 90-day period. If the intended  investment is not made,
     sufficient  shares will be sold to pay the  additional  sales charge due. A
     401(a)  plan  trustee  must  submit  the SOI at the time of the first  plan
     purchase.  The 90-day  lookback  period is not  available  to a 401(a) plan
     trustee.

3)   Rights of  accumulation.  The Class A,  Class B and Class C shares  already
     owned by a Qualified  Purchaser are added to the amount of the new purchase
     to determine the applicable sales charge percentage.  Class A shares of the
     Cash Management  Fund are not included in the calculation  unless they were
     acquired in exchange for other Principal Mutual Fund shares.

4)   Death Benefit proceeds. Death benefit proceeds from a life insurance policy
     or certain annuity  contracts issued by Principal Life (or its subsidiaries
     or affiliates) may be invested in Class A shares at a reduced sales charge.
     To qualify for the reduced  sales  charge,  the proceeds must be applied to
     the  purchase of shares of a  Principal  Mutual Fund within one year of the
     insured's  death.  The  applicable  sales charge is determined by the table
     below.

<TABLE>
<CAPTION>
                                                            Sales Charge as a % of:
                                                                                                           Dealer Allowance
                                                   Offering                    Net Amount                      as % of
           Amount of Purchase                        Price                      Invested                    Offering Price
<S>     <C>                                      <C>                              <C>                           <C>
         Less than $500,000                          2.50%                        2.56%                         2.10%
         $500,000 but less than $1,000,000           1.50%                        1.52%                         1.25%
         $1,000,000 or more                      no sales charge
</TABLE>

5)   Employer  sponsored  plans.  Retirement  plans meeting the  requirements of
     Section 401 of the Internal Revenue Code (401(k),  Profit Sharing and Money
     Purchase  Pension  Plans) and other  employer  sponsored  retirement  plans
     (SIMPLE IRAs, SEPs, SAR-SEPs,  non-qualified  deferred  compensation plans,
     and Payroll  Deduction  Plans).
     a)   Principal Mutual Fund 401 Plans. The employer chooses to fund the Plan
          with  either  Class  A,  Class B or  Class C  shares  when the plan is
          established.
          o    If Class A shares are used:
               o    all  plan  investments  are  treated  as  made  by a  single
                    investor to determine the applicable sales charge,
               o    the sales charge for  investments  of less than  $250,000 is
                    3.75% as a percentage of offering price (3.90% of net amount
                    invested), and
               o    if the  investment  is $250,000 or more,  the regular  sales
                    charge table is used.
          o    If Class B shares are used, contributions into the plan after the
               plan assets are $250,000 or more are used to buy Class A shares.
          o    Plan assets are not combined with investments made outside of the
               plan to determine the applicable sales charge.
          o    Investments  by  plan  participants  outside  the  plan  are  not
               included  with plan  assets to  determine  the  applicable  sales
               charge.
     b)  Other employer sponsored retirement plans.
          o    If Class A shares are used:
               o    all  plan  investments  are  treated  as  made  by a  single
                    investor to determine the applicable sales charge;
               o    the sales charge for  investments  of less than  $250,000 is
                    3.75% as a percentage of offering price (3.90% of net amount
                    invested); and
               o    if the  investment  is $250,000 or more,  the regular  sales
                    charge table is used.
          o    If Class B shares  are  used,  contributions  into the plan for a
               plan participant,  after the plan assets of that plan participant
               are $250,000 or more,  are used to buy Class A shares (unless the
               plan participant elects otherwise).
          o    Plan assets are not combined with investments made outside of the
               plan to determine the applicable sales charge.
          o    Investments  by  plan  participants  outside  the  plan  are  not
               included  with plan  assets to  determine  the  applicable  sales
               charge.
     c)  Participants of Principal  Mutual Fund 403(b) plans may buy Fund shares
         at the same sales charge levels  available to other employer  sponsored
         plans  described  above.  Contributions  by plan  participants  are not
         combined to determine the applicable sales charge.

Contingent deferred sales charge: Class B and Class C shares
A CDSC may be  imposed on sales of Class B shares  within six years of  purchase
(five  years for  certain  sponsored  plans).  A CDSC may be imposed on sales of
Class C shares within one year of purchase. Princor receives the proceeds of any
CDSC. The CDSC does not apply to shares  purchased with reinvested  dividends or
other distributions.  The amount of the CDSC is a percentage based on the number
of years you own the shares multiplied by the lesser of the current market value
or the initial  purchase price of the shares sold.
o    In the case of selling  some but not all of the shares in an  account,  the
     shares not  subject to a sales  charge are  redeemed  first.  Other Class B
     shares are  redeemed  in the order  purchased  (first in,  first  out).  In
     processing  redemptions  for  other  Class C  shares,  shares  held for the
     shortest period of time during the one year period are next redeemed.  As a
     result of these methods, you pay the lowest possible CDSC.
o    Using a periodic  withdrawal  plan,  you may sell up to 10% of the value of
     the shares subject to a CDSC without paying the CDSC.
o    Shares  subject  to the CDSC which are  exchanged  into  another  Principal
     Mutual Fund continue to be subject to the CDSC until the CDSC expires.

Class B shares
Class B shares automatically convert into Class A shares (based on share prices,
not numbers of shares) seven years after  purchase.  Class B shares  provide you
the benefit of putting all your dollars to work from the time of investment, but
(until  conversion)  have higher  ongoing fees and lower  dividends than Class A
shares.

The Class B share CDSC, if any, is determined by  multiplying  the lesser of the
current  market  value  or  initial  purchase  price of the  shares  sold by the
appropriate percentage from the table below:


<TABLE>
                                                Class B Share CDSC
                                                as a Percentage of
                                          Dollar Amount Subject to Charge

<CAPTION>
                                                                                           For Certain Sponsored Plans
                                                                                             Commenced After 2/1/98

                                      All Funds Except         LargeCap Stock          All Funds Except        LargeCap Stock
                                       LargeCap Stock             Index and             LargeCap Stock            Index and
      Years Since Purchase         Index and Limited Term        Limited Term        Index and Limited Term     Limited Term
         Payments Made                    Bond Funds               Bond Funds               Bond Funds            Bond Funds

<S>                                          <C>                    <C>                     <C>                    <C>
  2 years or less                            4.00%                  1.25%                   3.00%                  .75%
  more than 2 years, up to 4 years           3.00                   0.75                    2.00                   .50
  more than 4 years, up to 5 years           2.00                   0.50                    1.00                   .25
  more than 5 years, up to 6 years           1.00                   0.25                    None                   None
  more than 6 years                          None                   None                    None                   None
</TABLE>

Class C shares
A CDSC of 1% may be imposed on Class C shares sold within one year of  purchase.
The charge is assessed on the amount  equal to the lesser of the current  market
value or the original  purchase  cost of the shares being  redeemed.  No CDSC is
imposed  on  increases  in  account  value  above  the  initial  purchase  price
(including  shares acquiring from the reinvestment of dividends or capital gains
distributions). Class C shares do not convert to any other class of Fund shares.

Waiver of the sales charge (Class B and Class C shares)
The CDSC is  waived on sales of Class B shares  and of Class C shares  which are
sold:
o    due to a shareholder's death;
o    due to the  shareholder's  disability,  as defined in the Internal  Revenue
     Code;
o    from retirement plans to satisfy minimum distribution rules under the Code;
o    to pay surrender charges;
o    to pay retirement plan fees;
o    involuntarily from small balance accounts;
o    through a systematic withdrawal plan (certain limits apply);
o    from a retirement  plan to assure the plan complies  with Sections  401(k),
     401(m), 408(k) and 415 of the Code; or
o    from retirement plans qualified under Section 401(a) of the Code due to the
     plan participant's death, disability, retirement or separation from service
     after attaining age 55.

Ongoing fees. Each Fund pays ongoing operating fees to its Manager,  Underwriter
and others who provide services to the Fund. They reduce the value of each share
you own.

Distribution (12b-1) Fees
Each of the Funds has  adopted  a  Distribution  Plan  under  Rule  12b-1 of the
Investment  Company Act of 1940.  Under the Plan, the Fund pays a fee to Princor
based on the average  daily net asset value of the Fund.  These ongoing fees pay
expenses  relating  to  distribution  fees for the sale of Fund  shares  and for
services provided by Princor and other selling dealers to shareholders.  Because
they are ongoing fees, over time they may exceed other types of sales charges.

The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:

<TABLE>
<S>                                                                                                      <C>
o    Class A shares (except Cash Management, LargeCap Stock Index and Limited Term Bond)                 0.25%
o    Class A shares of LargeCap Stock Index and Limited Term Bond                                        0.15%
o    Class B shares (except LargeCap Stock Index and Limited Term Bond)                                  1.00%
o    Class B shares of LargeCap Stock Index and Limited Term Bond                                        0.50%
o    Class C shares                                                                                      1.00%
</TABLE>


CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

The Statement of Additional  Information (SAI) contains  additional  information
about investment strategies and their related risks.

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

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

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

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

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

Each  of  the  Funds  may  lend  its  portfolio   securities   to   unaffiliated
broker-dealers and other unaffiliated qualified financial institutions.

Currency Contracts
The  International,  International  Emerging  Markets,  International  SmallCap,
Partners Aggressive Growth,  Partners LargeCap Growth and Partners MidCap Growth
Funds may each enter into forward currency contracts, currency futures contracts
and options,  and options on  currencies  for hedging and other  non-speculative
purposes. A forward currency contract involves a privately negotiated obligation
to purchase  or sell a specific  currency at a future date at a price set in the
contract.  A Fund will not hedge currency exposure to an extent greater than the
aggregate  market  value of the  securities  held or to be purchased by the Fund
(denominated or generally quoted or currently convertible into the currency).

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

Forward Commitments
Each of the  Income-Oriented,  Balanced and Partners Aggressive Growth Funds may
enter into forward commitment agreements.  These agreements call for the Fund to
purchase  or sell a security on a future  date at a fixed  price.  Each of these
Funds may also enter into contracts to sell its investments  either on demand or
at a specific interval.

Warrants
Each of the Funds  (except Cash,  Government  Securities  Income and  Tax-Exempt
Bond) may invest up to 5% of its assets in warrants.  A warrant is a certificate
granting  its  owner  the  right to  purchase  securities  from the  issuer at a
specified price, normally higher than the current market price.

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

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

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

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

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

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

Options
Each of the Funds (except Capital Value, Cash Management,  Growth and Tax-Exempt
Bond)  may buy and  sell  certain  types of  options.  Each  type is more  fully
discussed in the SAI.

Foreign Securities
Each of the  following  Funds may invest in foreign  securities  (securities  of
non-U.S.  companies) to the indicated percentage of its assets: (Debt securities
issued in the United States pursuant to a registration  statement filed with the
Securities  and Exchange  Commission  are not treated as foreign  securities for
purposes of these limitations.)
     o    International,   International   Emerging  Markets  and  International
          SmallCap Funds - 100%;
     o    Partners  Aggressive Growth,  Partners LargeCap Growth and Real Estate
          Funds - 25%;
     o    Balanced,  Blue Chip, Bond, Capital Value, Growth, High Yield, Limited
          Term Bond, MidCap, SmallCap and Utilities Funds - 20%;
     o    LargeCap Stock Index and Partners MidCap Growth Funds - 10%;

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

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

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

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

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

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

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

Funds with high  turnover  rates (more than 100%) often have higher  transaction
costs (which are paid by the Fund) and may generate short-term capital gains (on
which you pay taxes even if you don't sell any of your shares  during the year).
You can find the turnover  rate for each Fund,  except for the Cash  Management,
Partners  LargeCap  Growth  and  Partners  MidCap  Growth  Funds,  in the Fund's
Financial Highlights table.

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

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

The Manager
Principal Management  Corporation serves as the manager for the Principal Mutual
Funds.  In its  handling  of the  business  affairs  of each Fund,  the  Manager
provides  clerical,  recordkeeping  and  bookkeeping  services,  and  keeps  the
financial and accounting  records required for the Funds. The Manager has signed
sub-advisory  agreements  with various  Sub-Advisors  for  portfolio  management
functions for certain Funds.  The Manager  compensates  the  Sub-Advisor for its
services as provided in the subadvisory agreement.

The Manager is a subsidiary of Principal Financial Services, Inc. It has managed
mutual funds since 1969.  As of  ____________________,  the funds it managed had
assets of  approximately  $____  billion.  The  Manager's  address is  Principal
Financial Group, Des Moines, Iowa 50392-0200.

The Sub-Advisors

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

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

Fund:          Partners LargeCap Growth
Sub-Advisor:   Duncan-Hurst  Capital  Management,  Inc.  was founded in
               1990. Its address is 4365 Executive Drive, Suite 1520, San Diego,
               CA  92121.  Duncan-Hurst  currently  manages  assets  of $ ______
               billion for institutional and individual investors.

Fund:          Partners MidCap Growth
Sub-Advisor:   Turner Investment  Partners,  Inc., 1235 Westlake Drive,
               Suite  350,  Berwyn,  PA  19312,  is  a  professional  investment
               management  firm  founded  in  1990.  As  of  ____,   Turner  had
               discretionary  management authority with respect to approximately
               $______  billion  in  assets.   Turner  has  provided  investment
               advisory services to investment companies since 1992.

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

The Manager is paid a fee by the Fund for its services,  which  includes any fee
paid to the  Sub-Advisor.  The fee  paid by each  Fund (as a  percentage  of the
average daily net assets) for the fiscal year ended October 31, 1999 was:

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


PRICING OF FUND SHARES

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

For all Funds except the Cash Management Fund, the share price is calculated by:
o    taking the current market value of the total assets of the Fund
o    subtracting liabilities of the Fund
o    dividing the remainder proportionately into the Classes of the Fund
o    subtracting the liabilities of each Class
o    dividing the remainder by the total number of shares owned by that Class.

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

NOTES:
o    If current market values are not readily available for a security, its fair
     value  is  determined  using  a  policy  adopted  by the  Fund's  Board  of
     Directors.
o    A Fund's  securities  may be traded on  foreign  securities  markets  which
     generally  complete  trading at various  times  during the day prior to the
     close of the New York Stock Exchange. The values of foreign securities used
     in  computing  share price are  determined  at the time the foreign  market
     closes.  Occasionally,  events  affecting  the value of foreign  securities
     occur when the foreign  market is closed and the New York Stock Exchange is
     open. If the Manager believes the market value is materially affected,  the
     share price will be calculated using the policy adopted by the Fund.
o    Certain  securities  issued by companies in emerging  market  countries may
     have  more than one  quoted  valuation  at any point in time.  These may be
     referred to as a local  price and a premium  price.  The  premium  price is
     often a  negotiated  price that may not  consistently  represent a price at
     which  a  specific   transaction   can  be  effected.   The   international
     growth-oriented  funds  each have a policy to value  such  securities  at a
     price at which the Manager or Sub-Advisor expects the shares may be sold.

DIVIDENDS AND DISTRIBUTIONS

The  Growth-Oriented  and  Income-Oriented  Funds pay most of their net dividend
income to you every year. The payment schedule is:

<TABLE>
<CAPTION>
<S>  <C>                                             <C>                                   <C>
     Funds                                           Record Date                           Payable Date
     Balanced,                                       three business days before            March 24, June 24,
     Real Estate and                                 each payable date                     September 24 and
     December 24
     Utilities                                                                             (or previous business day)

     Blue Chip                                       three business days before            June 24 and December 24
                                                     each payable date                     (or previous business day)

     Capital Value, Growth                           three business days before            December 24
     International, International                    each payable date                     (or previous business day)
     Emerging Markets, International
     SmallCap, LargeCap Stock Index
     MidCap, Partners Aggressive
     Growth, Partners LargeCap
     Growth, Partners Midcap
     Growth and SmallCap

     Bond, Government Securities                     three business days before            monthly on the 24th
     Income, High Yield, Limited                     each payable date                     (or previous business day)
     Term Bond and Tax-Exempt Bond
</TABLE>

Net realized  capital gains,  if any, are  distributed  annually.  Generally the
distribution is made on the fourth  business day of December.  Payments are made
to  shareholders  of record on the third business day prior to the payable date.
Capital gains may be taxable at different rates, depending on the length of time
that the Fund holds it assets.

You  can  authorize  income  dividend  and capital gain  distributions  to be:
o    invested in additional shares of the Fund you own without a sales charge;
o    invested  in shares of  another  Principal  Mutual  Fund  (Dividend  Relay)
     without a sales charge (distributions of a Fund may be directed only to one
     receiving Fund); or
o    paid in cash.

NOTE:     Payment of income  dividends  and capital  gains shortly after you buy
          shares has the effect of reducing the share price by the amount of the
          payment.

         Distributions  from the Fund, whether received in cash or reinvested in
         additional shares, may be subject to federal (and state) income tax.

Money Market Fund
The Cash  Management  Fund  declares  dividends of all its daily net  investment
income  each day its shares are  priced.  The  dividends  are paid daily and are
automatically reinvested back into additional shares of the Fund. You may ask to
have your dividends paid to you monthly in cash. These cash payments are made on
the 20th (or  preceding  business day if the 20th is not a business day) of each
month.

Under normal circumstances,  the Fund intends to hold portfolio securities until
maturity and value them at amortized cost.  Therefore,  the Fund does not expect
any capital  gains or losses.  Should  there be any gain,  it could result in an
increase in dividends. A capital loss could result in a dividend decrease.


HOW TO BUY SHARES

To open an account and buy fund shares, rely on your Registered  Representative.
Principal  Mutual  Funds are "load" funds which means you pay a sales charge for
the ongoing assistance of your Registered Representative.

Fill out the Principal Mutual Fund application* completely.  You must include:
o    the name(s) you want to appear on the account;
o    your choice of Class A, Class B or Class C shares;
o    the amount of the investment;
o    your Social Security number or Taxpayer I.D. number;
o    investor information (used to help your Registered  Representative  confirm
     that  your   investment   selection  is  consistent  with  your  goals  and
     circumstances) ;
o    employer information; and
o    other  required  information  (may  include  corporate  resolutions,  trust
     agreements, etc.).

     * An application is included with this prospectus.  A different application
     is needed for a Principal Mutual Fund IRA, 403(b), SEP, SIMPLE,  SAR-SEP or
     certain   employee    benefit   plans.    Call   Principal   Mutual   Funds
     (1-800-247-4123) for more information.

The Fund requires a minimum initial investment:
o    Regular Accounts                                            $1,000
o    Uniform Transfer to Minor Accounts                            $500
o    IRA Accounts                                                  $500

Subsequent  investment minimums are $100. However, if your subsequent investment
are made using an Automatic Investment Plan, the investment minimum is $50.

Note:     The  minimum  investment  applies  on a fund  level,  not on the total
          investment being made.  Minimums may be waived on accounts set up for:
          certain employee benefit plans; Principal Mutual Fund asset allocation
          programs; Automatic Investment Plans; and Cash Management Accounts.

Class B and Class C shares of the Cash  Management Fund may be purchased only by
exchange from other Fund accounts in the same share class.

Invest by mail:
o    Send a check and completed application to:
         Principal Mutual Funds
         P. O. Box 10423
         Des Moines Iowa 50306-9780

o    Make your check payable to Principal Mutual Funds.
o    Your  purchase  will be priced at the next  share  price  calculated  after
     Principal Mutual Funds receives your completed paperwork.

Order by telephone:
o    Call us at  1-800-247-4123  between 7:00 a.m. and 7:00 p.m. Central Time on
     any day that the New York Stock Exchange is open.
o    To buy shares the same day, you need to call before 3:00 p.m. Central Time.
o    We must receive your payment for the order within three  business  days (or
     the order will be canceled and you may be liable for any loss).
o    For new accounts, you also need to send a completed application.

Wire money from your bank:
o    Have  your   Registered   Representative   call   Principal   Mutual  Funds
     (1-800-247-4123) for an account number and wiring instructions.
o   For both initial and subsequent purchases, federal funds should be wired to:
                           Norwest Bank Iowa, N.A.
                           Des Moines, Iowa 50309
                           ABA No.: 073000228
                           For credit to: Principal Mutual Funds
                           Account No.: 3000499968
                           For credit: Principal ________ Fund, Class ____
                           Shareholder Account No. __________________
                           Shareholder Registration __________________

o    Give the  number  and  instructions  to your bank  (which may charge a wire
     fee).
o    To buy  shares the same day,  the wire must be  received  before  3:00 p.m.
     Central Time.
o    No wires are accepted on days when the New York Stock Exchange is closed or
     when the Federal  Reserve is closed  (because  the bank that would  receive
     your wire is closed).

Establish an Automatic Investment Plan
o    Make regular monthly  investments with automatic  deductions from your bank
     or other financial institution account.
o    Minimum investment amounts are waived if you set up an Automatic Investment
     Plan when you open your account.
o    Minimum monthly purchase $50 per Fund (except Cash Management Fund).
o    Cash Management Fund minimum monthly purchase is $100. However, if the Cash
     Management  account is  greater  than  $1,000  when the plan is set up, the
     monthly minimum is $50.
o    Send completed  application,  check authorization form and voided check (or
     voided deposit slip) to:
                  Principal Mutual Funds
                  P. O. Box 10423
                  Des Moines Iowa 50306-9780

Set up a Dividend Relay
o    Invest your  dividends and capital gains from one Principal  Mutual Fund in
     shares of another Principal Mutual Fund.
o    Distributions from a Fund may be directed only to one receiving Fund.
o    The Fund share class receiving the investment must be the same class as the
     originating Fund.
o    There is no sales charge or administrative charge for the Dividend Relay.
o    You can set up Dividend Relay:
     o    on the application for a new account; or
     o    by  calling  Principal  Mutual  Funds  (1-800-247-4123)  if  telephone
          services apply to the originating account; or
     o    in writing (a signature guarantee may be required).
o    You may  discontinue  your Dividend Relay election with a written notice to
     Principal Mutual Funds.
o    There may be a delay of up to 10 days  before  the  Dividend  Relay plan is
     discontinued.
o    The  receiving  Fund  must  meet fund  minimums.  If it does not,  the Fund
     reserves  the right to close the  account  if it is not  brought  up to the
     minimum  investment  amount  within  90 days of  sending  you a  deficiency
     notice.

HOW TO REDEEM (SELL) SHARES

After you place a sell  order in proper  form,  shares  are sold  using the next
share price calculated. The amount you receive will be reduced by any applicable
CDSC. There is no additional charge for a sale.  However,  you will be charged a
$6 wire fee if you have the sale  proceeds  wired to your bank.  Generally,  the
sale  proceeds  are sent out on the next  business  day after the sell order has
been placed. At your request,  the check will be sent overnight (a $15 overnight
fee will be deducted from your account  unless other  arrangements  are made). A
Fund can only sell  shares  after your  check  making  the Fund  investment  has
cleared  your bank.  To avoid the  inconvenience  of a delay in  obtaining  sale
proceeds,  shares  may be  purchased  with a  cashier's  check,  money  order or
certified check. A sell order from one owner is binding on all joint owners.

Selling  shares may create a gain or a loss for federal  (and state)  income tax
purposes.  You should maintain accurate records for use in preparing your income
tax returns.

Generally, sales proceeds checks are:
o    payable to all owners on the account (as shown in the account registration)
     and
o    mailed to address on the  account  (if not  changed  within  last month) or
     previously authorized bank account.

For  other   payment   arrangements,   please  call   Principal   Mutual   Funds
(1-800-247-4123).

You  should  also call  Principal  Mutual  Funds  (1-800-247-4123)  for  special
instructions that may apply to sales from accounts:
o    when an owner has died;
o    for certain employee benefit plans; or
o    owned by corporations, partnerships, agents or fiduciaries.

Within  60 days  after  the sale of  shares,  you have a one time  privilege  to
reinvest the amount of the sale proceeds into any Principal  Mutual Funds' Class
A shares without a sales charge if the shares that were sold were:
o    Class A shares on which a sales charge was paid;
o    Class A shares acquired by conversion of Class B shares; or
o    Class B or Class C shares on which a CDSC was paid.

The transaction is considered a sale for federal (and state) income tax purposes
even if the  proceeds  are  reinvested.  If a loss is realized on the sale,  the
reinvestment  may  be  subject  to  the  "wash  sale"  rules  resulting  in  the
postponement of the recognition of the loss for tax purposes.

Sell shares by mail
o    Send a letter (signed by the owner of the account) to:
         Principal Mutual Funds
         P. O. Box 10423
         Des Moines Iowa 50306-9780

o    Specify the Fund and account number.
o    Specify the number of shares or the dollar amount to be sold.
o    A signature guarantee* will be required if the:
     o   sell order is for more than $100,000;
     o   account address has been changed within one month of the sell order; or
     o   check is payable to a party  other than the account  shareholder(s)  or
         Principal Life Insurance Company.
          *    If required,  the signature(s) must be guaranteed by a commercial
               bank,  trust company,  credit union,  savings and loan,  national
               securities   exchange  member  or  brokerage  firm.  A  signature
               guaranteed by a notary public or savings bank is not acceptable.

Sell shares in amounts of $100,000 or less by telephone* (1-800-247-4123)
o    The address on the account must not have been changed within the last month
     and  telephone  privileges  must apply to the account from which the shares
     are being sold.
o    If our phone lines are busy, you may need to send in a written sell order.
o    To sell shares the same day,  the order must be  received  before 3:00 p.m.
     Central Time.
o    Telephone  redemption  privileges  are NOT available  for Principal  Mutual
     Funds IRAs, 403(b)s,  SEPs, SIMPLES,  SAR-SEPs, or certain employee benefit
     plans, or on shares for which certificates have been issued.
o    If previously  authorized,  checks can be sent to a shareholder's U.S. bank
     account.
     *   The Fund and  transfer  agent  reserve  the right to  refuse  telephone
         orders to sell shares.  The  shareholder is liable for a loss resulting
         from a fraudulent  telephone order that the Fund reasonably believes is
         genuine. The Fund will use reasonable procedures to assure instructions
         are genuine. If the procedures are not followed, the Fund may be liable
         for loss due to unauthorized or fraudulent transactions. The procedures
         include:  recording all  telephone  instructions,  requesting  personal
         identification information (name, phone number, social security number,
         birth date,  etc.) and sending  written  confirmation to the address on
         the account.

Periodic withdrawal plans
You may set up a  periodic  withdrawal  plan on a  monthly,  quarterly,
semiannual  or annual  basis to:
o    sell a fixed number of shares ($25 initial minimum amount);
o    sell enough shares to provide a fixed amount of money ($25 initial  minimum
     amount);
o    pay insurance or annuity  premiums or deposits to Principal  Life Insurance
     Company (call us at 1-800-247-4123 for details); and
o    provide  an easy  method of making  monthly  installment  payments  (if the
     service is  available  from your  creditor  who must  supply the  necessary
     forms).

You can set up a periodic withdrawal plan by:
o    completing the applicable section of the application; or
o    sending us your written instructions (and share certificate, if any, issued
     for the account).

Your periodic  withdrawal plan continues  until: o you instruct us to stop; or o
your Fund account balance is zero.

When you set up the withdrawal plan, you select which day you want the sale made
(if none  selected,  the sale  will be made on the  15th of the  month).  If the
selected date is not a trading day, the sale will take place on the next trading
day (if that day falls in the month after your selected  date,  the  transaction
will take place on the trading  day before your  selected  date).  If  telephone
privileges  apply  to the  account,  you  may  change  the  date  or  amount  by
telephoning us at 1-800-247-4123.

Sales may be subject  to a CDSC.  Up to 10% of the value of a Class B or Class C
share  account may be withdrawn  annually  free of a CDSC. If the plan is set up
when the account is opened, 10% of the value of additional purchases made within
60 days may also be withdrawn  free of a CDSC.  The amount of the 10% withdrawal
privilege is reset as of the last business day of December of each year based on
the account's value as of that day.

Withdrawal  payments are sent on or before the third business day after the date
of the sale. It may take an additional  three  business days for your  financial
institution to post this payment to your account at that financial institution.

Sales made under your periodic  withdrawal  plan will reduce and may  eventually
exhaust your account. The Funds do not normally accept purchase payments while a
periodic  withdrawal  plan  is in  effect  (unless  the  purchase  represents  a
substantial addition to your account).

The Fund from which the periodic  withdrawal is made makes no  recommendation as
to either  the  number of shares or the  fixed  amount  that you  withdraw.  The
portion  of sales  proceeds  from the  Tax-Exempt  Bond  Fund  which  represents
tax-exempt income which has been accrued but not declared a dividend by the Fund
may be taxed at capital gain rates.

HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS

Your shares in the Funds  (except  Class A shares of Cash  Management,  LargeCap
Stock Index and Limited Term Bond Funds) may be exchanged without a sales charge
for the same class of any other  Principal  Mutual Fund.  After 90 days of their
purchase, Class A shares of LargeCap Stock Index and Limited Term Bond Funds may
be exchanged into Class A shares of the other Principal Mutual Funds.

Class A shares  of the Cash  Management  Fund  may be  exchanged  into
o    Class A shares of other Principal Mutual Funds.
     o   If the Cash Management shares were acquired by direct purchase, a sales
         charge will be imposed on the exchange into other Class A shares.
     o   If the Cash Management  shares were acquired by (i) exchange from other
         Funds,  (ii)  conversion  of Class B shares  or (iii)  reinvestment  of
         dividends earned on Class A shares that were acquired through exchange,
         no sales  charge  will be imposed on the  exchange  into other  Class A
         shares.
o    Class B or Class C shares of other Principal  Mutual Funds - subject to the
     CDSC.

The CDSC, if any, is not charged on exchanges. However, the purchase date of the
exchanged  shares and the CSDC table are used to determine if the newly acquired
shares are subject to the CDSC (and the amount of the CDSC if any) when they are
sold.

You may exchange shares by:
o    calling  us  (1-800-247-4123),  if you  have  telephone  privileges  on the
     account and if no share certificate has been issued.
o    sending a written request to:
                           Principal Mutual Funds
                           P. O. Box 10423
                           Des Moines, Iowa 50306-9780
o    completing an Exchange  Authorization  Form (call us at  1-800-247-4123  to
     obtain the form).

Automatic exchange election
This election  authorizes an exchange from one Principal  Mutual Fund to another
on a monthly, quarterly, semiannual or annual basis. You can set up an automatic
exchange  by:
o    completing the Automatic Exchange Election section of the application;
o    calling us  (1-800-247-4123)  if telephone  privileges apply to the account
     from which the exchange is to be made; or
o    sending us your written instructions.

Your automatic  exchange  continues  until:
o    you instruct us to stop; or
o    your Fund account balance is zero.

You may specify the day of the  exchange.  If the  selected day is not a trading
day,  the sale will take place on the next trading day (if that day falls in the
month after your selected date, the  transaction  will take place on the trading
day before your selected  date). If telephone  privileges  apply to the account,
you may change the date or amount by telephoning us at 1-800-247-4123.

General
o    An exchange by any joint owner is binding on all joint owners.
o    If you do not have an existing account in the Fund to which the exchange is
     being  made,  a new  account is  established.  The new account has the same
     owner(s),  dividend  and capital  gain  options and dealer of record as the
     account from which the shares are being exchanged.
o    All  exchanges  are  subject  to the  minimum  investment  and  eligibility
     requirement of the Fund being acquired.
o    You may acquire shares of a Fund only if its shares are legally  offered in
     your state of residence.
o    If a  certificate  has been issued,  it must be returned to the Fund before
     the exchange can take place.
o    Instructions  for  exchanges  in excess of $500,000  must be in writing and
     signature guaranteed.

The  exchange  privilege  is not  intended  for  short-term  trading.  Excessive
exchange  activity may interfere with  portfolio  management and have an adverse
impact on all shareholders.  In order to limit excessive exchange activity,  and
under  other  circumstances  where  the  Board of  Directors  of the Fund or the
Manager  believes it is in the best interest of the Fund,  the Fund reserves the
right to revise or terminate the exchange privilege,  limit the amount or number
of exchanges, reject any exchange or close any account. You would be notified of
any such action to the extent required by law.

Fund shares  used to fund an employee  benefit  plan may be  exchanged  only for
shares of other Principal Mutual Funds available to employee benefit plans. Such
an exchange  must be made by following the  procedures  provided in the employee
benefit  plan and the written  service  agreement.  The exchange is treated as a
sale of shares for federal  income (and state) tax  purposes and may result in a
capital gain or loss.  Income tax rules  regarding the calculation of cost basis
may make it undesirable in certain  circumstances  to exchange  shares within 90
days of their purchase.

GENERAL INFORMATION ABOUT A FUND ACCOUNT

Statements
You  will  receive  quarterly   statements  (monthly  statements  for  the  Cash
Management  Fund) for the Funds you own. The  statements  provide the number and
value of shares you own, transactions during the quarter,  dividends declared or
paid and other information.  The year end statement includes information for all
transactions  that took place during the year.  Please review your  statement as
soon as your  receive  it.  Keep  your  statements  as you may need them for tax
reporting purposes.

Generally,  each time you buy, sell or exchange shares between  Principal Mutual
Funds,  you will  receive a  confirmation  in the mail  shortly  thereafter.  It
summarizes all the key  information - what you bought or sold, the amount of the
transaction,  and other vital data. The Cash Management Fund mails confirmations
only once a month detailing dividend and account activity.

Certain purchases and sales are only included on your quarterly statement. These
include accounts
o    when the only activity during the quarter:
     o    is purchase of shares from reinvested dividends and/or capital gains;
     o    is a result of Dividend Relay;
     o    are purchases under a Automatic Investment Plan;
     o    are sales under a periodic withdrawal plan; and
     o    are purchases or sales under an automatic exchange election.
o    used to fund certain individual retirement or individual pension plans.
o    established under a payroll deduction plan.

Signature Guarantees
Certain transactions require that your signature be guaranteed. If required, the
signature(s)  must be guaranteed by a commercial  bank,  trust  company,  credit
union,  savings and loan, national securities exchange member or brokerage firm.
A signature  guaranteed  by a notary  public or savings bank is not  acceptable.
Signature guarantees are required:
o    if you sell more than $100,000 from any one Fund;
o    if  a  sales   proceeds   check  is  payable  to  other  than  the  account
     shareholder(s), Principal Life Insurance Company or one of its affiliates;
o    to make a Dividend  Relay  election from an account with joint owners to an
     account with only one owner or different joint owners;
o    to change ownership of an account;
o    to add telephone transaction services,  checkwriting and/or wire privileges
     to an existing account;
o    to change bank account  information  designated under an existing telephone
     withdrawal plan;
o    to have a sales  proceeds check mailed to an address other than the address
     on the  account  or to the  address on the  account if it has been  changed
     within the preceding month; and
o    to exchange more than $500,000 among the Principal Mutual Funds.

Minimum Account Balance
Generally,  the Funds do not have a minimum  required  balance.  Because  of the
disproportional  high cost of maintaining small accounts,  the Funds reserve the
right to set a minimum  and sell all shares in an  account  with a value of less
than $300. The sales  proceeds  would then be mailed to you.  These  involuntary
sales will not be triggered  just by market  conditions.  If the Fund  exercises
this right,  you will be notified that the  redemption is going to be made.  You
will have 30 days to make an additional  investment and bring your account up to
the  required  minimum.  The Fund  reserves  the right to increase  the required
minimum.

Special Plans
The Funds reserve the right to amend or terminate the special plans described in
this  prospectus.  Such plans  include  automatic  investment,  dividend  relay,
periodic  withdrawal,  and waiver or  reduction  of sales  charges  for  certain
purchasers.  You will be notified  of any such action to the extent  required by
law.

Telephone Instructions
The Funds reserve the right to refuse telephone instructions. You are liable for
a loss  resulting  from a fraudulent  telephone  instruction  that we reasonably
believe is genuine.  We use  reasonable  procedures to assure  instructions  are
genuine.  If the procedures  are not followed,  we may be liable for loss due to
unauthorized or fraudulent transactions.  The procedures include:  recording all
telephone instructions,  requesting personal  identification  information (name,
phone number,  social  security  number,  birth date,  etc.) and sending written
confirmation to the shareholder's address of record.

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



Additional  information  about  the  Fund  is  available  in  the  Statement  of
Additional Information dated ____________, and which is part of this prospectus.
The  Statement  of  Additional  Information  can be  obtained  free of charge by
writing or telephoning Princor Financial Services  Corporation,  P.O. Box 10423,
Des Moines, IA 50306. Telephone 1-800-247-4123.

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

The U.S.  Government  does not insure or guarantee an  investment  in any of the
Funds.  There can be no assurance that the Cash  Management Fund will be able to
maintain a stable share price of $1.00 per share.

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


       SEC FILE            DOMESTIC GROWTH-ORIENTED FUNDS

       811-05072           Principal Balanced Fund, Inc.
       811-06263           Principal Blue Chip Fund, Inc.
       811-01874           Principal Capital Value Fund, Inc.
       811-01873           Principal Growth Fund, Inc.
       811-                Principal LargeCap Stock Index Fund, Inc.
       811-05171           Principal MidCap Fund, Inc.
       811-08379           Principal Real Estate Fund, Inc.
       811-08381           Principal SmallCap Fund, Inc.
       811-07266           Principal Utilities Fund, Inc.

                           INTERNATIONAL GROWTH-ORIENTED FUNDS

       811-08249           Principal International Emerging Markets Fund, Inc.
       811-03183           Principal International Fund, Inc.
       811-08251           Principal International SmallCap Fund, Inc.

                           INCOME-ORIENTED FUNDS

       811-05172           Principal Bond Fund, Inc.
       811-04226           Principal Government Securities Income Fund, Inc.
       811-05174           Principal High Yield Fund, Inc.
       811-07453           Principal Limited Term Bond Fund, Inc.
       811-04449           Principal Tax-Exempt Bond Fund, Inc.

                           MONEY MARKET FUND

       811-03585           Principal Cash Management Fund, Inc.

                           PARTNERS FUNDS

       811-09567           Principal Partners Aggressive Growth Fund, Inc.
       811-                Principal Partners LargeCap Growth Fund, Inc.
       811-                Principal Partners MidCap Growth Fund, Inc.





                             PRINCIPAL MUTUAL FUNDS




DOMESTIC GROWTH-ORIENTED FUNDS

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.


                      INCOME-ORIENTED FUNDS

Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.


INTERNATIONAL GROWTH-ORIENTED FUNDS

Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.


MONEY MARKET FUND

Principal Cash Management Fund, Inc.


PARTNERS FUNDS

Principal Partners Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.




This  Prospectus  describes  mutual funds  organized by Principal Life Insurance
Company.  The Funds provide a choice of investment  objectives  through Domestic
Growth-Oriented  Funds,  International  Growth-Oriented  Funds,  Income-Oriented
Funds and the Money Market Fund.




                  The date of this Prospectus is March 1, 2000.




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




                                TABLE OF CONTENTS

Fund Descriptions.......................................................  4
     Domestic Growth-Oriented Funds
         Balanced Fund..................................................  6
         Blue Chip Fund.................................................  8
         Capital Value Fund............................................. 10
         Growth Fund ................................................... 12
         LargeCap Stock Index Fund...................................... 14
         MidCap Fund.................................................... 16
         Real Estate Fund............................................... 18
         SmallCap Fund.................................................. 20
         Utilities Fund................................................. 22

     International Growth-Oriented Funds
         International Emerging Markets Fund............................ 24
         International Fund............................................. 26
         International SmallCap Fund.................................... 28

     Partners Funds
         Aggressive Growth Fund......................................... 30
         LargeCap Growth Fund........................................... 32
         MidCap Growth Fund............................................. 34

    Income-Oriented Funds
         Bond Fund...................................................... 36
         Government Securities Income Fund.............................. 38
         High Yield Fund................................................ 40
         Limited Term Bond Fund......................................... 42

     Money Market Fund
         Cash Management Fund........................................... 44

The Costs of Investing.................................................. 46

Certain Investment Strategies and Related Risks......................... 48

Management, Organization and Capital Structure.......................... 52

Pricing of Fund Shares.................................................. 53

Dividends and Distributions............................................. 54

How To Buy Shares....................................................... 55

How To Sell Shares...................................................... 57

How To Exchange Shares Among Principal Mutual Funds..................... 60

General Information About a Fund Account................................ 61

Financial Highlights.................................................... 64

FUND DESCRIPTIONS

The   Principal   Mutual  Funds  have  four   categories   of  funds:   domestic
growth-oriented  funds,  international  growth-oriented  funds,  income-oriented
funds and Partners Funds (sub-advised by investment professionals not affiliated
with the Principal  Financial  Group).  Principal  Management  Corporation,  the
Manager  of each of the  Funds,  selects  Sub-Advisors  based  on the  advisor's
investment  philosophy.  The Manager seeks to provide a full range of investment
approaches through the Principal Mutual Funds.

              Fund                                   Sub-Advisor
  Balanced, Blue Chip, Capital Value,       Invista Capital Management, LLC
  Government Securities Income,             ("Invista")
  Growth, International, International
  Emerging Markets, International
  SmallCap, LargeCap Stock Index,
  Limited Term Bond, MidCap,
  SmallCap and Utilities

  Partners Aggressive Growth                Morgan Stanley Asset Management
                                            ("Morgan Stanley")

  Partners LargeCap Growth                  Duncan-Hurst Capital Management Inc.
                                            ("Duncan-Hurst")

  Partners MidCap Growth                    Turner Investment Partners, Inc.
                                            ("Turner")

Class R shares of the Principal  Mutual Funds are sold without a front-end sales
charge and do not have a contingent  deferred sales charge.  Only Class R shares
are offered through this prospectus.  Class A shares are only described  because
Class R shares convert to Class A shares 49 months after purchase.

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

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

Annual operating expenses
The  annual  operating  expenses  for each Fund are  deducted  from Fund  assets
(stated as a percentage  of Fund assets) and are shown as of the end of the most
recent fiscal year (estimates of expenses are shown for the new Funds). Examples
are  provided  which are intended to help you compare the cost of investing in a
particular  fund with the cost of investing in other mutual funds.  The examples
assume you invest  $10,000 in a Fund for the time periods  indicated.  The first
two lines of each example  assume that you sell all of your shares at the end of
those time  periods.  The second two assume  that you do not sell your shares at
the end of the periods.  The examples also assume that your  investment has a 5%
return each year and that the Fund's operating expenses are the same as the most
recent fiscal year expenses.  Although your actual costs may be higher or lower,
based on these assumptions, your costs would be as shown.

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

Fund Performance
As certain Funds have not been offered  before,  historical  information  is not
available for those Funds.  If historical  information is available,  the Fund's
description includes a bar chart and a set of tables.

The bar  chart is  included  to  provide  you with an  indication  of the  risks
involved when you invest. The chart shows changes in the Fund's performance from
year to year.  The  performance  reflected  in the bar chart does not  include a
sales charge. Class R shares are not subject to a sales charge.

One of the tables compares the Fund's average annual returns with:

o    a broad-based  securities  market index (An index measures the market price
     of a specific group of securities in a particular market of securities in a
     market sector.  You cannot invest  directly in an index.  An index does not
     have an investment advisor and does not pay any commissions or expenses. If
     an index had expenses, its performance would be lower.); and

o    an  average  of  mutual  funds  with a  similar  investment  objective  and
     management style. The averages used are prepared by independent statistical
     services.

The other table provides the highest and lowest  quarterly return for the Fund's
Class A shares over a given period.

Included  in  each  Fund's  description  is a set  of  tables  and a bar  chart.
Together, these provide an indication of the risks involved when you invest.

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

You may call Principal  Mutual Funds  (1-800-247-4123)  to get the current 7-day
yield for the Cash Management Fund.

Note:    Class R shares are offered only to  individuals  (and  his/her  spouse,
         chile, parent, grandchild and trusts primarily for their benefit) who:

     o    receive  lump sum  distributions  from  retirement  plans  serviced by
          Principal Life Insurance Comany;

     o    are participants in retirement plans serviced by the Principal Life;

     o    own life or  disability  insurance  policies  issued by the  Principal
          Life;

     o    are customers of Principal Residential Mortgage, Inc.;

     o    are customers of Principal Bank; and

     o    have existing Principal Mutual Fund Class R share accounts.

         Investments  in  these  Funds  are not  deposits  of a bank and are not
         insured or guaranteed by the Federal Deposit  Insurance  Corporation or
         any other government agency.

         No  salesperson,  dealer or any  other  person  is  authorized  to give
         information  or make  representations  about a Fund  other  than  those
         contained  in this  Prospectus.  Information  or  representations  from
         unauthorized  parties  may not be relied  upon as having been made by a
         Fund, the Manager or any Sub-Advisor.

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL BALANCED FUND, INC.
The Fund  seeks to  generate a total  investment  return  consisting  of current
income and capital  appreciation while assuming  reasonable risks in furtherance
of the investment objective.

Main Strategies
The Fund invests  primarily in common  stocks and corporate  bonds.  It may also
invest in other equity  securities,  government bonds and notes  (obligations of
the U.S.  government or its agencies) and cash.  Though the  percentages in each
category are not fixed,  common  stocks  generally  represent  40% to 70% of the
Fund's  assets.  The  remainder  of the Fund's  assets are invested in bonds and
cash.

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

The Fund generates  interest  income by investing in bonds and notes.  Bonds and
notes are also purchased for capital  appreciation  purposes when Invista thinks
that  declining  interest rates may increase  market value.  Deep discount bonds
(those  which sell at a  substantial  discount  from their face amount) are also
purchased to generate  capital  appreciation.  The Fund may invest in bonds with
speculative  characteristics  but does not intend to invest  more than 5% of its
assets in  securities  rated  below BBB by S&P or Baa by Moody's.  Fixed  income
securities  that are not  investment  grade are  commonly  referred  to as "junk
bonds" or high yield  securities.  These  securities  offer a higher  yield than
other, higher rated securities,  but they carry a greater degree of risk and are
considered speculative by the major credit rating agencies.

Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
reflect the  activities of individual  companies and general market and economic
conditions.  In the short  term,  stock  prices can  fluctuate  dramatically  in
response to these factors.

Bond values change daily. Their prices reflect changes in interest rates, market
conditions  and   announcements  of  other  economic,   political  or  financial
information.  When  interest  rates  fall,  the  price of a bond  rises and when
interest rates rise, the price declines.  As with all mutual funds, the value of
the Fund's  assets may rise or fall. If you sell your shares when their value is
less than the price you paid, you will lose money.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
but are  uncomfortable  accepting  the  risks of  investing  entirely  in common
stocks.


The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -5.18
"1991"  31.72
"1992"  10.47
"1993"  9.01
"1994"  -3.38
"1995"  23.39
"1996"  13
"1997"  17.29
"1998"  11.2
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

    Highest      .% (quarter ended )
    Lowest       .% (quarter ended )


    Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past FivePast Ten                                                     Past One Past FivePast Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>     <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %        %             S&P 500 Stock Index                            %        %        %
     Class R              *       --             Lehman Brothers Government/Corporate Bond Index
                                                 Lipper Balanced Fund Average

<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses

                                     Class A   Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %


                        Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years
- ----------------------------------------------------------
     Class A                 $        $       $         $
     Class R
  You would pay the  following  expenses if you did not redeem your shares:
     Class A
     Class R


                    Day-to-day Fund Management

     Since April 1993  Co-Manager: Judith A. Vogel,  CFA.  Portfolio  Manager of
                       Invista since 1987.

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


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL BLUE CHIP FUND, INC.
The Fund seeks to achieve  growth of capital  and growth of income by  investing
primarily in common stocks of well capitalized, established companies.

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

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

Invista  may invest up to 35% of Fund  assets in equity  securities,  other than
common  stocks,  issued  by blue chip  companies  and in  equity  securities  of
companies that do not fit the blue chip definition.  It may also invest up to 5%
of Fund assets in securities of unseasoned  issuers,  which are more speculative
than blue chip company securities.  While small,  unseasoned companies may offer
greater   opportunities  for  capital  growth  than  larger,   more  established
companies, they also involve greater risks and should be considered speculative.

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

Main Risks
The value of the stocks owned by the Fund changes on a daily basis.  The current
price  reflects the  activities of individual  companies and general  market and
economic conditions.  In the short term, stock prices can fluctuate dramatically
in response to these factors. Because of these fluctuations,  as with all mutual
funds,  the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are  willing to accept the risks of  investing  in common  stocks but prefer
investing in larger, established companies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.


Annual Total Returns
"1992"  6.09
"1993"  2.62
"1994"  3.36
"1995"  33.19
"1996"  16.78
"1997"  26.25
"1998"  16.55
"1999"

Calendar Years Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

    Highest      .% (quarter ended )
    Lowest       .% (quarter ended )



 Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                              Past One Past Five Past Ten
                Year     Years    Years                                                  Year     Years    Years

<S>              <C>       <C>      <C>            <C>                                    <C>       <C>       <C>
     Class A     %         %        %*             S&P 500  Stock  Index                  %         %         %
     Class R     **        -        -              Lipper  Large-Cap Value Fund Average

<FN>
     *    Period from March 1, 1991,  date Class A shares  first  offered to the
          public, through December 31, 1999.
     **   Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses

                                     Class A   Class R
     Management Fees*...............   %        %
     12b-1 Fees.....................
     Other Expenses.................


       Total Fund Operating Expenses   %        %

     *    The Manager has agreed to waive a portion of its fee for the Fund. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2000.  The waiver will  maintain a total level of  operating  expenses
          (expressed as a percent of average net assets  attributable to a Class
          on an  annualized  basis)  not to exceed  1.70% for Class R Shares and
          1.20% for Class A Shares.  The  effect of the  waiver is to reduce the
          Fund's annual operating expenses.



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years
 ----------------------------------------------------------
      Class A                 $        $       $         $
      Class R
   You would pay the  following  expenses if you did not redeem your shares:
      Class A
      Class R



                           Day-to-day Fund Management

     Since March 1991  Manager:  Mark T.  Williams,  CFA.  Portfolio  Manager of
                       Invista since 1995.


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL CAPITAL VALUE FUND, INC.
The  Fund  seeks  to  achieve  primarily  long-term  capital   appreciation  and
secondarily growth of investment income through the purchase primarily of common
stocks, but the Fund may invest in other securities.

Main Strategies
The Fund invests  primarily in common stocks. It may also invest in other equity
securities.  To achieve its  investment  objective,  the  Sub-Advisor,  Invista,
invests primarily in securities that have "value" characteristics.  This process
is known as "value investing." Value stocks tend to have higher yields and lower
price to earnings (P/E) ratios than other stocks.

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

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

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

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

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

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

Main Risks
The value of the stocks owned by the Fund changes on a daily basis.  The current
price  reflects the  activities of individual  companies and general  market and
economic conditions.  In the short term, stock prices can fluctuate dramatically
in response to these factors.  As with all mutual funds, the value of the Fund's
assets may rise or fall.  If you sell your  shares when their value is less than
the price you paid, you will lose money.

Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth,
and are  willing  to accept  the risks of  investing  in common  stocks but also
prefer investing in companies that appear to be considered  undervalued relative
to similar companies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -10.64
"1991"  37.21
"1992"  9.09
"1993"  7.56
"1994"  0.21
"1995"  31.9
"1996"  23.42
"1997"  28.69
"1998"  12.13
"1999"


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

    Highest      .% (quarter ended )
    Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>      <C>                        <C>                               <C>      <C>      <C>
     Class A     %        %        %             S&P 500 Stock Index                            %        %        %
     Class R              *       --             Lipper Large-Cap Value Fund Average

<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses

                                Class A        Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years
 ---------------------------------------------------------
     Class A                 $        $       $         $
     Class R
  You would pay the  following  expenses if you did not redeem your shares:
     Class A
     Class R


                           Day-to-day Fund Management

Since November 1996   Manager:  Catherine A. Zaharis,  CFA.  Portfolio Manager
                      of Invista since 1987.



DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL GROWTH FUND, INC.
The Fund seeks  growth of  capital  through  the  purchase  primarily  of common
stocks, but the Fund may invest in other securities.

Main Strategies
In seeking  the Fund's  objective  of capital  growth,  the Fund's  Sub-Advisor,
Invista,  uses an approach described as "fundamental  analysis." The basic steps
involved in this analysis are:

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

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

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

     o    offer new products or new services.

Main Risks
These  securities  present greater  opportunities  for capital growth because of
high  potential  earnings  growth,  but  may  also  involve  greater  risk  than
securities which do not have the same potential.  The companies may have limited
product  lines,  markets  or  financial  resources,  or may  depend on a limited
management  group.  Their  securities  may trade less  frequently and in limited
volume.  As a result,  these  securities  may change in value more than those of
larger, more established companies. As the value of the stocks owned by the Fund
changes,  the Fund share price  changes.  In the short term, the share price can
fluctuate dramatically. As with all mutual funds, the value of the Fund's assets
may rise or fall.  If you sell your  shares  when  their  value is less than the
price you paid, you will lose money.

Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth.
Additionally,  you must be willing to accept  the risks of  investing  in common
stocks that may have greater risks than stocks of companies with lower potential
for earnings growth.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -1.41
"1991"  56.61
"1992"  10.16
"1993"  7.51
"1994"  3.21
"1995"  33.47
"1996"  12.23
"1997"  28.41
"1998"  20.37
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )



     Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past FivePast Ten                                                     Past One Past FivePast Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>     <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %        %             S&P 500 Stock Index                            %        %        %
     Class R              *       --             Lipper Multi-Cap Core Fund Average

<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


Fund Operating Expenses


                                    Class A        Class R
     Management Fees................   %              %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %              %



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                            1 Year  3 Years  5 Years 10 Years
  -----------------------------------------------------------
        Class A                 $        $       $         $
        Class R
     You would pay the  following  expenses if you did not redeem your shares:
        Class A
        Class R


                           Day-to-day Fund Management

     Since _________           Manager:



DOMESTIC  GROWTH-ORIENTED FUND

PRINCIPAL LARGECAP STOCK INDEX FUND, INC.
The LargeCap Stock Index Fund seeks long-term growth of capital.

Main Strategies
Under normal market  conditions,  the Fund invests at least 80% of its assets in
common  stocks of  companies  that  compose the  Standard & Poor's*  ("S&P") 500
Index.  The  Sub-advisor,   Invista,  will  attempt  to  mirror  the  investment
performance  of the index by allocating the Fund's assets in  approximately  the
same weightings as the S&P 500. Over the long-term,  Invista seeks a correlation
between performance of the Fund, before expenses, and that of the S&P 500. It is
unlikely that a perfect correlation of 100 will be achieved.

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

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

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

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

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

Investor Profile
The Stock Index 500 Fund is generally a suitable  investment  if you are seeking
long-term  growth and are  willing to accept  the risks of  investing  in common
stocks and prefer a passive rather than active management style.

*    Standard & Poor's  Corporation is not affiliated  with the Principal  Stock
     Index 500 Fund,  Inc.,  Invista  Capital  Management  LLC or Principal Life
     Insurance Company.

As the inception date of the Fund is ___________________, historical performance
data is not available. Estimated annual Fund operating expenses are as follows:

                            Fund Operating Expenses*

                                Class A        Class R
     Management Fees**..............   %        %
     12b-1 Fees.....................
     Other Expenses.................


       Total Fund Operating Expenses   %        %

     * Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed  _____%  for Class R Shares  and 0.80% for Class A Shares.  The
          effect  of  the  waiver  is to  reduce  the  Funds  annual  operating
          expenses.




                                    EXAMPLES


The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years
- ----------------------------------------------------------
     Class A                 $        $       $         $
     Class R
  You would pay the  following  expenses if you did not redeem your shares:
     Class A
     Class R




                           Day to Day Fund Management

Since __________
(Fund's Inception)



DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL MIDCAP FUND, INC.
The Fund  seeks to  achieve  capital  appreciation  by  investing  primarily  in
securities of emerging and other growth-oriented companies.

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

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

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

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

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are willing to accept the potential for short-term fluctuations in the value
of your  investments.  It is designed for a portion of your  investments and not
designed for you if you are seeking income or conservation of capital.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -6.33
"1991"  52.83
"1992"  14.81
"1993"  12.29
"1994"  3.03
"1995"  34.2
"1996"  19.13
"1997"  22.94
"1998"  -0.23
"1999"

Calendar Years Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )



       Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>      <C>           <C>                                            <C>      <C>      <C>
     Class A     %        %        %             S&P 400 MidCap Index                           %        %        %
     Class R              *       --             S&P 500 Stock Index
                                                 Lipper Mid-Cap Core Fund Average

<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses

                                     Class A   Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                           1 Year  3 Years  5 Years 10 Years
 -----------------------------------------------------------
       Class A                 $        $       $         $
       Class R
    You would pay the  following  expenses if you did not redeem your shares:
       Class A
       Class R


                           Day-to-day Fund Management

 Since ______          Manager:



DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL REAL ESTATE FUND, INC.
The Fund  seeks to  generate  total  return  by  investing  primarily  in equity
securities of companies principally engaged in the real estate industry.

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

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

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

Main Risks
Securities of real estate  companies  are subject to securities  market risks as
well as risks  similar  to those  of  direct  ownership  of real  estate.  These
include:

<TABLE>
<S>  <C> <C>                                              <C> <C>
     o   declines in the value of real estate             o   risks related to general and local economic conditions
     o   dependency on management skills                  o   heavy cash flow dependency
     o   possible lack of available mortgage funds        o   overbuilding
     o   extended vacancies in properties                 o   increases in property taxes and operating expenses
     o   changes in zoning laws                           o   expenses incurred in the cleanup of environmental problems
     o   casualty or condemnation losses                  o   changes in interest rates
</TABLE>

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

Because of these factors,  the value of the securities  held by the Fund, and in
turn the net asset value of the shares of the Fund change on a daily basis.  The
current share price reflects the activities of individual  companies and general
market and economic  conditions.  In the short term,  share prices can fluctuate
dramatically  in  response  to these  factors.  Because  of these  fluctuations,
principal  values and  investment  returns vary.  As with all mutual funds,  the
value of the Fund's  assets may rise or fall. If you sell your shares when their
value is less than the price you paid, you will lose money.

Investor Profile
The Real  Estate  Fund is  generally  a suitable  investment  if you are seeking
long-term  growth,  want to  invest  in  companies  engaged  in the real  estate
industry and are willing to accept fluctuations in the value of your investment.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1998"  -13.62
"1999"

Calendar Year Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

    Highest      .% (quarter ended )
    Lowest       .% (quarter ended )


     Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>      <C>             <C>                                            <C>     <C>        <C>
     Class A     %       %*        --             Morgan Stanley REIT Index                      %        %         %
     Class R             %**       --             Lipper Real Estate Fund Average

<FN>
     *    Period  from  December  31,  1997,  date A shares  first  offered to the
          public, through December 31, 1999.
     **   Period  from  December  31,  1997,  date R shares  first  offered to eligible
          purchasers, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses

                                Class A        Class R
     Management Fees*...............   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %

     *    The Manager has agreed to waive a portion of its fee for the Fund. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2000.  The waiver will  maintain a total level of  operating  expenses
          (expressed as a percent of average net assets  attributable to a Class
          on an  annualized  basis)  not to exceed  2.40% for Class R Shares and
          1.90% for Class A Shares.  The  effect of the  waiver is to reduce the
          Fund's annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                           1 Year  3 Years  5 Years 10 Years
  ----------------------------------------------------------
       Class A                 $        $       $         $
       Class R
    You would pay the  following  expenses if you did not redeem your shares:
       Class A
       Class R


                           Day-to-day Fund Management

Since December 1997  Manager: Kelly D. Rush, CFA. Assistant Director-Investment
            - Commercial Real Estate of Principal Capital Management since 1996.


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL SMALLCAP FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing  primarily in
equity   securities   of   companies   with    comparatively    smaller   market
capitalizations.

Main Strategies
The  Fund  invests  in  equity   securities   of  companies  in  the  U.S.  with
comparatively smaller market  capitalizations.  Market capitalization is defined
as total current  market value of a company's  outstanding  common stock.  Under
normal  market  conditions,  the Fund  invests  at least  65% of its  assets  in
securities of companies with market capitalizations of $1 billion or less.

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

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

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

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are willing to accept the potential for volatile  fluctuations  in the value
of your  investment.  It is not  designed  for you if you are seeking  income or
conservation of capital.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1998"  -5.68
"1999"

Calendar Year Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )


     Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>       <C>            <C>                                            <C>      <C>       <C>
     Class A     %       %*        --             S&P 500 Stock Index                            %        %         %
     Class R             %**        --             Lipper Small-Cap Core Fund Average

<FN>
     *    Period  from  December  31,  1997,  date A shares  first  offered to the
          public, through December 31, 1999.
     **   Period  from  December  31,  1997,  date R shares  first  offered to eligible
          purchasers, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

                                    Class A  Class R
     Management Fees*...............   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %

     *    The Manager has agreed to waive a portion of its fee for the Fund. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2000.  The waiver will  maintain a total level of  operating  expenses
          (expressed as a percent of average net assets  attributable to a Class
          on an  annualized  basis)  not to exceed  2.30% for Class R Shares and
          1.80% for Class A Shares.  The  effect of the  waiver is to reduce the
          Fund's annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                           1 Year  3 Years  5 Years 10 Years
  ----------------------------------------------------------
       Class A                 $        $       $         $
       Class R
    You would pay the  following  expenses if you did not redeem your shares:
       Class A
       Class R




                           Day-to-day Fund Management

Since December 1997   Co-Manager: Mark T. Williams, CFA. Portfolio Manager of
                      Invista since 1995.
Since December 1997   Co-Manager: John F. McClain, Portfolio Manager of Invista
                      since 1995.


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL UTILITIES FUND, INC.
The Fund seeks to provide high current income and long-term growth of income and
capital.  The Fund seeks to achieve its  objective  by  investing  primarily  in
equity  and  fixed  income  securities  of  companies  in the  public  utilities
industry.

Main Strategies

The Fund  invests in  securities  issued by  companies  in the public  utilities
industry. These companies include:
     o    companies engaged in the manufacture,  production, generation, sale or
          distribution of electric or gas energy or other types of energy, and
     o   companies   engaged   in   telecommunications,   including   telephone,
         telegraph, satellite, microwave and other communications media (but not
         public  broadcasting or cable  television).
The  Sub-Advisor,  Invista,  considers  a company to be in the public  utilities
industry if, at the time of  investment,  at least 50% of the company's  assets,
revenues or profits are derived from one or more of those industries.

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

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

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

Generally,  the prices  charged by utilities are regulated with the intention of
protecting  the public  while  ensuring  that  utility  companies  earn a return
sufficient to attract capital to grow and provide appropriate services. However,
due to political and regulatory factors, rate changes ordinarily occur following
a change in  financing  costs.  This delay tends to  favorably  affect a utility
company's  earnings and dividends  when costs are  decreasing but also adversely
affects earnings and dividends when costs are rising. In addition,  the value of
the utility  company  bond prices  rise when  interest  rates fall and fall when
interest rates rise.

Certain states are adopting  deregulation plans. These plans generally allow for
the  utility  company to set the  amount of their  earnings  without  regulatory
approval.

The share price of the Fund may  fluctuate  more widely than the value of shares
of a fund  that  invests  in a broader  range of  industries.  Because  of these
fluctuations,  principal values and investment  returns vary. As with all mutual
funds,  the value of the Fund's assets may rise or fall. If you sell your shares
when their value is less than the price you paid, you will lose money.

Investor Profile
The  Fund is  generally  a  suitable  investment  if you are  seeking  quarterly
dividends to generate  income or to be reinvested for growth,  want to invest in
companies in the utilities  industry and are willing to accept  fluctuations  in
the value of your investment.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns


"1993"  8.42
"1994"  -11.09
"1995"  33.87
"1996"  4.56
"1997"  29.58
"1998"  22.5
"1999"

Calendar Years Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       . (quarter ended )



      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>      <C>            <C>                                            <C>      <C>      <C>
     Class A     %        %       %*             S&P 500 Stock Index                            %        %        %
     Class R             **       --             Dow Jones Utilities Index with
                                                      Income Fund Average                                         --
                                                 Lipper Utilities Fund Average

<FN>
*    Period from  December  16, 1992,  date Class A shares first  offered to the
     public,  through  December 31, 1999.
**   Period  from  February  29,  1996,  date  Class R shares  first  offered to
     eligible purchasers, through December 31, 1999.

</FN>
</TABLE>


Fund Operating Expenses

                                     Class A   Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                           1 Year  3 Years  5 Years 10 Years
   ---------------------------------------------------------
       Class A                 $        $       $         $
       Class R
    You would pay the  following  expenses if you did not redeem your shares:
       Class A
       Class R


                           Day-to-day Fund Management

Since April 1993   Manager:  Catherine A. Zaharis, CFA. Portfolio Manager of
                   Invista since 1987.



INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
The Fund seeks to achieve long-term growth of capital by investing  primarily in
equity securities of issuers in emerging market countries.

Main Strategies
The Fund  seeks to  achieve  its  objective  by  investing  in common  stocks of
companies in emerging market countries. For this Fund, the term "emerging market
country" means any country which is considered to be an emerging  country by the
international   financial  community   (including  the  International  Bank  for
Reconstruction   and  Development  (also  known  as  the  World  Bank)  and  the
International  Financial  Corporation).  These countries generally include every
nation in the world except the United  States,  Canada,  Japan,  Australia,  New
Zealand and most nations located in Western  Europe.  Investing in many emerging
market  countries is not feasible or may involve  unacceptable  political  risk.
Invista,  the  Sub-Advisor,  focuses on those emerging market  countries that it
believes have strongly developing  economies and markets which are becoming more
sophisticated.

Under  normal  conditions,  at least 65% of the Fund's  assets are  invested  in
emerging market country equity securities. The Fund invests in securities of:
     o    companies with their principal  place of business or principal  office
          in emerging market countries;
     o    companies  for which the  principal  securities  trading  market is an
          emerging market country; or
     o    companies,  regardless of where its securities are traded, that derive
          50% or more of their  total  revenue  from  either  goods or  services
          produced in emerging market countries or sales made in emerging market
          countries.

Main Risks
Investments in emerging market countries involve special risks. Certain emerging
market countries have historically experienced,  and may continue to experience,
certain  economic  problems.  These may include:  high rates of inflation,  high
interest rates,  exchange rate  fluctuations,  large amounts of debt, balance of
payments  and trade  difficulties,  and  extreme  poverty and  unemployment.  In
addition,  there are risks involved with any  investment in foreign  securities.
Foreign  stocks  carry  risks  that are not  generally  found in  stocks of U.S.
companies.  These include the risk that a foreign security could lose value as a
result of political,  financial  and economic  events in foreign  countries.  In
addition,  foreign securities may be subject to securities  regulators with less
stringent  accounting  and  disclosure  standards  than  are  required  of  U.S.
companies.

Under  unusual  market or economic  conditions,  the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued  by  domestic  or  foreign  corporations,   governments  or  governmental
agencies,  instrumentalities  or political  subdivisions.  The securities may be
denominated in U.S. dollars or other currencies.

Because the values of the Fund's assets are likely to rise or fall dramatically,
if you sell your shares  when their  value is less than the price you paid,  you
will lose money.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
who want to invest a portion  of their  assets in  securities  of  companies  in
emerging market countries. This Fund is not an appropriate investment if you are
seeking either  preservation of capital or high current income. You must be able
to  assume  the  increased  risks  of  higher  price   volatility  and  currency
fluctuations  associated with investments in international stocks which trade in
non-U.S. currencies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.


Annual Total Returns

"1998"  -17.42
"1999"

Calendar Year Ended December 31


The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       .% (quarter ended )



      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>       <C>            <C>                                            <C>      <C>       <C>
     Class A     %       %*        --             Morgan Stanley Capital International EMF       %         %        %
     Class R              **       --               (Emerging Markets Free) Index
                                                  Lipper Emerging Markets Fund Average

<FN>
*    Period  from August 29,  1997,  date  A shares  first  offered to the public,
     through December 31, 1999.
**   Period  from August 29,  1997,  date  R shares  first  offered to eligible purchasers,
     through December 31, 1999.

</FN>
</TABLE>

Fund Operating Expenses

                                    Class A  Class R
     Management Fees*...............   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %

     *    The Manager has agreed to waive a portion of its fee for the Fund. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2000.  The waiver will  maintain a total level of  operating  expenses
          (expressed as a percent of average net assets  attributable to a Class
          on an  annualized  basis)  not to exceed  3.00% for Class R Shares and
          2.50% for Class A Shares.  The  effect of the  waiver is to reduce the
          Fund's annual operating expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                            1 Year  3 Years  5 Years 10 Years
  -----------------------------------------------------------
        Class A                 $        $       $         $
        Class R
     You would pay the  following  expenses if you did not redeem your shares:
        Class A
        Class R

                           Day-to-day Fund Management

Since May 1997    Manager:  Kurtis D. Spieler, CFA.  Portfolio Manager of
                  Invista since 1995.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL FUND, INC.

The Fund seeks long-term growth of capital by investing in a portfolio of equity
securities of companies domiciled in any of the nations of the world.

Main Strategies
The Fund invests in common stocks of companies  established  outside of the U.S.
The Fund has no limitation on the  percentage of assets that are invested in any
one country or  denominated  in any one  currency.  However  under normal market
conditions,  the Fund  intends  to have at least 65% of its assets  invested  in
companies in at least three different  countries.  One of those countries may be
the U.S.  though  currently  the Fund  does  not  intend  to  invest  in  equity
securities of U.S. companies.

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

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

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

Under  unusual  market or economic  conditions,  the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued  by  domestic  or  foreign  corporations,   governments  or  governmental
agencies,  instrumentalities  or political  subdivisions.  The securities may be
denominated in U.S. dollars or other currencies.

As with all mutual  funds,  the value of the Fund's  assets may rise or fall. If
you sell your shares when their value is less than the price you paid,  you will
lose money.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and want to  invest  in  non-U.S.  companies.  This  Fund is not an  appropriate
investment  if you are seeking  either  preservation  of capital or high current
income.  You  must be  able to  assume  the  increased  risks  of  higher  price
volatility   and  currency   fluctuations   associated   with   investments   in
international stocks which trade in non-U.S. currencies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -9.51
"1991"  15.25
"1992"  0.81
"1993"  46.34
"1994"  -5.26
"1995"  11.56
"1996"  23.76
"1997"  12.22
"1998"  8.48
"1999"

Calendar Years Ended December 31


The year-to-date  return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

       Highest      .% (quarter ended )
       Lowest       .% (quarter ended )



      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>      <C>          <C>                                              <C>      <C>       <C>
     Class A     %        %        %             Morgan Stanley Capital International EAFE       %         %        %
     Class R              *        --               (Europe, Australia and Far East) Index
                                                 Lipper International Fund Average

<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


Fund Operating Expenses

                                     Class A  Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                           1 Year  3 Years  5 Years 10 Years
   ---------------------------------------------------------
       Class A                 $        $       $         $
       Class R
    You would pay the  following  expenses if you did not redeem your shares:
       Class A
       Class R


                           Day-to-day Fund Management

Since April 1994  Manager: Scott D. Opsal, CFA. Executive Vice President and
                  Chief Investment Officer of Invista since 1997.



INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.

The Fund seeks to achieve long-term growth of capital by investing  primarily in
equity  securities of non-United  States  companies with  comparatively  smaller
market capitalizations.

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

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

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

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

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

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and want to invest a portion of your assets in smaller, non-U.S. companies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1998"  14.4
"1999"

Calendar Year Ended December 31



The year-to-date return as of December 31, 1999 for Class A shares is _____% and
for Class R shares is _____%.

The fund's highest/lowest quarterly results during this time period were:

     Highest      .% (quarter ended )
     Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>     <C>       <C>            <C>                                           <C>      <C>         <C>
     Class A     %       %*        --             Morgan Stanley Capital International EAFE      %        %         %
     Class R              **        --               (Europe, Australia and Far East) Index
                                                  Lipper International Small-Cap Fund Average

<FN>
     *    Period from August 29, 1997,  date A shares first offered to the public,
          through December 31, 1999.
     **   Period from August 29, 1997,  date R shares first offered to eligible purchasers,
          through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

                                    Class A  Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                           1 Year  3 Years  5 Years 10 Years
  ----------------------------------------------------------
       Class A                 $        $       $         $

       Class R
    You would pay the  following  expenses if you did not redeem your shares:
       Class A
       Class R


                           Day-to-day Fund Management

Since May 1997    Manager:  Darren K. Sleister, CFA.  Portfolio Manager of
                  Invista since 1995.



PARTNERS FUND

PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
The Fund seeks to provide long-term capital appreciation.

Main Strategies
The Fund seeks to maximize long-term capital appreciation by investing primarily
in the equity  securities of U.S. and, to a limited  extent,  foreign  companies
that exhibit strong or accelerating  earnings  growth.  The universe of eligible
companies generally includes those with market  capitalizations of $1 billion or
more. The Sub-Advisor,  Morgan Stanley, emphasizes individual security selection
and  may  focus  the  Fund's  holdings  within  the  limits  permissible  for  a
diversified fund.

Morgan Stanley  follows a flexible  investment  program in looking for companies
with above average  capital  appreciation  potential.  Morgan Stanley focuses on
companies  with  consistent or rising  earnings  growth  records and  compelling
business  strategies.  Morgan Stanley continually and rigorously studies company
developments,  including  business  strategy,  management  focus  and  financial
results to identify  companies with earnings  growth and business  momentum.  In
addition,  Morgan Stanley closely  monitors  analysts'  expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations.  Valuation is of secondary importance and is viewed in the context
of prospects  for  sustainable  earnings  growth and the  potential for positive
earnings surprises in relation to consensus expectations.

The Fund has a long-term investment approach.  However, Morgan Stanley considers
selling  securities of issuers that no longer meet its  criteria.  To the extent
that the Fund engages in short-term trading,  it may have increased  transaction
costs.

Main Risks
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
can fluctuate  dramatically  both in the long-term and  short-term.  The current
price  reflects the  activities of individual  companies and general  market and
economic  conditions.  Prices of equity securities tend to be more volatile than
prices of fixed-income securities. The prices of equity securities rise and fall
in response to a number of different  factors.  In particular,  prices of equity
securities  respond to events that affect entire financial markets or industries
(for example changes in inflation or consumer  demand) and to events that affect
particular  issuers  (for  example  news  about the  success or failure of a new
product).

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

At times, the Fund's market sector (mid- to large-capitalization growth-oriented
equity  securities)  may  underperform  relative to other sectors.  The Fund may
purchase  stocks of companies that may have greater risks than other stocks with
lower potential for earnings growth.

As with all mutual funds,  as the value of the Fund's assets rise and fall,  the
Fund's share price changes. If you redeem (sell) your shares when their value is
less than the price you paid, you will lose money.

Investor Profile
The Fund is  generally  a suitable  investment  if you are willing to accept the
risks and uncertainties of investing in equity securities in the hope of earning
superior returns.

As the inception  date of the Fund is November 1, 1999,  historical  performance
data is not available. Estimated annual Fund operating expenses are as follows:


Average Annual total return for the period ending December 31, 1999

This  table  shows how the Fund's  cumulative  returns  compare  with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One                                                        Past One Past Five Past Ten
                Year                                                            Year     Years    Years

<S>             <C>               <C>                                            <C>      <C>      <C>
     Class A    %*                S&P 500 Stock Index                            %        %        %
     Class R     **               Lipper Multi-Cap Core Fund Average

<FN>
     * Period  from  November  1, 1999,  date A shares first offered to the public, through December 31, 1999.
     * Period  from  November  1, 1999,  date R shares first  offered to eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


                            Fund Operating Expenses*

                                     Class A   Class R
     Management Fees **.............   %        %
     12b-1 Fees.....................
     Other Expenses.................


       Total Fund Operating Expenses   %        %

     * Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  2.10%  for Class R Shares  and 1.60% for Class A Shares.  The
          effect  of  the  waiver  is to  reduce  the  Fund's  annual  operating
          expenses.

                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years
- -----------------------------------------------------------
      Class A                 $        $     N/A       N/A
      Class R                                N/A       N/A
   You would pay the  following  expenses if you did not redeem your shares:
      Class A                                N/A       N/A
      Class R                                N/A       N/A

                       Day-to-day Fund Management

Since November 1999
(Fund's inception)

     Co-Manager,  Philip W. Friedman,  Managing Director of Morgan Stanley & Co.
     Incorporated  and Morgan Stanley.  Prior to joining Morgan Stanley in 1997,
     he was the Director of Equity Research,  Morgan Stanley & Co.  (1995-1997).
     Prior  thereto,  he was a member  of Morgan  Stanley  & Co.  Incorporated's
     Equity Research team (1990-1995).

     Co-Manager, William S. Auslander, Portfolio Manager and Principal of Morgan
     Stanley & Co.  Incorporated  and Morgan  Stanley.  Prior to joining  Morgan
     Stanley in 1995, he was an equity analyst at Icahn & Co. (1986-1995).

     Co-Manager,  Margaret K. Johnson, Portfolio Manager and Principal of Morgan
     Stanley & Co.  Incorporated  and Morgan  Stanley. Ms. Johnson joined Morgan
     Stanley in 1984.

PARTNERS FUND

PRINCIPAL PARTNERS LARGECAP GROWTH FUND, INC.
The Fund seeks  long-term  growth of capital by  investing  primarily  in common
stocks of larger capitalization domestic companies.

Main Strategies
The  Fund is a  non-diversified  fund  that  invests  in  equity  securities  of
companies in the U.S. with comparatively larger market  capitalizations.  Market
capitalization  is  defined  as  total  current  market  value  of  a  company's
outstanding common stock.  Under normal market  conditions,  the Fund invests at
least 75% of its total assets in domestic companies with market  capitalizations
in excess of $10  billion.  In  addition,  the Fund may  invest up to 25% of its
assets in securities of foreign issuers.

In selecting securities for investment, the Sub-Advisor,  Duncan-Hurst, looks at
stocks it believes  have  prospects  for  above-average  growth over an extended
period of time.  Duncan-Hurst  seeks to  identify  companies  with  accelerating
earnings growth and positive company  fundamentals.  While economic  forecasting
and industry sector analysis play a part in its research effort,  Duncan-Hurst's
stock selection process begins with individual  company analysis.  This is often
referred to as a bottom-up approach to investing. From a group of companies that
meet Duncan-Hurst's standards, it selects the securities of those companies that
it believes will have earnings growth at an  above-average  rate. In making this
determination,  Duncan-Hurst  considers certain  characteristics of a particular
company  including new product  development,  management  change and competitive
market dynamics.

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

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

The Fund  anticipates  that its portfolio  turnover rate will  typically  exceed
150%.  Turnover rates in excess of 100% generally  result in higher  transaction
costs and a possible increase in short-term capital gains (or losses).

The Fund is a non-diversified  company, as defined in the Investment Company Act
of 1940,  as amended  (the "1940  Act"),  which  means  that a  relatively  high
percentage of assets of the Fund may be invested in the obligations of a limited
number of issuers.  The value of the shares of the Fund may be more  susceptible
to a single  economic,  political or regulatory  occurrence than the shares of a
diversified investment company would be.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
and are willing to accept the potential for volatile  fluctuations  in the value
of your investment.  This Fund is designed as a long-term investment with growth
potential  for  diversification  of  your  investment   portfolio.   It  is  not
appropriate if you are seeking income or conservation of capital.

As  the  inception  date  of  the  Fund  is   ____________________,   historical
performance data is not available.  Estimated annual Fund operating expenses are
as follows:

                            Fund Operating Expenses*

                                     Class A   Class R
     Management Fees**..............   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %

     * Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  ____% for Class R Shares;  ____% and for Class A Shares.  The
          effect  of  the  waiver  is to  reduce  the  Fund's  annual  operating
          expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years
- -----------------------------------------------------------
      Class A                 $        $     N/A       N/A

      Class R                                N/A       N/A
   You would pay the  following  expenses if you did not redeem your shares:

      Class A                                N/A       N/A
      Class R                                N/A       N/A

                           Day-to-day Fund Management

Since _____
(Fund's inception)

PARTNERS FUND

PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC.
The Fund seeks to provide long-term growth of capital by investing  primarily in
medium capitalization U.S. companies with strong earnings growth potential.

Main Strategies
The Fund invests  primarily in common stocks and other equity securities of U.S.
companies.  Under normal market conditions, the Fund invests at least 65% of its
assets in  companies  with  market  capitalizations  in the $1  billion  and $10
billion range.

The Fund invests in securities of companies that are diversified across economic
sectors. It attempts to maintain sector concentrations that approximate those of
its current  benchmark,  the Russell MidCap Index. The Fund is not an index fund
and does not limit its  investment  to the  securities of issuers in the Russell
MidCap Index.

The  Sub-Advisor,  Turner,  selects stocks that it believes have strong earnings
growth potential. Turner invests in companies with strong earnings dynamics, and
sells those with deteriorating earnings prospects. Turner believes forecasts for
market timing and sector rotation are unreliable,  and introduce an unacceptable
level of risk.  As a result,  under normal market  conditions  the Fund is fully
invested.

Due to its investment strategy, the Fund may buy and sell securities frequently.
This may result in higher transaction costs and additional capital gains tax.

Main Risks
Because it  purchases  equity  securities,  the Fund is subject to the risk that
stock  prices  will fall over  short or  extended  periods  of time.  Individual
companies may report poor results or be negatively  affected by industry  and/or
economic  trends  and  developments.  The  price of  securities  issued  by such
companies may suffer a decline in response.  These  factors  contribute to price
volatility, which is the principal risk of investing in the Fund.

In addition,  the Fund is subject to the risk that its principal market segment,
medium  capitalization  growth stocks, may underperform compared to other market
segments or to the equity markets as a whole.  Because of this  volatility,  the
value of the Fund's  equity  securities  may  fluctuate on a daily basis.  These
fluctuations  may reduce your principal  investment and lead to varying returns.
If you sell your shares  when their  value is less than the price you paid,  you
will lose money.

The medium  capitalization  companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established  companies.
In  particular,  these  mid-size  companies  may pose greater risk due to narrow
product  lines,  limited  financial  resources,  less depth in  management  or a
limited trading market for their securities.

Investor Profile
The Fund is generally a suitable  investment if you are seeking long-term growth
of capital and are willing to accept the potential for  short-term  fluctuations
in the  value of your  investment.  This  Fund is not  designed  for  income  or
conservation of capital.

As  the  inception  date  of  the  Fund  is   ____________________,   historical
performance data is not available.  Estimated annual Fund operating expenses are
as follows:


Fund Operating Expenses*

                                     Class A   Class R
     Management Fees**..............   %        %
     12b-1 Fees....................
     Other Expenses................


       Total Fund Operating Expenses   %        %

     * Total Fund Operating Expenses are estimated.

     **   The Manager has agreed to waive a portion of its fee for the Fund from
          the date  operations  commenced.  The Manager  intends to continue the
          waiver and, if necessary,  pay expenses  normally  payable by the Fund
          through the period ending October 31, 2000. The waiver will maintain a
          total level of operating  expenses  (expressed as a percent of average
          net  assets  attributable  to a Class on an  annualized  basis) not to
          exceed:  ____% for Class R Shares;  ____% and for Class A Shares.  The
          effect  of  the  waiver  is to  reduce  the  Fund's  annual  operating
          expenses.


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                         1 Year  3 Years  5 Years 10 Years
- ----------------------------------------------------------
     Class A                 $        $     N/A       N/A
     Class R                                N/A       N/A
  You would pay the  following  expenses if you did not redeem your shares:
     Class A                                N/A       N/A
     Class R                                N/A       N/A





                           Day-to-day Fund Management

Since _____
(Fund's inception)


INCOME-ORIENTED FUND

PRINCIPAL BOND FUND, INC.
The Fund  seeks to  provide  as high a level of  income  as is  consistent  with
preservation of capital and prudent investment risk.

Main Strategies
The Fund invests in fixed-income  securities.  Generally,  the Fund invests on a
long-term basis but may make short-term investments. Longer maturities typically
provide  better yields but expose the Fund to the  possibility of changes in the
values of its  securities  as interest  rates change.  Generally,  when interest
rates fall, the price per share rises,  and when rates rise, the price per share
declines.

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

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

During the fiscal year ended  October  31,  1999,  the  average  ratings of this
Fund's  assets  based on market  value at each  month-end,  were as follows (all
ratings are by Moody's):
                                              Aaa                    0.05%
                                              Aa                     2.90%
                                              A                     21.87%
                                              Baa                   66.11%
                                              Ba                     9.06%

Under unusual market or economic  conditions,  the Fund may invest up to 100% of
its assets in cash and cash equivalents.

Main Risks
When  interest  rates fall,  the price of a bond rises and when  interest  rates
rise, the price declines. In addition,  the value of securities held by the Fund
may be affected by factors  such as credit  rating of the entity that issued the
bond and  effective  maturities of the bond.  Lower quality and longer  maturity
bonds will be subject to greater credit risk and price  fluctuations than higher
quality and shorter maturity bonds.

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce income or to be reinvested in additional  Fund shares to help achieve
modest  growth  objectives  without  accepting  the risks of investing in common
stocks.  As with all mutual  funds,  if you sell your shares when their value is
less than the price you paid, you will lose money.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  4.64
"1991"  17.45
"1992"  8.61
"1993"  12.77
"1994"  -4.35
"1995"  22.28
"1996"  2.27
"1997"  10.96
"1998"  7.14
"1999"

Calendar Years Ended December 31



The year-to-date  return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

      Highest      .% (quarter ended )
      Lowest       . (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>      <C>           <C>                                              <C>     <C>       <C>
     Class A     %        %        %             Lehman Brothers BAA Corporate Index              %        %        %
     Class R              *        --            Lipper Corporate Debt BBB Rated Fund Average


<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses


                                     Class A   Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                            1 Year  3 Years  5 Years 10 Years
   ----------------------------------------------------------
        Class A                 $        $       $         $
        Class R
     You would pay the  following  expenses if you did not redeem your shares:
        Class A
        Class R


                           Day-to-day Fund Management

Since November 1996   Manager: Scott A. Bennett, CFA. Assistant Director -
                      Securities Investment of Principal Capital
                      Management since 1996.



INCOME-ORIENTED FUND

PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.
The Fund seeks a high level of current income, liquidity and safety of principal
by purchasing  obligations  issued or guaranteed by the United States Government
or its  agencies,  with emphasis on Government  National  Mortgage  Associations
Certificates.  The  guarantees by the United States  Government  extends only to
principal and interest. There are certain risks unique to GNMA Certificates.

Main Strategies
The Fund invests in U.S. Government securities, which include obligations issued
or guaranteed by the U.S. Government or its agencies or  instrumentalities.  The
Fund may invest in securities supported by:
     o    full faith and credit of the U.S. Government (e.g. GNMA certificates);
          or
     o    credit of the  instrumentality  (e.g. bonds issued by the Federal Home
          Loan Bank).

In addition, the Fund may invest in money market instruments.

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

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

Main Risks
Although  some of the  securities  the Fund  purchases  are  backed  by the U.S.
government  and its  agencies,  shares  of the  Fund  are not  guaranteed.  When
interest rates fall, the value of the Fund's shares rises,  and when rates rise,
the value  declines.  Because of the fluctuation in values of the Fund's shares,
if you sell your shares  when their  value is less than the price you paid,  you
will lose money.

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

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

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

Investor Profile
The Fund is generally a suitable  investment  if you want  monthly  dividends to
provide  income or to be reinvested in additional  Fund shares to produce growth
and  prefer to have the  repayment  of  principal  and  interest  on most of the
securities  in which the Fund invests to be back by the U.S.  Government  or its
agencies.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  9.52
"1991"  16.83
"1992"  6.13
"1993"  9.16
"1994"  -4.89
"1995"  19.19
"1996"  3.85
"1997"  9.69
"1998"  7.19
"1999"

Calendar Years Ended December 31



The year-to-date  return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

    Highest      .% (quarter ended )
    Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>      <C>           <C>                                             <C>     <C>        <C>
     Class A     %        %        %             Lehman Brothers GNMA Index                      %        %         %
     Class R              *        --            Lipper GNMA Fund Average

<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>


Fund Operating Expenses

                                     Class A   Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                          1 Year  3 Years  5 Years 10 Years
  ---------------------------------------------------------
      Class A                 $        $       $         $
      Class R
   You would pay the  following  expenses if you did not redeem your shares:
      Class A
      Class R


                           Day-to-day Fund Management

Since May 1985    Manager:  Martin J. Schafer, CFA. Portfolio Manager of Invista
                  since 1992.



INCOME-ORIENTED FUND

PRINCIPAL HIGH YIELD FUND, INC.
The Fund seeks high current income primarily by purchasing high yielding,  lower
or non-rated  fixed income  securities  which are believed not to involve  undue
risk to income  or  principal.  Capital  growth is a  secondary  objective  when
consistent with the objective of high current income.

Main Strategies
The Fund invests in high yield, lower or unrated fixed income securities.  Fixed
income  securities  that  are  commonly  known  as "junk  bonds"  or high  yield
securities.  These  securities  offer a higher  yield than other,  higher  rated
securities  but they  carry a greater  degree of risk and are  considered  to be
speculative  with  respect to the  issuer's  ability to pay  interest  and repay
principal.

The Fund invests its assets in  securities  rated Ba1 or lower by Moody's or BB+
or lower by S&P.  The Fund may also  invest  in  unrated  securities  which  the
Manager  believes  to be of  comparable  quality.  The Fund  does not  invest in
securities rated below Caa (Moody's) or below CCC (S&P) at the time of purchase.
The SAI contains descriptions of the securities rating categories.

During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets,  based on market value at each  month-end,  were as follows (all ratings
are by Moody's):

       0.74% in securities rated A            46.72% in securities rated Ba
       2.62% in securities rated Baa          52.59% in securities rated B
       2.64% in securities rated C             0.10% in securities rated D

The  above  percentage  for  securities  rated  Ba  includes  2.89%  of  unrated
securities and securities  rated B includes  2.52% of unrated  securities  which
have been determined by the Manager to be of comparable quality.

Main Risks
Investors  assume special risks when  investing in the Fund.  Compared to higher
rated securities, lower rated securities may:
     o    have a more  volatile  market  value,  generally  reflecting  specific
          events affecting the issuer;
     o    be subject to greater  risk of loss of income and  principal  (issuers
          are generally not as financially secure);
     o    have a lower volume of trading,  making it more  difficult to value or
          sell the security; and
     o    be more susceptible to a change in value or liquidity based on adverse
          publicity  and  investor  perception,  whether or not based on factual
          analysis.

The market for higher-yielding, lower-rated securities has not been tested by an
economic  recession.  An economic  downturn may severely  disrupt the market for
these  securities.  This could cause financial  stress to the issuer  negatively
affecting the issuer's  ability to pay  principal  and  interest.  This may also
negatively affect the value of the Fund's securities.  In addition, if an issuer
defaults  the Fund may  have  additional  expenses  if it tries to  recover  the
amounts due it.

Some securities the Fund buys have call provisions.  A call provision allows the
issuer of the  security  to redeem it before  its  maturity  date.  If a bond is
called in a declining  interest  rate market,  the Fund would have to replace it
with  a  lower  yielding  security.  This  results  in a  decreased  return  for
investors.  In addition,  in a rising  interest rate market,  a higher  yielding
security's  value  decreases.  This is  reflected in a lower share price for the
Fund.

The Fund tries to minimize the risks of investing in lower rated  securities  by
diversification,  investment  analysis and attention to current  developments in
interest rates and economics  conditions.  Although the Fund's Manager considers
securities  ratings  when  making  investment  decisions,  it  performs  its own
investment  analysis.  This  analysis  includes  traditional  security  analysis
considerations such as:
     o    experience and managerial strength
     o    changing financial condition
     o    borrowing requirements or debt maturity schedules
     o    responsiveness to changes in business conditions
     o    relative value based on anticipated cash flow
     o    earnings prospects

The  Manager  continuously  monitors  the  issuers of the Fund's  securities  to
determine  if the  issuers  will have  sufficient  cash flow and profits to meet
required  principal  and interest  payments.  It also  monitors each security to
assure the security's  liquidity so the Fund can meet requests for sales of Fund
shares.

For defensive purposes, the Fund may invest in other securities.  During periods
of adverse market  conditions,  the Fund may invest in all types of money market
instruments,  higher  rated  fixed-income  securities  or any other fixed-income
securities  consistent  with the  temporary  defensive  strategy.  The  yield to
maturity on these  securities  is generally  lower than the yield to maturity on
lower rated fixed-income securities.

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to provide income or to be reinvested in Fund shares for growth.  However, it is
suitable only for that portion of your  investments for which you are willing to
accept  potentially  greater risk. You should carefully consider your ability to
assume the risks of this Fund  before  making an  investment  and be prepared to
maintain  your   investment  in  the  Fund  during  periods  of  adverse  market
conditions.  This Fund  should  not be relied  on to meet  short-term  financial
needs.  As with all mutual  funds,  the value of the  Fund's  assets may rise or
fall.  If you sell your shares when their value is less than the price you paid,
you will lose money.


The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1990"  -11.66
"1991"  28.74
"1992"  13.09
"1993"  12.1
"1994"  -0.65
"1995"  15.61
"1996"  12.54
"1997"  9.68
"1998"  -1.28
"1999"

Calendar Years Ended December 31



The year-to-date  return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

        Highest      .% (quarter ended )
        Lowest       .% (quarter ended )



      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                    Past One Past Five Past Ten
                Year     Years    Years                                                        Year     Years    Years

<S>              <C>      <C>      <C>        <C>                                               <C>      <C>        <C>
     Class A     %        %        %          Lehman Brothers High Yield Composite Bond Index   %         %         %
     Class R              *        --         Lipper High Current Yield Fund Average

<FN>
     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.
</FN>
</TABLE>

Fund Operating Expenses

                                     Class A   Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                            1 Year  3 Years  5 Years 10 Years
   ----------------------------------------------------------
        Class A                 $        $       $         $
        Class R
     You would pay the  following  expenses if you did not redeem your shares:
        Class A
        Class R


                           Day-to-day Fund Management

Since April 1998   Manager: Mark P. Denkinger, CFA. Assistant Director -
                   Securities Investment of Principal Capital Management
                   since 1998.



INCOME-ORIENTED FUND

PRINCIPAL LIMITED TERM BOND FUND, INC.
The Fund seeks a high level of current income  consistent with a relatively high
level of principal  stability by investing in a portfolio of  securities  with a
dollar weighted average maturity of five years or less.

Main Strategies
The Fund  invests  in high  grade,  short-term  debt  securities.  Under  normal
circumstances, it invests at least 80% of its assets in:
     o    securities issued or guaranteed by the U.S. Government or its agencies
          or instrumentalities;
     o    debt  securities of U.S.  issuers rated in the three highest grades by
          S&P or Moody's; or
     o    if  unrated,   are  of  comparable  quality  in  the  opinion  of  the
          Sub-Advisor, Invista.

The rest of the Fund's assets are invested in  securities in the fourth  highest
rating category or their  equivalent.  Securities in the fourth highest category
are "investment  grade." While they are considered to have adequate  capacity to
pay  interest and repay  principal,  they do have  speculative  characteristics.
Changes in economic and other  conditions  are more likely to impact the ability
of the issuer to make  principal  and  interest  payments  than is the case with
higher rated securities.

Main Risks
The Fund may invest in corporate debt securities and mortgage-backed securities.
When  interest  rates fall,  the price of a bond rises and when  interest  rates
rise,  the  price  declines.  In  addition,  the  value  of the  corporate  debt
securities  held by the Fund may be affected by factors such as credit rating of
the entity  that issued the bond and  effective  maturities  of the bond.  Lower
quality  and longer  maturity  bonds will be subject to greater  credit risk and
price fluctuations than higher quality and short maturity bonds.

Mortgage backed  securities are subject to prepayment  risk. When interest rates
decline,  significant unscheduled prepayments may result. These prepayments must
then be  reinvested at lower rates.  Prepayments  may also shorten the effective
maturities of these securities,  especially during periods of declining interest
rates.  On the other hand,  during periods of rising interest rates, a reduction
in  prepayments  may  increase the  effective  maturities  of these  securities,
subjecting  them to the risk of decline in market  value in  response  to rising
interest. This may increase the volatility of the Fund.

Under  normal  circumstances,  the  Fund  maintains  a  dollar-weighted  average
maturity of not more than five years. In determining the average maturity of the
Fund's  assets,  the maturity date of callable or prepayable  securities  may be
adjusted to reflect Invista's  judgment regarding the likelihood of the security
being called or prepaid.

Under unusual market or economic  conditions,  for temporary  defensive purposes
the Fund may invest up to 100% of its assets in the cash or cash equivalents.

As with all mutual  funds,  the value of the Fund's  assets may rise or fall. If
you sell your shares when their value is less than the price you paid,  you will
lose money.

Investor Profile
The Fund is generally a suitable  investment  if you want  monthly  dividends to
generate income or to reinvest for modest growth.  You must be willing to accept
some  volatility  in the  value  of your  investment  but do not  want  dramatic
volatility.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

Annual Total Returns

"1997"  6.63
"1998"  6.7
"1999"

Calendar Years Ended December



The year-to-date  return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

    Highest      .% (quarter ended )
    Lowest       .% (quarter ended )



      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

<TABLE>
<CAPTION>
              Past One Past Five Past Ten                                                            Past One Past Five Past Ten
                Year     Years    Years                                                                 Year     Years    Years

<S>              <C>     <C>       <C>       <C>                                                          <C>      <C>       <C>
     Class A     %       %*        --        Lehman Brothers Intermediate Government/Corporate Index      %        %         %
     Class R              **       --        Lipper Short-Intermediate Investment Grade Debt
                                               Fund Average

<FN>
     *    Period  from  February  29,  1996,  date shares  first  offered to the public,
          through December 31, 1999.
     **   Period  from  February  29,  1996,  date R shares  first  offered to eligible
          purchasers, through December 31, 1999.

</FN>
</TABLE>


Fund Operating Expenses

                                     Class A   Class R
     Management Fees*...............   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %

     *    The Manager has agreed to waive a portion of its fee for the Fund. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2000.  The waiver will  maintain a total level of  operating  expenses
          (expressed as a percent of average net assets  attributable to a Class
          on an  annualized  basis)  not to exceed  1.60% for Class R Shares and
          1.00% for Class A Shares.  The  effect of the  waiver is to reduce the
          Fund's annual operating expenses.



                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                             1 Year  3 Years  5 Years 10 Years
    ----------------------------------------------------------
         Class A                 $        $       $         $
         Class R
      You would pay the  following  expenses if you did not redeem your shares:
         Class A
         Class R


                           Day-to-day Fund Management

Since February 1996   Manager:  Martin J. Schafer, CFA. Portfolio Manager of
                      Invista since 1992.

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND, INC.

The Fund seeks as high a level of income available from short-term securities as
is considered  consistent  with  preservation  of principal and  maintenance  of
liquidity by investing in a portfolio of money market instruments.

Main Strategies
The Fund seeks as high a level of income available from short-term securities as
is considered  consistent  with  preservation  of principal and  maintenance  of
liquidity by investing in a portfolio of money market instruments.

The Fund  invests its assets in a portfolio  of money  market  instruments.  The
investments are U.S. dollar  denominated  securities  which the Manager believes
present minimal credit risks.  At the time the Fund purchases each security,  it
is an  "eligible  security"  as  defined  in the  regulations  issued  under the
Investment Company Act of 1940.

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

It is the policy of the Fund to be as fully  invested  as  possible  to maximize
current income. Securities in which the Fund invests include:

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

Main Risks
As with all  mutual  funds,  the value of the  Fund's  assets  may rise or fall.
Although  the Fund seeks to  preserve  the value of an  investment  at $1.00 per
share,  it is possible to lose money by  investing  in the Fund if you sell your
shares when their value is less than the price you paid.  An  investment  in the
Fund is not insured or guaranteed by the Federal Deposit  Insurance  Corporation
or any other government agency.

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly dividends
to produce  income without  incurring  much  principal  risk or your  short-term
needs.

The Fund's past  performance  is not predictive of future  performance.  The bar
chart and tables  provide some  indication of the risks of investing in the Fund
by showing changes in the Fund's Class A share performance from year to year.

 Annual Total Returns

"1990"  7.63
"1991"  5.8
"1992"  3.38
"1993"  2.63
"1994"  3.77
"1995"  5.44
"1996"  4.96
"1997"  4.88
"1998"  5.15
"1999"

Calendar Years Ended December 31



The year-to-date  return as of December 31, 1999 for Class A shares is ____% and
for Class R shares is ____%.

The fund's highest/lowest quarterly results during this time period were:

        Highest      .% (quarter ended )
        Lowest       .% (quarter ended )


      Average annual total returns for the period ending December 31, 1999

This table shows how the Fund's average  annual returns  compare with those of a
broad-based  securities  market  index  and  an  index  of  funds  with  similar
investment objectives.

              Past One Past FivePast Ten
                Year     Years    Years

     Class A     %        %        %
     Class R              *        --

     *    Period from  February 29, 1996,  date Class R shares first  offered to
          eligible purchasers, through December 31, 1999.

Fund Operating Expenses

                                    Class A  Class R
     Management Fees................   %        %
     12b-1 Fees.....................
     Other Expenses.................

       Total Fund Operating Expenses   %        %


                                    Examples

The  Examples  assume that you invest  $10,000 in the Fund for the time  periods
indicated  and then redeem all of your shares at the end of those  periods.  The
Examples also assume that your investment has a 5% return each year and that the
Fund's  operating  expenses  remain the same.  Although your actual costs may be
higher or lower, based on these assumptions your cost would be:

                            1 Year  3 Years  5 Years 10 Years
   ----------------------------------------------------------
        Class A                 $       $         $        $
        Class R
     You would pay the  following  expenses if you did not redeem your shares:
        Class A
        Class R


                           Day-to-day Fund Management

Since March 1983  Co-Manager: Michael R.Johnson. Assistant Director - Securities
                  Trading of Principal Capital Management since 1994.

Since _________   Co-Manager:   Alice Robertson

THE COSTS OF INVESTING

Fees and Expenses of the Funds

This table  describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.
<TABLE>
                                Shareholder Fees
                    (fees paid directly from your investment)

<CAPTION>
                               Maximum Sales Load Imposed                                         Contingent
                          on Purchases of Class R sharesRedemption      Exchange     Deferred       Sales
        Fund            (as a percentage of offering price)               Fee*          Fee         Charge

      <S>                              <C>                                <C>           <C>          <C>
      All Funds                        None                               None          None         None

*  A wire charge of $6.00 will be deducted for all wire transfers.
</TABLE>

Fees and expenses are important because they lower your earnings.  However,  low
costs do not guarantee  higher earnings.  For example,  a fund with no front-end
sales  charge may have  higher  ongoing  expenses  than a fund with such a sales
charge.  Before  investing,  you  should be sure you  understand  the  nature of
different costs. Your Registered Representative can help you with this process.

Class R shares of the Principal  Mutual Funds are sold without a front-end sales
charge and do not have a contingent deferred sales charge.  There is no sales on
shares  of any  of the  Funds  purchased  with  reinvested  dividends  or  other
distributions.

Class R shares automatically convert into Class A shares (based on share prices,
not numbers of shares) 49 months after purchase.  Class R shares provide you the
benefit of putting  all your  dollars to work from the time of  investment,  but
(until  conversion)  have higher  ongoing fees and lower  dividends than Class A
shares.

Only Class R shares  are  offered  in this  prospectus.  Class A shares are only
described  because Class R shares convert to Class A shares.  Orders for Class R
shares of $500,000 or more are treated as orders for Class A shares  (unless you
include a written  instruction  that the order should be treated as an order for
Class R shares.)

Class A shares of the Cash  Management  Fund are sold  without  a sales  charge.
Class A shares  of the  other  Funds  are  sold  with a sales  charge  that is a
variable  percentage  based on the amount of the purchase.  This table shows the
sales charge for those funds which is based on the amount of your purchase.
<TABLE>
<CAPTION>
                                         All Funds (Except
                                     LargeCap Stock Index and     LargeCap Stock Index and             Sales Charge for
                                     Limited Term Bond Funds)      Limited Term Bond Funds           Dealers Allowance as
                                       Sales Charge as % of:        Sales Charge as % of:             % of Offering Price

                                                                                              All Funds Except     LargeCap Stock
                                       Offering    Net Amount      Offering    Net Amount   LargeCap Stock Index  Index and Limited
         Amount invested                 Price      Invested         Price      Invested    and Limited Term Bond  Term Bond Funds

<S>                                      <C>         <C>            <C>          <C>                 <C>               <C>
   Less than $50,000                     4.75%       4.99%          1.50%        1.52%               4.00%             1.25%
   $50,000 but less than $100,000        4.25%       4.44%          1.25%        1.27%               3.75%             1.00%
   $100,000 but less than $250,000       3.75%       3.90%          1.00%        1.10%               3.25%             0.75%
   $250,000 but less than $500,000       2.50%       2.56%          0.75%        0.76%               2.00%             0.50%
   $500,000 but less than $1,000,000     1.50%       1.52%          0.50%        0.50%               1.25%             0.25%
   $1,000,000 or more                    0           0              0            0                   0.75%             0.25%
</TABLE>

The  front-end  sales charge is waived on an investment of $1 million or more in
Class A  shares.  There  may be a CDSC on  shares  sold  within 18 months of the
purchase  date.  The CDSC  does not apply to shares  purchased  with  reinvested
dividends or other distributions. The CDSC is calculated as 0.75% (0.25% for the
LargeCap  Stock Index and Limited  Term Bond Funds) of the lesser of the current
market  value or the  initial  purchase  price of the shares  sold.  The CDSC is
waived on shares sold to fund a Principal Mutual Fund 401(a) or Principal Mutual
Fund  401(k)  retirement  plan,  except  redemptions  which  are the  result  of
termination of the plan or transfer of plan assets.

The CDSC is also waived:
o    on shares sold to satisfy IRS minimum distribution rules
o    using a periodic  withdrawal  plan. (You may sell up to 10% of the value of
     the shares subject to a CDSC without paying the CDSC.)

In the case of selling some but not all of the shares in an account,  the shares
not subject to a sales charge are redeemed  first.  Other shares are redeemed in
the order purchased (first in, first out).  Shares subject to the CDSC which are
exchanged into another  Principal Mutual Fund continue to be subject to the CDSC
until the CDSC expires.

Broker-dealers that sell Principal Mutual Funds are paid a certain percentage of
the sales  charge in  exchange  for their  services.  At the  option of  Princor
Financial Services Corporation,  the amount paid to a dealer may be more or less
than that shown in the chart  above.  The amount  paid  depends on the  services
provided. Amounts paid to dealers on purchases without an front-end sales charge
are determined by and paid for by Princor.

SALES CHARGE WAIVER OR REDUCTION

Class A shares  of the  Funds may be  purchased  without a sales  charge or at a
reduced  sales  charge.  The Funds  reserve the right to change or stop offering
shares in this  manner at any time for new  accounts  and with 60 days notice to
shareholders of existing accounts.

Waiver of sales charge. A Fund's Class A shares may be purchased without a sales
charge:

o    by its Directors,  Principal Life and its subsidiaries and their employees,
     officers,  directors  (active or  retired),  brokers  or agents.  This also
     includes their immediate family members and trusts for the benefit of these
     individuals;
o    by the Principal Employees' Credit Union;
o    by  non-ERISA  clients  of Invista  Capital  Management  LLC and  Principal
     Capital Management LLC;
o    by any employee or Registered  Representative  (and their  employees) of an
     authorized broker-dealer;
o    through   broker-dealers,   investment   advisors   and   other   financial
     institutions  that  have  entered  into an  agreement  with  Princor  which
     includes a requirement  that such shares be sold for the benefit of clients
     participating  in a "wrap  account" or similar  program under which clients
     pay  a  fee  to  the   broker-dealer,   investment   advisor  or  financial
     institution;
o    by unit  investment  trusts  sponsored by Principal Life Insurance  Company
     and/or its subsidiaries or affiliates;
o    by certain  employee  welfare benefit plan customers of Principal Life with
     Plan Deposit Accounts;
o    by participants who receive  distributions  from certain annuity  contracts
     offered by Principal Life (except for shares of Tax-Exempt Bond Fund);
o    to the extent the investment  represents the proceeds of a total  surrender
     of certain  Principal Life issued  unregistered  group annuity contracts to
     fund an employer plan if Principal Life waives any applicable CDSC or other
     contract surrender charge;
o    using  cash  payments  received  from the  Principal  Bank under its awards
     program;
o    to the extent the investment  represents  redemption  proceeds from certain
     unregistered  group annuity  contracts  issued by Principal Life to fund an
     employer's  401(a) plan where such proceeds are used to fund the employer's
     401(a) plan; and
o    to the  extent  the  purchase  proceeds  represent  a  distribution  from a
     terminating  401(a) plan if the employer or plan trustee has entered into a
     written  agreement  with  Princor  permitting  the  group  solicitation  of
     employees/participants.  Such  purchases  are  subject  to the  CDSC  which
     applies to purchases of $1 million or more as described above.

Class A shares may also be purchased  without a sales charge if your  Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met:

o    your  purchase of Class A shares must take place  within the first 180 days
     of  your  Registered  Representative's   affiliation  with  the  authorized
     broker-dealer;
o    your  investments  must represent the sales proceeds from other mutual fund
     shares (you must have paid a front-end sales charge or a CDSC) and the sale
     must occur within the 180 day period; and
o    you must indicate on your Principal  Mutual Fund  application  that you are
     eligible for waiver of the front-end sales charge.
o    you must send Princor either:
     o    the check for the sales proceeds  (endorsed to Principal Mutual Funds)
          or
     o    a copy of the  confirmation  statement  from  the  other  mutual  fund
          showing the sale transaction. If you place your order to buy Principal
          Mutual  Fund shares on the  telephone,  you must send us a copy of the
          confirmation within 21 days of placing the order. If we do not receive
          the  confirmation  within 21 days, we will sell enough of your Class A
          shares to pay the sales charge that otherwise would have been charged.

NOTE:Please be aware  that the sale of your  other  mutual  funds  shares may be
     subject to federal (and state)  income  taxes.  In addition,  you may pay a
     surrender charge to the other mutual fund.

Ongoing fees. Each Fund pays ongoing operating fees to its Manager,  Underwriter
and others who provide services to the Fund. They reduce the value of each share
you own.

Distribution (12b-1) Fees
Each of the Funds  (except  the Cash  Management  Fund for  Class A shares)  has
adopted a Distribution  Plan under Rule 12b-1 of the  Investment  Company Act of
1940.  Under the Plan, the Fund pays a fee to Princor based on the average daily
net  asset  value of the Fund.  These  ongoing  fees pay  expenses  relating  to
distribution  fees for the sale of Fund  shares  and for  services  provided  by
Princor and other  selling  dealers to  shareholders.  Because  they are ongoing
fees, over time they may exceed other types of sales charges.

The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
o    Class R shares (except LargeCap Stock Index Fund)                  0.75%
o    Class R shares of the LargeCap Stock Index Fund                    0.65%
o    Class A shares (except Cash Management, LargeCap Stock Index
     and Limited Term Bond Funds)                                       0.25%
o    Class A shares of the LargeCap Stock Index and
     Limited Term Bond Funds                                            0.15%

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

The Statement of Additional  Information (SAI) contains  additional  information
about investment strategies and their related risks.

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

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

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

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

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

Each of the  Principal  Mutual  Funds  may  lend  its  portfolio  securities  to
unaffiliated   broker-dealers   and  other  unaffiliated   qualified   financial
institutions.

Currency Contracts
The  International,  International  Emerging  Markets,  International  SmallCap,
Partners Aggressive Growth,  Partners LargeCap Growth and Partners MidCap Growth
Funds may each enter into forward currency contracts, currency futures contracts
and options,  and options on  currencies  for hedging and other  non-speculative
purposes. A forward currency contract involves a privately negotiated obligation
to purchase  or sell a specific  currency at a future date at a price set in the
contract.  A Fund will not hedge currency exposure to an extent greater than the
aggregate  market  value of the  securities  held or to be purchased by the Fund
(denominated or generally quoted or currently convertible into the currency).

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

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

Warrants
Each of the Funds (except Cash Management and Government  Securities Income) may
invest up to 5% of its assets in  warrants.  Up to 2% of a Fund's  assets may be
invested  in  warrants  which are not listed on either the New York or  American
Stock Exchanges.

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

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

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

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

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

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

Options
Each of the Funds  (except Cash  Management)  may buy and sell certain  types of
options. Each type is more fully discussed in the SAI.

Foreign Securities
Each of the  following  Funds may invest in foreign  securities  (securities  of
non-U.S.  companies) to the indicated percentage of its assets. (Debt securities
issued in the United States pursuant to a registration  statement filed with the
Securities  and Exchange  Commission  are not treated as foreign  securities for
purposes of these limitations.)

o    International,  International  Emerging Markets and International  SmallCap
     Funds - 100%;
o    Partners Aggressive Growth,  Partners LargeCap Growth and Real Estate Funds
     - 25%;
o    Balanced,  Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
     Bond, MidCap, SmallCap and Utilities Funds - 20%; and
o    LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

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

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

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

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

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

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

Portfolio Turnover
"Portfolio  Turnover" is the term used in the industry for  measuring the amount
of trading that occurs in a Fund's  portfolio  during the year.  For example,  a
100%  turnover  rate means that on average  every  security in the portfolio has
been  replaced once during the year.  Funds with high turnover  rates (more than
100%) often have higher  transaction  costs (which are paid by the Fund) and may
generate short-term capital gains (on which you pay taxes even if you don't sell
any of your shares during the year).

You can find the turnover  rate for each Fund,  except for the Cash  Management,
LargeCap Stock Index,  Partners Aggressive Growth,  Partners LargeCap Growth and
Partners MidCap Growth Funds, in the Fund's Financial Highlights table.

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

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

The Manager
Principal Management  Corporation serves as the manager for the Principal Mutual
Funds.  In its  handling  of the  business  affairs  of each Fund,  the  Manager
provides  clerical,  recordkeeping  and  bookkeeping  services,  and  keeps  the
financial and accounting  records required for the Funds. The Manager has signed
sub-advisory  agreements  with various  Sub-Advisors  for  portfolio  management
functions for certain Funds.  The Manager  compensates  the  Sub-Advisor for its
services as provided in the subadvisory agreement.

The Manager is a subsidiary of Principal Financial Services, Inc. It has managed
mutual funds since 1969.  As of  ____________________,  the funds it managed had
assets of  approximately  $____  billion.  The  Manager's  address is  Principal
Financial Group, Des Moines, Iowa 50392-0200.

The Sub-Advisors

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

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

Fund:             Partners LargeCap Growth
Sub-Advisor:      Duncan-Hurst Capital Management, Inc. was founded in 1990.
                  Its address is 4365 Executive Drive, Suite 1520, San Diego, CA
                  92121. Duncan-Hurst  currently  manages  assets  of  $ ______
                  billion for institutional and individual investors.

Fund:             Partners MidCap Growth
Sub-Advisor:      Turner Investment  Partners,  Inc., 1235 Westlake Drive, Suite
                  350, Berwyn, PA 19312, is a professional investment management
                  firm  founded in 1990.  As of ____,  Turner had  discretionary
                  management  authority  with respect to  approximately  $______
                  billion in assets.  Turner has  provided  investment  advisory
                  services to investment companies since 1992.

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

The Manager is paid a fee by the Fund for its services,  which  includes any fee
paid to the  Sub-Advisor.  The fee  paid by each  Fund (as a  percentage  of the
average daily net assets) for the fiscal year ended October 31, 1999 was:

         Balanced                                    0.58%
         Blue Chip                                   0.46%
         Bond                                        0.48%
         Capital Value                               0.37%
         Cash Management                             0.44%
         Government Securities Income                0.45%
         Growth                                      0.38%
         High Yield                                  0.60%
         International                               1.25%
         International Emerging Markets              0.68%
         International SmallCap                      1.20%
         Limited Term Bond                           0.50%*
         MidCap                                      0.56%
         Real Estate                                 0.90%
         SmallCap                                    0.85%
         Tax-Exempt Bond                             0.46%
         Utilities                                   0.59%
         * Before waiver.


PRICING OF FUND SHARES

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

For all Funds,  except the Cash  Management  Fund, the share price is calculated
by:
o    taking the current market value of the total assets of the Fund
o    subtracting liabilities of the Fund
o    dividing the remainder proportionately into the Classes of the Fund
o    subtracting the liabilities of each Class
o    dividing the remainder by the total number of shares owned by that Class.

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

NOTES:
o    If current market values are not readily available for a security, its fair
     value  is  determined  using  a  policy  adopted  by the  Fund's  Board  of
     Directors.
o    A Fund's  securities  may be traded on  foreign  securities  markets  which
     generally  complete  trading at various  times  during the day prior to the
     close of the New York Stock Exchange. The values of foreign securities used
     in  computing  share price are  determined  at the time the foreign  market
     closes.  Occasionally,  events  affecting  the value of foreign  securities
     occur when the foreign  market is closed and the New York Stock Exchange is
     open. If the Manager believes the market value is materially affected,  the
     share price will be calculated using the policy adopted by the Fund.
o    Certain  securities  issued by companies in emerging  market  countries may
     have  more than one  quoted  valuation  at any point in time.  These may be
     referred to as a local  price and a premium  price.  The  premium  price is
     often a  negotiated  price that may not  consistently  represent a price at
     which  a  specific   transaction   can  be  effected.   The   international
     growth-oriented  funds  each have a policy to value  such  securities  at a
     price at which the Manager or Sub-Advisor expects the shares may be sold.

DIVIDENDS AND DISTRIBUTIONS

The  Growth-Oriented  and  Income-Oriented  Funds pay most of their net dividend
income to you every year. The payment schedule is:
<TABLE>
<CAPTION>

     Funds                                            Record Date                          Payable Date
     --------------------------------------------------------------------------------------------------
     <S>                                              <C>                                  <C>
     Balanced, Real Estate                            three business days before           March 24, June 24,
     and Utilities                                    each payable date                    September 24 and December 24
                                                                                           (or previous business day)

     Blue Chip                                        three business days before           June 24 or December 24
                                                      each payable date                    (or previous business day)

     Capital Value, Growth, International,            three business days before           December 24
     International Emerging Markets,                  each payable date                    (or previous business day)
     International SmallCap, LargeCap
     Growth Stock Index, MidCap,
     Partners Aggressive Growth,
     Partners LargeCap Growth,
     Partners MidCap Growth
     and SmallCap

     Bond, Government Securities                      three business days before           monthly on the 24th
     Income, High Yield and                           each payable date                    (or previous business day)
     Limited Term Bond
</TABLE>

Net realized  capital gains,  if any, are  distributed  annually.  Generally the
distribution is made on the fourth  business day of December.  Payments are made
to  shareholders  of record on the third business day prior to the payable date.
Capital gains may be taxable at different rates, depending on the length of time
that the Fund holds it assets.

You can authorize income dividend and capital gain distributions to be:
o    invested in additional shares of the Fund you own without a sales charge;
o    invested  in shares of  another  Principal  Mutual  Fund  (Dividend  Relay)
     without a sales charge (distributions of a Fund may be directed only to one
     receiving Fund); or
o    paid in cash.

NOTE:    Payment of income dividends and capital gains shortly after  you  buy
         shares has the effect of reducing the share price by the amount of the
         payment.

         Distributions  from a Fund,  whether  received in cash or reinvested in
         additional shares, may be subject to federal (and state) income tax.

Money Market Fund
The Cash  Management  Fund  declares  dividends of all its daily net  investment
income  each day its shares are  priced.  The  dividends  are paid daily and are
automatically reinvested back into additional shares of the Fund. You may ask to
have your dividends paid to you monthly in cash. These cash payments are made on
the 20th (or  preceding  business day if the 20th is not a business day) of each
month.

Under normal circumstances,  the Fund intends to hold portfolio securities until
maturity and value them at amortized cost.  Therefore,  the Fund does not expect
any capital  gains or losses.  Should  there be any gain,  it could result in an
increase in dividends. A capital loss could result in a dividend decrease.

HOW TO BUY SHARES

To open an account and buy fund shares, rely on your Registered  Representative.
Principal  Mutual  Funds are "load" funds which means you pay a sales charge for
the ongoing assistance of your Registered Representative.

Fill out the  Principal  Mutual Fund or  Principal  Mutual Fund IRA  application
completely. You must include:
o    the name(s) you want to appear on the account;
o    the Principal Mutual Fund(s) you want to invest in;
o    the amount of the investment;
o    your Social Security number or Taxpayer I.D. number;
o    investor information (used to help your Registered  Representative  confirm
     that  your   investment   selection  is  consistent  with  your  goals  and
     circumstances) ;
o    employer information; and
o    other  required  information  (may  include  corporate  resolutions,  trust
     agreements, etc.).

Each Fund requires a minimum initial investment:
o    Regular Accounts                     $1,000
o    Uniform Transfer to Minor Accounts     $500
o    IRA Accounts                           $500

Subsequent  investment  minimums are $100 per Fund.  However, if your subsequent
investment are made using an Automatic  Investment Plan, the investment  minimum
is $50 per Fund.

NOTE:The  minimum  investment  applies  on  a  fund  level,  not  on  the  total
     investment  being  made.  Minimums  may be waived on  accounts  set up for:
     certain  employee  benefit plans;  Principal  Mutual Fund asset  allocation
     programs; Automatic Investment Plans; and Cash Management Accounts.

Invest by mail:
o    Send a check and completed application to:
         Principal Mutual Funds
         P. O. Box 10423
         Des Moines Iowa 50306-9780
o    Make your check payable to Principal Mutual Funds.
o    Your  purchase  will be priced at the next  share  price  calculated  after
     Principal Mutual Funds receives your completed paperwork.

Order by telephone:
o    Call us at  1-800-247-4123  between 7:00 a.m. and 7:00 p.m. Central Time on
     any day that the New York Stock Exchange is open.
o    To buy shares the same day, you need to call before 3:00 p.m. Central Time.
o    We must receive your payment for the order within three  business  days (or
     the order will be canceled and you may be liable for any loss).
o    For new accounts, you also need to send a completed application.

Wire money from your bank:
o    Have  your   Registered   Representative   call   Principal   Mutual  Funds
     (1-800-247-4123) for an account number and wiring instructions.
o    For both initial and  subsequent  purchases,  federal funds should be wired
     to:
         Norwest Bank Iowa, N.A.
         Des Moines, Iowa 50309
         ABA No.: 073000228
         For credit to: Principal Mutual Funds
         Account No.: 3000499968
         For credit: Principal ________ Fund, Class ____
         Shareholder Account No. __________________
         Shareholder Registration __________________
o    Give the  number  and  instructions  to your bank  (which may charge a wire
     fee).
o    To buy  shares the same day,  the wire must be  received  before  3:00 p.m.
     Central Time.
o    No wires are accepted on days when the New York Stock Exchange is closed or
     when the Federal  Reserve is closed  (because  the bank that would  receive
     your wire is closed).

Establish an Automatic Investment Plan
o    Make regular monthly  investments with automatic  deductions from your bank
     or other financial institution account.
o    Minimum investment amounts are waived if you set up an Automatic Investment
     Plan when you open your account.
o    Minimum monthly purchase $50 per Fund (except Cash Management Fund).
o    Cash Management Fund minimum monthly purchase is $100. However, if the Cash
     Management  account is  greater  than  $1,000  when the plan is set up, the
     monthly minimum is $50.
o    Send completed  application,  check authorization form and voided check (or
     voided deposit slip) to:
         Principal Mutual Funds
         P. O. Box 10423
         Des Moines Iowa 50306-9780

Set up a Dividend Relay
o    Invest your  dividends and capital gains from one Principal  Mutual Fund in
     shares of another Principal Mutual Fund.
o    Distributions from a Fund may be directed only to one receiving Fund.
o    The Fund share class receiving the investment must be the same class as the
     originating Fund.
o    There is no sales charge or administrative charge for the Dividend Relay.
o    You can set up Dividend Relay:
     o    on the application for a new account; or
     o    by  calling  Principal  Mutual  Funds  (1-800-247-4123)  if  telephone
          services  apply  to  the  originating  account;  or
     o    in writing (a signature guarantee may be required).
o    You may  discontinue  your Dividend Relay election with a written notice to
     Principal Mutual Funds.
o    There may be a delay of up to 10 days  before  the  Dividend  Relay plan is
     discontinued.
o    The  receiving  Fund  must  meet fund  minimums.  If it does not,  the Fund
     reserves  the right to close the  account  if it is not  brought  up to the
     minimum  investment  amount  within  90 days of  sending  you a  deficiency
     notice.

HOW TO SELL SHARES

After you place a sell  order in proper  form,  shares  are sold  using the next
share  price  calculated.  There is no  additional  charge for a sale of Class R
shares. However, you will be charged a $6 wire fee if you have the sale proceeds
wired  to your  bank.  Generally,  the  sale  proceeds  are sent out on the next
business day after the sell order has been placed.  At your  request,  the check
will be sent  overnight (a $15  overnight fee will be deducted from your account
unless  other  arrangements  are made).  A Fund can only sell shares  after your
check  making  the  Fund   investment  has  cleared  your  bank.  To  avoid  the
inconvenience  of a delay in obtaining  sale  proceeds,  shares may be purchased
with a cashier's  check,  money order or certified  check. A sell order from one
owner is binding on all joint owners.

Your request for a distribution from your IRA must be in writing. You may obtain
a distribution form by telephoning us  (1-800-247-4123) or writing to Princor at
P.O. Box 10423, Des Moines,  Iowa 50309.  Distributions from an IRA may be taken
as:
o    lump sum of the entire interest in the IRA;
o    partial interest in the IRA; or
o    periodic payments of either a fixed amount of amounts based on certain life
     expectancy calculations.

Tax penalties may apply to distributions  before the IRA participant reaches age
50 1/2.

Selling  shares may create a gain or a loss for federal  (and state)  income tax
purposes.  You should maintain accurate records for use in preparing your income
tax returns.

Generally, sales proceeds checks are:
o    payable  to  the   owner(s)  on  the  account  (as  shown  in  the  account
     registration) and
o    mailed to address on the  account  (if not  changed  within  last month) or
     previously authorized bank account.

For  other   payment   arrangements,   please  call   Principal   Mutual   Funds
(1-800-247-4123).

You  should  also call  Principal  Mutual  Funds  (1-800-247-4123)  for  special
instructions that may apply to sales from accounts:
o    when an owner has died;
o    for certain employee benefit plans; or
o    owned by corporations, partnerships, agents or fiduciaries.

Within 60 days after the sale of shares,  the amount of the sale proceeds can be
reinvested  in any  Principal  Mutual  Funds'  Class R shares (or Class A shares
acquired by  conversion  of Class R shares  into Class A shares).  This is a one
time  privilege that permits you to reinvest the amount of the sales proceeds in
shares of the same  Class of shares of the  Funds  without a sales  charge.  The
transaction  is  considered a sale for federal  (and state)  income tax purposes
even if the  proceeds  are  reinvested.  If a loss is realized on the sale,  the
reinvestment  may  be  subject  to  the  "wash  sale"  rules  resulting  in  the
postponement of the recognition of the loss for tax purposes.

Sell shares by mail
o    Send a letter or distribution form (call us at 1-800-247-4123 for the form)
     which is signed by the owner of the account to:
         Principal Mutual Funds
         P. O. Box 10423
         Des Moines Iowa 50306-9780
o    Specify the Fund and account number.
o    Specify the number of shares or the dollar amount to be sold.
o    A signature guarantee* will be required if the:
     o    sell order is for more than $100,000;
     o    account  address has been changed  within one month of the sell order;
          or
     o    check is payable to a party other than the account  shareholder(s)  or
          Principal Life Insurance Company.

     *   If required,  the signature(s) must be guaranteed by a commercial bank,
         trust  company,  credit union,  savings and loan,  national  securities
         exchange member or brokerage  firm. A signature  guaranteed by a notary
         public or savings bank is not acceptable.

Sell shares in amounts of $100,000 or less by telephone* (1-800-247-4123)
o    The address on the account must not have been changed within the last month
     and  telephone  privileges  must apply to the account from which the shares
     are being sold.
o    If our phone lines are busy, you may need to send in a written sell order.
o    To sell shares the same day,  the order must be  received  before 3:00 p.m.
     Central Time.
o    Telephone  redemption  privileges  are not available  for Principal  Mutual
     Funds IRAs, 403(b)s, certain employee benefit plans, or on shares for which
     certificates have been issued.
o    If previously  authorized,  checks can be sent to a shareholder's U.S. bank
     account.
o    Shares in IRA accounts may not be sold over the telephone.

     *   The Fund and  transfer  agent  reserve  the right to  refuse  telephone
         orders to sell shares.  The  shareholder is liable for a loss resulting
         from a fraudulent  telephone order that the Fund reasonably believes is
         genuine.   Each  Fund  will  use   reasonable   procedures   to  assure
         instructions are genuine. If the procedures are not followed,  the Fund
         may be liable for loss due to unauthorized or fraudulent  transactions.
         The   procedures   include:   recording  all  telephone   instructions,
         requesting  personal  identification  information  (name, phone number,
         social  security   number,   birth  date,  etc.)  and  sending  written
         confirmation to the address on the account.

Sell shares by checkwriting (Class A shares of Cash Management Fund only)
o    Checkwriting  must be elected on initial  application or by written request
     to Principal Mutual Funds.
o    The Fund can only sell shares after your check  making the Fund  investment
     has cleared your bank.
o    Checks must be written for at least $100.
o    Checks  are drawn on  Norwest  Bank  Iowa,  N.A.  and its rules  concerning
     checking accounts apply.
o    If the account  does not have  sufficient  funds to cover the check,  it is
     marked  "Insufficient Funds" and returned (the Fund may revoke checkwriting
     on accounts on which "Insufficient Funds" checks are drawn).
o    Accounts may not be closed by withdrawal  check (accounts  continue to earn
     dividends  until  checks  clear and the exact  value of the  account is not
     known until the check is received by Norwest).
o    Not available  for Principal  Mutual Funds IRAs,  403(b)s,  SEPs,  SIMPLES,
     SAR-SEPs or certain  employee  benefit plans or shares subject to a CDSC or
     on shares for which a certificate has been issued.

Periodic withdrawal plan
You may set up a periodic withdrawal plan on a monthly, quarterly, semiannual or
annual basis to:
o    sell a fixed number of shares ($25 initial minimum amount);
o    sell enough shares to provide a fixed amount of money ($25 initial  minimum
     amount);
o    pay insurance or annuity  premiums or deposits to Principal  Life Insurance
     Company (call us at 1-800-247-4123 for details); and
o    to provide an easy method of making  monthly  installment  payments (if the
     service is  available  from your  creditor  who must  supply the  necessary
     forms).

You can set up a periodic withdrawal plan by:
o    completing the applicable section of the application; or
o    sending us your written instructions (and share certificate, if any, issued
     for the account).

Your periodic  withdrawal plan continues  until:
o    you instruct us to stop; or
o    your Fund account balance is zero.

When you set up the withdrawal plan, you select which day you want the sale made
(if none  selected,  the sale  will be made on the  15th of the  month).  If the
selected date is not a trading day, the sale will take place on the next trading
day (if that day falls in the month after your selected  date,  the  transaction
will take place on the trading  day before your  selected  date).  If  telephone
privileges  apply  to the  account,  you  may  change  the  date  or  amount  by
telephoning us at 1-800-247-4123.

Withdrawal  payments are sent on or before the third business day after the date
of the sale. It may take an additional  three  business days for your  financial
institution to post this payment to your account at that financial  institution.
Sales made under your periodic  withdrawal  plan will reduce and may  eventually
exhaust your account.  The Funds do not normally  accept  purchase  payments for
shares of any Fund except the Cash Management  Fund while a periodic  withdrawal
plan is in effect (unless the purchase represents a substantial addition to your
account).

The Fund from which the periodic  withdrawal is made makes no  recommendation as
to either the number of shares or the fixed amount that you withdraw.

HOW TO  EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS

Your shares in the Funds.  The purchase date of the exchanged  shares is used to
measure  the  length of time you have owned the  acquired  shares.  The  minimum
amount that may be  exchanged  into any  Principal  Mutual Fund must be at least
$300 on an annual basis.

You may exchange shares by:
o    calling  us  (1-800-247-4123),  if you  have  telephone  privileges  on the
     account and if no share certificate has been issued.
o    sending a written request to:
         Principal Mutual Funds
         P. O. Box 10423
         Des Moines, Iowa 50306-9780
o    completing an Exchange  Authorization  Form (call us at  1-800-247-4123  to
     obtain the form).

Automatic exchange election.
This election  authorizes an exchange from one Principal  Mutual Fund to another
on a monthly, quarterly, semiannual or annual basis. You can set up an automatic
exchange by:
o    completing the Automatic Exchange Election section of the application;
o    calling us  (1-800-247-4123)  if telephone  privileges apply to the account
     from which the exchange is to be made; or
o    sending us your written instructions.

Your automatic  exchange  continues  until:
o    you instruct us to stop; or
o    your Fund account balance is zero.

You may specify the day of the  exchange.  If the  selected day is not a trading
day,  the sale will take place on the next trading day (if that day falls in the
month after your selected date, the  transaction  will take place on the trading
day before your selected  date). If telephone  privileges  apply to the account,
you may change the date or amount by telephoning us at 1-800-247-4123.

General
o    An exchange by any joint owner is binding on all joint owners.
o    If you do not have an existing account in the Fund to which the exchange is
     being  made,  a new  account is  established.  The new account has the same
     owner(s),  dividend  and capital  gain  options and dealer of record as the
     account from which the shares are being exchanged.
o    All  exchanges  are  subject  to the  minimum  investment  and  eligibility
     requirement of the Fund being acquired.
o    You may acquire shares of a Fund only if its shares are legally  offered in
     your state of residence.
o    If a  certificate  has been issued,  it must be returned to the Fund before
     the exchange can take place.
o    Instructions  for  exchanges  in excess of $500,000  must be in writing and
     signature guaranteed.

The  exchange  privilege  is not  intended  for  short-term  trading.  Excessive
exchange  activity may interfere with  portfolio  management and have an adverse
impact on all shareholders.  In order to limit excessive exchange activity,  and
under  other  circumstances  where  the  Board of  Directors  of the Fund or the
Manager  believes it is in the best interest of the Fund,  the Fund reserves the
right to revise or terminate the exchange privilege,  limit the amount or number
of exchanges, reject any exchange or close the account. You would be notified of
any such action to the extent required by law.

Fund shares  used to fund an employee  benefit  plan may be  exchanged  only for
shares of other Principal Mutual Funds available to employee benefit plans. Such
an exchange  must be made by following the  procedures  provided in the employee
benefit  plan and the written  service  agreement.  The exchange is treated as a
sale of shares for federal  income tax purposes and may result in a capital gain
or loss.  Income tax rules  regarding the  calculation of cost basis may make it
undesirable in certain  circumstances to exchange shares within 90 days of their
purchase.

GENERAL INFORMATION ABOUT A FUND ACCOUNT

Statements
You  will  receive  quarterly   statements  (monthly  statements  for  the  Cash
Management  Fund) for the Funds you own. The  statements  provide the number and
value of shares you own, transactions during the quarter,  dividends declared or
paid and other information.  The year end statement includes information for all
transactions  that took place during the year.  Please review your  statement as
soon as your  receive  it.  Keep  your  statements  as you may need them for tax
reporting purposes.

Generally,  each time you buy, sell or exchange shares between  Principal Mutual
Funds,  you will  receive a  confirmation  in the mail  shortly  thereafter.  It
summarizes all the key  information;  what you bought or sold, the amount of the
transaction,  and other vital data. The Cash Management Fund mails confirmations
only once a month detailing dividend and account activity.

Certain purchases and sales are only included on your quarterly statement. These
include accounts
o    when the only activity during the quarter:
     o    is purchase of shares from reinvested dividends and/or capital gains;
     o    is a result of Dividend Relay;
     o    purchases under a Automatic Investment Plan;
     o    sales under a periodic withdrawal plan; and
     o    purchases or sales under an automatic exchange election.
o    used to fund certain individual retirement or individual pension plans.
o    established under a payroll deduction plan.

Signature Guarantees
Certain transactions require that your signature be guaranteed. If required, the
signature(s)  must be guaranteed by a commercial  bank,  trust  company,  credit
union,  savings and loan, national securities exchange member or brokerage firm.
A signature  guaranteed  by a notary  public or savings bank is not  acceptable.
Signature guarantees are required:
o    if you sell more than $100,000 from any one Fund;
o    if  a  sales   proceeds   check  is  payable  to  other  than  the  account
     shareholder(s), Principal Life Insurance Company or one of its affiliates;
o    to make a Dividend  Relay  election from an account with joint owners to an
     account with only one owner or different joint owners;
o    to change ownership of an account;
o    to add telephone transaction services,  checkwriting and/or wire privileges
     to an existing account;
o    to change bank account  information  designated under an existing telephone
     withdrawal plan;
o    to have a sales  proceeds check mailed to an address other than the address
     on the  account  or to the  address on the  account if it has been  changed
     within the preceding month; and
o    to exchange more than $500,000 among the Principal Mutual Funds.

Minimum Account Balance
Generally,  the Funds do not have a minimum  required  balance.  Because  of the
disproportional  high cost of maintaining small accounts,  the Funds reserve the
right to set a minimum  and sell all shares in an  account  with a value of less
than $300. The sales  proceeds  would then be mailed to you.  These  involuntary
sales will not be triggered just by market conditions.  If a Fund exercises this
right,  you will be notified that the  redemption is going to be made.  You will
have 30 days to make an additional  investment  and bring your account up to the
required minimum. The Funds reserve the right to increase the required minimum.

Special Plans
The Funds reserve the right to amend or terminate the special plans described in
this  prospectus.  Such plans  include  automatic  investment,  dividend  relay,
periodic  withdrawal,  and waiver or  reduction  of sales  charges  for  certain
purchasers.  You will be notified  of any such action to the extent  required by
law.

Telephone Instructions
The Funds reserve the right to refuse telephone instructions. You are liable for
a loss  resulting  from a fraudulent  telephone  instruction  that we reasonably
believe is genuine. We will use reasonable procedures to assure instructions are
genuine.  If the procedures  are not followed,  we may be liable for loss due to
unauthorized or fraudulent transactions.  The procedures include:  recording all
telephone instructions,  requesting personal  identification  information (name,
phone number,  social  security  number,  birth date,  etc.) and sending written
confirmation to the shareholder's address of record.

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


Financial Highlights (will be filed by amendment)


Additional  information  about  the  Funds  is  available  in the  Statement  of
Additional  Information  dated  March  1,  1999,  and  which  is  part  of  this
prospectus.  Information  about the Funds'  investments is also available in the
Funds'  annual and  semiannual  reports to  shareholders.  In the Funds'  annual
report,  you will find a  discussion  of the market  conditions  and  investment
strategies that  significantly  affected the Funds'  performance during its last
fiscal year. The Statement of Additional  Information  and annual and semiannual
reports  can be  obtained  free of  charge by  writing  or  telephoning  Princor
Financial Services Corporation,  P.O. Box 10423, Des Moines, IA 50306. Telephone
1-800-247-4123.

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

The U.S.  Government  does not insure or guarantee an  investment  in any of the
Funds.  There can be no assurance the Money Market Fund will be able to maintain
a stable share price of $1.00 per share.

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

     SEC FILE                DOMESTIC GROWTH-ORIENTED FUNDS

     811-05072               Principal Balanced Fund, Inc.
     811-06263               Principal Blue Chip Fund, Inc.
     811-01874               Principal Capital Value Fund, Inc.
     811-01873               Principal Growth Fund, Inc.
     811-                    Principal LargeCap Stock Index Fund, Inc.
     811-05171               Principal MidCap Fund, Inc.
     811-08379               Principal Real Estate Fund, Inc.
     811-08381               Principal SmallCap Fund, Inc.
     811-07266               Principal Utilities Fund, Inc.

                             INTERNATIONAL GROWTH-ORIENTED FUNDS

     811-08249               Principal International Emerging Markets Fund, Inc.
     811-03183               Principal International Fund, Inc.
     811-08251               Principal International SmallCap Fund, Inc.

                             INCOME-ORIENTED FUNDS

     811-05172               Principal Bond Fund, Inc.
     811-04226               Principal Government Securities Income Fund, Inc.
     811-05174               Principal High Yield Fund, Inc.
     811-07453               Principal Limited Term Bond Fund, Inc.

                             MONEY MARKET FUND

     811-03585               Principal Cash Management Fund, Inc.

                             PARTNERS FUNDS

     811-09567               Principal Partners Aggressive Growth Fund, Inc.
     811-                    Principal Partners LargeCap Growth Fund, Inc.
     811-                    Principal Partners MidCap Growth Fund, Inc.





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




                       Statement of Additional Information

                               dated March 1, 2000



This  Statement of Additional  Information  is not a prospectus but is a part of
the prospectuses for the Funds listed above. The most recent  prospectuses dated
March 1, 2000 and shareholder  report are available without charge.  Please call
1-800-247-4123  to request a copy. The prospectus for Class A, Class B and Class
C   shares   of  all   funds   may   also  be   viewed   on  our  web   site  at
www.principal.com/funds.


<PAGE>


                                TABLE OF CONTENTS

         Investment Policies and Restrictions of the Funds.................   3
         Growth-Oriented Funds.............................................   5
         Income-Oriented Funds ............................................  10
         Money Market Fund.................................................  14
         Funds' Investments................................................  15
         Management of the Fund............................................  26
         Manager and Sub-Advisors..........................................  31
         Cost of Manager's Services........................................  32
         Brokerage on Purchases and Sales of Securities....................  36
         How to Purchase Shares............................................  39
         Offering Price of Funds' Shares...................................  41
         Distribution Plan.................................................  48
         Determination of Net Asset Value of Funds' Shares ................  51
         Performance Calculation...........................................  52
         Tax Treatment of Funds, Dividends and Distributions  .............  58
         General Information and History...................................  60
         Financial Statements .............................................  60
         Appendix A........................................................  61


INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS

The  following  information  about  the  Principal  Mutual  Funds,  a family  of
separately  incorporated,  open-end management  investment  companies,  commonly
called mutual funds,  supplements the information  provided in the  Prospectuses
under the caption "CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS".

There are three categories of Principal Mutual Funds:

Growth-Oriented Funds which include:
o    ten Funds which seek capital appreciation  primarily through investments in
     equity securities (Capital Value Fund, Growth Fund,  International Emerging
     Markets Fund, International Fund, International SmallCap Fund, MidCap Fund,
     Partners  Aggressive Growth Fund,  Partners LargeCap Growth Fund,  Partners
     MidCap Growth Fund and SmallCap Fund);
o    one Fund which  seeks a total  investment  return  including  both  capital
     appreciation  and income through  investments in equity and debt securities
     (Balanced Fund);
o    one Fund  which  seeks  growth of capital  and  growth of income  primarily
     through  investments  in  common  stocks of  well-capitalized,  established
     companies (Blue Chip Fund);
o    one Fund which seeks to generate  total  return by  investing  primarily in
     equity  securities  of  companies  principally  engaged in the real  estate
     industry (Real Estate Fund);
o    one Fund which  seeks to  approximate  the  performance  of the  Standard &
     Poor's 500 Composite Stock Price Index (LargeCap Stock Index Fund); and
o    one Fund which  seeks  current  income and  long-term  growth of income and
     capital by investing  primarily in equity and  fixed-income  securities  of
     companies in the public utilities industry (Utilities Fund).

Income-Oriented Funds which include five funds which seek primarily a high level
of  income  through  investments  in  debt  securities  (Bond  Fund,  Government
Securities  Income Fund, High Yield Fund,  Limited Term Bond Fund and Tax-Exempt
Bond Fund).

Money  Market  Fund  which  seeks  primarily  a high  level  of  income  through
investments in short-term debt securities (Cash Management Fund).

In seeking to achieve its investment objective, each Fund has adopted as matters
of fundamental  policy certain  investment  restrictions which cannot be changed
without  approval by the holders of the lesser of: (i) 67% of the Fund's  shares
present or represented at a  shareholders'  meeting at which the holders of more
than 50% of such shares are present or represented  by proxy;  or (ii) more than
50% of the  outstanding  shares of the Fund.  Similar  shareholder  approval  is
required to change the investment  objective of each of the Funds. The following
discussion  provides for each Fund a statement of its  investment  objective,  a
description  of its  investment  restrictions  that are  matters of  fundamental
policy and a description of any investment restrictions it may have adopted that
are not matters of  fundamental  policy and may be changed  without  shareholder
approval. For purposes of the investment restrictions, all percentage and rating
limitations  apply at the time of acquisition of a security,  and any subsequent
change in any applicable  percentage  resulting from market fluctuations or in a
rating by a rating service will not require elimination of any security from the
portfolio.  Unless  specifically  identified as a matter of fundamental  policy,
each  investment  policy  discussed  in the  Prospectuses  or the  Statement  of
Additional  Information is not  fundamental and may be changed by the respective
Fund's Board of Directors.

The Table on the next page  graphically  illustrates  each  Fund's  emphasis  on
producing current income or capital growth and the stability of the market value
of the Fund's portfolio. These illustrations represent comparative relationships
only with  regard to the  investment  objectives  sought by the Funds.  Relative
income,  stability  and  growth may vary  among the Funds  with  certain  market
conditions.  The  illustrations  are not intended and should not be construed as
projected relative performances of the Principal Mutual Funds.

INCOME-ORIENTED FUNDS

PRINCIPAL  LIMITED  TERM BOND FUND . . . for  investors  seeking a high level of
current income  combined with a relative high level of stability of principal by
investing in fixed-income securities with maturities of 5 years or less.

PRINCIPAL  GOVERNMENT  SECURITIES INCOME FUND . . . for investors seeking a high
level of  current  income,  liquidity,  and  relative  safety  from a  portfolio
emphasizing GNMA securities.

PRINCIPAL  BOND FUND . . . for  investors  seeking  high  current  income from a
portfolio of higher quality bonds.

PRINCIPAL  TAX-EXEMPT  BOND FUND . . . for  investors  seeking  a high  level of
current income exempt from federal income tax,  consistent with  preservation of
capital.

PRINCIPAL HIGH YIELD FUND . . . for investors seeking higher current income from
a portfolio of lower or non-rated fixed-income securities.

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND . . . for investors seeking income, liquidity and
the stability of money market securities.

GROWTH ORIENTED
INTERNATIONAL FUNDS

PRINCIPAL  INTERNATIONAL  FUND . . . for  investors  seeking  growth from common
stocks of companies domiciled in any of the major nations of the world.

PRINCIPAL  INTERNATIONAL  SMALLCAP  FUND . . . for investors  seeking  long-term
growth from equities from  non-United  States  companies with  relatively  small
market capitalization.

PRINCIPAL  INTERNATIONAL  EMERGING  MARKETS  FUND  . . . for  investors  seeking
long-term  growth by  investing  in  stocks  of  companies  in  emerging  market
countries.

GROWTH-ORIENTED DOMESTIC FUNDS

PRINCIPAL  UTILITIES  FUND  . . .  for  investors  seeking  current  income  and
long-term  growth  of  income  and  capital  from  securities  issued  by public
utilities companies.

PRINCIPAL REAL ESTATE FUND . . . for investors  seeking long-term capital growth
and current income from  securities of companies  primarily  engaged in the real
estate industry.

PRINCIPAL BALANCED FUND . . . for investors seeking total return from a flexible
portfolio of common stocks, corporate bonds and money market securities.

PRINCIPAL  BLUE CHIP FUND . . . for  investors  seeking  growth of  capital  and
growth of income from stocks of well capitalized, established companies.

PRINCIPAL  CAPITAL  VALUE FUND . . . for  investors  seeking  long-term  capital
appreciation, with growth of income as a secondary objective.

PRINCIPAL GROWTH FUND . . . for investors seeking long-term growth opportunities
from a common stock portfolio.

PRINCIPAL MIDCAP FUND . . . for investors  seeking long-term capital growth from
securities of emerging and other growth-oriented companies.

PRINCIPAL  SMALLCAP FUND . . . for investors seeking long-term growth of capital
from a portfolio of investment  securities issued by companies  domiciled in the
United States with comparatively smaller market capitalization.

PRINCIPAL PARTNERS  AGGRESSIVE GROWTH FUND . . . for investors seeking long-term
capital appreciation from a portfolio of primarily equity securities.

* These illustrations  represent  comparative  relationships only with regard to
the investment  objectives sought by the funds.  Relative income,  stability and
growth may vary among the funds with certain market conditions. In no way should
the  illustrations  be  construed  as  projected  relative  performances  of the
Principal funds.

GROWTH-ORIENTED FUNDS

Investment Objectives

Principal  Balanced  Fund,  Inc.  ("Balanced  Fund")  seeks to  generate a total
investment  return consisting of current income and capital  appreciation  while
assuming reasonable risks in furtherance of the investment objective.

Principal  Blue Chip Fund,  Inc.  ("Blue Chip Fund") seeks to achieve  growth of
capital and growth of income by  investing  primarily  in common  stocks of well
capitalized, established companies.

Principal  Capital  Value Fund,  Inc.  ("Capital  Value  Fund") seeks to achieve
primarily  long-term capital  appreciation and secondarily  growth of investment
income through the purchase  primarily of common stocks, but the Fund may invest
in other securities.

Principal Growth Fund, Inc.  ("Growth Fund") seeks growth of capital through the
purchase  primarily  of  common  stocks,  but  the  Fund  may  invest  in  other
securities.

Principal  International  Emerging Markets Fund, Inc.  ("International  Emerging
Markets  Fund")  seeks to  achieve  long-term  growth of  capital  by  investing
primarily in equity securities of issuers in emerging market countries.

Principal International Fund, Inc. ("International Fund") seeks long-term growth
of capital  by  investing  in a  portfolio  of equity  securities  of  companies
domiciled in any of the nations of the world.

Principal  International  SmallCap Fund,  Inc.  ("International  SmallCap Fund")
seeks to achieve  long-term  growth of capital by investing  primarily in equity
securities of non-United  States  companies  with  comparatively  smaller market
capitalizations.

Principal  LargeCap  Stock Index  Fund,  Inc.  ("LargeCap  Stock  Index")  seeks
long-term growth of capital.  The Fund attempts to mirror the investment results
of the Standard & Poor's 500 Composite Stock Price Index.

Principal   MidCap  Fund,   Inc.   ("MidCap  Fund")  seeks  to  achieve  capital
appreciation  by  investing  primarily  in  securities  of  emerging  and  other
growth-oriented companies.

Principal  Partners  Aggressive Growth Fund, Inc.  ("Partners  Aggressive Growth
Fund") seeks to provide long-term capital appreciation by investing primarily in
equity securities.

Principal Partners LargeCap Growth Fund, Inc.  ("Partners LargeCap Growth Fund")
seeks  long-term  growth of capital by investing  primarily in common  stocks of
larger capitalization domestic companies.

Principal  Partners  MidCap Growth Fund,  Inc.  ("Partners  MidCap Growth Fund")
seeks to provide  long-term  capital  growth by  investing  primarily  in medium
capitalization U.S. companies with strong earnings growth potential.

Principal  Real Estate Fund,  Inc.  ("Real Estate Fund") seeks to generate total
return by investing  primarily  in equity  securities  of companies  principally
engaged in the real estate industry.

Principal  SmallCap  Fund,  Inc.  ("SmallCap  Fund") seeks to achieve  long-term
growth of capital by investing  primarily in equity securities of companies with
comparatively smaller market capitalizations.

Principal Utilities Fund, Inc.  ("Utilities Fund") seeks to provide high current
income and long-term growth of income and capital. The Fund seeks to achieve its
objective  by  investing  primarily  in equity and fixed  income  securities  of
companies in the public utilities industry.

Investment Restrictions

LargeCap Stock Index Fund,  Partners  Aggressive Growth Fund,  Partners LargeCap
Growth Fund and Partners MidCap Growth Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed without  shareholder  approval.  The LargeCap Stock Index
Fund,  Partners  Aggressive  Growth  Fund,  Partners  LargeCap  Growth  Fund and
Partners MidCap Growth Fund each may not:

(1)  Issue any senior  securities  as defined in the  Investment  Company Act of
     1940, as amended.  Purchasing and selling  securities and futures contracts
     and options  thereon and borrowing  money in accordance  with  restrictions
     described below do not involve the issuance of a senior security.

(2)  Invest in physical  commodities or commodity  contracts (other than foreign
     currencies),  but it may purchase  and sell  financial  futures  contracts,
     options  on  such  contracts,  swaps  and  securities  backed  by  physical
     commodities.

(3)  Invest  in real  estate,  although  it may  invest in  securities  that are
     secured by real  estate and  securities  of issuers  that invest or deal in
     real estate.

(4)  Borrow  money,  except that it may (a) borrow from banks (as defined in the
     Investment Company Act of 1940, as amended) or other financial institutions
     or through  reverse  repurchase  agreements in amounts up to 33 1/3% of its
     total assets (including the amount  borrowed);  (b) to the extent permitted
     by  applicable  law,  borrow up to an additional 5% of its total assets for
     temporary  purposes;  (c) obtain short-term credits as may be necessary for
     the  clearance of  purchases  and sales of  portfolio  securities;  and (d)
     purchase  securities on margin to the extent  permitted by  applicable  law
     (the  deposit or  payment  of margin in  connection  with  transactions  in
     options and  financial  futures  contracts  is not  considered  purchase of
     securities on margin).

(5)  Make loans, except that the Fund may (a) purchase and hold debt obligations
     in accordance  with its investment  objective and policies;  (b) enter into
     repurchase  agreements;  and (c)  lend  its  portfolio  securities  without
     limitation against  collateral  (consisting of cash or securities issued or
     guaranteed   by  the  United   States   Government   or  its   agencies  or
     instrumentalities) equal at all times to not less than 100% of the value of
     the  securities  loaned.  This  limit does not apply to  purchases  of debt
     securities or commercial paper.

(6)  Invest more than 5% of its total assets in the securities of any one issuer
     (other  than  obligations   issued  or  guaranteed  by  the  United  States
     Government or its agencies or  instrumentalities) or purchase more than 10%
     of the outstanding  voting  securities of any one issuer,  except that this
     limitation  shall apply only with respect to 75% of the total assets of the
     Fund. This restriction does not apply to the Partners LargeCap Growth Fund.

(7)  Act as an underwriter of securities, except to the extent that the Fund may
     be deemed to be an  underwriter  in connection  with the sale of securities
     held in its portfolio.

(8)  Concentrate  its  investments in any particular  industry,  except that the
     Fund may  invest  up to 25% of the  value of its  total  assets in a single
     industry,  provided that,  when the Fund has adopted a temporary  defensive
     posture, there shall be no limitation on the purchase of obligations issued
     or  guaranteed  by  the  United  States   Government  or  its  agencies  or
     instrumentalities.  This  restriction  applies to the LargeCap  Stock Index
     Fund except to the extent that the Standard & Poor's Stock Index also is so
     concentrated.

(9)  Sell  securities  short  (except  where the Fund  holds or has the right to
     obtain at no added cost a long position in the securities  sold that equals
     or exceeds the securities sold short).

Each of these Funds has also  adopted the  following  restrictions  that are not
fundamental policies and that may be changed without shareholder approval. It is
contrary to each Fund's present policy to:

(1)  Invest  more  than 15% of its net  assets  in  illiquid  securities  and in
     repurchase agreements maturing in more than seven days except to the extent
     permitted by applicable law.

(2)  Pledge,  mortgage or  hypothecate  its assets,  except to secure  permitted
     borrowings. The deposit of underlying securities and other assets in escrow
     and other collateral arrangements in connection with transactions in put or
     call options,  futures  contracts and options on futures  contracts are not
     deemed to be pledges or other encumbrances.

(3) Invest in companies for the purpose of exercising control or management.

(4)  Invest more than 25% (10% for the LargeCap Stock Index and Partners  MidCap
     Growth Funds) of its total assets in securities of foreign issuers.

(5)  Enter into (a) any futures  contracts and related options for non-bona fide
     hedging purposes within the meaning of Commodity Futures Trading Commission
     (CFTC) regulations if the aggregate initial margin and premiums required to
     establish  such  positions  will exceed 5% of the fair market  value of the
     Fund's net  assets,  after  taking  into  account  unrealized  profits  and
     unrealized  losses on any such  contracts it has entered into;  and (b) any
     futures contracts if the aggregate amount of such Fund's  commitments under
     outstanding  futures  contracts  positions would exceed the market value of
     its total assets.

(6)  Invest more than 5% of its total assets in real estate limited  partnership
     interests or real estate investment trusts. This restriction does not apply
     to the Partners MidCap Growth Fund.

(7)  Acquire  securities of other investment  companies,  except as permitted by
     the  Investment  Company  Act of 1940,  as amended,  or any rule,  order or
     interpretation  thereunder, or in connection with a merger,  consolidation,
     reorganization, acquisition of assets or an offer of exchange. The Fund may
     purchase securities of closed-end  investment  companies in the open market
     where no  underwriter  or  dealer's  commission  or  profit,  other  than a
     customary broker's commission, is involved.

Balanced   Fund,   Blue  Chip  Fund,   International   Emerging   Markets  Fund,
International Fund,  International SmallCap Fund, MidCap Fund, Real Estate Fund,
SmallCap Fund and Utilities Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed  without  shareholder  approval.  The Balanced Fund, Blue
Chip  Fund,   International   Fund,   International   Emerging   Markets   Fund,
International  SmallCap Fund,  MidCap Fund, Real Estate Fund,  SmallCap Fund and
Utilities Fund each may not:

(1)  Issue any senior  securities  as defined in the  Investment  Company Act of
     1940.  Purchasing and selling  securities and futures contracts and options
     thereon and borrowing money in accordance with restrictions described below
     do not involve the issuance of a senior security.

(2)  Purchase  or  retain in its  portfolio  securities  of any  issuer if those
     officers or directors of the Fund or its Manager owning  beneficially  more
     than  one-half of 1% (0.5%) of the  securities  of the issuer  together own
     beneficially more than 5% of such securities.

(3)  Invest in commodities or commodity contracts,  but it may purchase and sell
     financial futures contracts and options on such contracts.

(4)  Invest in real  estate,  although  it may  invest in  securities  which are
     secured by real estate and  securities  of issuers  which invest or deal in
     real estate.

(5)  Borrow money, except for temporary or emergency purposes,  in an amount not
     to  exceed 5% of the value of the  Fund's  total  assets at the time of the
     borrowing.

(6)  Make loans, except that the Fund may (i) purchase and hold debt obligations
     in accordance with its investment  objective and policies,  (ii) enter into
     repurchase  agreements,  and (iii) lend its  portfolio  securities  without
     limitation against  collateral  (consisting of cash or securities issued or
     guaranteed   by  the  United   States   Government   or  its   agencies  or
     instrumentalities) equal at all times to not less than 100% of the value of
     the securities loaned.

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

(8)  Act as an underwriter  of securities,  except to the extent the Fund may be
     deemed to be an underwriter in connection  with the sale of securities held
     in its portfolio.

(9)  Concentrate  its  investments  in any  particular  industry or  industries,
     except that:
     (a) the Utilities  Fund may not invest less than 25% of its total assets in
         securities of companies in the public utilities industry,
     (b) the Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
         International  Fund,  International  SmallCap  Fund,  MidCap  Fund  and
         SmallCap  Fund  each may  invest  not more than 25% of the value of its
         total assets in a single industry, and
     (c) the Real Estate  Fund may not invest less than 25% of its total  assets
         in securities of companies in the real estate industry.

(10) Sell  securities  short  (except  where the Fund  holds or has the right to
     obtain at no added cost a long position in the securities  sold that equals
     or exceeds the securities sold short) or purchase any securities on margin,
     except it may  obtain  such  short-term  credits as are  necessary  for the
     clearance of  transactions.  The deposit or payment of margin in connection
     with  transactions  in  options  and  financial  futures  contracts  is not
     considered the purchase of securities on margin.

(11) Invest in interests in oil, gas or other mineral exploration or development
     programs,  although  the Fund may invest in  securities  of  issuers  which
     invest in or sponsor such programs.

Each of these Funds has also adopted the  following  restrictions  which are not
fundamental  policies and may be changed  without  shareholder  approval.  It is
contrary to each Fund's present policy to:

(1)  Invest  more  than  15% of its  total  assets  in  securities  not  readily
     marketable and in repurchase  agreements  maturing in more than seven days.
     The value of any  options  purchased  in the  Over-the-Counter  market  are
     included as part of this 15% limitation.

(2)  Purchase  warrants in excess of 5% of its total assets,  of which 2% may be
     invested in warrants that are not listed on the New York or American  Stock
     Exchange.  The 2%  limitation  for the  International  Fund  also  includes
     warrants not listed on the Toronto Stock  Exchange.  The 2% limitation  for
     the  International  Emerging Markets Fund and  International  SmallCap Fund
     also  includes  warrants not listed on the Toronto  Stock  Exchange and the
     Chicago Board Options Exchange.

(3)  Purchase  securities of any issuer having less than three years' continuous
     operation (including operations of any predecessors) if such purchase would
     cause the value of the Fund's  investments in all such issuers to exceed 5%
     of the value of its total assets.

(4)  Pledge,  mortgage or  hypothecate  its assets,  except to secure  permitted
     borrowings. The deposit of underlying securities and other assets in escrow
     and other  collateral  arrangements in connection with  transactions in put
     and call options,  futures  contracts and options on futures  contracts are
     not deemed to be pledges or other encumbrances.

(5)  Invest in companies for the purpose of exercising control or management.

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

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

(8)  Invest in arbitrage transactions.

(9)  Invest  in real  estate  limited  partnership  interests  except  that this
     restriction shall not apply to the Real Estate Fund.

(10) Invest in mineral leases.

The Balanced Fund, Blue Chip Fund, MidCap Fund, SmallCap Fund and Utilities Fund
have also adopted a  restriction,  which is not a fundamental  policy and may be
changed without  shareholder  approval,  that each such Fund may not invest more
than 20% of its total assets in securities of foreign issuers.

The Real  Estate  Fund has  adopted a  restriction,  which is not a  fundamental
policy and may be changed without  shareholder  approval,  that the Fund may not
invest more than 25% of its total assets in securities of foreign issuers.

The  Balanced  Fund,  Blue  Chip  Fund,  International  Emerging  Markets  Fund,
International Fund,  International SmallCap Fund, MidCap Fund, SmallCap Fund and
Utilities  Fund have  also  adopted a  restriction,  which is not a  fundamental
policy and may be changed without shareholder  approval,  that each Fund may not
invest more than 10% of its assets in securities of other investment  companies,
invest more than 5% of its total assets in the  securities of any one investment
company or acquire 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 Funds 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 Utilities  Fund has also adopted a  restriction,  which is not a fundamental
policy and may be changed without  shareholder  approval,  that the Fund may not
own more than 5% of the  outstanding  voting  securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.

Capital Value Fund and Growth Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed without shareholder approval.  The Capital Value Fund and
Growth Fund each may not:

(1)  Concentrate  its  investments in any one industry.  No more than 25% of the
     value of its total assets will be invested in any one industry.

(2)  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 of any
     one issuer (except U.S. Government securities).

(3)  Purchase the  securities of any issuer if the purchase will cause more than
     10% of the  voting  securities,  or any other  class of  securities  of the
     issuer, to be held by the Fund.

(4)  Underwrite  securities of other  issuers,  except that the Fund may acquire
     portfolio  securities under  circumstances  where if sold the Fund might be
     deemed an underwriter for purposes of the Securities Act of 1933.

(5)  Purchase  securities of any company with a record of less than three years'
     continuous operation (including that of predecessors) if the purchase would
     cause the value of the Fund's  aggregate  investments in all such companies
     to exceed 5% of the Fund's total assets.

(6)  Engage in the purchase and sale of illiquid  interests in real estate.  For
     this purpose, readily marketable interests in real estate investment trusts
     are not interests in real estate.

(7)  Invest in commodities or commodity contracts,  but it may purchase and sell
     financial futures contracts and options on such contracts.

(8)  Purchase  or  retain in its  portfolio  securities  of any  issuer if those
     officers and directors of the Fund or its Manager owning  beneficially more
     than  one-half  of one  percent  (0.5%)  of the  securities  of the  issuer
     together own beneficially more than 5% of such securities.

(9)  Purchase securities on margin, except it may obtain such short-term credits
     as are necessary for the clearance of  transactions.  The Fund may not sell
     securities short (except where the Fund holds or has the right to obtain at
     no added cost a long position in the securities sold that equals or exceeds
     the securities sold short).  The deposit or payment of margin in connection
     with  transactions  in  options  and  financial  futures  contracts  is not
     considered the purchase of securities on margin. The Fund will not issue or
     acquire put and call options.

(10) Invest  more than 5% of its  assets at the time of  purchase  in rights and
     warrants  (other than those that have been acquired in units or attached to
     other securities).

(11) Invest more than 20% of its total assets in securities of foreign  issuers.
     In addition:

(12) The Fund may not make loans, except that the Fund may (i) purchase and hold
     debt obligations in accordance with its investment  objective and policies,
     (ii)  enter  into  repurchase  agreements,  and  (iii)  lend its  portfolio
     securities without  limitation  against  collateral  (consisting of cash or
     securities  issued or  guaranteed  by the United  States  Government or its
     agencies or instrumentalities)  equal at all times to not less than 100% or
     the value of the securities loaned.

(13) The Fund does not propose to borrow money except for temporary or emergency
     purposes  from banks in an amount not to exceed the lesser of (i) 5% of the
     value of the Fund's assets, less liabilities other than such borrowings, or
     (ii) 10% of the Fund's  assets taken at cost at the time such  borrowing is
     made.  The Fund may not pledge,  mortgage,  or  hypothecate  its assets (at
     value) to an extent greater than 15% of the gross assets taken at cost. The
     deposit  of  underlying  securities  and other  assets in escrow  and other
     collateral  arrangements  in connection  with  transactions in put and call
     options,  futures contracts and options on futures contracts are not deemed
     to be pledges or other encumbrances.

Each of these Funds has also adopted the  following  restrictions  which are not
fundamental policies and may be changed without shareholder approval,  each Fund
may not:

(1)  Invest in companies for the purpose of exercising control or management.

(2)  Purchase  warrants in excess of 5% of its total assets,  of which 2% may be
     invested in warrants that are not listed on the New York or American  Stock
     Exchange.

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

(4)  Invest in real estate limited partnership interests.

(5)  Invest  in  interests  in  oil,  gas,  or  other  mineral   exploration  or
     development  programs,  but the Fund may  purchase and sell  securities  of
     companies which invest or deal in such interests.

(6)  Invest  more  than 10% of its  assets  in  securities  of other  investment
     companies, invest more than 5% of its total assets in the securities of any
     one investment  company,  or acquire more than 3% of the outstanding voting
     securities of any one  investment  company except in connect with a merger,
     consolidation or plan of reorganization.

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

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

INCOME-ORIENTED FUNDS

Investment Objectives

Principal  Bond Fund,  Inc.  ("Bond  Fund")  seeks to provide as high a level of
income as is  consistent  with  preservation  of capital and prudent  investment
risk.

Principal Government Securities Income Fund, Inc. ("Government Securities Income
Fund") seeks a high level of current  income,  liquidity and safety of principal
by purchasing  obligations  issued or guaranteed by the United States Government
or its  agencies,  with  emphasis on Government  National  Mortgage  Association
Certificates  ("GNMA   Certificates").   The  guarantee  by  the  United  States
Government  extends  only to principal  and  interest.  There are certain  risks
unique to GNMA Certificates.

Principal  High Yield Fund,  Inc.  ("High Yield Fund") seeks high current income
primarily  by  purchasing  high  yielding,   lower  or  non-rated  fixed  income
securities  which are believed to not involve undue risk to income or principal.
Capital growth is a secondary  objective when  consistent  with the objective of
high current income.

Principal  Limited Term Bond Fund, Inc.  ("Limited Term Bond Fund") seeks a high
level of current  income  consistent  with a relatively  high level of principal
stability  by  investing in a portfolio  of  securities  with a dollar  weighted
average maturity of five years or less.

Principal  Tax-Exempt Bond Fund, Inc.  ("Tax-Exempt  Bond Fund") seeks as high a
level of current  income exempt from federal  income tax as is  consistent  with
preservation  of  capital.  The Fund seeks to achieve  its  objective  primarily
through the  purchase of  investment  grade  quality,  tax-exempt  fixed  income
obligations.

Investment Restrictions

Bond Fund, High Yield Fund and Limited Term Bond Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed without shareholder  approval.  The Bond Fund, High Yield
Fund and Limited Term Bond Fund each may not:

(1)  Issue any senior  securities  as defined in the  Investment  Company Act of
     1940.  Purchasing and selling  securities and futures contracts and options
     thereon and borrowing money in accordance with restrictions described below
     do not involve the issuance of a senior security.

(2)  Purchase  or  retain in its  portfolio  securities  of any  issuer if those
     officers or directors of the fund or its Manager owning  beneficially  more
     than  one-half of 1% (0.5%) of the  securities  of the issuer  together own
     beneficially more than 5% of such securities.

(3)  Invest in commodities or commodity contracts,  but it may purchase and sell
     financial futures contracts and options on such contracts.

(4)  Invest in real  estate,  although  it may  invest in  securities  which are
     secured by real estate and  securities  of issuers  which invest or deal in
     real estate.

(5)  Borrow money, except for temporary or emergency purposes,  in an amount not
     to  exceed 5% of the value of the  Fund's  total  assets at the time of the
     borrowing.

(6)  Make loans, except that the Fund may (i) purchase and hold debt obligations
     in accordance with its investment  objective and policies,  (ii) enter into
     repurchase  agreements,  and (iii) lend its  portfolio  securities  without
     limitation against  collateral  (consisting of cash or securities issued or
     guaranteed   by  the  United   States   Government   or  its   agencies  or
     instrumentalities) equal at all times to not less than 100% of the value of
     the securities loaned.

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

(8)  Act as an underwriter  of securities,  except to the extent the Fund may be
     deemed to be an underwriter in connection  with the sale of securities held
     in its portfolio.

(9)  Concentrate  its  investments  in any  particular  industry or  industries,
     except that the Fund may invest not more than 25% of the value of its total
     assets in a single industry.

(10) Sell  securities  short  (except  where the Fund  holds or has the right to
     obtain at no added cost a long position in the securities  sold that equals
     or exceeds the securities sold short) or purchase any securities on margin,
     except it may  obtain  such  short-term  credits as are  necessary  for the
     clearance of  transactions.  The deposit or payment of margin in connection
     with  transactions  in  options  and  financial  futures  contracts  is not
     considered the purchase of securities on margin.

(11) Invest in interests in oil, gas or other mineral exploration or development
     programs,  although  the Fund may invest in  securities  of  issuers  which
     invest in or sponsor such programs.

Each of these Funds has also adopted the  following  restrictions  which are not
fundamental  policies and may be changed  without  shareholder  approval.  It is
contrary to each Fund's present policy to:

(1)  Invest  more  than  15% of its  total  assets  in  securities  not  readily
     marketable and in repurchase  agreements  maturing in more than seven days.
     The value of any  options  purchased  in the  Over-the-Counter  market  are
     included as part of this 15% limitation.

(2)  Purchase  warrants in excess of 5% of its total assets,  of which 2% may be
     invested in warrants that are not listed on the New York or American  Stock
     Exchange.

(3)  Purchase  securities of any issuer having less than three years' continuous
     operation (including operations of any predecessors) if such purchase would
     cause the value of the Fund's  investments in all such issuers to exceed 5%
     of the value of its total assets.

(4)  Purchase securities of other investment companies except in connection with
     a merger,  consolidation,  or plan of  reorganization or by purchase in the
     open market of securities of closed-end  companies  where no underwriter or
     dealer's commission or profit,  other than a customary broker's commission,
     is involved,  and if immediately  thereafter not more than 10% of the value
     of the Fund's total assets would be invested in such securities.

(5)  Pledge,  mortgage or  hypothecate  its assets,  except to secure  permitted
     borrowings. The deposit of underlying securities and other assets in escrow
     and other  collateral  arrangements in connection with  transactions in put
     and call options,  futures  contracts and options on futures  contracts are
     not deemed to be pledges or other encumbrances.

(6)  Invest in companies for the purpose of exercising control or management.

(7)  Invest more than 20% of its total assets in securities of foreign issuers.

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

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

(10) Invest in arbitrage transactions.

(11) Invest in real estate limited partnership interests.

Government Securities Income Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed without shareholder  approval.  The Government Securities
Income Fund may not:

(1)  Issue any senior securities.

(2)  Purchase any securities other than obligations  issued or guaranteed by the
     United States Government or its agencies or instrumentalities,  except that
     the Fund may maintain  reasonable  amounts in cash or  commercial  paper or
     purchase  short-term debt securities not issued or guaranteed by the United
     States  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
     United States Government or its agencies or instrumentalities.

(3)  Act as an underwriter  of securities,  except to the extent the Fund may be
     deemed  to  be  an  underwriter  in  connection   with  the  sale  of  GNMA
     certificates held in its portfolio.

(4)  Engage in the purchase  and sale of  interests  in real  estate,  including
     interests  in real estate  investment  trusts  (although  it will invest in
     securities   secured  by  real  estate  or  interests   therein,   such  as
     mortgage-backed   securities)   or  invest  in   commodities  or  commodity
     contracts,  oil and gas  interests,  or mineral  exploration or development
     programs.

(5)  Purchase  or  retain in its  portfolio  securities  of any  issuer if those
     officers and directors of the Fund or its Manager owning  beneficially more
     than  one-half of 1% (0.5%) of the  securities  of the issuer  together own
     beneficially more than 5% of such securities.

(6)  Sell securities  short or purchase any securities on margin,  except it may
     obtain  such  short-term  credits as are  necessary  for the  clearance  of
     transactions.   The  deposit  or  payment  of  margin  in  connection  with
     transactions in options and financial  futures  contracts is not considered
     the purchase of securities on margin.

(7)  Invest in companies for the purpose of exercising control or management.

(8)  Make loans,  except that the Fund may purchase or hold debt  obligations in
     accordance with the investment  restrictions set forth in paragraph (2) and
     may enter into repurchase agreements for such securities,  and may lend its
     portfolio  securities without  limitation against collateral  consisting of
     cash, or securities issued or guaranteed by the United States Government or
     its agencies or  instrumentalities,  which is equal at all times to 100% of
     the value of the securities loaned.

(9)  Borrow money, except for temporary or emergency purposes,  in an amount not
     to exceed 5% of the value of the Fund's total assets.

(10) Enter into repurchase  agreements maturing in more than seven days if, as a
     result, thereof, more than 10% of the Fund's total assets would be invested
     in such repurchase  agreements and other assets without  readily  available
     market quotations.

(11) Invest more than 5% of its total assets in the  purchase of covered  spread
     options and the purchase of put and call options on securities,  securities
     indices and financial futures contracts.

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

The Fund has also adopted the following  restrictions  which are not fundamental
policies and may be changed without shareholder  approval. It is contrary to the
Fund's current policy to:

(1)  Invest  more  than  15% of its  total  assets  in  securities  not  readily
     marketable and in repurchase  agreements  maturing in more than seven days.
     The value of any  options  purchased  in the  Over-the-Counter  market  are
     included as part of this 15% limitation.

(2)  Pledge,  mortgage or  hypothecate  its assets,  except to secure  permitted
     borrowings. The deposit of underlying securities and other assets in escrow
     and other  collateral  arrangements in connection with  transactions in put
     and call options,  futures  contracts and options on futures  contracts are
     not deemed to be pledges or other encumbrances.

(3)  Invest in real estate limited partnership interests.

(4)  Invest  more  than 10% of its  assets  in  securities  of other  investment
     companies, invest more than 5% of its total assets in the securities of any
     one investment  company,  or acquire more than 3% of the outstanding voting
     securities  of any one  investment  company  except  in  connection  with a
     merger, consolidation or plan of reorganization.

Tax-Exempt Bond Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed without  shareholder  approval.  The Tax-Exempt Bond Fund
may not:

(1)  Issue any senior  securities  as  defined in the Act except  insofar as the
     Fund may be deemed to have  issued a senior  security  by  reason  of:  (a)
     purchasing any securities on a when-issued or delayed  delivery  basis;  or
     (b) borrowing money in accordance with restrictions described below.

(2)  Purchase  any  securities  other than  Municipal  Obligations  and  Taxable
     Investments  as defined  in the  Prospectus  and  Statement  of  Additional
     Information.

(3)  Act as an underwriter  of securities,  except to the extent the Fund may be
     deemed to be an underwriter in connection  with the sale of securities held
     in its portfolio.

(4)  Invest  more  than 10% of its  assets  in  securities  of other  investment
     companies, invest more than 5% of its total assets in the securities of any
     one investment  company,  or acquire more than 3% of the outstanding voting
     securities  of any one  investment  company  except  in  connection  with a
     merger, consolidation or plan of reorganization.

(5)  Purchase  or  retain in its  portfolio  securities  of any  issuer if those
     officers and directors of the Fund or its Manager owning more than one-half
     of 1% (0.5%) of the securities of the issuer together own beneficially more
     than 5% of such securities.

(6)  Invest in companies for the purpose of exercising control or management.

(7)  Invest more than:
     (a) Invest more than 5% of its total  assets in the  securities  of any one
         issuer  (other  than  obligations  issued or  guaranteed  by the United
         States  Government  or its agencies or  instrumentalities)  or purchase
         more than 10% of the outstanding  voting  securities of any one issuer,
         except that these  limitations  shall apply only with respect to 75% of
         the Fund's total assets.
     (b) 15% of its total assets in securities  that are not readily  marketable
         and in repurchase agreements maturing in more than seven days.

(8)  Invest in real  estate,  although  it may  invest in  securities  which are
     secured by real estate and  securities  of issuers  which invest or deal in
     real estate.

(9)  Invest in commodities or commodity futures contracts.

(10) Write, purchase or sell puts, calls or combinations thereof.

(11) Invest in interests in oil, gas or other mineral exploration or development
     programs,  although it may invest in  securities of issuers which invest in
     or sponsor such programs.

(12) Make short sales of securities.

(13) Purchase any  securities  on margin,  except it may obtain such  short-term
     credits as are necessary for the clearance of transactions.

(14) Make loans,  except that the Fund may purchase and hold debt obligations in
     accordance  with  its  investment   objective  and  policies,   enter  into
     repurchase  agreements,  and may  lend  its  portfolio  securities  without
     limitation against  collateral,  consisting of cash or securities issued or
     guaranteed   by  the  United   States   Government   or  its   agencies  or
     instrumentalities,  which is equal at all times to 100% of the value of the
     securities loaned.

(15) Borrow money,  except for temporary or emergency  purposes from banks in an
     amount not to exceed 5% of the value of the Fund's total assets at the time
     the loan is made.

(16) Pledge,  mortgage or  hypothecate  its assets,  except to secure  permitted
     borrowings.

The Fund has also adopted the following restriction which is not fundamental and
may be  changed  without  shareholder  approval.  It is  contrary  to the Fund's
current policy to invest in real estate limited partnership interests.

The identification of the issuer of a Municipal  Obligation depends on the terms
and  conditions  of the  security.  When the assets and  revenues  of an agency,
authority,  instrumentality  or other  political  subdivision  are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the  subdivision,  the  subdivision  is deemed the
sole issuer.  Similarly,  in the case of an industrial development bond, if that
bond is backed  only by the assets and  revenues of the  non-governmental  user,
then such  non-governmental  user is deemed the sole issuer. If, in either case,
the  creating  government  or some  other  entity  guarantees  a  security,  the
guarantee is  considered a separate  security and is treated as an issue of such
government or other  entity.  However,  that  guarantee is not deemed a security
issued by the guarantor if the value of all  securities  issued or guaranteed by
the  guarantor  and  owned by the Fund does not  exceed  10% of the value of the
Fund's total assets.

The Fund may invest without limit in debt  obligations of issuers located in the
same state and in debt  obligations  which are repayable out of revenue  sources
generated from economically related projects or facilities.  Sizable investments
in such  obligations  could  increase  the risk to the Fund  since an  economic,
business or political  development  or change  affecting one security could also
affect others. The Fund may also invest without limit in industrial  development
bonds, but it will not invest more than 20% of its total assets in any Municipal
Obligation  the  interest  on  which is  treated  as a tax  preference  item for
purposes of the federal alternative minimum tax.

MONEY MARKET FUND

Investment Objectives

Principal Cash Management  Fund, Inc. ("Cash  Management  Fund") seeks as high a
level of income available from short-term securities as is considered consistent
with  preservation  of principal and  maintenance of liquidity by investing in a
portfolio of money market instruments.

Investment Restrictions

Cash Management Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed without  shareholder  approval.  The Cash Management Fund
may not:

(1)  Concentrate  its  investments in any one industry.  No more than 25% of the
     value of its total assets will be invested in securities of issuers  having
     their  principal  activities  in any one  industry,  other than  securities
     issued  or   guaranteed   by  the  U.S.   Government  or  its  agencies  or
     instrumentalities,  or obligations  of domestic  branches of U.S. banks and
     savings institutions. (See "Bank Obligations").

(2)  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 of any
     one issuer (except securities issued or guaranteed by the U.S.  Government,
     its agencies or instrumentalities).

(3)  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).

(4)  Act as an  underwriter  except to the extent that, in  connection  with the
     disposition of portfolio securities,  it may be deemed to be an underwriter
     under the federal securities laws.

(5)  Purchase  securities  of any  company  with a record  of less  than 3 years
     continuous operation (including that of predecessors) if the purchase would
     cause the value of the Fund's  aggregate  investments in all such companies
     to exceed 5% of the value of the Fund's total assets.

(6)  Engage in the  purchase  and sale of  illiquid  interests  in real  estate,
     including  interests  in real estate  investment  trusts  (although  it may
     invest in securities secured by real estate or interests therein) or invest
     in commodities or commodity  contracts,  oil and gas interests,  or mineral
     exploration or development programs.

(7)  Purchase securities of other investment companies except in connection with
     a merger, consolidation, or plan of reorganization.

(8)  Purchase  or  retain in its  portfolio  securities  of any  issuer if those
     officers and directors of the Fund or its Manager owning  beneficially more
     than  one-half of 1% (0.5%) of the  securities  of the issuer  together own
     beneficially more than 5% of such securities.

(9)  Purchase securities on margin, except it may obtain such short-term credits
     as are  necessary  for the  clearance  of  transactions.  The Fund will not
     effect a short sale of any security. The Fund will not issue or acquire put
     and call options, straddles or spreads or any combination thereof.

(10) Invest in companies for the purpose of exercising control or management.

(11) The Fund may not make loans, except that the Fund may (i) purchase and hold
     debt obligations in accordance with its investment  objective and policies,
     (ii)  enter  into  repurchase  agreements,  and  (iii)  lend its  portfolio
     securities without  limitation  against  collateral  (consisting of cash or
     securities  issued or  guaranteed  by the United  States  Government or its
     agencies or instrumentalities)  equal at all times to not less than 100% or
     the value of the securities loaned.

(12) Borrow  money  except  from  banks for  temporary  or  emergency  purposes,
     including the meeting of redemption  requests which might otherwise require
     the  untimely  disposition  of  securities,  in an amount not to exceed the
     lesser  of (i) 5% of the  value of the  Fund's  assets,  or (ii) 10% of the
     value of the Fund's net assets taken at cost at the time such  borrowing is
     made. The Fund will not issue senior  securities  except in connection with
     such  borrowings.  The Fund may not pledge,  mortgage,  or hypothecate  its
     assets (at value) to an extent greater than 10% of the net assets.

(13) Invest in time  deposits  maturing in more than seven days;  time  deposits
     maturing from two business days through seven  calendar days may not exceed
     10% of the value of the Fund's total assets.

(14) Invest  more  than  10% of its  total  assets  in  securities  not  readily
     marketable and in repurchase agreements maturing in more than seven days.

The Fund has also adopted the following restriction which is not fundamental and
may be  changed  without  shareholder  approval.  It is  contrary  to the Fund's
current policy to:

(1)  Invest in real estate limited partnership interests.

FUNDS' INVESTMENTS

The following  information  supplements the discussion of the Funds'  investment
objectives  and  policies  in  the  Prospectuses   under  the  caption  "CERTAIN
INVESTMENT STRATEGIES AND RELATED RISKS."

Selections of equity  securities for the Funds (except the LargeCap Stock Index,
Partners Aggressive Growth,  Partners LargeCap Growth and Partners MidCap Growth
Funds) are made based on an approach described broadly as "top-down" fundamental
analysis. Three basic steps are involved in this analysis.

o    First is the  continuing  study of basic  economic  factors in an effort to
     conclude what the future general  economic climate is likely to be over the
     next one to two years.
o    Second,  given some  conviction  as to the  likely  economic  climate,  the
     Manager or  Sub-Advisor  attempts to identify the  prospects  for the major
     industrial, commercial and financial segments of the economy. By looking at
     such factors as demand for products,  capacity to produce, operating costs,
     pricing  structure,  marketing  techniques,  adequacy of raw  materials and
     components,  domestic and foreign competition,  and research  productivity,
     the Manager or  Sub-Advisor  evaluates  the prospects for each industry for
     the near and intermediate term.
o    Finally,   determinations   are  made  regarding   earnings  prospects  for
     individual  companies within each industry by considering the same types of
     factors described above. These earnings prospects are evaluated in relation
     to the current price of the securities of each company.

In selecting securities for the Partners Aggressive Growth Fund and the Partners
LargeCap Growth Fund, the Sub-Advisors, Morgan Stanley Asset Management ("Morgan
Stanley")  and   Duncan-Hurst   Capital   Management,   Inc.   ("Duncan-Hurst"),
respectively, follow a flexible investment program in looking for companies with
above  average  capital  appreciation  potential.  The  Sub-Advisor  focuses  on
companies  with  consistent or rising  earnings  growth  records and  compelling
business strategies.  The Sub-Advisor continually and rigorously studies company
developments,  including  business  strategy,  management  focus  and  financial
results,  to identify companies with earnings growth and business  momentum.  In
addition,  the Sub-Advisor  closely monitors analysts'  expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations.  Valuation is of secondary importance and is viewed in the context
of prospects  for  sustainable  earnings  growth and the  potential for positive
earnings surprises in relation to consensus expectations.

The Sub-Advisor for the Partners MidCap Growth Fund, Turner Investment Partners,
Inc.  ("Turner"),  selects  securities  that it believes to have strong earnings
growth potential.  Turner seeks to purchase securities that are well diversified
across economic sectors and to maintain sector  concentrations  that approximate
the economic  sector  weightings  comprising the Russell Midcap Growth Index (or
such other  appropriate  index selected by Turner).  Any remaining assets may be
invested in  securities  issued by smaller  capitalization  companies and larger
capitalization companies,  warrants and rights to purchase common stocks, and it
may  invest  to 10% of its  total  assets in ADRs.  Turner  will  only  purchase
securities  that are  traded on  registered  exchanges  or the  over-the-counter
market in the United States.

The Sub-Advisor for the LargeCap Stock Index Fund,  Invista Capital  Management,
LLC ("Invista"),  allocates Fund assets in approximately  the same weightings as
the S&P 500.  Invista  may omit or remove any S&P 500 stocks from the Fund if it
determines that the stock is not sufficiently  liquid. In addition,  Invista may
exclude or remove a stock  from the Fund if  extraordinary  events or  financial
conditions lead it to believe that such stock should not be a part of the Fund's
assets. Fund assets may be invested in futures and options.

Restricted Securities

Each of the Funds has adopted investment restrictions that limit its investments
in  restricted  securities  or  other  illiquid  securities  to 15% (10% for the
Government  Securities Income Fund and the Money Market Fund) of its assets. The
Board of Directors of each of the Growth-Oriented and Income-Oriented  Funds has
adopted  procedures to determine the liquidity of Rule 4(2) short-term paper and
of restricted  securities  under Rule 144A.  Securities  determined to be liquid
under these procedures are excluded from the preceding investment restriction.

Generally,  restricted  securities are not readily  marketable  because they are
subject to legal or contractual  restrictions upon resale. They are sold only in
a public offering with an effective  registration  statement or in a transaction
which is exempt from the  registration  requirements  of the  Securities  Act of
1933. When registration is required,  a Fund may be obligated to pay all or part
of the  registration  expenses and a considerable  period may elapse between the
time of the  decision to sell and the time the Fund may be  permitted  to sell a
security.  If, during such a period,  adverse market conditions were to develop,
the Fund might  obtain a less  favorable  price than  existed when it decided to
sell.  Restricted  securities and other  securities  not readily  marketable are
priced at fair value as  determined  in good faith by or under the  direction of
the Board of Directors.

Foreign Securities

Each of the  following  Funds may invest in foreign  securities to the indicated
percentage of its assets:

o    International,  International  Emerging Markets and International  SmallCap
     Funds - 100%;
o    Partners Aggressive Growth,  Partners LargeCap Growth and Real Estate Funds
     - 25%;
o    Balanced,  Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
     Bond, MidCap, SmallCap and Utilities Funds - 20%;
o    LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

Debt securities issued in the United States pursuant to a registration statement
filed with the  Securities  and Exchange  Commission  are not treated as foreign
securities for purposes of these limitations.

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

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

Securities of Smaller Companies

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

Unseasoned Issuers

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

Spread  Transactions,  Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts

The Funds (except Cash  Management)  may each engage in the practices  described
under this heading.  The  Tax-Exempt  Bond Fund may invest in financial  futures
contracts as described  under this  heading.  In the following  discussion,  the
terms "the Fund," "each Fund" or "the Funds" refer to each of these Funds.

     Spread Transactions

     Each Fund may purchase covered spread options.  Such covered spread options
     are not  presently  exchange  listed or traded.  The  purchase  of a spread
     option gives the Fund the right to put, or sell, a security that it owns at
     a fixed  dollar  spread or fixed yield  spread in  relationship  to another
     security that the Fund does not own, but which is used as a benchmark.  The
     risk to the Fund in purchasing  covered  spread  options is the cost of the
     premium paid for the spread option and any transaction  costs. In addition,
     there is no assurance  that closing  transactions  will be  available.  The
     purchase of spread options can be used to protect each Fund against adverse
     changes in  prevailing  credit  quality  spreads,  i.e.,  the yield  spread
     between high quality and lower quality  securities.  The security  covering
     the spread  option is  maintained  in a  segregated  account by each Fund's
     custodian.  The Funds do not consider a security covered by a spread option
     to be  "pledged"  as that term is used in the Funds'  policy  limiting  the
     pledging or mortgaging of assets.

     Options on Securities and Securities Indices

     Each Fund may write (sell) and purchase  call and put options on securities
     in which it invests and on securities  indices based on securities in which
     the Fund  invests.  The  International  Fund would only write  covered call
     options on its  portfolio  securities;  it does not write or  purchase  put
     options.  The Funds may write call and put options to  generate  additional
     revenue,  and may write and  purchase  call and put  options  in seeking to
     hedge against a decline in the value of securities  owned or an increase in
     the price of securities which the Fund plans to purchase.

     Writing Covered Call and Put Options.  When a Fund writes a call option, it
     gives the purchaser of the option the right to buy a specific security at a
     specified price at any time before the option expires. When a Fund writes a
     put option,  it gives the  purchaser of the option the right to sell to the
     Fund a specific security at a specified price at any time before the option
     expires. In both situations, the Fund receives a premium from the purchaser
     of the option.

     The premium received by a Fund reflects,  among other factors,  the current
     market price of the underlying  security,  the relationship of the exercise
     price to the market  price,  the time period  until the  expiration  of the
     option and interest rates. The premium generates  additional income for the
     Fund if the option  expires  unexercised  or is closed out at a profit.  By
     writing a call, a Fund limits its  opportunity  to profit from any increase
     in the market value of the underlying  security above the exercise price of
     the option,  but it retains  the risk of loss if the price of the  security
     should decline.  By writing a put, a Fund assumes the risk that it may have
     to purchase the underlying  security at a price that may be higher than its
     market value at time of exercise.

     The Funds write only covered options and comply with applicable  regulatory
     and exchange cover  requirements.  The Funds usually (and the International
     Fund must) own the  underlying  security  covered by any  outstanding  call
     option.  With respect to an outstanding put option,  each Fund deposits and
     maintains  with its custodian  cash,  U.S.  Government  securities or other
     liquid  securities with a value at least equal to the exercise price of the
     option.

     Once a Fund has written an option,  it may terminate its obligation  before
     the  option  is  exercised.  The Fund  executes  a closing  transaction  by
     purchasing an option of the same series as the option  previously  written.
     The Fund has a gain or loss depending on whether the premium  received when
     the option was  written  exceeds the closing  purchase  price plus  related
     transaction costs.

     Purchasing  Call and Put Options.  When a Fund purchases a call option,  it
     receives,  in return  for the  premium  it pays,  the right to buy from the
     writer of the option the  underlying  security at a specified  price at any
     time  before  the  option  expires.   A  Fund  purchases  call  options  in
     anticipation  of an  increase  in the market  value of  securities  that it
     intends  ultimately to buy. During the life of the call option, the Fund is
     able to buy the underlying security at the exercise price regardless of any
     increase in the market  price of the  underlying  security.  In order for a
     call  option  to  result  in a gain,  the  market  price of the  underlying
     security  must exceed the sum of the exercise  price,  the premium paid and
     transaction costs.

     When a Fund purchases a put option, it receives,  in return for the premium
     it pays,  the right to sell to the  writer  of the  option  the  underlying
     security at a specified price at any time before the option expires. A Fund
     purchases put options in  anticipation  of a decline in the market value of
     the  underlying  security.  During the life of the put option,  the Fund is
     able to sell the underlying  security at the exercise  price  regardless of
     any decline in the market price of the underlying security.  In order for a
     put option to result in a gain, the market price of the underlying security
     must decline,  during the option period, below the exercise price enough to
     cover the premium and transaction costs.

     Once a Fund  purchases an option,  it may close out its position by selling
     an option of the same series as the option previously  purchased.  The Fund
     has a gain or loss  depending on whether the closing sale price exceeds the
     initial purchase price plus related transaction costs.

     None of the Funds will invest more than 5% of its assets in the purchase of
     call and put  options on  individual  securities,  securities  indices  and
     financial futures contracts.

     Options on Securities Indices. Each Fund may purchase and sell put and call
     options on any  securities  index based on securities in which the Fund may
     invest. Securities index options are designed to reflect price fluctuations
     in a group of  securities or segment of the  securities  market rather than
     price fluctuations in a single security.  Options on securities indices are
     similar to options on  securities,  except that the exercise of  securities
     index  options  requires  cash  payments  and does not  involve  the actual
     purchase or sale of securities. The Funds engage in transactions in put and
     call options on securities  indices for the same purposes as they engage in
     transactions  in options on securities.  When a Fund writes call options on
     securities indices, it holds in its portfolio underlying  securities which,
     in the judgment of the Manager or Sub-Advisor,  correlate  closely with the
     securities  index and which  have a value at least  equal to the  aggregate
     amount of the securities index options.

     Risks  Associated  with Options  Transactions.  An options  position may be
     closed out only on an exchange  which  provides a  secondary  market for an
     option of the same series. The Funds generally purchase or write only those
     options for which there appears to be an active secondary market.  However,
     there is no assurance that a liquid  secondary market on an exchange exists
     for any particular  option,  or at any particular time. If a Fund is unable
     to effect closing sale transactions in options it has purchased,  it has to
     exercise  its  options  in  order  to  realize  any  profit  and may  incur
     transaction costs upon the purchase or sale of underlying securities.  If a
     Fund is  unable  to effect a  closing  purchase  transaction  for a covered
     option  that  it has  written,  it is  not  able  to  sell  the  underlying
     securities,  or dispose of the assets held in a segregated  account,  until
     the option expires or is exercised.  A Fund's  ability to terminate  option
     positions  established in the  over-the-counter  market may be more limited
     than for  exchange-traded  options  and may  also  involve  the  risk  that
     broker-dealers  participating in such transactions might fail to meet their
     obligations.

     Futures Contracts and Options on Futures Contracts

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

     Futures  Contracts.  When  a Fund  sells  a  futures  contract  based  on a
     financial  instrument,  the  Fund is  obligated  to  deliver  that  kind of
     instrument at a specified  future time for a specified  price.  When a Fund
     purchases  that kind of contract,  it is obligated to take  delivery of the
     instrument  at a specified  time and to pay the  specified  price.  In most
     instances,  these  contracts  are closed out by entering into an offsetting
     transaction  before the  settlement  date. The Fund realizes a gain or loss
     depending on whether the price of an offsetting  purchase plus  transaction
     costs are less or more than the price of the initial sale or on whether the
     price of an  offsetting  sale is more or less than the price of the initial
     purchase  plus  transaction  costs.  Although the Funds  usually  liquidate
     futures contracts on financial instruments in this manner, they may make or
     take delivery of the  underlying  securities  when it appears  economically
     advantageous  to do so. A  futures  contract  based on a  securities  index
     provides for the purchase or sale of a group of  securities  at a specified
     future time for a specified  price.  These  contracts do not require actual
     delivery of securities but result in a cash  settlement.  The amount of the
     settlement  is based on the  difference  in value of the index  between the
     time the contract was entered  into and the time it is  liquidated  (at its
     expiration  or earlier if it is closed out by entering  into an  offsetting
     transaction).

     When a futures  contract is  purchased  or sold a brokerage  commission  is
     paid.  Unlike the  purchase  or sale of a security  or option,  no price or
     premium is paid or received.  Instead, an amount of cash or U.S. Government
     securities  (generally about 5% of the contract amount) is deposited by the
     Fund with its custodian for the benefit of the futures commission  merchant
     through which the Fund engages in the transaction.  This amount is known as
     "initial margin." It does not involve the borrowing of funds by the Fund to
     finance the  transaction.  It instead  represents  a "good  faith"  deposit
     assuring the  performance  of both the  purchaser  and the seller under the
     futures  contract.  It is  returned  to the Fund  upon  termination  of the
     futures  contract  if all the  Fund's  contractual  obligations  have  been
     satisfied.

     Subsequent  payments to and from the broker,  known as "variation  margin,"
     are  required  to be made on a daily  basis  as the  price  of the  futures
     contract   fluctuates,   a  process  known  as  "marking  to  market."  The
     fluctuations  make the long or short positions in the futures contract more
     or less  valuable.  If the  position  is closed  out by taking an  opposite
     position  prior to the  settlement  date of the futures  contract,  a final
     determination  of variation margin is made. Any additional cash is required
     to be paid to or  released  by the broker  and the Fund  realizes a loss or
     gain.

     In using futures contracts, the Fund seeks to establish more certainly than
     would  otherwise  be possible the  effective  price of or rate of return on
     portfolio  securities  or securities  that the Fund proposes to acquire.  A
     Fund, for example,  sells futures  contracts in  anticipation  of a rise in
     interest  rates  which  would  cause a  decline  in the  value  of its debt
     investments.  When this kind of hedging is successful, the futures contract
     increases  in value when the Fund's  debt  securities  decline in value and
     thereby  keep the  Fund's  net asset  value  from  declining  as much as it
     otherwise would. A Fund also sells futures contracts on securities  indices
     in  anticipation  of or during a stock  market  decline in an  endeavor  to
     offset a decrease  in the market  value of its equity  investments.  When a
     Fund is not fully  invested  and  anticipates  an  increase  in the cost of
     securities  it intends  to  purchase,  it may  purchase  financial  futures
     contracts.  When  increases in the prices of equities are expected,  a Fund
     purchases  futures  contracts on securities  indices in order to gain rapid
     market exposure that may partially or entirely offset increases in the cost
     of the equity securities it intends to purchase.

     Options on Futures  Contracts.  The Funds may also  purchase and write call
     and put options on futures  contracts.  A call option on a futures contract
     gives the purchaser the right,  in return for the premium paid, to purchase
     a futures contract  (assume a long position) at a specified  exercise price
     at any time before the option expires. A put option gives the purchaser the
     right, in return for the premium paid, to sell a futures contract (assume a
     short  position),  for a specified  exercise  price, at any time before the
     option expires.

     Upon the exercise of a call,  the writer of the option is obligated to sell
     the futures  contract (to deliver a long position to the option  holder) at
     the option exercise price,  which will presumably be lower than the current
     market price of the contract in the futures market. Upon exercise of a put,
     the writer of the option is  obligated  to purchase  the  futures  contract
     (deliver  a short  position  to the option  holder) at the option  exercise
     price, which will presumably be higher than the current market price of the
     contract in the futures  market.  However,  as with the trading of futures,
     most  options are closed out prior to their  expiration  by the purchase or
     sale of an offsetting option at a market price that reflects an increase or
     a decrease from the premium originally paid. Options on futures can be used
     to hedge  substantially  the same risks addressed by the direct purchase or
     sale  of  the  underlying  futures  contracts.   For  example,  if  a  Fund
     anticipates  a rise in interest  rates and a decline in the market value of
     the debt  securities  in its  portfolio,  it might  purchase put options or
     write  call  options  on  futures  contracts  instead  of  selling  futures
     contracts.

     If a Fund purchases an option on a futures contract, it may obtain benefits
     similar to those that would result if it held the futures  position itself.
     But in  contrast  to a  futures  transaction,  the  purchase  of an  option
     involves the payment of a premium in addition to transaction  costs. In the
     event of an adverse market movement,  however, the Fund is not subject to a
     risk of loss on the option  transaction  beyond the price of the premium it
     paid plus its transaction costs.

     When a Fund writes an option on a futures contract, the premium paid by the
     purchaser is deposited  with the Fund's  custodian.  The Fund must maintain
     with its custodian all or a portion of the initial  margin  requirement  on
     the underlying  futures contract.  It assumes a risk of adverse movement in
     the price of the underlying futures contract comparable to that involved in
     holding a futures  position.  Subsequent  payments  to and from the broker,
     similar to  variation  margin  payments,  are made as the  premium  and the
     initial  margin  requirement  are marked to market  daily.  The premium may
     partially   offset  an  unfavorable   change  in  the  value  of  portfolio
     securities,  if the option is not exercised, or it may reduce the amount of
     any loss incurred by the Fund if the option is exercised.

     Risks  Associated  with Futures  Transactions.  There are a number of risks
     associated with  transactions in futures  contracts and related options.  A
     Fund's  successful use of futures  contracts is subject to the Manager's or
     Sub-Advisor's ability to predict correctly the factors affecting the market
     values of the Fund's portfolio securities. For example, if a Fund is hedged
     against  the  possibility  of an  increase  in  interest  rates which would
     adversely  affect debt  securities held by the Fund and the prices of those
     debt  securities  instead  increases,  the  Fund  loses  part or all of the
     benefit of the increased  value of its  securities it hedged because it has
     offsetting losses in its futures  positions.  Other risks include imperfect
     correlation  between  price  movements  in  the  financial   instrument  or
     securities index underlying the futures contract,  on the one hand, and the
     price  movements of either the futures  contract  itself or the  securities
     held by the Fund,  on the other hand. If the prices do not move in the same
     direction  or to the same  extent,  the  transaction  may result in trading
     losses.

     Prior to exercise or  expiration,  a position in futures may be  terminated
     only by entering into a closing purchase or sale transaction. This requires
     a secondary market on the relevant contract market.  The Fund enters into a
     futures  contract or related  option  only if there  appears to be a liquid
     secondary market.  There can be no assurance,  however,  that such a liquid
     secondary  market  exists for any  particular  futures  contract or related
     option at any specific  time.  Thus,  it may not be possible to close out a
     futures position once it has been  established.  Under such  circumstances,
     the Fund  continues to be required to make daily cash payments of variation
     margin in the event of adverse price movements. In such situations,  if the
     Fund has insufficient cash, it may be required to sell portfolio securities
     to  meet  daily  variation  margin  requirements  at a time  when it may be
     disadvantageous to do so. In addition,  the Fund may be required to perform
     under the terms of the futures  contracts it holds.  The inability to close
     out  futures  positions  also could  have an  adverse  impact on the Fund's
     ability effectively to hedge its portfolio.

     Most  United  States  futures  exchanges  limit the  amount of  fluctuation
     permitted in futures  contract  prices  during a single  trading day.  This
     daily  limit  establishes  the  maximum  amount that the price of a futures
     contract  may vary  either up or down from the  previous  day's  settlement
     price at the end of a  trading  session.  Once  the  daily  limit  has been
     reached in a  particular  type of  contract,  no more trades may be made on
     that day at a price beyond that limit.  The daily limit  governs only price
     movements  during a  particular  trading day and  therefore  does not limit
     potential   losses  because  the  limit  may  prevent  the  liquidation  of
     unfavorable  positions.  Futures contract prices have occasionally moved to
     the daily  limit for  several  consecutive  trading  days with little or no
     trading,  thereby  preventing  prompt  liquidation of futures positions and
     subjecting some futures traders to substantial losses.

     Limitations  on the Use of Futures and Options on Futures  Contracts.  Each
     Fund intends to come within an exclusion  from the definition of "commodity
     pool  operator"  provided by CFTC  regulations  by  complying  with certain
     limitations on the use of futures and related  options  prescribed by those
     regulations.

     None of the Funds  will  purchase  or sell  futures  contracts  or  options
     thereon for non-bona fide hedging  purposes if  immediately  thereafter the
     aggregate initial margin and premiums exceed 5% of the fair market value of
     the Fund's  assets,  after  taking  into  account  unrealized  profits  and
     unrealized losses on any such contracts it has entered into (except that in
     the case of an option that is  in-the-money  at the time of  purchase,  the
     in-the-money amount generally may be excluded in computing the 5%).

     The Funds may enter into futures contracts and related options transactions
     only for bona fide hedging  purposes as permitted by the CFTC and for other
     appropriate  risk  management  purposes,  if  any,  which  the  CFTC  deems
     appropriate  for  mutual  funds  excluded  from the  regulations  governing
     commodity pool operators,  and to a limited extent to enhance returns.  The
     Funds (other than Partners  Aggressive  Growth) are not permitted to engage
     in  speculative  futures  trading.  Each  Fund  determines  that the  price
     fluctuations  in the  futures  contracts  and  options on futures  used for
     hedging or risk  management  purposes  are  substantially  related to price
     fluctuations  in  securities  held  by the  Fund or  which  it  expects  to
     purchase.  In pursuing  traditional hedging activities,  each Fund may sell
     futures contracts or acquire puts to protect against a decline in the price
     of securities that the Fund owns. Each Fund may purchase futures  contracts
     or calls on futures  contracts  to protect the Fund  against an increase in
     the price of  securities  the Fund  intends to  purchase  before it is in a
     position to do so.

     When a Fund purchases a futures  contract,  or purchases a call option on a
     futures  contract,  it places any asset,  including  equity  securities and
     non-investment  grade debt in a segregated account, so long as the asset is
     liquid and marked to the market daily.  The amount so  segregated  plus the
     amount of initial  margin  held for the  account  of its broker  equals the
     market value of the futures contract.

     The Funds do not maintain open short positions in futures  contracts,  call
     options  written  on  futures  contracts,   and  call  options  written  on
     securities  indices if, in the  aggregate,  the value of the open positions
     (marked to market)  exceeds the current market value of that portion of its
     securities  portfolio  being  hedged by those  futures and options  plus or
     minus the unrealized gain or loss on those open positions, adjusted for the
     historical  volatility  relationship  between that portion of the portfolio
     and the contracts (i.e., the Beta volatility  factor). To the extent a Fund
     writes  call  options  on  specific  securities  in  that  portion  of  its
     portfolio,  the value of those  securities  is  deducted  from the  current
     market  value  of  that  portion  of  the  securities  portfolio.  If  this
     limitation  is exceeded at any time,  the Fund takes prompt action to close
     out the  appropriate  number  of open  short  positions  to bring  its open
     futures and options positions within this limitation.

Forward Foreign Currency Exchange Contracts

The  International,  International  Emerging  Markets,  International  SmallCap,
Partners Aggressive Growth,  Partners LargeCap Growth and Partners MidCap Growth
Funds may,  but are not  obligated  to,  enter  into  forward  foreign  currency
exchange contracts only under two circumstances.  First, when a Fund is entering
into a contract for the purchase or sale of a security  denominated in a foreign
currency and wants to "lock-in" the U.S.  dollar price of the security.  Second,
when the Sub-Advisor  believes that the currency of a particular foreign country
in  which a  portion  of a  Fund's  securities  are  denominated  may  suffer  a
substantial  decline  against the U.S.  dollar.  A Fund generally does not enter
into a forward contract with a term of greater than one year.

The  International,   International  Emerging  Markets  International  SmallCap,
Partners Aggressive Growth and Partners LargeCap Growth Funds enter into forward
foreign currency  exchange  contracts only for the purpose of "hedging," that is
limiting the risks  associated  with  changes in the relative  rates of exchange
between the U.S. dollar and foreign  currencies in which  securities  owned by a
Fund are denominated or exposed.  They do not enter into such forward  contracts
for speculative  purposes.  A Fund sets up a separate account with the Custodian
to place foreign  securities  denominated in the currency for which the Fund has
entered  into  forward  contracts  under the second  circumstance,  as set forth
above, for the term of the forward contract.  It should be noted that the use of
forward foreign currency exchange  contracts does not eliminate  fluctuations in
the  underlying  prices  of the  securities.  It  simply  establishes  a rate of
exchange  between the  currencies  that can be achieved at some future  point in
time.  Additionally,  although such  contracts tend to minimize the risk of loss
due to a decline  in the value of the hedged  currency,  they also tend to limit
any potential gain which might result if the value of the currency increases.

Currency  hedging  involves some of the same risks and  considerations  as other
transactions  with  similar  instruments.  Currency  transactions  can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a  direction  that is not  anticipated.  Further,  the risk  exists  that the
perceived  linkage between  various  currencies may not be present or may not be
present  during the  particular  time that a Fund is engaging in proxy  hedging.
Currency  transactions  are also subject to risks  different from those of other
portfolio  transactions.  Because currency control is of great importance to the
issuing governments and influences  economic planning and policy,  purchases and
sales  of  currency  and  related  instruments  can  be  adversely  affected  by
government  exchange  controls,  limitations or  restrictions on repatriation of
currency,  and  manipulations or exchange  restrictions  imposed by governments.
These  forms of  governmental  actions  can  result in losses to a Fund if it is
unable to deliver or receive  currency or monies in settlement  of  obligations.
They could also cause hedges the Fund has entered  into to be rendered  useless,
resulting  in full  currency  exposure as well as incurring  transaction  costs.
Currency  exchange  rates may also  fluctuate  based on factors  extrinsic  to a
country's economy.  Buyers and sellers of currency futures contracts are subject
to the same risks that apply to the use of futures contracts generally. Further,
settlement of a currency  futures  contract for the purchase of most  currencies
must occur at a bank based in the issuing  nation.  Trading  options on currency
futures  contracts is relative  new, and the ability to establish  and close out
positions on these options is subject to the maintenance of a liquid market that
may not always be available.

Repurchase Agreements

All Funds may invest in repurchase  agreements.  None of the  Growth-Oriented or
Income-Oriented  Funds may enter into  repurchase  agreements that do not mature
within  seven  days  if  any  such  investment,  together  with  other  illiquid
securities  held by the Fund,  amount to more than 15% of its assets.  The Money
Market Fund does not enter into repurchase  agreements that do not mature within
seven days of such  investment  together with other illiquid  securities held by
the Fund, amount to more than 10% of its assets. Repurchase agreements typically
involve the acquisition by the Fund of debt securities from a selling  financial
institution  such as a bank,  savings and loan association or  broker-dealer.  A
repurchase  agreement  provides  that the Fund sells back to the seller and that
the seller  repurchases the underlying  securities at a specified price and at a
fixed time in the future. Repurchase agreements may be viewed as loans by a Fund
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, each of the Funds follows
procedures  established by its Board of Directors which are designed to minimize
such risks.  These procedures  include entering into repurchase  agreements only
with large,  well-capitalized and well-established  financial institutions which
the Fund's  Manager or Sub-Advisor  believes  present  minimum credit risks.  In
addition,  the value of the collateral  underlying  the repurchase  agreement is
always at least equal to the repurchase price,  including  accrued interest.  In
the event of a default or bankruptcy  by a selling  financial  institution,  the
affected Fund bears a risk of loss. In seeking to liquidate  the  collateral,  a
Fund may be delayed in or  prevented  from  exercising  its rights and may incur
certain costs.  Further to the extent that proceeds from any sale upon a default
of the  obligation to repurchase are less than the  repurchase  price,  the Fund
could suffer a loss.

Lending of Portfolio Securities

All Funds may lend their portfolio securities. None of the Funds intends to lend
its portfolio  securities if as a result the aggregate of such loans made by the
Fund would  exceed 30% (33 1/3 for the Partners  Aggressive  Growth Fund) of its
total assets.  Portfolio  securities may be lent to unaffiliated  broker-dealers
and other unaffiliated qualified financial institutions provided that such loans
are  callable at any time on not more than five  business  days' notice and that
cash or government  securities equal to at least 100% of the market value of the
securities loaned,  determined daily, is deposited by the borrower with the Fund
and  is  maintained  each  business  day in a  segregated  account.  While  such
securities are on loan, the borrower pays the Fund any income accruing  thereon.
The Fund may invest any cash collateral,  thereby earning additional income, and
may receive an agreed-upon  fee from the borrower.  Borrowed  securities must be
returned  when the loan is  terminated.  Any gain or loss in the market price of
the borrowed  securities which occurs during the term of the loan belongs to the
Fund and its shareholders. A Fund pays reasonable administrative,  custodial and
other fees in connection with such loans and may pay a negotiated portion of the
interest  earned on the cash or government  securities  pledged as collateral to
the borrower or placing  broker.  A Fund does not vote securities that have been
loaned,  but it may call a loan of  securities in  anticipation  of an important
vote.

When-Issued and Delayed Delivery Securities

Each of the Funds may from time to time  purchase  securities  on a  when-issued
basis and may purchase or sell securities on a delayed delivery basis. The price
of such a transaction is fixed at the time of the  commitment,  but delivery and
payment  take  place on a later  settlement  date,  which may be a month or more
after the date of the commitment.  No interest  accrues to the purchaser  during
this period.  The securities are subject to market fluctuation which involve the
risk for the  purchaser  that  yields  available  in the  market  at the time of
delivery  are higher  than those  obtained  in the  transaction.  Each Fund only
purchases  securities  on a  when-issued  or  delayed  delivery  basis  with the
intention of acquiring the securities.  However,  a Fund may sell the securities
before the settlement  date, if such action is deemed  advisable.  At the time a
Fund commits to purchase  securities on a when-issued or delayed delivery basis,
it  records  the  transaction  and  reflects  the  value  of the  securities  in
determining its net asset value. Each Fund also establishes a segregated account
with its custodian  bank in which it maintains cash or other liquid assets equal
in  value  to  the  Fund's  commitments  for  when-issued  or  delayed  delivery
securities. The availability of liquid assets for this purpose and the effect of
asset segregation on a Fund's ability to meet its current obligations,  to honor
requests for redemption and to have its investment  portfolio  managed  properly
limit the extent to which the Fund may engage in forward commitment  agreements.
Except as may be imposed by these factors, there is no limit on the percent of a
Fund's total assets that may be committed to transactions in such agreements.

Money Market Instruments

The Cash  Management  Fund invests all of its  available  assets in money market
instruments  maturing in 397 days or less. The types of  instruments  which this
Fund purchases are described below.

(1)  U.S.  Government  Securities -- Securities issued or guaranteed by the U.S.
     Government, including treasury bills, notes and bonds.

(2)  U.S.  Government Agency  Securities -- Obligations  issued or guaranteed by
     agencies  or  instrumentalities  of the  U.S.  Government.

     o    U.S. agency obligations  include, but are not limited to, the Bank for
          Co-operatives,  Federal Home Loan Banks,  Federal  Intermediate Credit
          Banks, and the Federal National Mortgage Association.
     o    U.S. instrumentality  obligations include, but are not limited to, the
          Export-Import Bank and Farmers Home Administration.

     Some  obligations  issued or  guaranteed  by U.S.  Government  agencies and
     instrumentalities  are  supported  by the full faith and credit of the U.S.
     Treasury.  Others,  such as those issued by the Federal  National  Mortgage
     Association,   are  supported  by  discretionary   authority  of  the  U.S.
     Government   to   purchase   certain   obligations   of   the   agency   or
     instrumentality.  Still  others,  such as those  issued by the Student Loan
     Marketing  Association,  are supported  only by the credit of the agency or
     instrumentality.

(3)  Bank  Obligations --  Certificates  of deposit,  time deposits and bankers'
     acceptances  of U.S.  commercial  banks having total assets of at least one
     billion dollars and overseas branches of U.S.  commercial banks and foreign
     banks, which in the Manager's opinion, are of comparable quality.  However,
     each such bank with its  branches has total assets of at least five billion
     dollars, and certificates,  including time deposits of domestic savings and
     loan  associations  having at least one billion dollars in assets which are
     insured by the Federal Savings and Loan Insurance Corporation. The Fund may
     acquire  obligations  of U.S.  banks  which are not  members of the Federal
     Reserve System or of the Federal Deposit Insurance Corporation.

     Any  obligations  of foreign  banks must be  denominated  in U.S.  dollars.
     Obligations of foreign banks and  obligations of overseas  branches of U.S.
     banks are subject to somewhat different regulations and risks than those of
     U.S.  domestic banks. For example,  an issuing bank may be able to maintain
     that the liability for an investment is solely that of the overseas  branch
     which  could  expose  the  Fund to a  greater  risk of loss.  In  addition,
     obligations  of foreign banks or of overseas  branches of U.S. banks may be
     affected by governmental action in the country of domicile of the branch or
     parent bank. Examples of adverse foreign  governmental  actions include the
     imposition of currency  controls,  the imposition of  withholding  taxes on
     interest income payable on such obligations,  interest limitations, seizure
     or nationalization of assets, or the declaration of a moratorium.  Deposits
     in foreign banks or foreign  branches of U.S.  banks are not covered by the
     Federal  Deposit  Insurance  Corporation.  The Fund  only  buys  short-term
     instruments where the risks of adverse  governmental action are believed by
     the Manager to be minimal.  The Fund  considers  these  factors  along with
     other appropriate  factors in making an investment decision to acquire such
     obligations.  It only acquires  those which,  in the opinion of management,
     are of an investment  quality comparable to other debt securities bought by
     the Fund.  The Fund invests in  certificates  of deposit of selected  banks
     having less than one billion dollars of assets  providing the  certificates
     do not exceed the level of insurance  (currently  $100,000) provided by the
     applicable government agency.

     A certificate  of deposit is issued  against  funds  deposited in a bank or
     savings and loan  association for a definite period of time, at a specified
     rate  of  return.   Normally  they  are  negotiable.   However,   the  Fund
     occasionally  invests in  certificates of deposit which are not negotiable.
     Such  certificates  may  provide  for  interest  penalties  in the event of
     withdrawal prior to their maturity.  A bankers'  acceptance is a short-term
     credit  instrument  issued by corporations  to finance the import,  export,
     transfer  or  storage  of goods.  They are  termed  "accepted"  when a bank
     guarantees their payment at maturity and reflect the obligation of both the
     bank and drawer to pay the face amount of the instrument at maturity.

(4)  Commercial  Paper -- Short-term  promissory notes issued by U.S. or foreign
     corporations.

(5)  Short-term Corporate Debt -- Corporate notes, bonds and debentures which at
     the time of purchase have 397 days or less remaining to maturity.

(6)  Repurchase  Agreements -- Instruments  under which securities are purchased
     from a bank  or  securities  dealer  with an  agreement  by the  seller  to
     repurchase  the  securities  at the same price plus interest at a specified
     rate. (See "FUND INVESTMENTS - Repurchase Agreements.")

(7)  Taxable  Municipal   Obligations  --  Short-term   obligations   issued  or
     guaranteed by state and municipal issuers which generate taxable income.

The ratings of nationally  recognized  statistical rating organization  (NRSRO),
such as Moody's  Investor  Services,  Inc.  ("Moody's")  and Standard and Poor's
("S&P"),  which are described in Appendix A, represent  their opinions as to the
quality of the money market  instruments which they undertake to rate. It should
be emphasized,  however, that ratings are general and are not absolute standards
of quality.  These ratings,  including  ratings of NRSROs other than Moody's and
S&P, are the initial  criteria for selection of portfolio  investments,  but the
Manager further evaluates these securities.

Municipal Obligations

The  Tax-Exempt  Bond Fund can  invest  in  "Municipal  Obligations."  Municipal
Obligations are obligations issued by or on behalf of states,  territories,  and
possessions  of the  United  States  and the  District  of  Columbia  and  their
political  subdivisions,  agencies and  instrumentalities,  including  municipal
utilities,  or multi-state  agencies or  authorities.  The interest on Municipal
Obligations  is exempt from federal income tax in the opinion of bond counsel to
the issuer. Three major  classifications of Municipal Obligations are: Municipal
Bonds, which generally have a maturity at the time of issue of one year or more,
Municipal  Notes,  which  generally  have a maturity at the time of issue of six
months to three years,  and Municipal  Commercial  Paper,  which generally has a
maturity at the time of issue of 30 to 270 days.

The term  "Municipal  Obligations"  includes debt  obligations  issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports,  bridges, highways, housing, hospitals, mass
transportation, schools, streets, water and sewer works, and electric utilities.
Other  public  purposes  for which  Municipal  Obligations  are  issued  include
refunding  outstanding  obligations,   obtaining  funds  for  general  operating
expenses and lending such funds to other public institutions and facilities.

Industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide for the construction,  equipment,  repair or improvement
of privately operated housing facilities, sports facilities, convention or trade
show facilities,  airport, mass transit, industrial, port or parking facilities,
air or water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal.  They are considered
to be Municipal  Obligations  if the interest  paid thereon  qualifies as exempt
from  federal  income tax in the  opinion of bond  counsel to the  issuer,  even
though the interest may be subject to the federal alternative minimum tax.

Municipal Bonds. Municipal Bonds may be either "general obligation" or "revenue"
issues.  General  obligation  bonds are  secured by the  issuer's  pledge of its
faith,  credit  and taxing  power for the  payment of  principal  and  interest.
Revenue bonds are payable from the revenues  derived from a particular  facility
or class of facilities or, in some cases,  from the proceeds of a special excise
tax or other  specific  revenue source (e.g.,  the user of the facilities  being
financed),  but not from the general taxing power.  Industrial development bonds
and pollution control bonds in most cases are revenue bonds and generally do not
carry the pledge of the credit of the issuing  municipality.  The payment of the
principal and interest on industrial revenue bonds depends solely on the ability
of the user of the  facilities  financed  by the  bonds  to meet  its  financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment.  The Fund may also invest in "moral obligation" bonds
which are normally issued by special purpose public authorities. If an issuer of
moral obligation  bonds is unable to meet its obligations,  the repayment of the
bonds  becomes a moral  commitment  but not a legal  obligation  of the state or
municipality in question.

Municipal Notes.  Municipal Notes usually are general  obligations of the issuer
and are sold in anticipation  of a bond sale,  collection of taxes or receipt of
other revenues.  Payment of these notes is primarily dependent upon the issuer's
receipt of the  anticipated  revenues.  Other notes include  "Construction  Loan
Notes" issued to provide construction financing for specific projects, and "Bank
Notes" issued by local  governmental  bodies and agencies to commercial banks as
evidence  of  borrowings.  Some  notes  ("Project  Notes")  are  issued by local
agencies under a program administered by the United States Department of Housing
and Urban Development. Project Notes are secured by the full faith and credit of
the United States.

Bond  Anticipation  Notes (BANs) are usually  general  obligations  of state and
local  governmental  issuers  which are sold to  obtain  interim  financing  for
projects  that will  eventually  be funded  through the sale of  long-term  debt
obligations  or bonds.  The ability of an issuer to meet its  obligations on its
BANs is primarily  dependent on the issuer's  access to the long-term  municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.

Tax  Anticipation  Notes  (TANs)  are issued by state and local  governments  to
finance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues.  TANs are usually general obligations
of the issuer.  A weakness in an issuer's  capacity to raise taxes due to, among
other  things,  a  decline  in its tax  base or a rise in  delinquencies,  could
adversely  affect the issuer's  ability to meet its  obligations  on outstanding
TANs.

Revenue  Anticipation  Notes (RANs) are issued by  governments  or  governmental
bodies with the expectation  that future revenues from a designated  source will
be used to repay the notes. In general they also constitute general  obligations
of the  issuer.  A  decline  in the  receipt  of  projected  revenues,  such  as
anticipated revenues from another level of government, could adversely affect an
issuer's ability to meet its obligations on outstanding  RANs. In addition,  the
possibility  that the  revenues  would,  when  received,  be used to meet  other
obligations  could  affect the  ability of the issuer to pay the  principal  and
interest on RANs.

Construction  Loan  Notes  are  issued to  provide  construction  financing  for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.

Bank Notes are notes issued by local  governmental  bodies and agencies  such as
those  described  above to  commercial  banks as  evidence  of  borrowings.  The
purposes  for which the notes are  issued  are  varied  but they are  frequently
issued to meet short-term  working-capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.

Municipal  Commercial  Paper.  Municipal  Commercial  Paper refers to short-term
obligations  of  municipalities  which may be issued  at a  discount  and may be
referred to as Short-Term Discount Notes.  Municipal  Commercial Paper is likely
to be used to meet seasonal  working  capital needs of a municipality or interim
construction  financing.  Generally they are repaid from general revenues of the
municipality  or  refinanced  with  long-term  debt.  In  most  cases  Municipal
Commercial  Paper is backed by  letters  of  credit,  lending  agreements,  note
repurchase  agreements or other credit facility  agreements  offered by banks or
other institutions.

Variable  and  Floating  Rate  Obligations.   Certain   Municipal   Obligations,
obligations  issued or  guaranteed  by the U.S.  Government  or its  agencies or
instrumentalities  and debt instruments issued by domestic banks or corporations
may carry variable or floating rates of interest. Such instruments bear interest
at rates which are not fixed,  but which vary with changes in  specified  market
rates or indices,  such as a bank prime rate or  tax-exempt  money market index.
Variable  rate notes are  adjusted  to current  interest  rate levels at certain
specified  times,   such  as  every  30  days.  A  floating  rate  note  adjusts
automatically  whenever  there is a change in its base interest  rate  adjustor,
e.g., a change in the prime  lending rate or specified  interest  rate  indices.
Typically such instruments  carry demand features  permitting the Fund to redeem
at par.

A Fund's right to obtain payment at par on a demand instrument upon demand could
be affected by events  occurring  between the date the Fund elects to redeem the
instrument and the date redemption proceeds are due which affects the ability of
the  issuer to pay the  instrument  at par value.  The  Manager  monitors  on an
ongoing  basis the  pricing,  quality  and  liquidity  of such  instruments  and
similarly  monitors the ability of an issuer of a demand  instrument,  including
those  supported by bank letters of credit or  guarantees,  to pay principal and
interest  on demand.  Although  the  ultimate  maturity  of such  variable  rate
obligations  may exceed one year,  the Funds treat the maturity of each variable
rate demand  obligation as the longer of (i) the notice period  required  before
the Fund is entitled to payment of the principal amount through demand,  or (ii)
the period  remaining  until the next  interest rate  adjustment.  Floating rate
instruments  with  demand  features  are deemed to have a maturity  equal to the
period remaining until the principal amount can be recovered through demand.

The Funds may  purchase  participation  interests  in  variable  rate  Municipal
Obligations  (such as industrial  development  bonds). A participation  interest
gives the  purchaser an undivided  interest in the  Municipal  Obligation in the
proportion that its  participation  interest bears to the total principal amount
of the  Municipal  Obligation.  A Fund has the right to demand  payment on seven
days' notice,  for all or any part of the Fund's  participation  interest in the
Municipal  Obligation,  plus accrued interest.  Each  participation  interest is
backed  by an  irrevocable  letter  of  credit  or  guarantee  of a  bank.  Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank.  Banks will  retain a service  and letter of credit fee and a fee for
issuing repurchase  commitments in an amount equal to the excess of the interest
paid on the  Municipal  Obligations  over the  negotiated  yield  at  which  the
instruments  were  purchased  by the Funds.  No Fund  committed  during the last
fiscal year or intends to commit during the present  fiscal year more than 5% of
its net assets to participation interests.

Other  Municipal   Obligations.   Other  kinds  of  Municipal   Obligations  are
occasionally  available in the marketplace,  and a Fund may invest in such other
kinds of obligations to the extent consistent with its investment  objective and
limitations.  Such  obligations  may be issued for  different  purposes and with
different security than those mentioned above.

Risks  of  Municipal  Obligations.  The  yields  on  Municipal  Obligations  are
dependent  on a variety of factors,  including  general  economic  and  monetary
conditions,  money  market  factors,  conditions  in the  Municipal  Obligations
market, size of a particular offering, maturity of the obligation, and rating of
the issue. Each Fund's ability to achieve its investment  objective also depends
on the continuing  ability of the issuers of the Municipal  Obligations in which
it invests to meet their  obligation  for the payment of interest and  principal
when due.

Municipal  Obligations  are subject to the provisions of bankruptcy,  insolvency
and other laws  affecting  the rights and  remedies  of  creditors,  such as the
Federal  Bankruptcy Act. They are also subject to federal or state laws, if any,
which extend the time for payment of principal or interest,  or both,  or impose
other constraints upon enforcement of such obligations or upon municipalities to
levy taxes.  The power or ability of issuers to pay, when due,  principal of and
interest on Municipal Obligations may also be materially affected by the results
of litigation or other conditions.

From  time to time,  proposals  have been  introduced  before  Congress  for the
purpose of  restricting  or  eliminating  the federal  income tax  exemption for
interest on Municipal  Obligations.  It may be expected  that similar  proposals
will be introduced in the future. If such a proposal was enacted, the ability of
the Funds to pay "exempt  interest"  dividends may be adversely  affected.  Each
Fund would reevaluate its investment objective and policies and consider changes
in its structure.

Taxable Investments of the Tax-Exempt Bond Fund

The  Tax-Exempt  Bond  Fund  may  invest  up to  20% of its  assets  in  taxable
short-term  investments  consisting of:  Obligations issued or guaranteed by the
United  States  Government or its agencies or  instrumentalities;  domestic bank
certificates  of deposit and bankers'  acceptances;  short-term  corporate  debt
securities  such  as  commercial  paper;  and  repurchase  agreements  ("Taxable
Investments"). These investments must have a stated maturity of one year or less
at the time of purchase and must meet the following  standards:  banks must have
assets of at least $1  billion;  commercial  paper must be rated at least "A" by
S&P or "Prime" by Moody's or, if not rated,  must be issued by companies  having
an outstanding debt issue rated at least "A" by S&P or Moody's;  corporate bonds
and  debentures  must be rated at least "A" by S&P or Moody's.  Interest  earned
from Taxable  Investments  is taxable to investors.  When, in the opinion of the
Fund's Manager, it is advisable to maintain a temporary "defensive" posture, the
Fund may invest  more than 20% of its total  assets in Taxable  Investments.  At
other times,  Taxable  Investments,  Municipal  Obligations that do not meet the
quality  standards  required for the 80% portion of the  portfolio and Municipal
Obligations  the  interest  on which is  treated  as a tax  preference  item for
purposes  of the  federal  alternative  minimum  tax will not  exceed 20% of the
Fund's total assets.

Portfolio Turnover

Portfolio  turnover normally differs for each Fund, varies from year to year (as
well as within a year) and is affected by portfolio sales necessary to meet cash
requirements for redemptions of Fund shares.  This requirement may in some cases
limit  the  ability  of a Fund to effect  certain  portfolio  transactions.  The
portfolio  turnover  rate for a Fund is  calculated  by  dividing  the lesser of
purchases  or sales of its  portfolio  securities  during the fiscal year by the
monthly  average of the value of its portfolio  securities  (excluding  from the
computation all securities,  including  options,  with maturities at the time of
acquisition  of one year or less). A high rate of portfolio  turnover  generally
involves correspondingly greater brokerage commission expenses which are paid by
the Fund.

No  portfolio  turnover  rate can be  calculated  for the Cash  Management  Fund
because  of the short  maturities  of the  securities  in which it  invests.  No
turnover rates are calculated for the new Funds (LargeCap Stock Index,  Partners
LargeCap Growth and Partners MidCap Growth).

The portfolio turnover rates for each of the other Funds for its most recent and
immediately  preceding fiscal periods were as follows (annualized when reporting
period is less than one year):

             Balanced Fund                               24.2% and 57.0%
             Blue Chip Fund                              16.4% and 0.5%
             Bond Fund                                   48.9% and15.2%
             Capital Value Fund                          44.5% and 23.2%
             Government Securities Income Fund           19.4% and 17.1%
             Growth Fund                                 32.4% and21.9%
             High Yield Fund                             86.1% and 65.9%
             International Emerging Markets Fund         95.8% and 45.2%
             International Fund                          58.7% and 38.7%
             International SmallCap Fund                 191.5% and99.8%
             Limited Term Bond Fund                      20.9% and 23.8%
             MidCap Fund                                 59.9% and 25.1%
             Real Estate Fund                            55.1% and 60.4%
             SmallCap Fund                               100.7% and 20.5%
             Tax-Exempt Bond Fund                        15.6% and 6.6%
             Utilities Fund                              23.5% and 11.9%

MANAGEMENT OF THE FUND

Board of Directors

Under  Maryland  law,  a Board of  Directors  oversees  each of the  Funds.  The
Directors  have  financial or other  relevant  experience and meet several times
during the year to review contracts, Fund activities and the quality of services
provided  to the Funds.  Other  than  serving  as  Directors,  most of the Board
members have no affiliation with the Funds or service providers.

The current  Directors  and Officers  are shown below.  Each person also has the
same position with the Principal  Variable  Contracts  Fund,  Inc. which is also
sponsored by Principal Life Insurance  Company.  Unless an address is shown, the
mailing address for the Directors and Officers is Principal Financial Group, Des
Moines, Iowa 50392.

*    John E. Aschenbrenner,  50, Director.  Executive Vice President,  Principal
     Life Insurance Company since 2000; Senior Vice President,  1996-2000;  Vice
     President - Individual Markets 1990-1996.  Director,  Principal  Management
     Corporation and Princor Financial Services Corporation.

@    James  D.  Davis,  65,  Director.  4940  Center  Court,  Bettendorf,  Iowa.
     Attorney. Vice President, Deere and Company, Retired.

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

@    Pamela A. Ferguson, 56, Director.  4112 River Oaks Drive, Des Moines, Iowa.
     Professor of  Mathematics,  Grinnell  College  since 1998.  Prior  thereto,
     President, Grinnell College.

     Richard W. Gilbert, 59, Director. 1357 Asbury Avenue,  Winnetka,  Illinois.
     President,   Gilbert  Communications,   Inc.  since  1993.  Prior  thereto,
     President and Publisher, Pioneer Press.

*&   J. Barry Griswell,  50,  Director and Chairman of the Board.  President and
     CEO,  Principal Life Insurance  Company since 2000;  President,  1998-2000;
     Executive Vice  President,  1996-1998;  Senior Vice  President,  1991-1996.
     Director and Chairman of the Board,  Principal  Management  Corporation and
     Princor Financial Services Corporation.

@    William C. Kimball,  52, 4700 Westown Parkway,  Suite 300, West Des Moines,
     Iowa  50266-6730.  Chairman and CEO, Medicap  Pharmacies,  Inc. since 1998.
     Prior thereto, President and CEO.

&    Barbara A.  Lukavsky,  59,  Director.  13731 Bay Hill Court,  Clive,  Iowa.
     President and CEO,  Barbican  Enterprises,  Inc. since 1997.  President and
     CEO, Lu San ELITE USA, L.C. 1985-1998.

*    Craig L. Bassett,  47,  Treasurer.  Second Vice  President  and  Treasurer,
     Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
     Prior thereto, Associate Treasurer.

*    Michael J. Beer, 39, Financial Officer.  Executive Vice President,  Princor
     Financial Services Corporation and Principal  Management  Corporation since
     1999. Senior Vice President and Chief Operating  Officer,  1997-1999.  Vice
     President and Chief Operating Officer,  1995-1997. Prior thereto, Financial
     Officer.

     Michael  W.  Cumings,  48,  Assistant  Counsel.  Counsel,   Principal  Life
     Insurance Company since 1989.

*    Arthur S. Filean, 61, Vice President and Secretary. Vice President, Princor
     Financial  Services  Corporation,  since 1990.  Vice  President,  Principal
     Management Corporation, since 1996.

*    Ernest H. Gillum, 44, Assistant Secretary.  Vice President - Compliance and
     Product  Development,  Princor Financial Services Corporation and Principal
     Management   Corporation,   since  1998.  Prior  thereto,   Assistant  Vice
     President,   Registered  Products,   1995-1998.   Prior  thereto,   Product
     Development and Compliance Officer.

     Jane E. Karli, 42, Assistant Treasurer. Assistant Treasurer, Principal Life
     Insurance Company since 1998;  Senior Accounting and Custody  Administrator
     1994-1998; Prior thereto, Senior Investment Cost Accountant.

*    Michael D. Roughton,  48,  Counsel.  Vice  President and Associate  General
     Counsel,  Principal Life Insurance Company,  since 1999. Counsel 1994-1999.
     Counsel,  Invista Capital  Management,  Inc.,  Princor  Financial  Services
     Corporation,  Principal  Investors  Corporation  and  Principal  Management
     Corporation.

*    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 Principal Life.

@    Member of Audit and Nominating Committee

&    Member of Executive Committee (which is selected by the Board and which may
     exercise  all the powers of the Board,  with certain  exceptions,  when the
     Board is not in  session.  The  Committee  must  report its  actions to the
     Board.)
                                    COMPENSATION TABLE*
                            fiscal year ended October 31, 1999

                                    Compensation from         Compensation from
              Director          Each Principal Mutual Fund       Fund Complex

         James D. Davis                  $1,350                    $53,250
         Pamela A. Ferguson               1,200                     47,700
         Richard W. Gilbert               1,350                     50,850
         Barbara A. Lukavsky              1,200                     47,700

     *   None of the Funds provide retirement benefits for any of the directors.

As of _______________ Principal Life Insurance Company, a life insurance company
organized in 1879 under the laws of Iowa, its  subsidiaries and affiliates owned
of record a percentage of the outstanding voting shares of each Fund:

                                                                % of Outstanding
                           Fund                                   Shares Owned

             Balanced Fund                                            %
             Blue Chip Fund
             Bond Fund
             Capital Value Fund
             Cash Management Fund
             Government Securities Income Fund
             Growth Fund
             High Yield Fund
             International Emerging Markets Fund
             International Fund
             International SmallCap Fund
             LargeCap Stock Index Fund
             Limited Term Bond Fund
             MidCap Fund
             Partners Aggressive Growth Fund*
             Partners LargeCap Growth Fund*
             Partners MidCap Growth Fund*
             Real Estate Fund
             SmallCap Fund
             Tax-Exempt Bond Fund
             Utilities Fund

     * represents start-up capital.

As of  __________the  Officers and  Directors of each Fund as a group owned less
than 1% of the outstanding shares of any Class of any of the Funds.

As of __________,  the following  shareholders  of the Funds owned 5% or more of
the outstanding shares of any Class of the Funds:

MANAGER AND SUB-ADVISORS

The  Manager  of  each of the  Funds  is  Principal  Management  Corporation,  a
wholly-owned  subsidiary of Princor  Financial  Services  Corporation which is a
wholly-owned   subsidiary  of  Principal  Financial  Services,   Inc.  Principal
Financial Services, Inc. is a holding company which is a wholly-owned subsidiary
of Principal  Financial Group,  Inc. The Principal  Financial  Group,  Inc. is a
holding company which is a wholly-owned  subsidiary of Principal  Mutual Holding
Company.  The  address of the  Manager is the  Principal  Financial  Group,  Des
Moines, Iowa 50392-0200. The Manager was organized on January 10, 1969 and since
that time has managed various mutual funds sponsored by Principal Life Insurance
Company.

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

Funds:            Balanced,  Blue Chip,  Capital  Value,  Government  Securities
                  Income, Growth, International,  International Emerging Growth,
                  International  SmallCap,  LargeCap  Stock Index,  Limited Term
                  Bond, MidCap, SmallCap and Utilities Funds.
Sub-Advisor:      Invista,  an indirectly  wholly-owned  subsidiary of Principal
                  Life  Insurance  Company and an affiliate of the Manager,  was
                  founded  in 1985 and  manages  investments  for  institutional
                  investors,  including Principal Life Insurance Company. Assets
                  under  management  at  ____________  were  approximately  $___
                  billion.  Invista's address is 1800 Hub Tower, 699 Walnut, Des
                  Moines, Iowa 50309.

Fund:             Partners Aggressive Growth Fund
Sub-Advisor:      Morgan  Stanley  Asset  Management  ("Morgan  Stanley"),  with
                  principal offices at 1221 Avenue of the Americas, New York, NY
                  10020, provides a broad range of portfolio management services
                  to  customers  in the U.S.  and abroad.  As of  _____________,
                  Morgan  Stanley,  together with its  affiliated  institutional
                  asset   management    companies,    managed   investments   of
                  approximately  $175  billion as named  fiduciary  or fiduciary
                  advisor.  On December 1, 1998, Morgan Stanley Asset Management
                  Inc. changed it name to Morgan Stanley Dean Witter  Investment
                  Management  Inc.  but  continues  to do  business  in  certain
                  instances using the name Morgan Stanley Asset Management.

Fund:             Partners LargeCap Growth Fund
Sub-Advisor:      Duncan-Hurst  Capital  Management Inc.  ("Duncan-Hurst"),  was
                  founded in 1990.  Its address is 4365 Executive  Drive,  Suite
                  1520,  San  Diego CA  92121.  Duncan-Hurst  currently  manages
                  assets  of $____  billion  for  institutional  and  individual
                  investors.

Fund:             Partners MidCap Growth Fund
Sub-Advisor:      Turner Investment  Partners,  Inc.  ("Turner"),  1235 Westlake
                  Drive,   Suite  350,   Berwyn  PA  19312,  is  a  professional
                  investment  management firm founded in 1990. As of __________,
                  Turner had discretionary  management authority with respect to
                  approximately  $____  billion in assets.  Turner has  provided
                  investment  advisory  services to investment  companies  since
                  1992.

The Manager,  each of the Sub-Advisors and each of the Funds have adopted a Code
of Ethics designed to prevent  persons with access to information  regarding the
portfolio  trading  activity of the Funds from using that  information for their
personal  benefit.  In  certain  circumstances  personal  securities  trading is
permitted in accordance with procedures  established by the Code of Ethics.  The
Boards of Directors for the Manager,  each of the  Sub-Advisors  and each of the
Funds periodically review their respective Code of Ethics.

Each of the persons  affiliated with a Fund who is also an affiliated  person of
the Manager or Invista is named below,  together  with the  capacities  in which
such person is affiliated:

<TABLE>
<CAPTION>
          Name                Office Held With Each Fund                  Office Held With The Manager/Invista


<S>                        <C>                                     <C>
John  E. Aschenbrenner     Director                                Director (Manager)
Michael J. Beer            Financial Officer                       Vice President and Chief Operating Officer (Manager)
Ralph C. Eucher            Director and President                  Director and President (Manager)
Arthur S. Filean           Vice President and Secretary            Vice President (Manager)
Ernest H. Gillum           Assistant Secretary                     Vice President, Compliance and Product Development (Manager)
J. Barry Griswell          Director and Chairman of the Board      Director and Chairman of the Board (Manager)
Michael D. Roughton        Counsel                                 Counsel (Manager; Invista)
</TABLE>

COST OF MANAGER'S SERVICES

For providing the investment  advisory  services,  and specified other services,
the  Manager,  under the terms of the  Management  Agreement  for each Fund,  is
entitled to receive a fee computed and accrued daily and payable monthly, at the
following annual rates:

<TABLE>
<CAPTION>
                                                                           Net Asset Value of Fund

                                                 First             Next             Next              Next
                                             $250,000,000      $250,000,000     $250,000,000      $250,000,000      Thereafter

<S>                                              <C>               <C>              <C>               <C>               <C>
Blue Chip, Capital Value and Growth Funds        .60%              .55%             .50%              .45%              .40%
Partners Aggressive Growth Fund                  .75               .70              .65               .60               .55
International Fund                               .85               .80              .75               .70               .65
</TABLE>

<TABLE>
<CAPTION>
                                                                           Net Asset Value of Fund

                                                 First             Next             Next              Next             Over
                                             $100,000,000      $100,000,000     $100,000,000      $100,000,000     $400,000,000

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

                                              Overall Fee

LargeCap Stock Index Fund                        .35%
Partners LargeCap Growth Fund                    .90%
Partners MidCap Growth Fund                      .90%


There is no  assurance  that any of the Funds' net assets will reach  sufficient
amounts to be able to take  advantage of the rate  decreases.  The net assets of
each  Fund on  October  31,  1999  and the  rate of the fee for  each  Fund  for
investment  management services as provided in the Management  Agreement for the
fiscal year then ended were as follows:
                                                              Management Fee
                                       Net Assets as of     or Fiscal Year Ended
                  Fund                 October 31, 1999      October 31, 1999

Balanced Fund                             $160,113,402              0.58%
Blue Chip Fund                             291,707,955              0.46
Bond Fund                                  187,792,641              0.48
Capital Value Fund                         670,726,648              0.37
Cash Management Fund                       374,707,858              0.44
Government Securities Income Fund          279,432,929              0.45
Growth Fund                                636,878,130              0.38
High Yield Fund                             40,312,045              0.60
International Emerging Markets Fund         22,166,474              0.68
International Fund                         408,882,643              1.25
International SmallCap Fund                 40,867,074              1.20
Limited Term Bond Fund                      33,418,483              0.50*
MidCap Fund                                407,721,977              0.56
Real Estate Fund                            13,009,308              0.90
SmallCap Fund                               66,121,454              0.85
Tax-Exempt Bond Fund                       198,589,990              0.46
Utilities Fund                             126,445,559              0.59

     * Before waiver.

The Manager pays for office space,  facilities and simple business equipment and
the costs of keeping the books of the Fund.  The Manager  also  compensates  all
personnel  who are officers and  directors,  if such  officers and directors are
also affiliated with the Manager.

Each Fund pays all its other corporate expenses incurred in the operation of the
Fund and the continuous public offering of its shares, but not selling expenses.
Among other expenses, the Fund pays its taxes (if any), brokerage commissions on
portfolio  transactions,  interest,  the cost of stock  issue and  transfer  and
dividend disbursement,  administration of shareholder accounts,  custodial fees,
expenses  of  registering  and  qualifying  shares  for sale  after the  initial
registration,  auditing and legal  expenses,  fees and expenses of  unaffiliated
directors,  and costs of  shareholder  meetings.  The Manager pays most of these
expenses  in the  first  instance,  and is  reimbursed  for  them by the Fund as
provided in the Management  Agreement.  The Manager also is responsible  for the
performance of certain of the functions  described  above,  such as transfer and
dividend  disbursement and administration of shareholder  accounts,  the cost of
which the Manager is reimbursed by the Fund.

Fees paid for investment  management  services during the periods indicated were
as follows:

<TABLE>
<CAPTION>
                                                        Management Fees For Fiscal Years Ended October 31,

           Fund                                    1999                           1998                     1997

<S>                                            <C>                           <C>                       <C>
Balanced Fund                                  $   914,378                   $    750,616              $    556,009
Blue Chip Fund                                   1,142,839                        764,784                   417,958
Bond Fund                                          909,902                        782,241(1)                636,217(1)
Capital Value Fund                               2,570,792                      2,349,118                 2,031,143
Cash Management    Fund                          1,526,404                      2,127,595(1)              2,864,916(1)
Government Securities Income Fund                1,283,959                      1,239,644                 1,227,604
Growth Fund                                      2,283,089                      1,863,070                 1,443,120
High Yield Fund                                    259,764                        287,858                   230,667
International Emerging Markets Fund                216,500                        157,324                    28,487(2)
International Fund                               2,673,903                      2,492,037                 1,882,664
International SmallCap Fund                        358,891                        242,403                    30,283(2)
Limited Term Bond Fund                             160,694(1)                     133,825(1)                 97,039(1)
MidCap Fund                                      2,461,880                      2,548,924                 2,004,305
Real Estate Fund                                   114,693                         87,653(3)                    N/A
SmallCap Fund                                      412,361                        147,083(3)                    N/A
Tax-Exempt Bond Fund                               972,600                        974,740                   941,387
Utilities Fund                                     685,175                        531,644(1)                436,296(1)

<FN>
   (1) Before waiver.
   (2) Period from August 14, 1997 (Date Operations  Commenced)  through
       October 31,  1997.
   (3) Period from  December  11, 1997 (Date  Operations  Commenced) through
       October 31, 1998.
</FN>
</TABLE>

The Manager waived $66,728, $100,270 and $59,630 of its fee for the Limited Term
Bond Fund for the years ended October 31, 1999, 1998 and 1997, respectively. The
Manager  waived  $172,366 and $60,665 of its fee for the Bond Fund for the years
ended  October 31, 1998 and 1997,  respectively.  The Manager also waived $1,343
and $7,933 of its fee for the Cash  Management  Fund for the years ended October
31, 1998 and 1997, respectively.  The Manager also waived $82,515 and $79,048 of
its fee for the  Utilities  Fund for the years ended  October 31, 1998 and 1997,
respectively.

Costs reimbursed to the Manager during the periods indicated for providing other
services pursuant to the Management Agreement were as follows:
<TABLE>
<CAPTION>
                                                                          Reimbursement by Fund
                                                                          of Certain Costs For
                   Fund                                              Fiscal Years Ended October 31,

                                                   1999                          1998                      1997

<S>                                                 <C>                       <C>                        <C>
Balanced Fund                                       $  664,179                $  521,852                 $  364,442
Blue Chip Fund                                       1,336,983                   832,394                    402,003
Bond Fund                                              534,104                   482,817                    278,385
Capital Value Fund                                   1,415,788                 1,247,865                    837,825
Cash Management Fund                                   788,303                   854,575                  1,833,423
Government Securities Income Fund                      544,396                   499,207                    407,146
Growth Fund                                          1,613,707                 1,421,948                  1,121,832
High Yield Fund                                        170,349                   217,020                     98,481
International Emerging Markets Fund                    148,065                   119,948                      4,116(1)
International Fund                                   1,111,335                 1,168,106                    906,359
International SmallCap Fund                            168,397                   153,320                      4,283(1)
Limited Term Bond Fund                                 123,038                    90,187                     44,634
MidCap Fund                                          1,733,436                 1,840,474                  1,308,608
Real Estate Fund                                        93,688                    76,546(2)                     N/A
SmallCap Fund                                          348,721                   199,807(2)                     N/A
Tax-Exempt Bond Fund                                   165,845                   199,780                    135,553
Utilities Fund                                         390,699                   304,813                    230,151

<FN>
   (1) Period from August 14, 1997 (Date Operations  Commenced)  through
       October 31,  1997.
   (2) Period from  December  11, 1997 (Date  Operations  Commenced)
       through October 31, 1998.
</FN>
</TABLE>

NOTE:    The  Manager  voluntarily  waived a portion of its fee for the  Limited
         Term  Bond Fund  from the date  operations  commenced  and  intends  to
         continue such waiver and, if necessary,  pay expenses  normally payable
         by the Limited  Term Bond Fund  through the period  ending  October 31,
         1999 in an  amount  that  will  maintain  a total  level  of  operating
         expenses,  which as a percent of average net assets  attributable  to a
         class on an  annualized  basis  will not  exceed  1.00% for the Class A
         shares,  1.35% for the Class B shares, 1.35% for the Class C shares and
         1.60% for the Class R shares.  The effect of the waiver was and will be
         to reduce the Fund's annual operating  expenses and increase the Fund's
         yield and effective yield.

         The  Manager has agreed to waive a portion of its fee for the Blue Chip
         Fund from November 1, 1999. The Manager  intends to continue the waiver
         and, if necessary,  pay expenses normally payable by the Blue Chip Fund
         through the period ending  October 31, 2000. The waiver will maintain a
         total level of operating  expenses  (expressed  as a percent of average
         net  assets  attributable  to a Class on an  annualized  basis)  not to
         exceed  1.20% for Class A Shares,  1.95% for Class B Shares,  1.95% for
         Class C Shares  and 1.70% for Class R Shares.  The effect of the waiver
         is to reduce the Fund's annual operating expenses.

         The  Manager  has  agreed  to waive a  portion  of its fee for the Real
         Estate Fund from November 1, 1999. The Manager  intends to continue the
         waiver and, if  necessary,  pay expenses  normally  payable by the Real
         Estate Fund through the period ending October 31, 2000. The waiver will
         maintain a total level of operating expenses (expressed as a percent of
         average net assets  attributable to a Class on an annualized basis) not
         to exceed 1.90% for Class A Shares, 2.65% for Class B Shares, 2.65% for
         Class C Shares  and 2.40% for Class R Shares.  The effect of the waiver
         is to reduce the Fund's annual operating expenses.

         The Manager  has agreed to waive a portion of its fee for the  SmallCap
         Fund from November 1, 1999. The Manager  intends to continue the waiver
         and, if necessary,  pay expenses  normally payable by the SmallCap Fund
         through the period ending  October 31, 2000. The waiver will maintain a
         total level of operating  expenses  (expressed  as a percent of average
         net  assets  attributable  to a Class on an  annualized  basis)  not to
         exceed  1.80% for Class A Shares,  2.55% for Class B Shares,  2.55% for
         Class C Shares  and 2.30% for Class R Shares.  The effect of the waiver
         is to reduce the Fund's annual operating expenses

         The  Manager  has  agreed  to  waive  a  portion  of its  fee  for  the
         International  Emerging Markets Fund from November 1, 1999. The Manager
         intends to continue the waiver and, if necessary, pay expenses normally
         payable by the  International  Emerging Markets Fund through the period
         ending  October 31,  2000.  The waiver  will  maintain a total level of
         operating  expenses  (expressed  as a percent  of  average  net  assets
         attributable to a Class on an annualized basis) not to exceed 2.50% for
         Class A Shares,  3.25% for Class B Shares, 3.25% for Class C Shares and
         3.00% for Class R Shares.  The  effect of the  waiver is to reduce  the
         Fund's annual operating expenses.


         The Manager  has agreed to waive a portion of its fee for the  LargeCap
         Stock Index Fund from March 1, 2000.  The  Manager  intends to continue
         the waiver and, if  necessary,  pay  expenses  normally  payable by the
         LargeCap  Stock Index Fund through the period ending  October 31, 2000.
         The waiver will maintain a total level of operating expenses (expressed
         as a  percent  of  average  net  assets  attributable  to a Class on an
         annualized  basis) not to exceed  0.80% for Class A Shares,  _____% for
         Class B  Shares,  _____%  for  Class C Shares  and  _____%  for Class R
         Shares.  The  effect  of the  waiver  is to reduce  the  Fund's  annual
         operating expenses.

         The Manager  has agreed to waive a portion of its fee for the  Partners
         Aggressive  Growth Fund from November 1, 1999.  The Manager  intends to
         continue the waiver and, if necessary, pay expenses normally payable by
         the Partners  Aggressive  Growth Fund through the period ending October
         31, 2000. The waiver will maintain a total level of operating  expenses
         (expressed as a percent of average net assets  attributable  to a Class
         on an annualized  basis) not to exceed 1.60% for Class A Shares,  2.35%
         for  Class B Shares,  2.35%  for  Class C Shares  and 2.10% for Class R
         Shares.  The  effect  of the  waiver  is to reduce  the  Fund's  annual
         operating expenses.

         The Manager  has agreed to waive a portion of its fee for the  Partners
         LargeCap  Growth  Fund from  March 1,  2000.  The  Manager  intends  to
         continue the waiver and, if necessary, pay expenses normally payable by
         the Partners LargeCap Growth Fund through the period ending October 31,
         2000.  The waiver  will  maintain a total level of  operating  expenses
         (expressed as a percent of average net assets  attributable  to a Class
         on an annualized basis) not to exceed 1.80% for Class A Shares,  _____%
         for Class B Shares,  _____%  for Class C Shares  and _____% for Class R
         Shares.  The  effect  of the  waiver  is to reduce  the  Fund's  annual
         operating expenses.

         The Manager  has agreed to waive a portion of its fee for the  Partners
         MidCap Growth Fund from March 1, 2000. The Manager  intends to continue
         the waiver and, if  necessary,  pay  expenses  normally  payable by the
         Partners MidCap Growth Fund through the period ending October 31, 2000.
         The waiver will maintain a total level of operating expenses (expressed
         as a  percent  of  average  net  assets  attributable  to a Class on an
         annualized  basis) not to exceed  1.80% for Class A Shares,  _____% for
         Class B  Shares,  _____%  for  Class C Shares  and  _____%  for Class R
         Shares.  The  effect  of the  waiver  is to reduce  the  Fund's  annual
         operating expenses.

Each Fund has entered into certain  agreements that provide for  continuation in
effect  from  year to year  only so long as such  continuation  is  specifically
approved at least  annually  either by the Board of  Directors of the Fund or by
vote of a majority of the outstanding  voting securities of the applicable Fund,
provided that in either event such  continuation  shall be approved by vote of a
majority of the  Directors who are not  "interested  persons" (as defined in the
Investment Company Act of 1940) of the Manager, Principal Life Insurance Company
or its  subsidiaries  or the Fund,  cast in person at a meeting  called  for the
purpose of voting on such approval. The Agreements may be terminated at any time
on 60 days  written  notice  to the  Manager  by the Board of  Directors  of the
applicable Fund or by a vote of a majority of the outstanding  securities of the
Fund and by the Manager, the respective  sub-advisor,  if any, or Principal Life
Insurance  Company,  as the case may be, on 60 days written  notice to the Fund.
The Agreements will automatically terminate in the event of their assignment.

The  Management  Agreement for each Fund (except  Growth,  LargeCap Stock Index,
MidCap, Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap
Growth) was last approved by  shareholders of the applicable Fund on November 2,
1999.  Shareholders  approved the  Management  Agreement  for the other Funds as
follows: Growth - November 9, 1999; LargeCap Stock Index - _____________,  2000;
MidCap - December  10,  1999;  Partners  Aggressive  Growth - November  1, 1999;
Partners  LargeCap  Growth -  ____________,  2000;  and Partners  MidCap Growth-
_____________, 2000.

The  agreements  for each Fund were last  approved by the Board of Directors for
that Fund as follows:

<TABLE>
<CAPTION>
                                            Investment Services              Management             Sub-Advisory
         Fund                                    Agreement                    Agreement               Agreement


<S>                                               <C>                         <C>                      <C>
   Balanced                                        9/13/99                     9/13/99                  9/13/99
   Blue Chip                                       9/13/99                     9/13/99                  9/13/99
   Bond                                            9/13/99                     9/13/99                  9/13/99
   Capital Value                                   9/13/99                     9/13/99                  9/13/99
   Cash Management                                 9/13/99                     9/13/99                  9/13/99
   Government Securities Income                    9/13/99                     9/13/99                  9/13/99
   Growth                                          9/13/99                     9/13/99                  9/13/99
   High Yield                                      9/13/99                     9/13/99                  9/13/99
   International                                   9/13/99                     9/13/99                  9/13/99
   International Emerging Markets                  9/13/99                     9/13/99                  9/13/99
   International SmallCap                          9/13/99                     9/13/99                  9/13/99
   LargeCap Stock Index                           12/13/99                    12/13/99                 12/13/99
   Limited Term Bond                               9/13/99                     9/13/99                  9/13/99
   MidCap                                          9/13/99                     9/13/99                  9/13/99
   Partners Aggressive Growth                          N/A                     9/13/99                  9/13/99
   Partners LargeCap Growth                            N/A                    12/13/99                 12/13/99
   Partners MidCap Growth                              N/A                    12/13/99                 12/13/99
   Real Estate                                     9/13/99                     9/13/99                  9/13/99
   SmallCap                                        9/13/99                     9/13/99                  9/13/99
   Tax-Exempt Bond                                 9/13/99                     9/13/99                  9/13/99
   Utilities                                       9/13/99                     9/13/99                  9/13/99
</TABLE>

BROKERAGE ON PURCHASES AND SALES OF SECURITIES

In distributing  brokerage  business  arising out of the placement of orders for
the purchase and sale of  securities  for any Fund,  the objective of the Fund's
Manager or  Sub-Advisor  is to obtain the best overall  terms.  In pursuing this
objective,  the Manager or Sub-Advisor  considers all matters it deems relevant,
including the breadth of the market in the security,  the price of the security,
the financial condition and executing capability of the broker or dealer and the
reasonableness of the commission,  if any (for the specific transaction and on a
continuing  basis).  This  may  mean in  some  instances  that  the  Manager  or
Sub-Advisor  will pay a broker  commissions  that are in excess of the amount of
commissions another broker might have charged for executing the same transaction
when the Manager or Sub-Advisor believes that such commissions are reasonable in
light of (a) the size and difficulty of the  transaction  (b) the quality of the
execution provided and (c) the level of commissions paid relative to commissions
paid by other institutional investors. (Such factors are viewed both in terms of
that  particular  transaction  and in  terms  of all  transactions  that  broker
executes for accounts over which the Manager or Sub-Advisor exercises investment
discretion.   The  Manager  or  Sub-Advisor  may  purchase   securities  in  the
over-the-counter  market,  utilizing  the  services of principal  market  makers
unless better terms can be obtained by purchases through brokers or dealers, and
may purchase  securities listed on the New York Stock Exchange from non-Exchange
members in transactions off the Exchange.)

The Manager or Sub-Advisor gives  consideration in the allocation of business to
services  performed by a broker (e.g.,  the furnishing of  statistical  data and
research  generally  consisting  of,  but not  limited  to,  information  of the
following types: analyses and reports concerning issuers,  industries,  economic
factors and trends,  portfolio strategy and performance of client accounts).  If
any such  allocation  is made,  the primary  criteria used will be to obtain the
best overall terms for such  transactions.  The Manager or  Sub-Advisor  may pay
additional  commission amounts for research services.  Such statistical data and
research  information  received from brokers or dealers may be useful in varying
degrees and the Manager or  Sub-Advisor  may use it in servicing  some or all of
the accounts it manages.  Some statistical data and research information may not
be  useful to the  Manager  or  Sub-Advisor  in  managing  the  client  account,
brokerage for which  resulted in the Manager's or  Sub-Advisor's  receipt of the
statistical  data  and  research  information.  However,  in  the  Manager's  or
Sub-Advisor's  opinion,  the value  thereof  is not  determinable  and it is not
expected that the  Manager's or  Sub-Advisor's  expenses  will be  significantly
reduced since the receipt of such statistical  data and research  information is
only  supplementary to the Manager's or Sub-Advisor's own research efforts.  The
Manager or Sub-Advisor allocated portfolio  transactions for the Funds indicated
in the following  table to certain  brokers during the fiscal year ended October
31,  1999 due to research  services  provided  by such  brokers.  The table also
indicates the  commissions  paid to such brokers as a result of these  portfolio
transactions.

                    Fund                                Commissions Paid

          Balanced                                          $
          Blue Chip
          Capital Value
          Growth
          International Emerging Markets
          International
          International SmallCap
          MidCap
          Real Estate
          SmallCap
          Utilities

Purchases and sales of debt securities and money market instruments  usually are
principal  transactions;  portfolio  securities are normally  purchased directly
from the issuer or from an underwriter or marketmaker for the  securities.  Such
transactions  are  usually  conducted  on a net  basis  with the Fund  paying no
brokerage  commissions.  Purchases  from  underwriters  include a commission  or
concession paid by the issuer to the underwriter, and the purchases from dealers
serving as marketmakers include the spread between the bid and asked prices.

The  following  table shows the  brokerage  commissions  paid during the periods
indicated.  In each  year,  100% of the  commissions  paid by each  Fund went to
broker-dealers   which   provided   research,   statistical   or  other  factual
information.

                                             Total Brokerage Commissions Paid

                 Fund                           1999       1998         1997

 Balanced Fund                             $   50,867   $  70,261     $  47,096
 Blue Chip Fund                               149,945      41,024       113,923
 Capital Value Fund                           695,270     331,316       339,994
 Growth Fund                                  438,476     276,004        43,018
 International Emerging Markets Fund          125,801      51,821        45,140*
 International Fund                         1,201,021     758,808       708,333
 International SmallCap Fund                  306,636     101,485        46,970*
 MidCap Fund                                  517,173     242,311        98,217
 Real Estate Fund                              36,634      40,791**         N/A
 SmallCap Fund                                154,031      46,957**         N/A
 Utilities Fund                                95,017      39,470        58,450

         * Period from August 14, 1997 (date operations commenced) through
           October  31,  1997.
         **Period  from  December  11,  1997 (date operations commenced) through
           October 31, 1998.

Brokerage  commissions paid to affiliates  during the fiscal year ending October
31 were as follows:

<TABLE>
<CAPTION>
                                                      Commissions Paid to Goldman Sachs Co.
                                      Total Dollar             As Percent of           Percent of Dollar Amount
        Fund                             Amount              Total Commissions       of Commissionable Transactions
<S>                                     <C>                       <C>                           <C>
Balanced Fund
         1999                           $  1,725                   3.39%                         1.94%
         1998                              2,950                   4.20%                         1.87%
Blue Chip Fund
         1999                              7,735                   5.16%                         5.25%
Capital Value Fund
         1999                             87,440                  12.58%                        10.41%
Growth Fund
         1999                             10,650                   2.43%                         3.63%
         1998                              5,000                   1.81%                         1.87%
International Emerging Markets Fund
         1999                              6,756                   5.37%                         5.97%
         1998                                662                   1.28%                         1.54%
International Fund
         1999                             90,123                   7.50%                         5.97%
         1998                             41,600                   5.48%                         5.79%
International SmallCap Fund
         1999                             26,377                   8.60%                         9.72%
         1998                              2,326                   2.29%                         2.96%
MidCap Fund
         1999                             21,673                   4.19%                         3.49%
Real Estate Fund
         1999                                135                   0.37%                         0.47%
SmallCap Fund
         1999                              2,370                   1.54%                         2.95%
         1998                                210                   0.45%                         0.61%
Utilities Fund
         1999                              3,160                   3.33%                         3.83%
         1998                              1,500                   3.80%                         3.71%
</TABLE>

<TABLE>
<CAPTION>
                                                       Commissions Paid to J.P. Morgan Securities
                                      Total Dollar             As Percent of           Percent of Dollar Amount
        Fund                             Amount              Total Commissions       of Commissionable Transactions
<S>                                     <C>                       <C>                           <C>
Balanced Fund
         1999                           $  6,841                  13.45%                        15.18%
         1998                                500                   0.71%                         1.03%
Blue Chip Fund
         1999                              8,485                   5.66%                         5.82%
         1998                              1,950                   4.75%                         5.35%
Capital Value Fund
         1999                              9,470                   1.36%                         1.83%
         1998                             18,935                   5.72%                         6.27%
Growth Fund
         1999                             23,170                   5.28%                         5.47%
         1998                              1,250                   0.45%                         0.39%
International Emerging Markets Fund
         1999                              4,492                   3.57%                         4.82%
         1998                              2,570                   4.96%                         6.77%
International Fund
         1999                             13,911                   1.16%                         1.22%
         1998                             17,961                   2.37%                         1.80%
MidCap Fund
         1999                             10,715                   2.07%                         1.87%
Real Estate Fund
         1999                              8,845                  24.14%                        23.03%
         1998                              3,205                   7.86%                         7.67%
SmallCap Fund
         1999                              3,065                   1.99%                         2.68%
Utilities Fund
         1999                              3,935                   4.14%                         4.98%
</TABLE>

<TABLE>
<CAPTION>
                                                 Commissions Paid to Morgan Stanley& Co. Incorporated
                                      Total Dollar             As Percent of           Percent of Dollar Amount
        Fund                             Amount              Total Commissions       of Commissionable Transactions
<S>                                     <C>                       <C>                           <C>
Balanced Fund
         1999                           $  2,300                   4.52%                         4.33%
         1998                              2,630                   3.74%                         2.27%
         1997                                 45                     -                           0.1%
Blue Chip Fund
         1999                             13,950                   9.30%                        11.72%
         1998                                365                   0.89%                         0.99%
         1997                              4,602                   4.0%                          2.4%
Capital Value Fund
         1999                             12,575                   1.81%                         2.48%
         1998                             13,740                   4.15%                         3.78%
         1997                              9,900                   2.9%                          2.4%
Growth Fund
         1999                             12,338                   2.81%                         3.90%
         1998                             12,500                   4.53%                         4.92%
         1997                              3,250                   7.6%                          8.5%
International Emerging Markets Fund
         1999                              2,570                   2.04%                         2.76%
         1998                              1,499                   2.89%                         3.64%
         1997                              1,586                   3.5%                          9.3%
International Fund
         1999                            128,900                  10.73%                        11.76%
         1998                             78,938                  10.40%                        10.03%
         1997                             20,595                   2.9%                          2.7%
International SmallCap Fund
         1999                             18,755                   6.12%                         8.26%
         1998                              4,284                   4.22%                         7.42%
         1997                              1,502                   3.2%                          4.2%
MidCap Fund
         1999                             21,551                   4.17%                         5.00%
         1998                              7,716                   3.18%                         4.19%
         1997                              3,750                   3.8%                          2.8%
Real Estate Fund
         1999                              1,600                   4.37%                         4.10%
         1998                             11,540                  28.29%                        28.36%
SmallCap Fund
         1999                                795                   0.52%                         0.81%
         1998                                840                   1.79%                         1.65%
Utilities Fund
         1999                                340                   0.36%                         0.49%
         1998                              1,735                   4.40%                         5.95%
</TABLE>

Morgan Stanley & Co. Incorporated is affiliated with Morgan Stanley,  which acts
as sub-advisor to the Partners  Aggressive Growth Fund and two Accounts included
in the Fund complex.

The  Manager  acts as  investment  advisor  for each of the funds  sponsored  by
Principal Life Insurance  Company.  The Manager or  Sub-Advisor,  if any, places
orders to trade  portfolio  securities for each of these Funds.  If, in carrying
out the investment  objectives of the Funds,  occasions  arise when purchases or
sales of the same equity  securities are to be made for two or more of the Funds
at the same time (or, in the case of accounts managed by a Sub-Advisor,  for two
or more Funds and any other accounts managed by the Sub-Advisor), the Manager or
Sub-Advisor may submit the orders to purchase or, whenever possible, to sell, to
a broker/dealer  for execution on an aggregate or "bunched"  basis.  The Manager
(or, in the case of accounts  managed by a  Sub-Advisor,  the  Sub-Advisor)  may
create several  aggregate or "bunched"  orders  relating to a single security at
different times during the same day. On such occasions,  the Manager (or, in the
case of accounts managed by a Sub-Advisor,  the Sub-Advisor) will randomly order
the accounts whose individual orders for purchase or sale make up each aggregate
or "bunched" order.  Securities  purchased or proceeds of sales received on each
trading day with  respect to each such  aggregate  or  "bunched"  order shall be
allocated to the various  Funds (or, in the case of a  Sub-Advisor,  the various
Funds and other client  accounts) whose  individual  orders for purchase or sale
make up the aggregate or "bunched" order by filling each Fund's (or, in the case
of a Sub-Advisor,  each Fund's or other client  account's) order in the sequence
arrived at by the random  ordering.  Securities  purchased for funds (or, in the
case of a  Sub-Advisor,  Funds and other client  accounts)  participating  in an
aggregate  or  "bunched"  order  will be placed  into  those  Funds  and,  where
applicable,  other client accounts at a price equal to the average of the prices
achieved in the course of filling that aggregate or "bunched" order.

If purchases or sales of the same debt securities are to be made for two or more
of the  Funds  at the  same  time,  the  securities  will be  purchased  or sold
proportionately  in  accordance  with the amount of such  security  sought to be
purchased or sold at that time for each Fund.

HOW TO PURCHASE SHARES

Each Fund,  except the Tax-Exempt  Bond Fund,  offers  investors four classes of
shares which bear sales charges in different  forms and amounts:  Class A, Class
B, Class C and Class R shares.  The  Tax-Exempt  Bond Fund  offers only Class A,
Class B and Class C shares.

Purchases are generally made by completing an Account Application or a Principal
Mutual Fund IRA Application and mailing it to Princor.  Shares are issued at the
offering price next computed after the application is received at Princor's main
office and Princor  receives the amount to be invested.  Generally,  the initial
amount to be invested in a Principal Mutual Fund IRA is directly  transferred to
Princor from the Administered Employee Benefit Plans ("AEBP").  However, in some
cases the investor purchases shares by check. If investing by check,  shares are
issued at the offering price next computed after the completed  application  and
check are received at Princor's main office.  Subsequent  purchases are executed
at the price next computed  after receipt of the  investor's  check at Princor's
main  office.  All orders are  subject  to  acceptance  by the Fund or Funds and
Princor.  Orders  from  individuals  for  Class R shares  that  equal or  exceed
$500,000  are  treated as orders  for Class A shares,  unless  accompanied  by a
written  acknowledgment that the order should be treated as an order for Class R
shares.

Redemptions  by  shareholders  investing  by check will be  effected  only after
payment has been collected on the check, which may take up to 8 business days or
more.  Investors  considering  redeeming  or  exchanging  shares  shortly  after
purchase  should pay for those  shares with a certified  check,  bank  cashier's
check or money order to avoid any delay in redemption, exchange or transfer.

Class A Shares. An investor who purchases less than $1 million of Class A shares
(except Class A shares of the Cash  Management  Fund) pays a sales charge at the
time of purchase.  As a result,  such shares are not subject to any charges when
they are  redeemed.  An  investor  who  purchases  $1 million or more of Class A
shares  does  not  pay a  sales  charge  at the  time of  purchase.  However,  a
redemption of such shares  occurring  within 18 months from the date of purchase
will be subject to a contingent  deferred  sales charge  ("CDSC") at the rate of
 .75% (.25% for the LargeCap  Stock Index and Limited Term Bond Funds) the lesser
of the value of the  shares  redeemed  (exclusive  of  reinvested  dividend  and
capital gain distributions) or the total cost of such shares.  Shares subject to
the CDSC which are exchanged into another Principal Mutual Fund will continue to
be subject to the CDSC until the  original 18 month period  expires.  However no
CDSC is payable  with  respect to  redemption  of Class A shares  used to fund a
Principal  Mutual Fund 401(a) or Principal  Mutual Fund 401(k)  retirement plan,
except  redemptions  resulting  from the  termination of the plan or transfer of
plan  assets.  In  addition,  the CDSC  will be  waived  in  connection  with 1)
redemption of shares from retirement plans to satisfy minimum distribution rules
under the Code or 2) shares redeemed  through a systematic  withdrawal plan that
permits up to 10% of the value of a shareholder's Class A shares of a particular
Fund  on the  last  business  day of  December  of  each  year  to be  withdrawn
automatically  in  equal  monthly  installments  throughout  the  year.  Certain
purchases of Class A shares  qualify for reduced sales  charges.  Class A shares
for each Fund,  except the Cash Management  Fund,  currently bear a 12b-1 fee at
the annual rate of up to 0.25% (0.15% for the  LargeCap  Stock Index and Limited
Term Bond  Funds) of the  Fund's  average  net  assets  attributable  to Class A
shares. See "Distribution Plan."

Class B Shares.  Class B shares are  purchased  without an initial sales charge,
but are subject to a declining  CDSC of up to 4% (1.25% for the  LargeCap  Stock
Index and Limited Term Bond Funds) if redeemed within six years.  Class B shares
purchased under certain sponsored  Principal Mutual Fund plans established after
February  1, 1998,  are  subject to a CDSC of up to 3% if  redeemed  within five
years of purchase.  (See "Plans Other than Administered  Employee Benefit Plans"
("AEBP") for discussion of sponsored Principal Mutual Fund plans.) See "Offering
Price of Funds'  Shares."  Class B shares  bear a higher  12b-1 fee than Class A
shares, currently at the annual rate of up to 1.00% (.50% for the LargeCap Stock
Index and Limited Term Bond Funds) of the Fund's average net assets attributable
to Class B shares.  See "Distribution  Plan." Class B shares provide an investor
the benefit of putting all of the  investor's  dollars to work from the time the
investment  is made,  but  (until  conversion  to Class A shares)  have a higher
expense  ratio and pay lower  dividends  than  Class A shares  due to the higher
12b-1 fee. Class B shares  automatically  convert into Class A shares,  based on
relative  net asset  value  (without  a sales  charge),  seven  years  after the
purchase  date.  Class B shares  acquired  by  exchange  from  Class B shares of
another  Principal  Mutual Fund convert into Class A shares based on the time of
the  initial  purchase.  At the same  time,  a pro rata  portion  of all  shares
purchased through reinvestment of dividends and distributions convert into Class
A shares, with that portion determined by the ratio that the shareholder's Class
B shares converting into Class A shares bears to the shareholder's total Class B
shares  that  were  not  acquired  through  dividends  and  distributions.   The
conversion  of Class B shares to Class A shares  is  subject  to the  continuing
availability  of a ruling  from the  Internal  Revenue  Service or an opinion of
counsel that such conversions will not constitute taxable events for Federal tax
purposes.  There  can be no  assurance  that  such  ruling  or  opinion  will be
available, and the conversion of Class B shares to Class A shares will not occur
if such ruling or opinion is not available.  In such event, Class B shares would
continue to be subject to higher  expenses than Class A shares for an indefinite
period.

Class C Shares.  Class C shares are sold  without the  imposition  of an initial
sales charge;  however,  Class C shares redeemed within one year of purchase are
subject to a CDSC of 1% (.5% for  LargeCap  Stock  Index and  Limited  Term Bond
Funds).  The charge is assessed on the amount equal to the lesser of the current
market value or the original purchase cost of the shares being redeemed. No CDSC
is imposed on  increases  in account  value  above the initial  purchase  price,
including  shares  derived from the  reinvestment  of dividends or capital gains
distributions. Class C shares do not convert to any other class of Fund shares.

Class C shares bear a higher 12b-1 fee than other Class shares.  Currently Class
C share  12b-1  fees are set at the  annual  rate of up to 1.00%  (.50%  for the
LargeCap  Stock  Index and Limited  Term Bond  Funds) of the Fund's  average net
assets. See "Distribution  Plan." Class C shares provide an investor the benefit
of putting all of the investor's dollars to work from the time the investment is
made, but have a higher  expense ratio and pay lower  dividends than other Class
shares due to the higher  12b-1 fee.  Class C shares do not  convert  into other
Class  shares.  Class C shares are subject to higher  expenses  than other Class
shares for an indefinite period.

Which  arrangement  between Class A, Class B and Class C Shares is better for an
investor?  The  decision  as to which class of shares  provides a more  suitable
investment for an investor depends on a number of factors,  including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might  consider  Class A shares.  Investors who prefer
not to pay an initial  sales  charge and who plan to hold their  investment  for
more than seven years might consider Class B shares. Orders from individuals for
Class B shares for $250,000 or more will be treated as orders for Class A shares
unless the shareholder provides written  acknowledgment that the order should be
treated as an order for Class B shares.  Sales  personnel may receive  different
compensation depending on which class of shares are purchased. If you prefer not
to pay an initial sales charge and you plan to hold your  investment for greater
than one but less than seven years, you may prefer Class C shares.

Class R Shares.  Class R shares are purchased without an initial sales charge or
a contingent deferred sales charge ("CDSC").  Class R shares bear a higher 12b-1
fee than Class A shares,  currently  at the annual  rate of up to .75% (.25% for
the LargeCap Stock Index and .35% for the Limited Term Bond Funds) of the Fund's
average  net  assets  attributable  to Class R  shares.  See  "Distribution  and
Shareholder  Servicing  Plans and Fees." Class R shares  provide an investor the
benefit  of  putting  all of the  investor's  dollars  to work from the time the
investment  is made,  but  (until  conversion  to Class A shares)  have a higher
expense  ratio and pay lower  dividends  than  Class A shares  due to the higher
12b-1 fee.  Class R shares  automatically  convert  to Class A shares,  based on
relative net asset value (without a sales charge),  on the first business day of
the 49th month after the purchase date. Class R shares acquired by exchange from
Class R shares of another  Principal  Mutual  Fund  convert  into Class A shares
based on the time of the initial  purchase.  (See "How to Exchange  Shares Among
Principal Mutual Funds" in the Prospectus.) At the same time, a pro rata portion
of all shares  purchased  through  reinvestment  of dividends and  distributions
convert into Class A shares,  with that portion determined by the ratio that the
shareholder's  Class R  shares  converting  into  Class A  shares  bears  to the
shareholder's  total Class R shares that were not acquired through dividends and
distributions.  The conversion of Class R shares to Class A shares is subject to
the continuing  availability of a ruling from the Internal Revenue Service or an
opinion of counsel that such conversions will not constitute  taxable events for
Federal tax purposes. There can be no assurance that such ruling or opinion will
be  available,  and the  conversion of Class R shares to Class A shares will not
occur if such ruling or opinion is not available.  In such event, Class R shares
would  continue  to be  subject  to higher  expenses  that Class A shares for an
indefinite period.

Purchasing  Class R Shares.  Class R shares are offered only to individuals (and
his/her  spouse,  child,  parent,  grandchild  and  trusts  primarily  for their
benefit) who: receive lump sum  distributions  from retirement plans serviced by
Principal  Life  Insurance  Company;  or are  participants  in retirement  plans
serviced  by  Principal  Life  Insurance  Company;  or own  individual  life  or
disability insurance policies issued by Principal Life Insurance Company that do
not have an  insurance  agent  licensed  to sell such  policies  assigned to the
policies;  or have  mortgages  which are  serviced by Principal  Life  Insurance
Company;  or have  existing  Principal  Mutual  Fund  Class  R  Share  accounts.
Generally,  the initial amount to be invested in a Principal  Mutual Fund IRA is
directly  transferred to Princor from the  Administered  Employee  Benefit Plans
("AEBP").  However,  in some cases the investor  purchases  shares by check.  If
investing by check,  shares are issued at the offering price next computed after
the  completed  application  and check are  received at  Princor's  main office.
Orders from  individuals  for Class R shares that equal or exceed  $500,000  are
treated  as  orders  for  Class  A  shares,  unless  accompanied  by  a  written
acknowledgment that the order should be treated as an order for Class R shares.

OFFERING PRICE OF FUNDS' SHARES

The Funds offer their respective shares continuously  through Princor,  which is
the principal  underwriter  for the Funds and sells shares as agent on behalf of
the Funds.  Princor may select other  dealers  through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.

Class A shares
Class A shares of the Cash  Management  Fund is sold to the  public at net asset
value; no sales charge applies to purchases of the Cash Management Fund. Class A
shares of the  Growth-Oriented  and  Income-Oriented  Funds, except the LargeCap
Stock Index and Limited Term Bond Funds, are sold to the public at the net asset
value plus a sales  charge  which ranges from a high 4.75% to a low of 0% of the
offering price (equivalent to a range of 4.99% to 0% of the net amount invested)
according to the schedule below.  Class A shares of the LargeCap Stock Index and
Limited  Term Bond  Funds are sold to the  public at the net asset  value plus a
sales  charge  which  ranges from a high of 1.50% to a low of 0% of the offering
price according to the schedule below. Selected dealers are allowed a concession
as shown.  At  Princor's  discretion,  the entire  sales  charge may at times be
reallowed to dealers. In some situations,  depending on the services provided by
the dealer,  the concession  may be less. Any dealer  allowance on purchases not
involving  a  sales  charge  is  determined  by  Princor.  Upon  notice  to  all
broker-dealers  with  whom it has a  selling  agreement,  Princor  may  allow to
broker-dealers  electing to participate up to the full applicable  sales charge,
as shown in the table below,  during periods and for  transactions  specified in
such  notice,  and such  reallowances  may be  based  in  whole or in part  upon
attainment of minimum sales levels.  Certain commercial banks may make shares of
the Funds  available  to their  customers  on an agency  basis.  Pursuant to the
agreements  between  Princor and such banks all or a portion of the sales charge
paid by a bank  customer  in  connection  with a purchase  of Fund shares may be
retained by or remitted to the bank.

<TABLE>
<CAPTION>
                                             Sales Charge for
                                             All Funds Except              Sales Charge for
                                         LargeCap Stock Index and      LargeCap Stock Index and           Dealer Allowance as
                                          Limited Term Bond Funds       Limited Term Bond Funds           % of Offering Price
                                                                                                        All Funds         LargeCap
                                                                                                     Except LargeCap     Stock Index
                                           Sales Charge as % of:         Sales Charge as % of:         Stock Index       and Limited
                                         Offering       Amount          Offering      Amount           and Limited          Term
     Amount of Purchase                    Price       Invested           Price      Invested        Term Bond Funds      Bond Funds
<S>                                  <C>                 <C>        <C>                <C>                 <C>               <C>
Less than  $50,000                         4.75%         4.99%             1.50%       1.52%               4.00%             1.25%
$50,000 but less than $100,000             4.25          4.44              1.25        1.27                3.75              1.00
$100,000 but less than $250,000            3.75          3.90              1.00        1.01                3.25              0.75
$250,000 but less than $500,000            2.50          2.56              0.75        0.76                2.00              0.50
$500,000 but less than $1,000,000          1.50          1.52              0.50        0.50                1.25              0.25
$1,000,000 or more                   No  Sales  Charge   0.00       No  Sales  Charge  0.00                0.75              0.25
</TABLE>

Rights of Accumulation.  The applicable sales charge is determined by adding the
current net asset value of any Class A shares, Class B shares and Class C shares
already  owned  by  the  investor  to  the  amount  of  the  new  purchase.  The
corresponding  percentage  factor in the  schedule is then applied to the entire
amount of the new purchase.  For example, if an investor currently owns Class A,
Class B or  Class C shares  with a value  of  $5,000  and  makes  an  additional
investment of $45,000 in Class A shares of a Growth-Oriented  Fund (the total of
which equals $50,000),  the charge applicable to the $45,000 investment would be
4.25% of the offering price. If the investor  purchases  shares of more than one
Principal Mutual Fund at the same time, those purchases are aggregated and added
to the net asset value of the shares of Principal  Mutual Funds already owned by
the investor to determine the sales charge for the new purchase.  Class A shares
of the Cash Management Fund are not counted in determining  either the amount of
a new purchase or the current net asset value of shares  already  owned,  unless
the shares of the Cash  Management  Fund were acquired in exchange for shares of
other  Principal  Mutual  Funds.  If  the  investor   purchases  shares  from  a
broker/dealer  other than  Princor,  the dealer  should be advised of any shares
already owned.

Investments  made by an individual,  or by an individual's  spouse and dependent
children purchasing shares for their own account or by a trust primarily for the
benefit of such persons,  or by a trustee or other  fiduciary  purchasing  for a
single  trust  estate  or  single  fiduciary   account   (including  a  pension,
profit-sharing,  or other  employee-benefit  trust  created  pursuant  to a plan
qualified  under  Section 401 of the Internal  Revenue  Code) will be treated as
investments  made by a single  investor  in  calculating  the sales  charge.  In
addition,  investments  made  through an employer by or on behalf of an employee
(including independent contractors) by means of payroll deductions or otherwise,
are also  considered  investments by a single  investor in calculating the sales
charge.  Other  groups  (as  allowed  by rules of the  Securities  and  Exchange
Commission) may be considered for a reduced sales charge.  An investor whose new
account  qualifies for a reduced  charge on the basis of other accounts owned by
the individual, spouse or children, should be certain to identify those accounts
at the time of the new application.

Statement of Intention  (SOI).  Another method is available by which a purchaser
may qualify for a reduced  sales charge on the purchase of Class A shares of the
Funds.  A purchaser may execute an SOI  indicating  the total amount  (excluding
reinvested  dividends and capital gains  distributions)  intended to be invested
(including all investments for the account of the spouse and dependent  children
or trusts for the  benefit of such  persons) in Class A shares  (except  Class A
shares of the Cash  Management  Fund),  Class B shares and Class C shares of the
Funds within a thirteen-month period (two-year period if the intended investment
is made by a trustee of a Section  401(a) plan or is equal to or greater than $1
million).  The SOI may be submitted by a  shareholder  other than a trustee of a
Principal  Mutual Fund 401(a)  plan,  within 90 days after the date of the first
purchase to be included within the SOI period.  A trustee of a Principal  Mutual
Fund  401(a)  plan must  submit the SOI at the time the first plan  purchase  is
made;  the SOI may not be submitted  after the initial plan  purchase and the 90
day backdating is not available.  The SOI period begins on the date of the first
purchase  included for purposes of satisfying  the  statement.  When an existing
shareholder  submits an SOI,  the net asset value of all Class A shares  (except
Class A shares of the Cash Management  Fund),  Class B shares and Class C shares
in that  shareholder's  account or accounts  combined for rights of accumulation
purposes, is added to the amount that has been indicated will be invested during
the applicable period, and the sales charge applicable to all purchases of Class
A shares  made  under  the SOI is the sales  charge  which  applies  to a single
purchase of this total amount.

An SOI may be entered into for any amount  provided  such amount,  when added to
the net asset value of any shares  already  held,  equals or is in excess of the
amount needed to qualify for a reduced sales charge.  In the event a shareholder
invests an amount in excess of the indicated amount,  such excess is allowed any
further reduced sales charge for which it qualifies.

The SOI provides for a price adjustment if the amount actually  invested is less
than the amount  specified  therein.  Sufficient Class A shares belonging to the
shareholder, other than a shareholder that is 401(a) qualified plan trustee, are
held in escrow in the shareholder's account by Princor to make up any difference
in sales  charges  based  on the  amount  actually  purchased.  If the  intended
investment is completed within the  thirteen-month  period (or two-year period),
such shares are released to the shareholder. If the total intended investment is
not completed within that period shares are, to the extent  necessary,  redeemed
and the proceeds used to pay the additional sales charge due. A shareholder that
is  401(a)  qualified  plan  trustee  is billed by  Princor  Financial  Services
Corporation  for any  additional  sales  charge  due at the end of the  two-year
period.  In any event, the sales charge applicable to these purchases is no more
than the applicable  sales charge had the shareholder made all of such purchases
at one time.  The SOI does not  constitute an obligation on the  shareholder  to
purchase, nor the Funds to sell, the amount indicated.

Purchases at Net Asset Value.
A Fund's Class A shares may be purchased without a sales charge:
o    by its Directors,  Principal Life and its subsidiaries and their employees,
     officers,  directors  (active or  retired),  brokers  or agents.  This also
     includes their immediate family members and trusts for the benefit of these
     individuals;
o    by the Principal Employees' Credit Union;
o    by non-ERISA clients of Invista and Principal Capital Management LLC;
o    by any employee or Registered  Representative  (and their  employees) of an
     authorized broker-dealer;
o    through   broker-dealers,   investment   advisors   and   other   financial
     institutions  that  have  entered  into an  agreement  with  Princor  which
     includes a requirement  that such shares be sold for the benefit of clients
     participating  in a "wrap  account" or similar  program under which clients
     pay  a  fee  to  the   broker-dealer,   investment   advisor  or  financial
     institution;
o    by  unit  investment   trusts   sponsored  by  Principal  Life  and/or  its
     subsidiaries or affiliates;
o    by certain  employee  welfare benefit plan customers of Principal Life with
     Plan Deposit Accounts;
o    by participants who receive  distributions  from certain annuity  contracts
     offered by Principal Life (except for shares of Tax-Exempt Bond Fund);
o    to the extent the investment  represents the proceeds of a total  surrender
     of certain  Principal Life issued  unregistered  group annuity contracts if
     Principal  Life  waives any  applicable  CDSC or other  contract  surrender
     charge;
o    by using  cash  payments  received  from  Principal  Bank  under its awards
     program;
o    to the extent the investment  represents  redemption  proceeds from certain
     unregistered  group annuity  contracts  issued by Principal Life to fund an
     employer's  401(a) plan where such proceeds are used to fund the employer's
     401(a) plan; and
o    to the  extent  the  purchase  proceeds  represent  a  distribution  from a
     terminating  401(a) plan if the employer or plan trustee has entered into a
     written  agreement  with  Princor  permitting  the  group  solicitation  of
     employees/participants.  Such  purchases  are  subject  to the  CDSC  which
     applies to purchases of $1 million or more as described above.

Class A shares may also be purchased  without a sales charge if your  Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met;
o    your  purchase of Class A shares must take place  within the first 180 days
     of  your  Registered  Representative's   affiliation  with  the  authorized
     broker-dealer;
o    your  investment  must  represent the sales proceeds from other mutual fund
     shares (you must have paid a front-end sales charge or a CDSC) and the sale
     must occur within the 180 day period; and
o    you must indicate on your Principal  Mutual Fund  application  that you are
     eligible for waiver of the front-end sales charge.
o    you must send us either:
     o   the check for the sales proceeds  (endorsed to Principal  Mutual Funds)
         or
     o   a copy of the confirmation statement from the other mutual fund showing
         the sale  transaction.  If you place your order to buy Principal Mutual
         Fund  shares  on  the  telephone,  you  must  send  us a  copy  of  the
         confirmation  within 21 days of placing the order. If we do not receive
         the  confirmation  within 21 days,  we will sell enough of your Class A
         shares to pay the sales charge that otherwise would have been charged.

Each of the Funds,  except  Principal  Tax-Exempt  Bond Fund,  have  obtained an
exemptive  order from the Securities and Exchange  Commission  ("SEC") to permit
each Fund to offer its  shares at net asset  value to  participants  of  certain
annuity contracts issued by Principal Life Insurance Company. In addition,  each
of these Funds are  available  at net asset  value to the extent the  investment
represents the proceeds from a total surrender of certain  unregistered  annuity
contracts  issued by Principal  Life Insurance  Company and for which  Principal
Life Insurance Company waives any applicable  contingent  deferred sales charges
or other contract surrender charges.

During the  period  beginning  December  1, 2000 and ending  January  31,  2001,
investors  may  purchase  Class A shares of the Funds at net asset  value to the
extent that this investment represents the proceeds of a redemption,  within the
preceding 60 days,  of shares (the  purchase  price of which  shares  included a
front-end  sales charge on the  redemption  of which was subject to a contingent
deferred sales charge) of another  investment  company.  This provision does not
apply to purchase of Class A shares  used to fund a defined  contribution  plan.
When  making a purchase  at net asset  value  pursuant  to this  provision,  the
investor must indicate on the account  application  that the purchase  qualifies
for a net asset  value  purchase  and must  forward  to  Princor  either (i) the
redemption check  representing the proceeds of the shares redeemed,  endorsed to
the  order of  Princor  Financial  Services  Corporation,  or (ii) a copy of the
confirmation   from  the  other   investment   company  showing  the  redemption
transactions.  In the case of a wire purchase pursuant to this provision, a copy
of the  confirmation  from the other  investment  company showing the redemption
must be forwarded to and received by Princor  within 21 days  following the date
of purchase.  If the  confirmation is not provided  within the 21-day period,  a
sufficient number of shares will be redeemed from the  shareholder's  account to
pay the otherwise applicable sales charge.

Purchases at a Reduced  Sales Charge.  A reduced sales charge is also  available
for  purchases of Class A shares of the Funds,  except the LargeCap  Stock Index
and Limited Term Bond Funds,  to the extent that the  investment  represents the
death  benefit  proceeds  of one or more  life  insurance  policies  or  annuity
contracts (other than an annuity  contract issued to fund an  employer-sponsored
retirement  plan that is not an SEP,  salary deferral 403(b) plan or HR-10 plan)
of which the  shareholder  is a  beneficiary  if one or more of such policies or
contracts  is issued by Principal  Life  Insurance  Company,  or any directly or
indirectly  owned  subsidiary  of Principal  Life  Insurance  Company,  and such
investment is made in any  Principal  Mutual Fund within one year after the date
of death of the  insured.  (Shareholders  should  seek  advice  from  their  tax
advisors   regarding  the  tax  consequences  of   distributions   from  annuity
contracts.)  Such shares may be purchased at net asset value plus a sales charge
which  ranges  from a  high  of  2.50%  to a low  of 0% of  the  offering  price
(equivalent to a range of 2.56% to 0% of the net amount  invested)  according to
the schedule below:

<TABLE>
<CAPTION>
                                                   Sales Charge as a % of:

                                                                                     Net Dealer Allowance as %
                                                 Offering             Amount              of Offering
           Amount of Purchase                      Price             Invested               Price

<S>                                            <C>                    <C>                    <C>
     Less than $500,000                            2.50%              2.56%                  2.10%
     $500,000 but less than $1,000,000             1.50               1.52                   1.25
     $1,000,000 or more                        No Sales Charge        0.00                   0.75
</TABLE>

Sales Charges for Employer-Sponsored Plans

Administered  Employee  Benefit  Plans.  Class A shares  of the  Growth-Oriented
Funds,  except  LargeCap Stock Index Fund,  and  Income-Oriented  Funds,  except
Limited Term Bond Fund and, in certain circumstances, Tax-Exempt Bond Fund which
is not available for certain  retirement  plans,  are sold at net asset value to
stock bonus,  pension or profit  sharing  plans that meet the  requirements  for
qualification  under  Section  401 of the  Internal  Revenue  Code of  1986,  as
amended, certain Section 403(b) Plans, Section 457 Plans and other Non-qualified
Plans  administered  by Principal Life Insurance  Company  pursuant to a written
service agreement ("Administered Employee Benefit Plans"). The service agreement
between  Principal  Life  Insurance  Company  and the  employer  relating to the
administration  of the plan  includes a charge  payable by the  employer for any
commissions  which Princor is  authorized to pay in connection  with such sales.
Principal  Life  Insurance  Company in turn pays the amount of these  charges to
Princor. The commission payable by Princor in connection with any such sale will
be determined in accordance with one of the following schedules:

<TABLE>
<CAPTION>
                                                         Schedule 1
                                                                            Amount Payable by Employer as a Percent
     Amount of Plan Contributions*  in Each Year                                        of Plan Contributions

<S>              <C>                                      <C>                                  <C>
                 The first $5,000                                                              4.50%
                 The next $5,000                                                               3.00
                 The next $5,000                                                               1.70
                 The next $35,000                                                              1.40
                 The next $50,000                                                              0.90
                 The next $400,000                                                             0.60
                 Excess over $500,000                                                          0.25


                                                          Schedule 2
                 The first $50,000                                                             3.00%
                 The next $50,000                                                              2.00
                 The next $400,000                                                             1.00
                 The next $2,500,000                                                           0.50
                 Excess over $3,000,000                                                        0.25

<FN>
     *   Plan contributions  directed to an annuity contract issued by Principal
         Life Insurance Company to fund the plan are combined with contributions
         directed to the Funds to determine the applicable commission charge.
</FN>
</TABLE>

Generally,  the  commission  level  described  in  Schedule  2 apply for  salary
deferral Plans and the commission  level  described in Schedule 1 apply to other
plans. No commission will be payable by the employer if shares of the Funds used
to fund an Administered Employee Benefit Plan are purchased through a registered
representative  of Princor  Financial  Services  Corporation who is also a Group
Insurance Representative employee of Principal Life Insurance Company.

Plans Other Than  Administered  Employee Benefit Plans.  Shares of the Funds are
offered to fund certain sponsored Princor plans. These plans can be divided into
three  categories:  Retirement  plans meeting the requirements of Section 401 of
the Internal  Revenue Code (e.g.  401(k) Plans,  Profit  Sharing Plans and Money
Purchase  Pension  Plans);   Group  Solicited  Plan   Terminations;   and  other
employer-sponsored  retirement  plans  (SIMPLE  IRA Plans,  Simplified  Employee
Pension Plans, Salary Reduction Simplified Employee Pension Plans, Non-Qualified
Deferred  Compensation  Plans,  Payroll  Deduction  Plans  ("PDP")  and  certain
Association Plan.

     Princor 401 Plans
     When  establishing a Princor Section 401 Plan, the employer chooses whether
     to fund the plan  with  either  Class A  shares,  Class B shares or Class C
     shares.  If Class A shares are used to fund the plan, all plan  investments
     are  treated as made by a single  investor to  determine  whether a reduced
     sales  charge is  available.  The regular  sales  charge  table for Class A
     shares applies to purchases $250,000 or more. If Class B shares are used to
     fund the plan,  contributions into the plan after the plan assets amount to
     $250,000  or more,  are used to  purchase  Class A shares  unless  the plan
     trustee directs  otherwise.  Plan assets are not combined with  investments
     made outside of the plan to determine  the sales charge  applicable to such
     investments.  Investments made by plan participants outside of the plan are
     not included with plan assets to determine  the sales charge  applicable to
     the plan.

     Group Solicited Plan Terminations
     Occasionally, an employer terminates a Section 401 Plan. If the employer or
     plan trustee enters into a written  agreement  with Princor  permitting the
     group  solicitation  of the  employees/plan  participants,  the proceeds of
     distributions  from such plans are eligible to purchase shares of the funds
     at net asset  value.  A  redemption  of such shares  within 18 months after
     purchase are subject to a contingent  deferred sales charge ("CDSC") at the
     rate of .75%  (.25% for the  LargeCap  Stock  Index and  Limited  Term Bond
     Funds) of the  lesser of the value of the  shares  redeemed  (exclusive  of
     reinvested  dividends and capital gain  distributions) or the total cost of
     such shares. The CDSC is waived in connection with (1) redemption of shares
     to satisfy IRS minimum  distribution rules or (2) shares redeemed through a
     systematic  withdrawal  plan  that  permits  up to 10% of the  value of the
     shareholder's Class A shares of a Fund on the last business day of December
     each  year to be  withdrawn  automatically  in equal  monthly  installments
     throughout the year.

     Other Employer Sponsored Princor Plans
     When establishing an employer-sponsored  Princor plan, the employer chooses
     whether  to fund the plan with  either  Class A  shares,  Class B shares or
     Class C  shares.  If Class A shares  are  used to fund the  plan,  all plan
     investments are treated as made by a single investor to determine whether a
     reduced sales charge is available. The regular sales charge table for Class
     A shares  applies to purchases  of $250,000 or more.  If Class B shares are
     used to fund the plan and a plan  participant has $250,000 or more invested
     in Class B shares,  Class A shares are  purchased  with plan  contributions
     attributable to the plan  participant,  unless the plan participant  elects
     otherwise.  Plan assets are not combined with  investments  made outside of
     the plan to determine  the sales  charge  applicable  to such  investments.
     Investments made by plan participants  outside of the plan are not included
     with plan assets to determine the sales charge applicable to the plan.

Shares of the funds are also available to  participants  of Princor 403(b) plans
at the same sales charge levels  available to other  employer-sponsored  Princor
plans described  above.  However,  contributions  by plan  participants  are not
combined to determine sales charges.

The Funds reserve the right to  discontinue  offering  shares at net asset value
and/or at a reduced  sales  charge at any time for new accounts and upon 60-days
notice to shareholders of existing accounts.  Other types of sponsored plans may
be added in the future.

Class B shares
Class B shares  are sold  without an initial  sales  charge,  although a CDSC is
imposed  if you  redeem  shares  within  six years of  purchase.  Class B shares
purchased under certain  sponsored  Princor plans  established after February 1,
1998,  are  subject  to a CDSC of up to 3% if  redeemed  within  five  years  of
purchase.  (See "Plans Other than Administered Employee Benefit Plans" above for
discussion of sponsored  Princor  plans.) The  following  types of shares may be
redeemed  without charge at any time:  (i) shares  acquired by  reinvestment  of
distributions  and (ii)  shares  otherwise  exempt from the CDSC,  as  described
below.  Subject  to the  foregoing  exclusions,  the  amount  of the  charge  is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed.  Therefore, when a share is redeemed, any increase
in its value above the initial  purchase  price is not subject to any CDSC.  The
amount of the CDSC will depend on the number of years since you invested and the
dollar amount being redeemed, according to the following table:

<TABLE>
<CAPTION>
                                                   Contingent Deferred Sales Charge
                                                          as a Percentage of
                                                    Dollar Amount Subject to Charge

                                                                                           For Certain Sponsored Plans
                                                                                             Commenced After 2/1/98

                                           All Funds                                      All Funds
      Years Since Purchase             Except LargeCap          LargeCap Stock         Except LargeCap        LargeCap Stock
                                       Stock Index and             Index and          Stock Index and            Index and
                                         Limited Term            Limited Term           Limited Term           Limited Term
             Payments Made                Bond Funds              Bond Funds              Bond Funds             Bond Funds

<S>                                          <C>                    <C>                     <C>                    <C>
  2 years or less                            4.00%                  1.25%                   3.00%                  .75%
  more than 2 years, up to 4 years           3.00                   0.75                    2.00                   .50
  more than 4 years, up to 5 years           2.00                   0.50                    1.00                   .25
  more than 5 years, up to 6 years           1.00                   0.25                    None                    None
  more than 6 years                          None                   None                    None                    None
</TABLE>

In  determining  whether a CDSC is  payable  on any  redemption,  the Fund first
redeems  shares not subject to any charge,  and then shares held longest  during
the six (five) year period.  For information on how sales charges are calculated
if shares are  exchanged,  see "How To Exchange  Shares Among  Principal  Mutual
Funds" in the Prospectus.

The CDSC is  waived on  redemptions  of Class B shares  in  connection  with the
following  types of  transactions:
a. Shares  redeemed  due to a  shareholder's death;
b.   Shares  redeemed  due to the  shareholder's  disability,  as defined in the
     Internal Revenue Code of 1986 (the "Code"), as amended;
c.   Shares redeemed from retirement plans to satisfy minimum distribution rules
     or to satisfy substantially equal periodic payment
     calculation rules under the Code;
d.   Shares redeemed to pay surrender charges;
e.   Shares redeemed to pay retirement plan fees;
f.   Shares redeemed  involuntarily  from small balance accounts (values of less
     than $300);
g.   Shares redeemed through a systematic withdrawal plan that permits up to 10%
     of the value of a shareholder's  Class B shares of a particular Fund on the
     last business day of December of each year to be withdrawn automatically in
     equal monthly  installments  throughout the year;
h.   Shares  redeemed  from a retirement  plan to assure the plan  complies with
     Sections 401(k), 401(m), 408(k) and 415 of the Code; or
i.   Shares redeemed from retirement plans qualified under Section 401(a) of the
     Code  due  to the  plan  participant's  death,  disability,  retirement  or
     separation from service after attaining age 55.

As principal  underwriter,  Princor received  underwriting fees from the sale of
shares for the periods indicated as follows:

<TABLE>
<CAPTION>
                                                                                Underwriting Fees for
                                                                           Fiscal Years Ended October 31,

                   Fund                                       1999                      1998                     1997

<S>                                                       <C>                       <C>                       <C>
Balanced Fund                                             $   689,518               $    716,315              $    518,345
Blue Chip Fund                                              1,419,225                 1,230, 098                   816,203
Bond Fund                                                     800,916                    887,870                   582,903
Capital Value Fund                                          1,647,688                  1,769,043                 1,383,995
Cash Management Fund                                           76,773                     19,171                    14,123
Government Securities Income Fund                             940,825                    846,821                   737,229
Growth Fund                                                 2,515,833                  2,079,726                 1,548,696
High Yield Fund                                               200,747                    335,156                   321,051
International Emerging Markets Fund                           111,950                    114,325                    33,588(1)
International Fund                                          1,032,623                  1,369,016                 1,524,740
International SmallCap Fund                                   156,120                    197,039                    38,421(1)
Limited Term Bond Fund                                         89,515                     77,191                    50,773
MidCap Fund                                                 1,677,041                  2,447,638                 2,152,664
Real Estate Fund                                               50,841                     53,280(2)                    N/A
SmallCap Fund                                                 453,831                    398,391(2)                    N/A
Tax-Exempt Bond Fund                                          576,841                    667,756                   558,697
Utilities Fund                                                513,501                    339,353                   169,904

<FN>
   (1) Period from August 14, 1997 (Date Operations  Commenced)  through October
       31,  1997.
   (2) Period from  December  11, 1997 (Date  Operations  Commenced) through
       October 31, 1998.
</FN>
</TABLE>

Class C Shares
Class C shares are sold without a sales charge; however, Class C shares redeemed
within one year of purchase are subject to a CDSC of 1% (.5% for LargeCap  Stock
Index and Limited Term Bond  Funds).  The charge is assessed on the amount equal
to the lesser of the current  market value or the original  purchase cost of the
shares  being  redeemed.  The amount of the CDSC,  if any,  is  calculated  as a
percentage of the amount being redeemed according to the following table.

<TABLE>
<CAPTION>
                                                   Contingent Deferred Sales Charge
                                                          as a Percentage of
                                                    Dollar Amount Subject to Charge

                                                                                            For Certain Sponsored Plans
                                                                                              Commenced After 2/1/98

                                                 All Funds                                  All Funds
                                              Except LargeCap       LargeCap Stock       Except LargeCap      LargeCap Stock
                                              Stock Index and          Index and         Stock Index and         Index and
              Years Since Purchase             Limited Term          Limited Term         Limited Term         Limited Term
                 Payments Made                  Bond Funds             Bond Funds           Bond Funds           Bond Funds

<S>      <C>                                       <C>                  <C>                   <C>                 <C>
         1 year or less                            1.00%                0.50%                 1.00%               0.50%
         more than 1 year                          None                  None                 None                None
</TABLE>

For the  purpose  of  determining  the  holding  period of Class C  shares,  all
payments  during a month are  aggregated  and  considered to have be made on the
first day of that month. In processing  redemptions of Class C shares,  the Fund
first  redeems  shares not  subject to any CDSC,  and then  shares  held for the
shortest  period of time during the one-year  period.  As a result,  you pay the
lowest possible CDSC.

The CDSC on Class C shares may be waived or reduced as follows:
     o    for automatic  redemptions (Periodic Withdrawal Plans) (limited to 10%
          of the value of the account);
     o    if the  redemption  results  from the death or a total  and  permanent
          disability  (as defined in Section 72 of the  Internal  Revenue  Code)
          occurring  after  the  purchase  of the  shares  being  redeemed  of a
          shareholder or participant in an employer-sponsored retirement plan;
     o    if the  distribution  is  part  of a  series  of  substantially  equal
          payments made over the life expectancy of the participant or the joint
          life expectancy of the participant and his or her beneficiary; or
     o   if  the  distribution  is to a  participant  in  an  employer-sponsored
         retirement  plan and is
          o    a return of excess employee deferrals or contributions,
          o    a qualifying hardship distribution as defined by the Code,
          o    from a termination of employment,
          o    in the form of a loan to a  participant  in a plan which  permits
               loans, or
          o    from  qualified  defined   contribution  plan  and  represents  a
               participant's directed transfer (provided that this privilege has
               been pre-authorized  through a prior agreement with PFD regarding
               participant directed transfers).

The CDSC may be waived or reduced for either  non-retirement  or retirement plan
accounts if the  redemption is made pursuant to the Fund's right to liquidate or
involuntarily  redeem  shares  in a  shareholder's  account.  The  CDSC  is  not
applicable if the selling  broker-dealer  elects,  with Princor's  approval,  to
waive receipt of the commission normally paid at the time of the sale.

Class C shares of the Cash  Management  Fund may be  purchased  only by exchange
from other Class C share accounts.  Class C shares do not convert into any other
Class shares. Class C shares provide you the benefit of putting all your dollars
to work from the time of  investment,  but have  higher  ongoing  fees and lower
dividends than Class A shares.

DISTRIBUTION PLAN

Rule  12b-1 of the  Investment  Company  Act of 1940 (the  "Act"),  as  amended,
permits a mutual  fund to  finance  distribution  activities  and bear  expenses
associated  with the  distribution of its shares provided that any payments made
by the Fund are made pursuant to a written plan adopted in  accordance  with the
Rule. A majority of the Board of Directors of each Fund, including a majority of
the Directors who have no direct or indirect financial interest in the operation
of the Plan or any  agreements  related to the Plan and who are not  "interested
persons" as defined in the Act,  adopted  the  Distribution  Plans as  described
below. No such Plan was adopted for Class A shares of the Cash Management  Fund.
Shareholders  of each class of shares of each Fund  approved the adoption of the
Plan for their respective class of shares.

Class A Distribution  Plan. Each of the Funds,  except the Cash Management Fund,
has  adopted  a  distribution  plan for the  Class A  shares.  The  Class A Plan
provides  that the Fund makes  payments  from its assets to Princor  pursuant to
this  Plan to  compensate  Princor  and  other  selling  Dealers  for  providing
shareholder  services to existing Fund shareholders and rendering  assistance in
the  distribution  and  promotion of the Fund Class A shares to the public.  The
Fund pays Princor a fee after the end of each month at an annual rate no greater
than 0.25% (.15% for the  LargeCap  Stock Index and Limited  Term Bond Funds) of
the daily net asset  value of the Fund.  Princor  retains  such  amounts  as are
appropriate  to compensate  for actual  expenses  incurred in  distributing  and
promoting  the  sale  of the  Fund  shares  to the  public  but may  remit  on a
continuous  basis up to .25% (.15% for the LargeCap Stock Index and Limited Term
Bond Funds) to Registered  Representatives and other selected Dealers (including
for this purpose,  certain financial institutions) as a trail fee in recognition
of their services and assistance.

Class B Distribution  Plan.  Each Class B Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the LargeCap  Stock Index
and Limited  Term Bond Funds) of the Fund's  average net asset  attributable  to
Class B shares.  Princor  also  receives  the  proceeds  of any CDSC  imposed on
redemptions of such shares.

Although Class B shares are sold without an initial sales charge, Princor pays a
sales commission equal to 4.00% (3.00% for certain  sponsored plans or 1.25% for
the LargeCap Stock Index and Limited Term Bond Funds) of the amount  invested to
dealers who sell such shares.  These  commissions are not paid on exchanges from
other  Principal  Mutual Funds.  In addition,  Princor may remit on a continuous
basis up to .25% (.15% for the LargeCap Stock Index and Limited Term Bond Funds)
to the Registered Representatives and other selected Dealers (including for this
purpose,  certain financial institutions) as a trail fee in recognition of their
services and assistance.

Class C Distribution  Plan.  Each Class C Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the LargeCap  Stock Index
and Limited  Term Bond Funds) of the Fund's  average net asset  attributable  to
Class C shares.  Princor  also  receives  the  proceeds  of any CDSC  imposed on
redemptions of such shares.

Class C shares are sold without an initial sales charge.  Princor may remit on a
continuous basis up to 1.00% (.50% for the LargeCap Stock Index and Limited Term
Bond  Funds)  to the  Registered  Representatives  and  other  selected  Dealers
(including for this purpose,  certain financial  institutions) as a trail fee in
recognition of their services and assistance.

Class R Distribution  Plan. Each of the Funds,  except the Tax-Exempt Bond Fund,
has  adopted  a  distribution  plan for the Class R  shares.  Each  Class R Plan
(except the  LargeCap  Stock Index Fund)  provides  for  payments by the Fund to
Princor  at the  annual  rate of up to .75% of the  Fund's  average  net  assets
attributable  to Class R shares.  The Class R Plan for the LargeCap  Stock Index
Fund  provides for payments from the Fund to Princor at the annual rate of up to
 .65% of the Fund's average net assets attributable to Class R shares

Although Class R shares are sold without an initial sales charge, Princor incurs
certain distribution  expenses.  In addition,  Princor may remit on a continuous
basis  up to .25% to  Registered  Representatives  and  other  selected  Dealers
(including,  for this purpose, certain financial institutions) as a trail fee in
recognition of their ongoing services and assistance.

General  Information  Regarding  Distribution Plans. A representative of Princor
provides to each Fund's  Board of  Directors,  and the Board  reviews,  at least
quarterly,  a written report of the amounts  expended  pursuant to the Plans and
the purposes for which such expenditures were made.

If  expenses  under a Class A, Class B or Class R Plan  exceed the  compensation
limit for Princor  described in the Plan in any one fiscal  year,  the Fund does
not carry over such  expenses to the next fiscal  year.  The Funds have no legal
obligation  to  pay  any  amount  pursuant  to  these  Plans  that  exceeds  the
compensation  limit.  The Funds do not pay,  directly or  indirectly,  interest,
carrying  charges,  or other  financing costs in connection with these Plans. If
the aggregate  payments received by Princor under these Plans in any fiscal year
exceed  the  expenditures  made by Princor  in that year  pursuant  to the Plan,
Princor promptly reimburses the Fund for the amount of the excess.

The Funds pay Princor the compensation described in the Class C Plan. The amount
of the payment and the distribution  expenses are reviewed annually by the Board
of Directors of each Fund.

The amount received from each Fund and retained by Princor during the year ended
October 31, 1999 and the manner in which such amounts were spent pursuant to the
Class A  Distribution  Plan for the last fiscal period of each of the Funds were
as follows:
<TABLE>
<CAPTION>
                                                                             Expenditures

                                              Prospectus and                               Registered
                                                Shareholder                   Salaries   Representative
                                   Amount         Report          Sales           &           Sales        Service        Total
              Fund                Retained       Printing       Brochures     Overhead      Materials       Fees      Expenditures

<S>                               <C>           <C>             <C>           <C>           <C>            <C>          <C>
Balanced                          $             $               $             $             $              $            $
Blue Chip
Bond
Capital Value
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>

The amount  received  from each Fund and  retained by Princor  during the period
ended October 31, 1999 and the manner in which such amounts were spent  pursuant
to the Class B Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
                                                                             Expenditures

                                             Prospectus and                         Registered
                                               Shareholder              Salaries  Representative
                                   Amount        Report        Sales       &           Sales      Service                  Total
                 Fund             Retained      Printing     Brochures  Overhead     Materials     Fees    Commissions  Expenditures

<S>                                <C>          <C>           <C>        <C>         <C>          <C>       <C>           <C>
Balanced                           $            $             $          $           $            $         $             $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>

The amount  received  from each Fund and  retained by Princor  during the period
ended October 31, 1999 and the manner in which such amounts were spent  pursuant
to the Class C Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
                                                                             Expenditures

                                             Prospectus and                         Registered
                                               Shareholder              Salaries  Representative
                                   Amount        Report        Sales       &           Sales     Service                   Total
                 Fund             Retained      Printing     Brochures  Overhead      Materials    Fees     Commissions Expenditures

<S>                                    <C>       <C>          <C>        <C>           <C>         <C>        <C>          <C>
Balanced                               $         $            $          $             $           $          $            $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>


The amount  received  from each Fund and  retained by Princor  during the period
ended October 31, 1999 and the manner in which such amounts were spent  pursuant
to the Class R Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
                                                                             Expenditures

                                              Prospectus and                 Registered
                                                Shareholder                Representative              Underwriter's
                                    Amount        Report          Sales         Sales        Service   Salaries and        Total
                 Fund              Retained      Printing       Brochures     Materials       Fees       Overhead      Expenditures

<S>                                 <C>           <C>            <C>           <C>            <C>       <C>              <C>
Balanced                            $             $              $             $              $         $                $
Blue Chip
Bond
Capital Value
Cash Management
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
Limited Term Bond
MidCap
Real Estate
SmallCap
Utilities
</TABLE>

A Plan may be  terminated at any time by vote of a majority of the Directors who
are not interested  persons (as defined in the Act), or by vote of a majority of
the outstanding  voting securities of the class of shares of a Fund to which the
Plan  relates.  Any  change  in  a  Plan  that  would  materially  increase  the
distribution  expenses of a class of shares of a Fund  provided  for in the Plan
requires  approval  of the  shareholders  of the class of  shares to which  such
increase would relate.

While a Distribution  Plan is in effect for a Fund, the selection and nomination
of Directors who are not interested persons of that Fund is at the discretion of
the Directors who are not interested persons.

Each Plan  continues in effect from year to year as long as its  continuance  is
specifically  approved at least  annually by a majority vote of the directors of
the Fund  including a majority of the  non-interested  directors.  The Plans for
Classes A, B, C and R shares were last approved by the Board of Directors of all
Funds,  including a majority of the  non-interested  directors,  on December 13,
1999.

DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES

Growth-Oriented and Income-Oriented Funds

The share price of each class of the Growth-Oriented  and Income-Oriented  Funds
is calculated each day that the New York Stock Exchange is open. The Funds treat
as  customary  national  business  holidays  the days  when  the New York  Stock
Exchange is closed (New Year's Day,  Martin  Luther King,  Jr. Day,  Presidents'
Day, Good Friday,  Memorial Day,  Independence Day, Labor Day,  Thanksgiving Day
and Christmas Day).

The share price for each class of shares for each Fund is determined by dividing
the value of securities in the Fund's investment portfolio plus all other assets
attributable to that class, less all liabilities  attributable to that class, by
the number of Fund shares of that class outstanding. Securities for which market
quotations  are readily  available,  including  options and futures traded on an
exchange, are valued at market value, which is for exchanged-listed  securities,
the  closing  price;  for  United  Kingdom-listed  securities,  the  marketmaker
provided price; and for non-listed equity securities,  the bid price. Non-listed
corporate debt securities,  government  securities and municipal  securities are
usually  valued using an evaluated bid price provided by a pricing  service.  If
closing prices are unavailable for exchange-listed securities, generally the bid
price,  or in the case of debt  securities  an evaluated  bid price,  is used to
value such securities.  When reliable market quotations are not considered to be
readily available,  which may be the case, for example,  with respect to certain
debt  securities,  preferred  stocks,  foreign  securities and  over-the-counter
options,  the  investments  are  valued by using  market  quotations  considered
reliable, prices provided by market makers, which may include dealers with which
the Fund has executed transactions,  or estimates of market values obtained from
yield data and other factors  relating to instruments or securities with similar
characteristics  in accordance with procedures  established in good faith by the
Board of Directors.  Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith through procedures established by the Board of Directors of the Fund.

Generally,  trading in foreign securities is substantially completed each day at
various times prior to the close of the New York Stock  Exchange.  The values of
foreign  securities used to compute the share prices are usually determined when
the foreign market closes. Occasionally,  events which affect the values of such
securities and foreign currency  exchange rates occur between the times at which
the values are generally determined and the close of the New York Stock Exchange
and would  therefore not be reflected in the computation of the Fund's net asset
value. If events materially  affecting the value of securities occur during such
period,  the  securities  are valued at their fair value as  determined  in good
faith by the Manager under procedures  established and regularly reviewed by the
Board of Directors. To the extent a Fund invests in foreign securities listed on
foreign  exchanges  which trade on days on which the Fund does not determine its
net asset  value,  for  example  Saturdays  and other  customary  national  U.S.
holidays,  the Fund's net asset  value could be  significantly  affected on days
when shareholders have no access to the Fund.

Certain  securities  issued by companies in emerging  market  countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a  "local"  price  and a  "premium"  price.  The  premium  price  is  often a
negotiated  price  which  may not  consistently  represent  a price  at  which a
specific  transaction  can be  effected.  It is the policy of the  International
Emerging Markets Fund,  International  Fund and  International  SmallCap Fund to
value such  securities  at prices at which it is  expected  those  shares may be
sold,   and  the  Manager  or  any   Sub-Advisor  is  authorized  to  make  such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.

Money Market Fund

The  share  price  of each  class  of  shares  of the  Cash  Management  Fund is
determined  at the same  time and on the same  days as the  Growth-Oriented  and
Income-Oriented  Funds as  described  above.  The share  price for each class of
shares  of the Fund is  computed  by  dividing  the  total  value of the  Fund's
securities  and other  assets,  less  liabilities,  by the number of Fund shares
outstanding.

All securities  held by the Cash Management Fund are valued on an amortized cost
basis.  Under this method of valuation,  a security is initially valued at cost;
thereafter,  the Fund  assumes a constant  proportionate  amortization  in value
until  maturity  of  any  discount  or  premium,  regardless  of the  impact  of
fluctuating  interest  rates on the  market  value of the  security.  While this
method  provides  certainty in valuation,  it may result in periods during which
value,  as determined by amortized  cost, is higher or lower than the price that
would be received upon sale of the security.

Use of the amortized cost valuation  method by the Cash Management Fund requires
the Fund to maintain a dollar weighted  average  maturity of 90 days or less and
to purchase only obligations that have remaining  maturities of 397 days or less
or have a variable or floating rate of interest.  In addition,  the Fund invests
only in  obligations  determined by its Board of Directors to be of high quality
with minimal credit risks.

The Board of Directors for the Cash Management  Fund has established  procedures
designed to stabilize,  to the extent reasonably possible,  the Fund's price per
share as  computed  for the  purpose  of sales and  redemptions  at $1.00.  Such
procedures  include a directive  to the Manager to test price the  portfolio  or
specific securities on a weekly basis using a mark-to-market method of valuation
to determine possible deviations in the net asset value from $1.00 per share. If
such deviation  exceeds 1/2 of 1%, the Board promptly  considers what action, if
any,  will be  initiated.  In the event the Board  determines  that a  deviation
exists  which  may  result in  material  dilution  or other  unfair  results  to
shareholders,   the  Board  takes  such  corrective  action  as  it  regards  as
appropriate,  including:  sale of portfolio  instruments prior to maturity;  the
withholding of dividends;  redemptions of shares in kind; the establishment of a
net asset value per share based upon available market quotations;  or splitting,
combining  or otherwise  recapitalizing  outstanding  shares.  The Fund may also
reduce  the  number of shares  outstanding  by  redeeming  proportionately  from
shareholders,  without the payment of any monetary compensation,  such number of
full and  fractional  shares as is  necessary to maintain the net asset value at
$1.00 per share.

PERFORMANCE CALCULATION

The Principal Mutual Funds advertise their  performance in terms of total return
or yield for each class of shares.  The figures  used for total return and yield
are based on the past  performance  of a Fund.  They show the  performance  of a
hypothetical  investment  and are not intended to indicate  future  performance.
Total  return  and  yield  vary  from  time to time  depending  upon:
o    market conditions
o    the composition of a Fund's portfolio
o    operating expenses

These factors and  differences  in the methods used in  calculating  performance
figures  should  be  considered  when  comparing  a  Fund's  performance  to the
performance of other investments.

A Fund  may  include  in  its  advertisements  performance  rankings  and  other
performance-related information published by independent statistical services or
publishers,  such as
o    Baron's, Changing Times
o    Forbes
o    Fortune
o    Investment Advisor
o    Lipper Analytical Services
o    Money Magazine
o    Stanger's Investment Advisor
o    The Wall Street Journal
o    USA Today
o    U.S. News
o    Weisenberger Investment Companies Services
o    W. R. Kipplinger's Personal Finance

A Fund may also include in its advertisements  comparisons of the performance of
the Fund to that of various  market  indices,  such as:
o    Bond Buyer Municipal Index
o    Dow Jones Industrials Index
o    Dow Jones Utility Index with Income
o    Lehman Brothers BAA Corporate Index
o    Lehman Brothers GNMA Index
o    Lehman Brothers High Yield Index
o    Lehman Brothers Municipal Bond Index
o    Lehman Brothers Revenue Bond Index
o    Brothers Mutual Fund Short Government/Corporate Index
o    Lehman Brothers Intermediate Government/Corporate Index
o    Lehman Brothers Government/Corporate Bond Index
o    Merrill Lynch Corporate Government Bond Index
o    Morgan Stanley Capital International EAFE (Europe,  Australia and Far East)
     Index
o    Morgan Stanley Capital International EMF (Emerging Markets) Index
o    Morgan Stanley REIT Index
o    Salomon Brothers Investment Grade Bond Index
o    S&P 400 Index
o    S&P 500 Index
o    S&P 600 Index
o    Valueline
o    World Index

Total Return

The Growth-Oriented  and Income-Oriented  Funds include its average annual total
return for the one-,  five- and ten-year  periods as of the last day of the most
recent calendar  quarter when advertising  total return figures.  If the Fund or
class has been in existence for a shorter time period, it uses the time from the
beginning of the Fund (or class) to the end of the most recent calendar quarter.

Average  annual  total  return is  calculated  by  comparing  an initial  $1,000
investment  to the  redeemable  value of the Fund at the end of 1, 5 or 10 years
(or from the Fund's inception date).

     Initial  Investment  - $1,000 less maximum  front-end  sales charge (in the
     case of Class A shares)
     Ending  redeemable  value - assumes the  reinvestment  of all dividends and
     capital gains at net asset value less the  applicable  contingent  deferred
     sales charge (in the case of Class B or Class C shares).

A Fund may also include in its advertising  average annual total return for some
other period or cumulative  total return for a specified  period.  These returns
may include  reduced sales charges,  reflect no sales charge or CDSC in order to
illustrate  the change in a Fund's net asset value over time.  Cumulative  total
return is calculated:

                   (Ending redeemable value less the initial investment)
                                      Initial investment

The  following  table shows as of October 31, 1999  average  annual  returns for
Class A shares for each of the Funds for the periods indicated:
                 Fund                     1-Year      5-Year        10-Year

   Balanced Fund                          (0.07)%     11.06%         9.80%
   Blue Chip Fund                         11.50       18.81         14.01(1)
   Bond Fund                              (9.53)       6.83          7.22
   Capital Value Fund                     (1.84)      16.22         12.42
   Government Securities Income Fund      (3.30)       7.16          7.13
   Growth Fund                            11.94       17.89         16.38
   High Yield Fund                        (2.02)       5.90          6.36
   International Emerging Markets Fund    24.74       (5.53)(3)
   International Fund                     10.72       10.21         11.04
   International SmallCap Fund            47.25       19.94(3)
   Limited Term Bond Fund                  0.31        4.67(4)
   MidCap Fund                             0.60       11.98         13.15
   Real Estate Fund                       (8.87)     (13.27)
   SmallCap Fund                          28.20        4.16
   Tax-Exempt Bond Fund                   (7.09)       5.82          6.07
   Utilities Fund                          9.35       17.29         12.02(2)

   (1)Period beginning March 1, 1991 and ending October 31, 1999.
   (2)Period beginning December 16, 1992 and ending October 31, 1999.
   (3)Period beginning August 29, 1997 and ending October 31, 1999.
   (4)Period beginning February 29, 1996 and ending October 31, 1999.
   (5)Period beginning January 1, 1998 and ending October 31, 1999.

The  following  table shows as of October 31, 1999  average  annual  returns for
Class B shares for each of the Funds for the period indicated:
                 Fund                       1-Year           5-Year

   Balanced Fund                             0.06%           12.31(1)
   Blue Chip Fund                           12.09            20.30(1)
   Bond Fund                                (6.36)            6.72(1)
   Capital Value Fund                       (1.57)           18.12(1)
   Government Securities Income Fund        (3.17)            7.17(1)
   Growth Fund                              12.75            20.29(1)
   High Yield Fund                          (1.76)            6.05(1)
   International Emerging Markets Fund      25.91            (5.67)(2)
   International Fund                       11.27            12.45(1)
   International SmallCap Fund              49.42            20.65(2)
   Limited Term Bond Fund                    0.08             4.49(3)
   MidCap Fund                               1.09            14.26(1)
   Real Estate Fund                         (8.79)          (13.20)(4)
   SmallCap Fund                            29.29             4.16(4)
   Tax-Exempt Bond Fund                     (6.73)            6.48(1)
   Utilities Fund                            9.85            17.88(1)

  (1)Period beginning December 9, 1994 and ending October 31, 1999.
  (2)Period beginning August 29, 1997 and ending October 31, 1999.
  (3)Period beginning February 29, 1996 and ending October 31, 1999.
  (4)Period beginning January 1, 1998 and ending October 31, 1999.

The  following  table shows as of October 31, 1999  average  annual  returns for
Class C shares for each of the Funds for the period indicated:
                 Fund                                         1-Year(1)

   Balanced Fund                                              (5.67)%
   Blue Chip Fund                                             (2.29)
   Bond Fund                                                  (1.40)
   Capital Value Fund                                         (8.42)
   Government Securities Income Fund                           0.11
   Growth Fund                                                (4.75)
   High Yield Fund                                            (1.99)
   International Emerging Markets Fund                        (5.47)
   International Fund                                          2.95
   International SmallCap Fund                                16.81
   Limited Term Bond Fund                                      0.34
   MidCap Fund                                                (9.36)
   Real Estate Fund                                          (11.21)
   SmallCap Fund                                               0.53
   Tax-Exempt Bond Fund                                       (3.59)
   Utilities Fund                                             (1.47)

  (1)Period beginning June 30, 1999 and ending October 31, 1999.

The  following  table shows as of October 31, 1999  average  annual  returns for
Class R shares for each of the Funds for the period indicated:
                 Fund                           1-Year               5-Year

   Balanced Fund                                 4.21%               10.14%(1)
   Blue Chip Fund                               16.31                17.46(1)
   Bond Fund                                    (2.45)               (4.76)(1)
   Capital Value Fund                            2.35                14.57(1)
   Government Securities Income Fund             0.78                 5.25(1)
   Growth Fund                                  16.78                16.29(1)
   High Yield Fund                               2.01                 3.88(1)
   International Emerging Markets Fund          30.93                (3.46)(2)
   International Fund                           15.27                12.18(1)
   International SmallCap Fund                  54.61                22.77(2)
   Limited Term Bond Fund                        1.13                 4.48(1)
   MidCap Fund                                   4.89                 7.49(1)
   Real Estate Fund                             (4.70)              (11.07)(3)
   SmallCap Fund                                33.85                 6.77(3)
   Utilities Fund                               13.97                15.54(1)

  (1)Period  beginning  February  29, 1996 and ending  October 31,  1999.
  (2)Period  beginning  August 29, 1997 and ending  October 31,  1999.
  (3) Period beginning January 1, 1998 and ending October 31, 1999.

Yield

Income-Oriented Funds
Each Income-Oriented Fund computes a yield by:
1.   calculating  net  investment  income  per share for a 30 day (or one month)
     period
2.   annualizing  net  investment   income  per  share,   assuming   semi-annual
     compounding
3.   dividing  the  annualized  net  investment  income  by the  maximum  public
     offering price for Class A shares or the net asset value for Class B, Class
     C and Class R shares for the last day of the same period.
The  following  table  shows as of October  31, 1999 the yield for each class of
shares for each of the Income-Oriented Funds:

<TABLE>
<CAPTION>
                                                                   Yield as of October 31, 1999

                   Fund                              Class A           Class B          Class C           Class R

<S>                                                   <C>              <C>               <C>               <C>
Bond Fund                                             7.40%            6.63%             6.56%             6.79%
Government Securities Income Fund                     6.34             5.48              5.50              5.76
High Yield Fund                                       9.69             8.74              8.87              8.56
Limited Term Bond Fund                                6.23             5.83              5.83              5.58
Tax-Exempt Bond Fund                                  4.94             4.54              3.96              N/A
</TABLE>

The  Tax-Exempt   Bond  Fund  may  advertise  a   tax-equivalent   yield.   Your
tax-equivalent yield would be calculated by:

   [(Tax-exemptportion of the yield) divided by (1 minus  your tax  rate)] plus
             [any portion  of  the  yield  which  is not tax-exempt]

As of October  31, 1999 the Fund's  tax-equivalent  yields for Class A , Class B
and Class C shares were as follows:

             Tax-Equivalent Yield                  Assumed
     Class A       Class B       Class C           Tax Rate

      6.53%         6.31%        5.50%              28.0%
      7.34          7.09         6.19               36.0
      7.78          7.52         6.56               39.6

Money Market Fund

The Cash Management Fund advertises its yield and its effective yield.

Yield is computed by:
o    determining   the  net  change   (excluding   shareholder   purchases   and
     redemptions) in the value of a hypothetical  pre-existing  account having a
     balance of one share at the beginning of the period
o    dividing the difference by the value of the account at the beginning of the
     base period to obtain the base period return
o    multiplying  the base period  return by (365/7)  with the  resulting  yield
     figure carried to at least the nearest hundredth of one percent.

The  following  table  shows as of October  31, 1999 the yield for each class of
shares for the Cash Management Fund:

                                       Yield as of October 31, 1999

           Fund             Class A       Class B        Class C         Class R

Cash Management Fund         5.17%         4.75%          4.65%           3.63%

There  may be a  difference  in the net  investment  income  per  share  used to
calculate  yield  and the net  investment  income  per share  used for  dividend
purposes.  This is because the  calculation  for yield purposes does not include
net  short-term  realized  gains or losses on the Fund's  investment,  which are
included in the calculation for dividend purposes.

Effective yield is computed by:
o    determining   the  net  change   (excluding   shareholder   purchases   and
     redemptions) in the value of a hypothetical  pre-existing  account having a
     balance of one share at the beginning of the period
o    dividing the difference by the value of the account at the beginning of the
     base period to obtain the base period  return  compounding  the base period
     return by adding 1,  raising  the sum to a power equal to 365 divided by 7,
     and subtracting 1 from the result.
The  resulting  effective  yield  figure  is  carried  to at least  the  nearest
hundredth of one percent.
The following  table shows as of October 31, 1999 the  effective  yield for each
class of shares for the Cash Management Fund:

                                  Effective Yield as of October 31, 1999

              Fund          Class A       Class B        Class C         Class R

Cash Management Fund         5.30%         4.85%          3.69%           4.75%

The yield quoted at any time for the Cash  Management Fund represents the amount
that has earned during a specific, recent seven-day period and is a function of:
o    the quality of investments in the Fund's portfolio
o    types of investments in the Fund's portfolio
o    length of maturity of investments in the Fund's portfolio
o    Fund's operating expenses.

The length of maturity for the portfolio is calculated  using the average dollar
weighted  maturity  of all  investments.  This means that the  portfolio  has an
average maturity of a stated number of days for its investments. The calculation
is weighted by the relative value of each investment.

The yield for the Cash Management Fund will fluctuate daily as the income earned
on the  investments  of the Fund  fluctuates.  There is no  assurance  the yield
quoted on any given  occasion  will remain in effect for any period of time.  It
should also be  emphasized  that the Funds are  open-end  investment  companies.
There is no guarantee that the net asset value or any stated rate of return will
remain  constant.  A  shareholder's  investment  in the  Fund  is  not  insured.
Investors  comparing results of the Cash Management Fund with investment results
and yields from other  sources  such as banks or savings  and loan  associations
should understand these distinctions.
Historical and comparative yield information may be presented by the Funds.

A Fund may include in its  advertisements  the compounding  effect of reinvested
dividends   over  an  extended   period  of  time  as  shown  in  the  following
illustrations.

The Power of Compounding


Fund  shareholders  who  reinvest  their  distributions  get  the  advantage  of
compounding.  Here's what happens to a $10,000  investment  with monthly  income
reinvested at 6 percent, 8 percent and 10 percent over 20 years.

These  figures  assume no change in the value of  principal.  This  chart is for
illustration purposes only and is not an indication of the results a shareholder
may receive as a shareholder of a specific Fund. The return and capital value of
an investment in a Fund vary so that the value, when redeemed, may be worth more
or less than the original cost.

     (chart)
Year     6%      8%         10%
  0   $10,000   $10,000  $10,000
 20   $32,071   $46,610  $67,275

A Fund may also include in its  advertisements  an illustration of the impact of
income  taxes and  inflation  on  earnings  from bank  certificates  of  deposit
("CD's"). The interest rate on the hypothetical CD will be based upon average CD
rates for a stated  period as  reported  in the Federal  Reserve  Bulletin.  The
illustrated annual rate of inflation will be the core inflation rate as measured
by the Consumer Price Index for the 12-month  period ended as of the most recent
month prior to the advertisement's  publication. The illustrated income tax rate
may  include any federal  income tax rate that may apply to  individuals  at the
time the advertisement is published.  Any such advertisement will indicate that,
unlike  bank CD's,  an  investment  in the Fund is not  insured nor is there any
guarantee  that the Fund's net asset  value or any  stated  rate of return  will
remain constant.

An  example  of a typical  calculation  included  in such  advertisements  is as
follows: the after-tax and inflation-adjusted  earnings on a bank CD, assuming a
$10,000  investment in a six-month bank CD with an annual interest rate of ____%
(monthly average  six-month CD rate for the month of October,  1999, as reported
in the  Federal  Reserve  Bulletin)  and an  inflation  rate of  ____%  (rate of
inflation  for the  12-month  period  ended  October 31, 1999 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(105).

     ($10,000 x ___9%) / 2 = $___ Interest for six-month period
                             - __  Federal  income taxes (28%)
                             - __5 Inflation's impact on invested principal
                             $(10,000 x ___%) / 2
                            ($___) After-tax, inflation-adjusted earnings
A Fund may also include in its  advertisements  an  illustration of tax-deferred
accumulation  versus  currently  taxable  accumulation  in conjunction  with the
Fund's use as a funding  vehicle  for  403(b)  plans,  IRAs or other  retirement
plans. The illustration set forth below assumes a monthly investment of $200, an
annual return of 8% compounded monthly, and a 28% tax bracket.

The information is for illustrative  purposes only and is not meant to represent
the  performance  of any of the  Principal  Mutual  Funds.  An investment in the
Principal Mutual Funds is not guaranteed; values and returns generally vary with
changes in market conditions.


                        Tax-deferred vs. taxable savings plan

                          _______________________________________  - $300,059

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

                          _______________________________________  --- $192,844

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

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

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

                          ---------------------------------------
                   Years:  5    10    15    20    25    30

                      -    With a tax-deferred savings plan
                      ---    Without a tax-deferred savings plan

TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS

It is the policy of each Fund to  distribute  substantially  all net  investment
income and net realized  gains.  Through such  distributions,  and by satisfying
certain other  requirements,  each Fund intends to qualify for the tax treatment
accorded to regulated  investment  companies under the applicable  provisions of
the  Internal  Revenue  Code.  This  means  that  in each  year in  which a Fund
qualifies,  it is exempt from federal income tax upon the amount  distributed to
investors.  The Tax  Reform Act of 1986  imposed  an excise tax on mutual  funds
which fail to distribute net  investment  income and capital gains by the end of
the  calendar  year in  accordance  with the  provisions  of the Act.  Each Fund
intends to comply with the Act's requirements and to avoid this excise tax.

Dividends  from net  investment  income  will be  eligible  for a 70%  dividends
received  deduction  generally  available to  corporations  to the extent of the
amount of qualifying dividends received by the Funds from domestic  corporations
for  the  taxable  year.   Distributions  from  the  Cash  Management  Fund  and
Income-Oriented  Funds are  generally  not eligible for the  corporate  dividend
received deduction.

All  taxable  dividends  and  capital  gains  are  taxable  in the year in which
distributed,  whether  received  in cash or  reinvested  in  additional  shares.
Dividends declared with a record date in December and paid in January are deemed
to  be  distributed  to  shareholders   in  December.   Each  Fund  informs  its
shareholders  of the amount and nature of their  taxable  income  dividends  and
capital gain distributions. Dividends from a Fund's net income and distributions
of capital gains, if any, may also be subject to state and local taxation.

The Fund is required in certain cases to withhold and remit to the U.S. Treasury
31% of ordinary income dividends and capital gain dividends, and the proceeds of
redemption of shares,  paid to any  shareholder  (1) who has provided  either an
incorrect tax  identification  number or no number at all, (2) who is subject to
backup  withholding  by the Internal  Revenue  Service for failure to report the
receipt  of  interest  or  dividend  income  properly,  or (3) who has failed to
certify to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."

A shareholder recognizes gain or loss on the sale or redemption of shares of the
Fund in an amount equal to the  difference  between the proceeds of the sales or
redemption  and the  shareholder's  adjusted  tax basis in the shares.  All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of the Fund within 30 days before or after the sale or  redemption.
In general,  any gain or loss arising from (or treated as arising from) the sale
or  redemption  of  shares  of the  Fund  is  considered  capital  gain  or loss
(long-term  capital  gain or loss if the shares  were held for  longer  than one
year).  However, any capital loss arising from the sales or redemption of shares
held for six  months  or less is  disallowed  to the  extent  of the  amount  of
exempt-interest  dividends  received  on such  shares  and (to  the  extent  not
disallowed)  is treated as a long-term  capital loss to the extent of the amount
of capital gain  dividends  received on such shares.  Capital losses in any year
are  deductible  only to the  extent of  capital  gains  plus,  in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

If a shareholder  (i) incurs a sales load in acquiring  shares of the Fund, (ii)
disposes  of such  shares  less than 91 days after they are  acquired  and (iii)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant  to a right  to  reinvest  at  such  reduced  sales  load  acquired  in
connection  with the  acquisition of the shares disposed of, then the sales load
on the shares  disposed of (to the extent of the  reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares  disposed  of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.

Shareholders should consult their own tax advisors as to the federal,  state and
local tax  consequences of ownership of shares of the Funds in their  particular
circumstances.

Special Tax Considerations

     Tax-Exempt Bond Fund

     The  Tax-Exempt  Bond Fund also intends to qualify to pay  "exempt-interest
     dividends" to its shareholders. An exempt-interest dividend is that part of
     dividend  distributions made by the Fund which consist of interest received
     by that Fund on tax-exempt  Municipal  Obligations.  Shareholders  incur no
     federal  income  taxes  on  exempt-interest   dividends.   However,   these
     exempt-interest  dividends  may be taxable  under state or local law.  Fund
     shareholders that are corporations must include  exempt-interest  dividends
     in  determining  whether  they are  subject  to the  corporate  alternative
     minimum tax.  Exempt-interest  dividends  that derive from certain  private
     activity  bonds must be included by  individuals  as a  preference  item in
     determining  whether they are subject to the  alternative  minimum tax. The
     Fund may also pay ordinary  income  dividends and distribute  capital gains
     from time to time.  Ordinary income dividends and  distributions of capital
     gains, if any, are taxable for federal purposes.

     If a  shareholder  receives an  exempt-interest  dividend  with  respect to
     shares of the Funds held for six months or less,  then any loss on the sale
     or exchange of such shares,  to the extent of the amount of such  dividend,
     is  disallowed.  If a  shareholder  receives a capital gain  dividend  with
     respect to shares held for six months or less, then any loss on the sale or
     exchange  of such  shares is  treated  as a long term  capital  loss to the
     extent the loss exceeds any exempt-interest  dividend received with respect
     to such shares,  and is  disallowed  to the extent of such  exempt-interest
     dividend.

     Interest on indebtedness incurred or continued by a shareholder to purchase
     or carry shares of this Fund is not  deductible.  Furthermore,  entities or
     persons who are  "substantial  users" (or related  persons)  under  Section
     147(a) of the Code of facilities  financed by private activity bonds should
     consult their tax advisors before purchasing shares of the Fund.

     From time to time,  proposals have been introduced  before Congress for the
     purpose of restricting or eliminating  the federal income tax exemption for
     interest  on  Municipal   Obligations.   If  legislation  is  enacted  that
     eliminates  or   significantly   reduces  the   availability  of  Municipal
     Obligations,  it could adversely affect the ability of the Fund to continue
     to pursue its investment  objectives and policies.  In such event, the Fund
     would reevaluate its investment objectives and policies.

     International  Emerging Markets,  International and International  SmallCap
     Funds

     In each fiscal year when,  at the close of such year,  more than 50% of the
     value  of  the  total  assets  of  the   International   Emerging   Market,
     International  or  the   International   SmallCap  Funds  are  invested  in
     securities of foreign corporations,  the Fund may elect pursuant to Section
     853 of the Code to permit  shareholders  to take a credit (or a  deduction)
     for  foreign  income  taxes paid by the Fund.  In that  case,  shareholders
     should  include in their report of gross income in their federal income tax
     returns both cash dividends received from the Fund and the amount which the
     Fund  advises is their pro rata  portion of foreign  income taxes paid with
     respect to, or withheld from,  dividends and interest paid to the Fund from
     its foreign  investments.  Shareholders  are then entitled to subtract from
     their federal income taxes the amount of such taxes withheld, or treat such
     foreign  taxes as a  deduction  from gross  income,  if that should be more
     advantageous.  As in the case of individuals receiving income directly from
     foreign sources, the above-described tax credit or tax deduction is subject
     to certain  limitations.  Shareholders or prospective  shareholders  should
     consult their tax advisors on how these provisions apply to them.

     Futures Contracts and Options

     As  previously  discussed,  some of the  Principal  Mutual  Funds invest in
     futures  contracts or options  thereon,  index options or options traded on
     qualified  exchanges.  For federal  income tax purposes,  capital gains and
     losses on futures  contracts or options  thereon,  index options or options
     traded on qualified  exchanges are  generally  treated as 60% long-term and
     40% short-term.  In addition, the Funds must recognize any unrealized gains
     and losses on such positions held at the end of the fiscal year. A Fund may
     elect out of such tax treatment, however, for a futures or options position
     that  is part  of an  "identified  mixed  straddle"  such  as a put  option
     purchased with respect to a portfolio security. Gains and losses on futures
     and options  included in an identified  mixed straddle are considered  100%
     short-term and  unrealized  gain or loss on such positions are not realized
     at year end. The straddle  provisions  of the Code may require the deferral
     of  realized  losses  to the  extent  that a Fund has  unrealized  gains in
     certain  offsetting  positions at the end of the fiscal year.  The Code may
     also  require  recharacterization  of all or a part of  losses  on  certain
     offsetting positions from short-term to long-term, as well as adjustment of
     the holding periods of straddle positions.

GENERAL INFORMATION AND HISTORY

The Funds were incorporated in Maryland on the following dates:

         Balanced Fund                           November 26, 1986
         Blue Chip Fund                          December 10, 1990
         Bond Fund                               December 2, 1986
         Capital Value Fund                      May 26, 1989
         Cash Management Fund                    June 10, 1982
         Government Securities Income Fund       September 5, 1984
         Growth Fund                             May 26, 1989
         High Yield Fund                         November 26, 1986
         International Emerging Markets Fund     May 27, 1997
         International Fund                      May 12, 1981
         International SmallCap Fund             May 27, 1997
         LargeCap Stock Index Fund               November 24, 1999
         Limited Term Bond Fund                  August 9, 1995
         MidCap Fund                             February 20, 1987
         Partners Aggressive Growth Fund         August 10, 1999
         Partners LargeCap Growth Fund           November 24, 1999
         Partners MidCap Growth Fund             November 24, 1999
         Real Estate Fund                        May 27, 1997
         SmallCap Fund                           August 13, 1997
         Tax-Exempt Bond Fund                    June 7, 1985
         Utilities Fund                          September 3, 1992


Effective  January 1, 1998, the following  changes were made to the names of the
Funds:

<TABLE>
<CAPTION>
                            Old Fund Name                                                   New Fund Name

<S>      <C>                                                             <C>
         Princor Balanced Fund, Inc.                                     Principal Balanced Fund, Inc.
         Princor Blue Chip Fund, Inc.                                    Principal Blue Chip Fund, Inc.
         Princor Bond Fund, Inc.                                         Principal Bond Fund, Inc.
         Princor Capital Accumulation Fund, Inc.                         Principal Capital Value Fund, Inc.
         Princor Cash Management Fund, Inc.                              Principal Cash Management Fund, Inc.
         Princor Emerging Growth Fund, Inc.                              Principal MidCap Fund, Inc.
         Princor Government Securities Income Fund, Inc.                 Principal Government Securities Income Fund, Inc.
         Princor Growth Fund, Inc.                                       Principal Growth Fund, Inc.
         Princor High Yield Fund, Inc.                                   Principal High Yield Fund, Inc.
         Princor Limited Term Bond Fund, Inc.                            Principal Limited Term Bond Fund, Inc.
         Princor Tax-Exempt Bond Fund, Inc.                              Principal Tax-Exempt Bond Fund, Inc.
         Princor Utilities Fund, Inc.                                    Principal Utilities Fund, Inc.
         Princor World Fund, Inc.                                        Principal International Fund, Inc.
</TABLE>

FINANCIAL STATEMENTS

The  financial  statements  for each of the  Principal  Mutual Funds (except the
LargeCap Stock Index,  Partners Aggressive Growth,  Partners LargeCap Growth and
Partners  MidCap Growth Funds) for the year ended October 31, 1999 are a part of
this Statement of Additional Information. The financial statements appear in the
Annual Reports to  Shareholders.  Reports on those statements from Ernst & Young
LLP, independent auditors, are included in the Annual Report and are also a part
of this Statement of Additional  Information.  The Annual Reports are furnished,
without  charge,  to investors who request copies of the Statement of Additional
Information.

The statements of net assets of the Principal Partners Aggressive Growth Fund as
of October 28, 1999,  the LargeCap  Stock Index,  Partners  LargeCap  Growth and
Partners  MidCap Growth Funds as of February 28, 2000 and the reports of Ernst &
Young LLP thereon are provided herein following the Appendix.

APPENDIX A

Description of Bond Ratings:

Moody's Investors Service, Inc. Bond Ratings

Aaa:     Bonds  which are rated Aaa are judged to be of the best  quality.  They
         carry the smallest degree of investment risk and are generally referred
         to as "gilt edge." Interest  payments are protected by a large or by an
         exceptionally  stable margin and principal is secure. While the various
         protective  elements  are  likely to  change,  such  changes  as can be
         visualized  are  most  unlikely  to  impair  the  fundamentally  strong
         position of such issues.

Aa:      Bonds  which  are  rated Aa are  judged  to be of high  quality  by all
         standards. Together with the Aaa group they comprise what are generally
         known as high  grade  bonds.  They are rated  lower than the best bonds
         because  margins of protection may not be as large as in Aaa securities
         or  fluctuation of protective  elements may be of greater  amplitude or
         there may be other  elements  present  which make the  long-term  risks
         appear somewhat larger than in Aaa securities.

A:       Bonds which are rated A possess many  favorable  investment  attributes
         and are to be  considered  as upper medium grade  obligations.  Factors
         giving security to principal and interest are considered adequate,  but
         elements may be present  which suggest a  susceptibility  to impairment
         sometime in the future.

Baa:     Bonds which are rated Baa are  considered as medium grade  obligations,
         i.e., they are neither highly  protected nor poorly  secured.  Interest
         payments and  principal  security  appear  adequate for the present but
         certain protective elements may be lacking or may be characteristically
         unreliable over any great length of time.  Such bonds lack  outstanding
         investment characteristics and in fact have speculative characteristics
         as well.

Ba:      Bonds which are rated Ba are judged to have speculative elements; their
         future cannot be considered as  well-assured.  Often the  protection of
         interest and  principal  payments may be very  moderate and thereby not
         well  safeguarded  during  both  good and bad  times  over the  future.
         Uncertainty of position characterizes bonds in this class.

B:       Bonds which are rated B generally lack characteristics of the desirable
         investment.   Assurance  of  interest  and  principal  payments  or  of
         maintenance of other terms of the contract over any long period of time
         may be small.

Caa:     Bonds which are rated Caa are of poor  standing.  Such issues may be in
         default  or there may be present  elements  of danger  with  respect to
         principal or interest.

Ca:      Bonds which are rated Ca represent obligations which are speculative in
         a high  degree.  Such issues are often in default or have other  marked
         shortcomings.

C:       Bonds which are rated C are the lowest  rated class of bonds and issues
         so rated can be regarded as having  extremely  poor  prospects  of ever
         attaining any real investment standing.

CONDITIONAL RATING:  Bonds for which the security depends upon the completion of
some act or the  fulfillment  of some condition are rated  conditionally.  These
bonds secured by (a) earnings of projects  under  construction,  (b) earnings of
projects  unseasoned  in  operation  experience,  (c)  rentals  which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches.  Parenthetical  rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

RATING REFINEMENTS:  Moody's may apply numerical  modifiers,  1, 2 and 3 in each
generic rating  classification  from Aa through B in its bond rating system. The
modifier 1 indicates  that the  security  ranks in the higher end of its generic
rating category;  the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

SHORT-TERM  NOTES:  The four ratings of Moody's for short-term  notes are MIG 1,
MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality,  enjoying strong protection
from established  cash flows";  MIG 2 denotes "high quality" with "ample margins
of  protection";  MIG 3  notes  are  of  "favorable  quality...but  lacking  the
undeniable  strength  of the  preceding  grades";  MIG 4 notes are of  "adequate
quality,  carrying specific risk for having  protection...and  not distinctly or
predominantly speculative."

Description of Moody's Commercial Paper Ratings

Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
Moody's  employs the following three  designations,  all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:

Issuers  rated  Prime-1 (or  related  supporting  institutions)  have a superior
capacity for repayment of short-term promissory obligations.

Issuers  rated  Prime-2  (or  related  supporting  institutions)  have a  strong
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-3 (or related  supporting  institutions)  have an acceptable
capacity for repayment of short-term promissory obligations.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

Description of Standard & Poor's Corporation's Debt Ratings:

A Standard & Poor's debt rating is a current assessment of the  creditworthiness
of an obligor with respect to a specific  obligation.  This  assessment may take
into consideration obligors such as guarantors, insurers, or lessees.

The debt rating is not a  recommendation  to purchase,  sell or hold a security,
inasmuch  as it does  not  comment  as to  market  price  or  suitability  for a
particular investor.

The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources  Standard & Poor's  considers  reliable.
Standard & Poor's  does not perform an audit in  connection  with any rating and
may, on occasion,  rely on unaudited financial  information.  The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.

The ratings are based, in varying degrees, on the following considerations:

I.   Likelihood of default -- capacity and  willingness of the obligor as to the
     timely  payment of interest and repayment of principal in  accordance  with
     the terms of the obligation;

II.  Nature of and provisions of the obligation;

III. Protection  afforded by, and relative  position of, the  obligation  in the
     event of bankruptcy,  reorganization or other arrangement under the laws of
     bankruptcy and other laws affecting creditor's rights.

AAA:      Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
          Capacity to pay interest and repay principal is extremely strong.

AA:       Debt rated "AA" has a very strong  capacity to pay  interest and repay
          principal  and  differs  from the  highest-rated  issues only in small
          degree.

A:        Debt  rated  "A" has a  strong  capacity  to pay  interest  and  repay
          principal  although they are somewhat more  susceptible to the adverse
          effects of changes in circumstances and economic  conditions than debt
          in higher-rated categories.

BBB:      Debt rated "BBB" is  regarded  as having an  adequate  capacity to pay
          interest and repay principal.  Whereas it normally  exhibits  adequate
          protection   parameters,   adverse  economic  conditions  or  changing
          circumstances  are more  likely to lead to a weakened  capacity to pay
          interest and repay  principal  for debt in this category than for debt
          in higher-rated categories.

BB, B, CCC, CC:      Debt  rated  "BB",  "B",  "CCC"  and "CC" is  regarded,  on
                     balance,  as  predominantly   speculative  with  respect to
                     capacity to pay interest and repay  principal in accordance
                     with the terms of the obligation. "BB" indicates the lowest
                     degree  of  speculation   and "CC"  the  highest  degree of
                     speculation. While such debt will likely  have some quality
                     and  protective  characteristics,  these  are outweighed by
                     large  uncertainties  or major  risk  exposures  to adverse
                     conditions.

C:        The rating "C" is  reserved  for income  bonds on which no interest is
          being paid.

D:        Debt rated "D" is in default, and payment of interest and/or repayment
          of principal is in arrears.

Plus (+) or Minus  (-):  The  ratings  from "AA" to "B" may be  modified  by the
addition  of a plus or minus  sign to show  relative  standing  within the major
rating categories.

Provisional Ratings: The letter "p" indicates that the rating is provisional.  A
provisional  rating  assumes the  successful  completion  of the  project  being
financed by the bonds being rated and  indicates  that  payment of debt  service
requirements  is largely or entirely  dependent  upon the  successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project,  makes no comment on the likelihood of,
or the risk of default upon  failure of, such  completion.  The investor  should
exercise his own judgment with respect to such likelihood and risk.

NR:       Indicates   that  no  rating  has  been   requested,   that  there  is
          insufficient  information on which to base a rating or that Standard &
          Poor's does not rate a particular  type of  obligation  as a matter of
          policy.

Standard & Poor's, Commercial Paper Ratings

A Standard  & Poor's  Commercial  Paper  Rating is a current  assessment  of the
likelihood of timely payment of debt having an original maturity of no more than
365 days.  Ratings are graded  into four  categories,  ranging  from "A" for the
highest  quality  obligations  to "D" for the lowest.  Ratings are applicable to
both  taxable  and  tax-exempt  commercial  paper.  The four  categories  are as
follows:

A:        Issues assigned the highest rating are regarded as having the greatest
          capacity for timely  payment.  Issues in this category are  delineated
          with the numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1:      This designation  indicates that the degree of safety regarding timely
          payment is either  overwhelming  or very  strong.  Issues that possess
          overwhelming safety characteristics will be given a "+" designation.

A-2:      Capacity for timely payment on issues with this designation is strong.
          However,  the  relative  degree of safety is not as high as for issues
          designated "A-1".

A-3:      Issues  carrying this  designation  have a  satisfactory  capacity for
          timely  payment.  They are,  however,  somewhat more vulnerable to the
          adverse effects of changes in circumstances than obligations  carrying
          the highest designations.

B:        Issues rated "B" are regarded as having only an adequate  capacity for
          timely  payment.  However,  such  capacity  may be damaged by changing
          conditions or short-term adversities.

C:        This rating is assigned to short-term debt obligations with a doubtful
          capacity for payment.

D:        This  rating  indicates  that the  issue is either  in  default  or is
          expected to be in default upon maturity.

The  Commercial  Paper  Rating is not a  recommendation  to  purchase  or sell a
security.  The ratings are based on current information  furnished to Standard &
Poor's by the issuer and  obtained by  Standard & Poor's  from other  sources it
considers  reliable.  The ratings may be changed,  suspended,  or withdrawn as a
result of changes in or unavailability of, such information.

Standard  & Poor's  rates  notes with a  maturity  of less than  three  years as
follows:

SP-1:     A very strong,  or strong,  capacity to pay  principal  and  interest.
          Issues that possess overwhelming safety  characteristics will be given
          a "+" designation.

SP-2:     A satisfactory capacity to pay principal and interest.

SP-3:     A speculative capacity to pay principal and interest.

<PAGE>
                            PART C. OTHER INFORMATION

Item 23.  Exhibits.
- --------  ---------
               (a)  (1)  Articles of Incorporation (filed 8/31/99)
                    (2)  Articles of Amendment (filed 10/29/99)

               (b)       By-laws (filed 10/29/99)

               (c)       Specimen Share Certificate (filed 10/29/99)

               (d)  (1)  Management Agreement*
                    (2)  Sub-Advisory Agreement*

               (e)  (1)  Distribution Agreement*
                    (2)  (a) Selling Agreement (A, B & C Shares) (filed 8/31/99)
                         (b) Selling Agreement (R Shares) (filed 8/31/99)

               (f)       N/A

               (g)       Custodian Agreement*

               (h)       Transfer Agency & Shareholder Services Agreement*

               (i)       Legal Opinion (filed 10/29/99)

               (j)       Consents of Auditors (filed 10/29/99)

               (k)       Financial Statements (N/A)

               (l)       Initial Capital Agreement (filed 10/29/99)

               (m)       Rule 12b-1 Plan

                    (1)  A Share Plan*
                    (2)  B Share Plan*
                    (3)  C Share Plan*
                    (4)  R Share Plan*

               (n)       Financial Data Schedule (N/A)

               (o)       Rule 18f-3 Plan*


*    Filed herein.
**   To be filed by amendent.

Item 24.  Persons Controlled by or Under Common Control with Registrant

          Principal   Financial   Services,   Inc.  (an  Iowa   corporation)  an
          intermediate  holding company organized pursuant to Section 512A.14 of
          the Iowa Code.

          Subsidiaries   wholly-owned  by  Principal   Financial  Services, Inc.

          a.   Principal  Life  Insurance  Company (an Iowa  corporation) a life
               group, pension and individual insurance company.

          b.   Princor  Financial  Services  Corporation (an Iowa Corporation) a
               registered broker-dealer.

          c.   PFG Do Brasil LTDA (Brazil) a Brazilian holding company.

          d.   Principal Financial Services  (Australia),  Inc. (an Iowa holding
               company)  formed to facilitate the  acquisition of the Australian
               business of BT Australia.

          e.   Principal Financial Services (NZ), Inc. (an Iowa holding company)
               formed to facilitate the acquisition of the New Zealand  business
               of BT Australia.

          f.   BT  Funds  Management  (Singapore)  Limited  (a  Singapore  asset
               management company).

          g.   Principal Capital  Management  (Europe) Limited a fund management
               company.

          h.   Principal Capital Management  (Ireland) Limited a fund management
               company.

          Subsidiary wholly-owned by Princor Financial Services Corporation:

          a.   Principal   Management   Corporation  (an  Iowa   Corporation)  a
               registered investment advisor.

          Subsidiary wholly-owned by PFG Do Brasil LTDA

          a.   Brasilprev    Previdencia   Privada    S.A.(Brazil)   a   pension
               administration company.

          Subsidiary wholly-owned by Principal Financial Services (Australia),
          Inc.:

          a.   Principal  Financial  Group  (Australia)  Holdings  Pty  Ltd.  an
               Australian  holding  company  organized  in  connection  with the
               contemplated acquisition of BT Australia Funds Management.

          Subsidiary  wholly-owned  by  Principal  Financial  Group  (Australia)
          Holdings Pty Ltd:

          a.   Principal  Financial  Group  (Australia)  Pty Ltd.  an  Australia
               holding   company   organized  on  connection  the   contemplated
               acquisition of BT Australia Funds Management.

          Subsidiary  wholly-owned by Principal  Financial Group (Australia) Pty
          Ltd:

          a.   BT  International  (Australia)  Limited  (an  Australian  holding
               company).

          Subsidiary wholly-owned by BT International (Australia) Limited:

          a.   Bankers Trust Australia Limited (an Australian holding company).

          Subsidiary wholly-owned by Bankers Trust Australia Limited:

          a.   BT Australia Limited (an Australian holding company).

          Subsidiaries wholly-owned by BT Australia Limited:

          a.   Bankers  Trust Life  Limited (an  Australian  financial  services
               company).

          b.   BT Funds  Management  Limited (an Australian  financial  services
               company).

          c.   BT  Funds  Management   (International)  Limited  (an  Australian
               financial services company).

          d.   BT Tactical Asset  Management  Limited (an  Australian  financial
               services company).

          e.   BT  Securities   Limited  (an   Australian   financial   services
               company).

          f.   BT (Queensland) Pty Limited (an Australian  financial  services
               company).

          g.   BT Portfolio Services Limited (an Australian  financial  services
               company).

          h.   BT  Australia  Corporate  Services  Pty  Limited  (an  Australian
               services company).

          i.   Oniston Pty Ltd (an Australian financial services company).

          Subsidiaries wholly-owned by BT Portfolio Services Limited:

          a.   BT Custodial  Services Pty Ltd (an Australian  financial services
               company).

          b.   BT Custodians Limited (an Australian financial services company).

          c.   National  Registry  Services Pty Ltd. (an  Australian  financial
               services company).

          d.   National  Registry  Services  (WA)  Pty  Limited  (an  Australian
               financial services company).

          e.   BT  Finance  &  Investments  Pty  Ltd  (an  Australian  financial
               services company).

          Subsidiaries and wholly-owned by BT Australia  Corporate  Services Pty
          Limited:

          a.   BT Finance Pty Ltd (an Australian financial services company).

          b.   Chifley  Services Pty Limited (an Australian  financial  services
               company).

          c.   BT  Nominees  Pty  Limited  (an  Australian   financial  services
               company).

          Subsidiary organized and wholly-owned by Principal  Financial Services
          (NZ), Inc.

          a.   Principal  Financial  Group (NZ)  Limited (a New Zealand  holding
               company).

          Subsidiary  organized and  wholly-owned  by Principal  Financial Group
          (NZ) Limited:

          a.   BT  Portfolio  Service  (NZ)  Limited  (a New  Zealand  financial
               services company).

          b.   BT New Zealand Nominees Limited (a New Zealand financial services
               company).

          c.   BT  Funds  Management  (NZ)  Limited  (a  New  Zealand  financial
               services company).

          Principal Life Insurance  Company  sponsored the  organization  of the
          following mutual funds,  some of which it controls by virtue of owning
          voting securities:

               Principal  Balanced Fund, Inc.(a Maryland  Corporation)  0.14% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 6, 1999.

               Principal Blue Chip Fund, Inc.(a Maryland  Corporation)  0.78% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 6, 1999.

               Principal Bond Fund, Inc.(a Maryland Corporation) 0.63% of shares
               outstanding owned by Principal Life Insurance Company  (including
               subsidiaries and affiliates) on December 6, 1999.

               Principal  Capital  Value Fund,  Inc.  (a  Maryland  Corporation)
               23.63% of  outstanding  shares owned by Principal  Life Insurance
               Company  (including  subsidiaries and  affiliates)on  December 6,
               1999.

               Principal Cash  Management  Fund,  Inc. (a Maryland  Corporation)
               5.86% of  outstanding  shares owned by Principal  Life  Insurance
               Company  (including  subsidiaries and affiliates)  on December 6,
               1999.

               Principal  Government  Securities  Income Fund,  Inc. (a Maryland
               Corporation)  0.03% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 6, 1999.

               Principal  Growth Fund,  Inc. (a Maryland  Corporation)  0.37% of
               outstanding  shares owned by  Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 6, 1999.

               Principal High Yield Fund, Inc. (a Maryland  Corporation)  7.60%
               of shares  outstanding  owned by Principal Life Insurance Company
               (including subsidiaries and affiliates) on December 6, 1999.

               Principal  International  Emerging Markets Fund, Inc. (a Maryland
               Corporation) 37.34% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 6, 1999.

               Principal  International  Fund,  Inc.  (a  Maryland  Corporation)
               24.44% of shares  outstanding  owned by Principal  Life Insurance
               Company  (including  subsidiaries and affiliates) on December 6,
               1999.

               Principal   International   SmallCap   Fund,   Inc.  (a  Maryland
               Corporation) 34.71% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 6, 1999.

               Principal  Limited Term Bond Fund, Inc. (a Maryland  Corporation)
               20.71% of shares outstanding  owned by Principal  Life  Insurance
               Company  (including  subsidiaries and  affiliates) on December 6,
               1999.

               Principal  MidCap Fund,  Inc. (a Maryland  Corporation)  0.73% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 6, 1999

               Principal  Partners   Aggressive  Growth  Fund,  Inc.(a  Maryland
               Corporation) 42.96% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 6, 1999

               Principal Real Estate Fund, Inc. (a Maryland  Corporation) 63.30%
               of shares  outstanding  owned by Principal Life Insurance Company
               (including subsidiaries and affiliates) on December 6, 1999

               Principal SmallCap Fund, Inc.(a Maryland  Corporation)  15.15% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 6, 1999.

               Principal  Special  Markets Fund,  Inc. (a Maryland  Corporation)
               83.30%  of  shares  outstanding  of  the  International  Emerging
               Markets  Portfolio,  41.88%  of  the  shares  outstanding  of the
               International Securities Portfolio,  98.66% of shares outstanding
               of the  International  SmallCap  Portfolio and 100% of the shares
               outstanding  of the  Mortgage-Backed  Securities  Portfolio  were
               owned by Principal Life Insurance Company (including subsidiaries
               and affiliates) on December 6, 1999

               Principal  Tax-Exempt  Bond Fund,  Inc. (a Maryland  Corporation)
               0.05% of shares  outstanding  owned by Principal  Life  Insurance
               Company  (including subsidiaries and affiliates)  on December 6,
               1999.

               Principal Utilities Fund, Inc. (a Maryland  Corporation) 0.26% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 6, 1999.

               Principal Variable Contracts Fund, Inc. (a Maryland  Corporation)
               100% of shares  outstanding  of the following  Accounts  owned by
               Principal  Life  Insurance  Company and its Separate  Accounts on
               December 6, 1999: Aggressive Growth, Asset Allocation,  Balanced,
               Blue Chip, Bond, Capital Value,  Government  Securities,  Growth,
               High  Yield,  International,   International  SmallCap,  LargeCap
               Growth,  MicroCap,  MidCap,  MidCap Growth,  MidCap Value,  Money
               Market, Real Estate,  SmallCap,  SmallCap Growth,  SmallCap Value
               Stock Index 500, and Utilities.

          Subsidiaries  organized and  wholly-owned  by Principal Life Insurance
          Company:

          a.   Principal Holding Company (an Iowa Corporation) a holding company
               wholly-owned by Principal Life Insurance Company.

          b.   PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a
               life  insuranced  corporation  which offers group and  individual
               products.

          c.   Principal Development  Investors,  LLC (a Delaware Corporation) a
               limited liability company engaged in acquiring and improving real
               property through development and redevelopment.

          d.   Principal  Capital  Management,  LLC (a Delaware  Corporation)  a
               limited  liability  company that provides  investment  management
               services.

          e.   Principal Net Lease  Investors,  LLC (a Delaware  Corporation)  a
               limited liability company which operates as a buyer and seller of
               net leased investments.

          Subsidiaries wholly-owned by Principal Capital Management, LLC:

          a.   Principal Structured Investments,  LLC (a Delaware Corporation) a
               limited  liability  company  that  provides  product  development
               administration,   marketing   and   asset   management   services
               associated with stable value products together with other related
               institutional    financial   services   including    derivatives,
               asset-liability  management,  fixed income investment  management
               and ancillary money management products.

          b.   Principal  Enterprise  Capital,  LLC (a Delaware  Corporation)  a
               company engaged in the operation of nonresidential buildings.

          c.   Principal Commercial  Acceptance,  LLC (a Delaware Corporation) a
               limited  liability  company involved in purchasing,  managing and
               selling commercial real estate assets in the secondary market.

          d.   Principal Real Estate Investors,  LLC (a Delaware  Corporation) a
               registered investment advisor.

          e.   Principal  Commercial  Funding,  LLC (a Delaware  Corporation)  a
               correspondent lender and service provider for loans.

          f.   Principal Real Estate  Services,  LLC (a Delaware  Corporation) a
               limited  liability  company which acts as a property  manager and
               real estate service provider.

          Subsidiaries wholly-owned by Principal Holding Company:

          a.   Principal  Bank (a Federal  Corporation)  a  Federally  chartered
               direct delivery savings bank.

          b.   Patrician  Associates,  Inc. (a  California  Corporation)  a real
               estate development company.

          c.   Petula  Associates,  Ltd.  (an Iowa  Corporation)  a real  estate
               development company.

          d.   Principal Development Associates, Inc. (a California Corporation)
               a real estate development company.

          e.   Principal Spectrum Associates,  Inc. (a California Corporation) a
               real estate development company.

          f.   Principal  FC,  Ltd.  (an Iowa  Corporation)  a  limited  purpose
               investment corporation.

          g.   Equity FC,  Ltd.  (an Iowa  Corporation)  engaged  in  investment
               transactions  including limited partnership and limited liability
               companies.

          h.   HealthRisk   Resource  Group,   Inc.  (an  Iowa   Corporation)  a
               management services organization.

          i.   Invista  Capital   Management,   LLC  (an  Iowa   Corporation)  a
               registered investment adviser.

          j.   Principal  Residential  Mortgage,  Inc. (an Iowa  Corporation)  a
               residential mortgage loan broker.

          k.   Principal Asset Markets, Inc. (an Iowa Corporation) a residential
               mortgage loan broker.

          l.   Principal  Portfolio  Services,  Inc.  (an  Iowa  Corporation)  a
               mortgage due diligence company.

          m.   The Admar Group, Inc. (a Florida  Corporation) a national managed
               care service  organization  that  develops and manages  preferred
               provider organizations.

          n.   The Principal  Financial Group,  Inc. (a Delaware  corporation) a
               general business  corporation  established in connection with the
               new corporate identity. It is not currently active.

          o.   Principal  Marketing  Services,  Inc. (a Delaware  Corporation) a
               corporation formed to serve as an interface between marketers and
               manufacturers of financial services products.

          p.   Principal Health Care, Inc. (an Iowa Corporation) a developer and
               administrator of managed care systems.

          q.   Dental-Net,  Inc.  (an Arizona  Corporation)  holding  company of
               Employers  Dental  Services;   a  managed  dental  care  services
               organization. HMO and dental group practice.

          r.   Principal  Financial  Advisors,  Inc.  (an  Iowa  Corporation)  a
               registered investment advisor.

          s.   Delaware  Charter  Guarantee  &  Trust  Company,   d/b/a  Trustar
               Retirement  Services (a  Delaware  Corporation)  a  nondepository
               trust company.

          t.   Professional  Pensions,   Inc.  (a  Connecticut   Corporation)  a
               corporation  engaged in sales,  marketing and  administration  of
               group  insurance  plans and  serves as a record  keeper and third
               party  administrator  for various clients'  defined  contribution
               plans.

          u.   Principal  Investors  Corporation  (a New Jersey  Corporation)  a
               registered broker-dealer with the Securities Exchange Commission.
               It is not currently active.

          v.   Principal  International,  Inc. (an Iowa  Corporation)  a company
               formed for the purpose of international business development.

          Subsidiary wholly-owned by Petula Associates, Ltd.

          a.   Magnus  Properties,  Inc. (an Iowa  Corporation)  which owns real
               estate.

          Subsidiary wholly-owned by Invista Capital Management, LLC:

          a.   Principal  Capital - Invista  Trust.  (a Delaware  Corporation) a
               business   trust  and   private   investment   company   offering
               non-registered units, initially, to tax-exempt entities.

         Subsidiary wholly-owned by Principal Residential Mortgage, Inc.:

          a.   Principal  Wholesale  Mortgage,  Inc.  (an  Iowa  Corporation)  a
               brokerage and servicer of residential mortgages.

          Subsidiaries wholly-owned by The Admar Group, Inc.:

          a.   Admar  Corporation  (a  California  Corporation)  a managed  care
               services organization.

          Subsidiaries wholly-owned by Dental-Net, Inc.

          a.   Employers  Dental  Services,  Inc.  (an  Arizona  corporation)  a
               prepaid dental plan organization.

          Subsidiaries wholly-owned by Professional Pensions, Inc.:

          a.   Benefit Fiduciary Corporation (a Rhode Island corporation) serves
               as a corporate trustee for retirement trusts.

          b.   PPI Employee Benefits  Corporation (a Connecticut  corporation) a
               registered   broker-dealer  pursuant  to  Section  15(b)  of  the
               Securities  Exchange Act an a member of the National  Association
               of  Securities  Dealers  (NASD),  limited to the sale of open-end
               mutual funds and variable insurance products.

          c.   Boston  Insurance  Trust,  Inc.  (a  Massachusetts   corporation)
               authorized  by charter to serve as a trustee in  connection  with
               multiple-employer  group life insurance  trusts or  arrangements,
               and to generally  participate in the  administration of insurance
               trusts.

          Subsidiaries wholly-owned by Principal International, Inc.:

          a.   Principal  International Espana, S.A. de Seguros de Vida (a Spain
               Corporation)  a  life  insurance  company   (individual   group),
               annuities and pension.

          b.   Zao Principal International (a Russia Corporation) inactive.

          c.   Principal  International  Argentina,  S.A. (an Argentina services
               corporation).

          d.   Principal  Asset  Management  Company  (Asia) Ltd.  (Hong Kong) a
               corporation which manages pension funds.

          e.   Principal  International Asia Limited (a Hong Kong Corporation) a
               corporation operating as a regional headquarters for Asia.

          f.   Principal  Insurance  Company  (Hong  Kong)  Limited (a Hong Kong
               Corporation) group life and group pension products.

          g.   Principal Trust Company (Asia) Limited (an Asia trust company).

          h.   Principal  International de Chile,  S.A. (a Chile  Corporation) a
               holding company.

          i.   Principal  Mexico  Compania  de  Seguros,  S.A. de C.V. (a Mexico
               Corporation) a life  insurance  company  (individual  and group),
               personal accidents.

          j.   Principal Pensiones, S.A. de C.V. (a Mexico Corporation) a single
               premium annuity.

          k.   Principal Afore, S.A. de C.V. (a  Mexico Corporation), a  pension
               administration company.

          l.   Principal   Consulting   (India)   Private   Limited   (an  India
               corporation) an India consulting company.

          Subsidiary  wholly-owned by Principal  International  Espana,  S.A. de
          Seguros de Vida:

          a.   Princor  International  Espana  Sociedad  Anonima  de  Agencia de
               Seguros (a Spain Corporation) an insurance agency.

          Subsidiary  wholly-owned  by Principal  International  (Asia)  Limited
          (Hong Kong):

          a.   BT Funds Management  (Asia) Limited (a Hong Kong  Corporation) an
               asset management company.

          Subsidiaries wholly-owned by Principal International Argentina, S.A.:

          a.   Principal  Retiro  Compania  de  Seguros  de  Retiro,   S.A.  (an
               Argentina  Corporation)  an individual  annuity/employee  benefit
               company.

          b.   Principal   Life   Compania  de  Seguros,   S.A.  (an   Argentina
               Corporation) a life insurance company.

          Subsidiary wholly-owned by Principal International de Chile, S.A.:

          a.   Principal  Compania  de  Seguros  de Vida  Chile  S.A.  (a  Chile
               Corporation) life insurance and annuity company.

          Subsidiary wholly-owned by Principal Compania de Seguros de Vida Chile
          S.A.:

          a.   Andueza  &  Principal   Creditos   Hipotecarios   S.A.  (a  Chile
               Corporation) a residential mortgage company.

          Subsidiary wholly-owned by Principal Afore, S.A. de C.V.:

          a.   Siefore  Principal,  S.A.  de  C.V.  (a  Mexico  Corporation)  an
               investment fund company.

tem 25.       Indemnification

     Under Section 2-418 of the Maryland  General  Corporation Law, with respect
to any  proceedings  against a present  or former  director,  officer,  agent or
employee (a "corporate  representative")  of the Registrant,  the Registrant may
indemnify the corporate representative against judgments,  fines, penalties, and
amounts paid in settlement, and against expenses,  including attorneys' fees, if
such  expenses  were  actually  incurred  by  the  corporate  representative  in
connection with the proceeding, unless it is established that:

        (i)    The act or omission of the corporate representative was
               material to the matter giving rise to the proceeding; and

               1.    Was committed in bad faith; or

               2.    Was the result of active and deliberate dishonesty; or

       (ii)    The  corporate   representative  actually  received  an  improper
               personal benefit in money, property, or services; or

      (iii)    In  the  case  of  any   criminal   proceeding,   the   corporate
               representative  had  reasonable  cause to believe that the act or
               omission was unlawful.

     If a proceeding is brought by or on behalf of the Registrant,  however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant.  Under the  Registrant's  Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the  Registrant to the fullest  extent  permitted  under Maryland law and the
Investment  Company Act of 1940.  Reference is made to Article VI,  Section 7 of
the Registrant's  Articles of Incorporation,  Article 12 of Registrant's  Bylaws
and Section 2-418 of the Maryland General Corporation Law.

     The  Registrant has agreed to indemnify,  defend and hold the  Distributor,
its officers and directors,  and any person who controls the Distributor  within
the meaning of Section 15 of the Securities Act of 1933,  free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating  or defending such claims,  demands or liabilities and any
counsel  fees  incurred in  connection  therewith)  which the  Distributor,  its
officers,  directors  or  any  such  controlling  person  may  incur  under  the
Securities  Act of 1933,  or under  common law or  otherwise,  arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material  fact  required  to be stated in either  thereof or
necessary  to make the  statements  in either  thereof  not  misleading,  except
insofar as such claims,  demands,  liabilities  or expenses  arise out of or are
based  upon any such  untrue  statement  or  omission  made in  conformity  with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus:  provided,  however, that
this indemnity  agreement,  to the extent that it might require indemnity of any
person who is also an officer or director of the  Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer,  director or controlling person unless
a court  of  competent  jurisdiction  shall  determine,  or it shall  have  been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event  shall  anything  contained  herein be so  construed  as to protect the
Distributor  against any liability to the Registrant or to its security  holders
to which the  Distributor  would  otherwise  be  subject  by  reason of  willful
misfeasance,  bad faith, or gross negligence,  in the performance of its duties,
or by reason of its reckless  disregard of its obligations under this Agreement.
The  Registrant's  agreement  to  indemnify  the  Distributor,  its officers and
directors and any such controlling person as aforesaid is expressly  conditioned
upon the Registrant  being promptly  notified of any action brought  against the
Distributor,  its officers or directors,  or any such controlling  person,  such
notification to be given by letter or telegram addressed to the Registrant.

Item 26.  Business or Other Connection of Investment Adviser

     A complete  list of the officers and directors of the  investment  adviser,
Principal Management Corporation,  are set out below. This list includes some of
the same people  (designated by an *), who are serving as officers and directors
of the Registrant.  For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.

     A complete  list of the officers and directors of the  investment  adviser,
Principal Management Corporation,  are set out below. This list includes some of
the same people  (designated by an *), who are serving as officers and directors
of the Registrant.  For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.

   John E. Aschenbrenner        Principal         Senior Vice President
   Director                     Financial Group   Principal Life Insurance
                                                  Company

   Craig R. Barnes              Same              President & Chief Executive
   Vice President                                 Officer, Invista Capital
                                                  Management LLC

  *Craig L. Bassett             Same              See Part B
   Treasurer

  *Michael J. Beer              Same              See Part B
   Executive Vice President

   David J. Drury               Same              Chief Executive Officer
   Director                                       and Chairman of the Board
                                                  Principal Life
                                                  Insurance Company

  *Ralph C. Eucher              Same              See Part B
   President and Director

  *Arthur S. Filean             Same              See Part B
   Vice President

   Dennis P. Francis            Same              Senior Vice President
   Director                                       Principal Life
                                                  Insurance Company

   Paul N. Germain              Same              Vice President -
   Vice President -                               Mutual Fund Operations
   Mutual Fund Operations                         Princor Financial Services
                                                  Corporation

  *Ernest H. Gillum             Same              See Part B
   Vice President - Compliance
   & Product Development

   Thomas J. Graf               Same              Senior Vice President
   Director                                       Principal Life
                                                  Insurance Company

  *J. Barry Griswell            Same              See Part B
   Chairman of the Board
   and Director

   Joyce N. Hoffman             Same              Vice President and
   Vice President and                             Corporate Secretary
   Corporate Secretary                            Principal Life
                                                  Insurance Company

   Ellen Z. Lamale              Same              Vice President & Chief Actuary
   Director                                       Principal Life Insurance
                                                  Company

   Julia M. Lawler              Same              Second Vice President
   Director                                       Principal Life Insurance
                                                  Company

   Gregg R. Narber              Same              Senior Vice President and
   Director                                       General Counsel
                                                  Principal Life
                                                  Insurance Company

   Richard L. Prey              Same              Senior Vice President
   Director                                       Principal Life Insurance
                                                  Company

   Layne A. Rasmussen           Same              Controller
   Controller -                                   Princor Financial Services
   Mutual Funds                                   Corporation

   Elizabeth R. Ring            Same              Controller- Broker Dealer
   Controller                                     Operations
                                                  Princor Financial Services
                                                  Corporation

  *Michael D. Roughton          Same              See Part B
   Counsel

   Jean B. Schustek             Same              Product Compliance Officer -
   Product Compliance Officer -                   Princor Financial Services
   Registered Products                            Corporation

     Principal Management  Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Balanced Fund, Inc., Principal Blue
Chip Fund, Inc.,  Principal Bond Fund, Inc., Principal Capital Value Fund, Inc.,
Principal Cash Management Fund, Inc.,  Principal  Government  Securities  Income
Fund,  Inc.,  Principal  Growth Fund,  Inc.,  Principal  High Yield Fund,  Inc.,
Principal  International  Emerging Markets Fund, Inc.,  Principal  International
Fund, Inc.,  Principal  International  SmallCap Fund, Inc.,  Principal  LargeCap
Stock Index Fund, Inc., Principal Limited Term Bond Fund, Inc., Principal MidCap
Fund, Inc.,  Principal Partners Aggressive Growth Fund, Inc., Principal Partners
LargeCap  Growth Fund,  Inc.,  Principal  Partners  MidCap  Growth  Fund,  Inc.,
Principal  Real Estate Fund,  Inc.,  Principal  SmallCap Fund,  Inc.,  Principal
Special Markets Fund,  Inc.,  Principal  Tax-Exempt Bond Fund,  Inc.,  Principal
Utilities Fund, Inc.,  Principal Variable Contracts Fund, Inc. - funds sponsored
by Principal Life Insurance Company.

Item 27.       Principal Underwriters

     (a) Princor  Financial  Services  Corporation,  principal  underwriter  for
Registrant,  acts as principal  underwriter for,  Principal Balanced Fund, Inc.,
Principal Blue Chip Fund,  Inc.,  Principal Bond Fund, Inc.,  Principal  Capital
Value Fund, Inc.,  Principal Cash Management Fund,  Inc.,  Principal  Government
Securities Income Fund, Inc.,  Principal Growth Fund, Inc., Principal High Yield
Fund, Inc.,  Principal  International  Emerging  Markets Fund,  Inc.,  Principal
International Fund, Inc., Principal International SmallCap Fund, Inc., Principal
LargeCap  Stock  Index  Fund,  Inc.,  Principal  Limited  Term Bond Fund,  Inc.,
Principal MidCap Fund, Inc.,  Principal  Partners  Aggressive Growth Fund, Inc.,
Principal Partners LargeCap Growth Fund, Inc.,  Principal Partners MidCap Growth
Fund,  Inc.,  Principal Real Estate Fund, Inc.,  Principal  SmallCap Fund, Inc.,
Principal  Special Markets Fund,  Inc.,  Principal  Tax-Exempt Bond Fund,  Inc.,
Principal Utilities Fund, Inc.,  Principal Variable Contracts Fund, Inc. and for
variable annuity  contracts  participating  in Principal Life Insurance  Company
Separate  Account B, a registered  unit  investment  trust for retirement  plans
adopted by public school systems or certain tax-exempt organizations pursuant to
Section  403(b) of the Internal  Revenue  Code,  Section 457  retirement  plans,
Section 401(a) retirement plans,  certain non- qualified  deferred  compensation
plans and Individual Retirement Annuity Plans adopted pursuant to Section 408 of
the Internal  Revenue Code, and for variable life insurance  contracts issued by
Principal Life Insurance  Company Variable Life Separate  Account,  a registered
unit investment trust.

     (b)      (1)                 (2)                            (3)
                               Positions
                               and offices                    Positions and
  Name and principal           with principal                 offices with
  business address             underwriter                    registrant

  John E. Aschenbrenner        Director                      Director
  Principal
  Financial Group
  Des Moines, IA  50392

  Robert W. Baehr              Marketing Services            None
  Principal                    Officer
  Financial Group
  Des Moines, IA 50392

  Craig L. Bassett             Treasurer                     Treasurer
  Principal
  Financial Group
  Des Moines, IA 50392

  Michael J. Beer              Executive Vice President      Financial Officer
  Principal
  Financial Group
  Des Moines, IA 50392

  Jerald L. Bogart             Insurance License Officer     None
  Principal
  Financial Group
  Des Moines, IA 50392

  David J. Drury               Director                      None
  Principal
  Financial Group
  Des Moines, IA 50392

  Ralph C. Eucher              Director and                  President and
  Principal                    President                     Director
  Financial Group
  Des Moines, IA  50392

  Arthur S. Filean             Vice President                Vice President and
  Principal                                                  Secretary
  Financial Group
  Des Moines, IA 50392

  Dennis P. Francis            Director                      None
  Principal
  Financial Group
  Des Moines, IA 50392

  Paul N. Germain              Vice President-               None
  Principal                    Mutual Fund Operations
  Financial Group
  Des Moines, IA 50392

  Ernest H. Gillum             Vice President-               Assistant Vice
  Principal                    Compliance and Product        President
  Financial Group              Development
  Des Moines, IA 50392

  Thomas J. Graf               Director                      None
  Principal
  Financial Group
  Des Moines, IA 50392

  J. Barry Griswell            Director and                  Director and
  Principal                    Chairman of the               Chairman of the
  Financial Group              Board                         Board
  Des Moines, IA 50392

  Susan R. Haupts              Marketing Officer             None
  Principal
  Financial Group
  Des Moines, IA 50392

  Joyce N. Hoffman             Vice President and            None
  Principal                    Corporate Secretary
  Financial Group
  Des Moines, IA 50392

  Kraig L. Kuhlers             Marketing Officer             None
  Principal
  Financial Group
  Des Moines, IA 50392

  Ellen Z. Lamale              Director                      None
  Principal
  Financial Group
  Des Moines, IA  50392

  Julia M. Lawler              Director                      None
  Principal
  Financial Group
  Des Moines, IA  50392

  John R. Lepley               Senior Vice                   None
  Principal                    President - Marketing
  Financial Group              and Distribution
  Des Moines, IA 50392

  Gregg R. Narber              Director                      None
  Principal
  Financial Group
  Des Moines, IA 50392

  Kelly A. Paul                Systems & Technology          None
  Principal                    Officer
  Financial Group
  Des Moines, IA 50392

  Elise M. Pilkington          Assistant Director -          None
  Principal                    Retirement Consulting
  Financial Group
  Des Moines, IA  50392

  Richard L. Prey              Director                      None
  Principal
  Financial Group
  Des Moines, IA  50392

  Layne A. Rasmussen           Controller-Mutual Funds       None
  Principal
  Financial Group
  Des Moines, IA 50392

  Martin R. Richardson         Operations Officer-           None
  Principal                    Broker/Dealer Services
  Financial Group
  Des Moines, IA  50392

  Elizabeth R. Ring            Controller                    None
  Principal
  Financial Group
  Des Moines, IA 50392

  Michael D. Roughton          Counsel                       Counsel
  Principal
  Financial Group
  Des Moines, IA 50392

  Jean B. Schustek             Product Compliance Officer-   None
  Principal                    Registered Products
  Financial Group
  Des Moines, IA 50392

  Kyle R. Selberg              Vice President-               None
  Principal                    Marketing
  Financial Group
  Des Moines, IA 50392

  Minoo Spellerberg            Compliance Officer            None
  Principal
  Financial Group
  Des Moines, IA  50392

  Roger C. Stroud              Assistant Director-           None
  Principal                    Marketing
  Financial Group
  Des Moines, IA 50392

               (c)    Inapplicable.


Item 28.       Location of Accounts and Records

     All accounts, books or other documents of the Registrant are located at the
offices of the  Registrant  and its  Investment  Adviser in the  Principal  Life
Insurance  Company home office  building,  The Principal  Financial  Group,  Des
Moines, Iowa 50392.

Item 29.       Management Services

               Inapplicable.

Item 30.       Undertakings

               Indemnification

     Reference is made to Item 27 above,  which  discusses  circumstances  under
which  directors  and officers of the  Registrant  shall be  indemnified  by the
Registrant  against certain  liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.

     Notwithstanding  the provisions of Registrant's  Articles of  Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors,  officers and controlling  persons of the
Registrant,  pursuant to the foregoing  provisions or otherwise,  the Registrant
has been advised that in the opinion of the Securities  and Exchange  Commission
such  indemnification  is against  public policy as expressed in the Act and is,
therefore,  unenforceable. In the event that a claim for indemnification against
such liabilities  (other than the payment by the Registrant of expenses incurred
or paid by a director,  officer or controlling person of the Registrant,  in the
successful  defense of any  action,  suit or  proceeding)  is  asserted  by such
director,  officer or controlling  person of the Registrant,  in connection with
the securities being  registered,  the Registrant will, unless in the opinion of
its counsel the matter has been settled by  controlling  precedent,  submit to a
court of appropriate  jurisdiction the question whether such  indemnification by
it is against  public policy as expressed in the Act and will be governed by the
final adjudication of such issue

               Shareholder Communications

     Registrant  hereby  undertakes  to call a meeting of  shareholders  for the
purpose of voting upon the question of removal of a director or  directors  when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the  provisions  of Section  16(c) of the  Investment  Company  Act of 1940
relating to shareholder communications

               Delivery of Annual Report to Shareholders

     The  registrant  hereby  undertakes  to  furnish  each  person  to  whom  a
prospectus  is  delivered a copy of the  registrant's  latest  annual  report to
shareholders, upon request and without charge.
<PAGE>
                                   SIGNATURES


Pursuant to the  requirements  of the  Securities Act of 1933 and the Investment
Company  Act of 1940  the  Registrant  has duly  caused  this  Amendment  to the
Registration Statement to be signed on its behalf by the undersigned,  thereunto
duly  authorized in the City of Des Moines and State of Iowa, on the 29th day of
December, 1999.

                             Principal Partners Aggressive Growth Fund, Inc.
                                            (Registrant)


                             By          /s/ R. C. Eucher
                                --------------------------------------
                                 R. C. Eucher
                                 President and Director

Attest:

/s/ A. S. Filean
- --------------------------------------
A. S. Filean
Vice President and Secretary

Pursuant to the requirement of the Securities Act of 1933, this Amendment to the
Registration  Statement  has been signed below by the  following  persons in the
capacities and on the dates indicated.

       Signature                         Title                          Date



/s/ R. C. Eucher
_____________________________      President and Director
R. C. Eucher                       (Principal Executive Officer)      12/29/1999



  (J. B. Griswell)*
_____________________________      Director and
J. B. Griswell                     Chairman of the Board              12/29/1999


/s/ M. J. Beer
_____________________________      Financial Officer (Principal
M. J. Beer                         Financial and Accounting Officer)  12/29/1999


   (J. E. Aschenbrenner)*
_____________________________      Director
J. E. Aschenbrenner                                                   12/29/1999


   (J. D. Davis)*
_____________________________      Director
J. D. Davis                                                           12/29/1999


   (P. A. Ferguson)*
_____________________________      Director
P. A. Ferguson                                                        12/29/1999


   (R. W. Gilbert)*
_____________________________      Director
R. W. Gilbert                                                         12/29/1999


   (W. C. Kimball)*
_____________________________      Director
W. C. Kimball                                                         12/29/1999


   (B. A. Lukavsky)*
_____________________________      Director
B. A. Lukavsky                                                        12/29/1999




                                         By    /s/ R. C. Eucher
                                           -------------------------------------
                                           R. C. Eucher
                                           President and Director

                                        *Pursuant to Powers of Attorney
                                         Previously Filed or Included


                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton,  E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's  true and lawful  attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name  of the  undersigned,  to  execute  and  file  any  documents  relating  to
registration  under the Securities Act of 1933 and the Investment Company Act of
1940  with  respect  to  open-end  management   investment  companies  currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance  Company,  and any and all amendments  thereto and reports  thereunder
with all exhibits and all  instruments  necessary or  appropriate  in connection
therewith,   each  of  said  attorneys-in-fact  and  agents  and  his  or  their
substitutes  being empowered to act with or without the others or other,  and to
have  full  power  and  authority  to do or  cause to be done in the name and on
behalf of the undersigned  each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person;  hereby ratifying and confirming
all that said  attorneys-in-fact  and agents, or any of them, may do or cause to
be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ John E. Aschenbrenner
                                             ____________________________
                                                 J. E. Aschenbrenner
<PAGE>



                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton,  E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's  true and lawful  attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name  of the  undersigned,  to  execute  and  file  any  documents  relating  to
registration  under the Securities Act of 1933 and the Investment Company Act of
1940  with  respect  to  open-end  management   investment  companies  currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance  Company,  and any and all amendments  thereto and reports  thereunder
with all exhibits and all  instruments  necessary or  appropriate  in connection
therewith,   each  of  said  attorneys-in-fact  and  agents  and  his  or  their
substitutes  being empowered to act with or without the others or other,  and to
have  full  power  and  authority  to do or  cause to be done in the name and on
behalf of the undersigned  each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person;  hereby ratifying and confirming
all that said  attorneys-in-fact  and agents, or any of them, may do or cause to
be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ James D. Davis
                                             ____________________________
                                                 J. D. Davis



<PAGE>



                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints J. B. Griswell,  M. D. Roughton,
E. H.  Gillum and A. S. Filean and each of them (with full power to each of them
to act alone),  the undersigned's  true and lawful  attorney-in-fact  and agent,
with full power of  substitution  to each,  for and on behalf and in the name of
the  undersigned,  to execute and file any  documents  relating to  registration
under the  Securities  Act of 1933 and the  Investment  Company Act of 1940 with
respect to open-end management investment companies currently organized or to be
organized in the future which are sponsored by Principal Life Insurance Company,
and any and all amendments  thereto and reports thereunder with all exhibits and
all instruments necessary or appropriate in connection  therewith,  each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other,  and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned  each and every
act and thing  necessary or  appropriate  to be done in order to effectuate  the
same, as fully to all intents and purposes as the undersigned  might or could do
in person;  hereby ratifying and confirming all that said  attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ Ralph C. Eucher
                                             ____________________________
                                                 R. C. Eucher



<PAGE>
                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton,  E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's  true and lawful  attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name  of the  undersigned,  to  execute  and  file  any  documents  relating  to
registration  under the Securities Act of 1933 and the Investment Company Act of
1940  with  respect  to  open-end  management   investment  companies  currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance  Company,  and any and all amendments  thereto and reports  thereunder
with all exhibits and all  instruments  necessary or  appropriate  in connection
therewith,   each  of  said  attorneys-in-fact  and  agents  and  his  or  their
substitutes  being empowered to act with or without the others or other,  and to
have  full  power  and  authority  to do or  cause to be done in the name and on
behalf of the undersigned  each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person;  hereby ratifying and confirming
all that said  attorneys-in-fact  and agents, or any of them, may do or cause to
be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ P. A. Ferguson
                                             ____________________________
                                                 P. A. Ferguson



<PAGE>
                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton,  E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's  true and lawful  attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name  of the  undersigned,  to  execute  and  file  any  documents  relating  to
registration  under the Securities Act of 1933 and the Investment Company Act of
1940  with  respect  to  open-end  management   investment  companies  currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance  Company,  and any and all amendments  thereto and reports  thereunder
with all exhibits and all  instruments  necessary or  appropriate  in connection
therewith,   each  of  said  attorneys-in-fact  and  agents  and  his  or  their
substitutes  being empowered to act with or without the others or other,  and to
have  full  power  and  authority  to do or  cause to be done in the name and on
behalf of the undersigned  each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person;  hereby ratifying and confirming
all that said  attorneys-in-fact  and agents, or any of them, may do or cause to
be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ Richard W. Gilbert
                                             ____________________________
                                                 R. W. Gilbert



<PAGE>
                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, M. D. Roughton, E.
H.  Gillum and A. S. Filean and each of them (with full power to each of them to
act alone), the undersigned's true and lawful  attorney-in-fact  and agent, with
full  power of  substitution  to each,  for and on behalf and in the name of the
undersigned,  to execute and file any documents  relating to registration  under
the Securities  Act of 1933 and the Investment  Company Act of 1940 with respect
to  open-end  management  investment  companies  currently  organized  or  to be
organized in the future which are sponsored by Principal Life Insurance Company,
and any and all amendments  thereto and reports thereunder with all exhibits and
all instruments necessary or appropriate in connection  therewith,  each of said
attorneys-in-fact and agents and his or their substitutes being empowered to act
with or without the others or other,  and to have full power and authority to do
or cause to be done in the name and on behalf of the undersigned  each and every
act and thing  necessary or  appropriate  to be done in order to effectuate  the
same, as fully to all intents and purposes as the undersigned  might or could do
in person;  hereby ratifying and confirming all that said  attorneys-in-fact and
agents, or any of them, may do or cause to be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ J. Barry Griswell
                                             ____________________________
                                                 J. B. Griswell



<PAGE>
                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton,  E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's  true and lawful  attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name  of the  undersigned,  to  execute  and  file  any  documents  relating  to
registration  under the Securities Act of 1933 and the Investment Company Act of
1940  with  respect  to  open-end  management   investment  companies  currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance  Company,  and any and all amendments  thereto and reports  thereunder
with all exhibits and all  instruments  necessary or  appropriate  in connection
therewith,   each  of  said  attorneys-in-fact  and  agents  and  his  or  their
substitutes  being empowered to act with or without the others or other,  and to
have  full  power  and  authority  to do or  cause to be done in the name and on
behalf of the undersigned  each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person;  hereby ratifying and confirming
all that said  attorneys-in-fact  and agents, or any of them, may do or cause to
be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ W. C. Kimball
                                             ____________________________
                                                 W. C. Kimball
<PAGE>



                                POWER OF ATTORNEY

The undersigned hereby constitutes and appoints R. C. Eucher, J. B. Griswell, M.
D. Roughton,  E. H. Gillum and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's  true and lawful  attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name  of the  undersigned,  to  execute  and  file  any  documents  relating  to
registration  under the Securities Act of 1933 and the Investment Company Act of
1940  with  respect  to  open-end  management   investment  companies  currently
organized or to be organized in the future which are sponsored by Principal Life
Insurance  Company,  and any and all amendments  thereto and reports  thereunder
with all exhibits and all  instruments  necessary or  appropriate  in connection
therewith,   each  of  said  attorneys-in-fact  and  agents  and  his  or  their
substitutes  being empowered to act with or without the others or other,  and to
have  full  power  and  authority  to do or  cause to be done in the name and on
behalf of the undersigned  each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person;  hereby ratifying and confirming
all that said  attorneys-in-fact  and agents, or any of them, may do or cause to
be done by virtue hereof.

IN WITNESS  WHEREOF,  the undersigned has hereunto set his hand this 13th day of
December, 1999.


                                             /s/ B. A. Lukavsky
                                             ____________________________
                                                 B. A. Lukavsky

                              MANAGEMENT AGREEMENT

     AGREEMENT  to be  effective  October 27,  1999,  by and  between  PRINCIPAL
PARTNERS  AGGRESSIVE  GROWTH  FUND,  INC., a Maryland  corporation  (hereinafter
called the "Fund") and PRINCIPAL  MANAGEMENT  CORPORATION,  an Iowa  corporation
(hereinafter called "the Manager").

                              W I T N E S S E T H:

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

     (a) Certificate of Incorporation of the Fund;

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

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

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

 1.  INVESTMENT ADVISORY SERVICES

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

     (a) Provide investment research, advice and supervision;

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

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

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

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

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

 2.  CORPORATE ADMINISTRATIVE SERVICES

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

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

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

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

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

 3.  RESERVED RIGHT TO DELEGATE DUTIES AND SERVICES TO OTHERS

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

 4.  EXPENSES BORNE BY THE MANAGER

     The Manager will pay:

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

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

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

 5.  COMPENSATION OF THE MANAGER BY FUND

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

                               0.90% on all assets

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

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

 6.  SERVICES FURNISHED BY THE MANAGER

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

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

 7.  EXPENSES BORNE BY FUND

     The Fund will pay:

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

     (b) Portfolio brokerage fees and incidental brokerage expenses;

     (c) Interest;

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

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

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

     (g) The cost of meetings of shareholders; and

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

 8.  AVOIDANCE OF INCONSISTENT POSITION

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

 9.  LIMITATION OF LIABILITY OF THE MANAGER

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

10.  DURATION AND TERMINATION OF THIS AGREEMENT

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

11.  AMENDMENT OF THIS AGREEMENT

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

12.  ADDRESS FOR PURPOSE OF NOTICE

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

13.  MISCELLANEOUS

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

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

                          PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.


                          By /s/Arthur S. Filean
                               Arthur S. Filean, Vice President

                          PRINCIPAL MANAGEMENT CORPORATION


                          By /s/Ralph C. Eucher
                              Ralph C. Eucher, President



                 PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
                             SUB-ADVISORY AGREEMENT


AGREEMENT executed as of the 27th day of October, 1999, by and between PRINCIPAL
MANAGEMENT CORPORATION,  an Iowa Corporation  (hereinafter called "the Manager")
and MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC.
(hereinafter called "the Sub-Advisor").

                              W I T N E S S E T H:

WHEREAS, the Manager is the manager and investment adviser to Principal Partners
Aggressive Growth 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  the  Sub-Advisor  to furnish it with
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") between the Manager
          and the Fund;

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

     (c) The Fund's Articles of Incorporation and By-laws;

NOW,  THEREFORE,  in  consideration of the promises 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 the Fund,  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 Fund.

         (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 the  Fund  consistent  with  the  Fund=s  investment
              objective and policies as set forth in the Registration Statement,
              as may be amended from time to time.

         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
              Articles of  Incorporation  and Bylaws and the requirements of the
              1940  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 the
              Fund's 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 Fund 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 Fund. Except for expenses
              specifically  assumed  or  agreed  to be paid by the  Sub-Advisor
              under this Agreement, the Sub-Advisor shall not be liable for any
              expenses   of  the  Manager  or  the  Fund   including,   without
              limitation,  (i) interest and taxes,  (ii) brokerage  commissions
              and  other  costs  in  connection  with the  purchase  or sale of
              securities or other  investment  instruments  with respect to the
              Fund, and (iii) custodian fees and expenses.

         (h)  Select  brokers  and dealers to effect all  transactions  for the
              Fund (which may include  brokers or dealers  affiliated  with the
              Sub-Advisor,  provided such  transactions  comply with applicable
              requirements under the 1940 Act), place all necessary orders with
              brokers, dealers, or issuers, and negotiate brokerage commissions
              if applicable.  To the extent  consistent  with  applicable  law,
              purchase  or sell  orders  for the  Fund may be  aggregated  with
              contemporaneous  purchase or sell orders of other  clients of the
              Sub-Advisor. The Sub-Advisor shall use its best efforts to obtain
              execution  of  transactions  for the  Fund  at  prices  that  are
              advantageous  to  the  Fund  and at  commission  rates  that  are
              reasonable in relation to the benefits received.

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

         (j)  Provide  to the  Manager a copy of its Form ADV as filed  with the
              Securities and Exchange Commission,  as amended from time to time,
              and a list of the  persons  whom the  Sub-Advisor  wishes  to have
              authorized to give written and/or oral  instructions to custodians
              of assets of the Fund.

     3.  Compensation

         As full compensation for all services rendered and obligations  assumed
         by the  Sub-Advisor  hereunder  with  respect to the Fund,  the Manager
         shall pay the  compensation  specified in Appendix A to this Agreement.
         Although the Manager may from time to time waive the compensation it is
         entitled to receive  from the Fund,  such waiver will have no effect on
         the  Manager's  obligation  to pay  the  Sub-Advisor  the  compensation
         provided for herein.

     4.  Liability of Sub-Advisor

         Neither the Sub-Advisor nor any of its directors, officers or employees
         shall be liable to the Manager, the Fund or any shareholder of the Fund
         for any loss suffered by the Manager,  the Fund or any  shareholder  of
         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.  The Manager  shall hold harmless and indemnify
         the  Sub-Advisor  for any loss,  liability,  cost,  damage  or  expense
         (including  reasonable attorneys fees and costs) arising from any claim
         or demand by any past or  present  shareholder  of the Fund that is not
         based upon the obligations of the Sub-Advisor  with respect to the Fund
         under this  Agreement.  The  Manager  acknowledges  and agrees that the
         Sub-Advisor makes no  representation  or warranty,  express or implied,
         that any level of performance or investment results will be achieved by
         the Fund or that the Fund will perform  comparably with any standard or
         index,  including other clients of the  Sub-Advisor,  whether public or
         private.

     5.  Supplemental Arrangements

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

     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 become  effective as of the date of execution and,
         unless otherwise  terminated,  shall remain in force for two years from
         the date of execution and 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 a vote of a majority of the  directors of the Fund who are not
         interested  persons of the Manager,  Principal 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 1940 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  or  upon
         termination of the Management Agreement. In interpreting the provisions
         of this  Section 7, the  definitions  contained  in Section 2(a) of the
         1940  Act  (particularly   the  definitions  of  "interested   person,"
         "assignment" and "voting security") shall be applied.

     8.  Amendment of this Agreement

         This  Agreement  may be  amended  at any time by mutual  consent of the
         parties,  provided that, if required by law, such amendment  shall also
         have  been  approved  by  vote  of the  holders  of a  majority  of the
         outstanding  voting securities of the Fund and by vote of a majority of
         the  Directors  of the  Fund  who are  not  interested  persons  of the
         Manager, the Sub-Advisor,  Principal 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, NY 10020.

         (c)  Each  party  will  promptly  notify  the other in  writing of the
              occurrence of any of the following events:

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

              (2) the  party 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.

         (e)  No written  materials naming or relating to the  Sub-Advisor,  its
              employees  or  its  affiliated  companies,  other  than  materials
              provided  or  approved  by the  Sub-Advisor,  shall be used by the
              Manager,  the Fund or their  affiliates  in offering or  marketing
              shares of the Fund.

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

                                PRINCIPAL MANAGEMENT CORPORATION


                                By /s/A. S. Filean
                                   A. S. Filean, Vice President


                                MORGAN STANLEY DEAN WITTER INVESTMENT
                                MANAGEMENT INC.

                                By /s/Philip A. Friedman
                                     Philip A. Friedman


                                 Attachment I-1

                                   APPENDIX A


     The  Sub-Advisor  shall serve as investment  sub-advisor for the Fund. With
respect to the Fund, 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 $200 million.........................0.30%
     Next $100 million..........................0.25%
     Thereafter.................................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.


                             DISTRIBUTION AGREEMENT


Agreement to be effective  October 27, 1999, by and between  PRINCIPAL  PARTNERS
AGGRESSIVE  GROWTH FUND,  INC., a Maryland  corporation  (hereinafter  sometimes
called  the  "Fund")  and  PRINCOR  FINANCIAL  SERVICES  CORPORATION,   an  Iowa
corporation (Hereinafter sometimes called the "Distributor").

                              W I T N E S S E T H:

WHEREAS,  The Fund and the Distributor  wish to enter into an agreement  setting
forth  the  terms  upon  which  the  Distributor  will  act as  underwriter  and
distributor of the Fund.

NOW,  THEREFORE,  in  consideration  of the premises  and the mutual  agreements
herein  contained,  the Fund hereby appoints the Distributor to act as principal
underwriter  (as such term is  defined  in Section  2(a)(29)  of the  Investment
Company  Act of 1940 (as  amended)  of the shares of  Capital  Stock of the Fund
(hereinafter  sometimes call "shares"),  and the  distributor  agrees to act and
perform the duties and functions of underwriter in the manner and subject to the
conditions hereinafter set forth.

1.      SOLICITATION OF ORDERS

        The  Distributor  will use its best efforts (but only in states where it
        may lawfully do so) to obtain from  investors  unconditional  orders for
        shares  authorized  for  issue  by the  Fund and  registered  under  the
        Securities Act of 1933, as amended,  provided the Distributor may in its
        own  discretion  refuse to accept orders for shares from any  particular
        applicant.  The  Distributor  does not  undertake  to sell any  specific
        number of shares of the Fund.

2.      SALE OF SHARES

        The  Distributor  is  authorized  to sell as agent on behalf of the Fund
        authorized shares of the Fund by accepting  unconditional  orders placed
        with the  Distributor by investors in states wherever sales may lawfully
        be made.

3.      PUBLIC OFFERING PRICE

        Except as limited by  paragraphs 6 and 7 hereof,  all shares of the Fund
        sold to investors by the  Distributor as agent for the Fund will be sold
        for the basic retail price, which basic retail price shall be the public
        offering  price  applicable to each purchase as from time to time stated
        in the current prospectus of the Fund.

4.      COMMISSIONS

        The  Distributor  shall  receive a  commission  equal to the  difference
        between the basic  retail  price and the "net asset value" of the Fund's
        shares sold  through the  Distributor  subject to a sales  charge at the
        basic retail price.  The term, "net asset value," as used herein,  means
        said  value as  determined  either as of the close of trading of the New
        York  Stock  Exchange  on the day an order  for  purchase  of  shares is
        accepted  or as of such  other  time as may be in  accordance  with  any
        provision of the 1940  Investment  Company  Act, any rule or  regulation
        thereunder,  or any rule or regulation made or adopted by any securities
        association  registered  under the 1934 Securities  Exchange Act (all as
        the  Distributor  may  determine)  or as of such  time as the  Board  of
        Directors  or  duly  authorized  officers  or  agents  of the  Fund  may
        determine  in  the  manner   provided  in  the  Fund's   Certificate  of
        Incorporation  or  Bylaws  as from  time to time  amended.  If any  such
        commission is received by the Fund,  it will pay such  commission to the
        Distributor. In addition, the Distributor will be paid the entire amount
        of any contingent deferred sales charge imposed and paid by shareholders
        upon the  redemption  or repurchase of the Fund's shares as set forth in
        the Fund's  prospectus,  subject to any waivers or  reductions  in sales
        charge that may be disclosed in the prospectus.  The Distributor may pay
        its agents  and  employees  such  compensation,  allow to  dealers  such
        concessions,   and  allow  (and  authorize  dealers  to  re-allow)  such
        discounts to purchasers,  as the  Distributor may determine from time to
        time. The Distributor may also purchase as principal  shares of the Fund
        at "net asset value" and sell such shares at the public offering price.

5.      DELIVERY OF PAYMENTS AND ISSUANCE OF SHARES

        The  Distributor  will deliver to the Fund all payments made pursuant to
        orders  accepted  by  the  Distributor   upon  receipt  thereof  by  the
        Distributor in its principal place of business.

        After  payment the Fund will issue shares of Capital  Stock by crediting
        to a  stockholder  account in such names and such manner as specified in
        the application or order relating to such shares.  Certificates  will be
        issued only upon request by the shareholder.

6.      SALES OF SHARES TO CERTAIN CLASSES OF INVESTORS OR TRANSACTIONS

        The sale price of Class A shares of the Fund will reflect the  scheduled
        variations in, or elimination  of, the sales load to particular  classes
        of investors or  transactions  as may be described in the Fund's current
        prospectus or statement of additional information.

7.      SALE OF SHARES TO INVESTORS BY THE FUND

        Any right granted to the Distributor to accept orders for shares or make
        sales  on  behalf  of the Fund  will  not  apply  to  shares  issued  in
        connection  with the  merger or  consolidation  of any other  investment
        company with the Fund or its acquisition,  purchase or otherwise, of all
        or   substantially   all  the  assets  of  any  investment   company  or
        substantially all the outstanding shares of any such company.  Also, any
        such  right  shall  not  apply to shares  issued,  sold or  transferred,
        whether Treasury or newly issued shares, that may be offered by the Fund
        to its  shareholders as stock dividends or splits for not less than "net
        asset value".

8.      AGREEMENTS WITH DEALERS OR OTHERS

        In making  agreements with any dealers or others,  the Distributor shall
        act only in its own  behalf  and in no  sense as agent  for the Fund and
        shall be agent for the Fund only in respect of sales and  repurchases of
        Fund shares.

9.      COPIES OF CORPORATE DOCUMENTS

        The Fund will furnish the Distributor  promptly with properly  certified
        or authenticated copies of any registration  statements filed by it with
        the Securities and Exchange Commission under the Securities Act of 1933,
        as amended, or the Investment Company Act of 1940, as amended,  together
        with any  financial  statements  and exhibits  included  therein and all
        amendments or supplements  thereto hereafter filed. Also, the Fund shall
        furnish the  Distributor  with a reasonable  number of printed copies of
        each  semi-annual  and annual report  (quarterly if made) of the Fund as
        the Distributor may request, and shall cooperate fully in the efforts of
        the Distributor to sell and arrange for the sale of the Fund's shares of
        Capital Stock and in the  performance  by the  Distributor of all of its
        duties under this Agreement.

10.     RESPONSIBILITY FOR CONTINUED REGISTRATION INCLUDING INCREASE IN SHARES

        The Fund will  assume  the  continued  responsibility  for  meeting  the
        requirements  of  registration  under  the  Securities  Act of 1933,  as
        amended, under the Investment Company Act of 1940, as amended, and under
        the  securities  laws of the various  states  where the  Distributor  is
        registered  as a  broker-dealer.  The  Fund,  subject  to the  necessary
        approval of its  shareholders,  will  increase the number of  authorized
        shares from time to time as may be necessary to provide the  Distributor
        with such number of shares as the Distributor may reasonably be expected
        to sell.

11.     SUSPENSION OF SALES

        If and whenever the  determination of asset value is suspended  pursuant
        to applicable law, and such suspension has become effective,  until such
        suspension  is terminated  no further  applications  for shares shall be
        accepted by the Distributor except  unconditional orders placed with the
        Distributor  before the Distributor had knowledge of the suspension.  In
        addition,  the  Fund  reserves  the  right  to  suspend  sales  and  the
        Distributor's  authority  to accept  orders  for shares on behalf of the
        Fund, if in the judgment of the majority of its Board of Directors it is
        in the best  interest of the Fund to do so,  suspension  to continue for
        such period as may be determined by such majority;  and in that event no
        shares will be sold by the Fund or by the  Distributor  on behalf of the
        Fund while such suspension remains in effect except for shares necessary
        to cover  unconditional  orders accepted by the  Distributor  before the
        Distributor had knowledge of the suspension.

12.     EXPENSES

        The Fund will pay (or will enter  into  arrangements  providing  for the
        payment of) all fees and expenses (1) in connection with the preparation
        and  filing of any  registration  statement  or  amendments  thereto  as
        required  under the Investment  Company Act of 1940, as amended;  (2) in
        connection with the preparation and filing of any registration statement
        and  prospectus or amendments  thereto under the Securities Act of 1933,
        as amended, covering the issue and sale of the Fund's shares; and (3) in
        connection with the registration of the Fund and qualification of shares
        for sale in the various  states and other  jurisdictions.  The Fund will
        also pay the cost of (i) preparation and distribution to shareholders of
        prospectuses,  reports, tax information,  notices,  proxy statements and
        proxies;  (ii) preparation and distribution of dividend and capital gain
        payments  to  shareholders;   (iii)  issuance,  transfer,  registry  and
        maintenance  of  open  account  charges;   (iv)  delivery,   remittance,
        redemption and repurchase  charges;  (v) communication with shareholders
        concerning these items; and (vi) stock  certificates.  The Fund will pay
        taxes including,  in the case of redeemed  shares,  any initial transfer
        taxes unpaid.

        The Distributor shall assume  responsibility for the expense of printing
        prospectuses used for the solicitation of new accounts.  The Distributor
        will pay the expenses of other sales  literature,  all fees and expenses
        in connection with the Distributor's qualification as a dealer under the
        Securities Exchange Act of 1934, as amended,  and in the various states,
        and all other expenses in connection with the sale and offering for sale
        of shares of the Fund which have not been herein specifically  allocated
        to or assumed by the Fund.

13.     CONFORMITY WITH LAW

        The  Distributor  agrees  that in selling the shares of the Fund it will
        duly conform in all respects  with the laws of the United States and any
        state or other jurisdiction in which such shares may be offered for sale
        pursuant to this Agreement.

14.     MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS

        The Fund recognizes that the Distributor is now a member of the National
        Association  of  Securities  Dealers,  and in the  conduct of its duties
        under this  Agreement the  Distributor  is subject to the various rules,
        orders and  regulations  of such  organization.  The right to  determine
        whether such membership should or should not continue,  or to join other
        organizations, is reserved by the Distributor.

15.     OTHER INTERESTS

        It is understood that directors,  officers,  agents and  stockholders of
        the Fund  are or may be  interested  in the  Distributor  as  directors,
        officers,  stockholders, or otherwise; that directors, officers, agents,
        and stockholders of the Distributor are or may be interested in the Fund
        as directors, officers,  stockholders or otherwise; that the Distributor
        may be interested in the Fund as a  stockholder  or otherwise;  and that
        the existence of any dual interest shall not affect the validity  hereof
        or of any  transaction  hereunder  except as  otherwise  provided in the
        Certification   of  Incorporation  of  the  Fund  and  the  Distributor,
        respectively, or by specific provision of applicable law.

16.     INDEMNIFICATION

        The Fund  agrees to  indemnify,  defend  and hold the  Distributor,  its
        officers and  directors,  and any person who  controls  the  Distributor
        within the meaning of Section 15 of the Securities Act of 1933, free and
        harmless from and against any and all claims,  demands,  liabilities and
        expenses  (including the cost of investigating or defending such claims,
        demands or  liabilities  and any counsel  fees  incurred  in  connection
        therewith)  which the Distributor,  its officers,  directors or any such
        controlling  person may incur under the Securities Act of 1933, or under
        common  law or  otherwise,  arising  out of or  based  upon  any  untrue
        statement  of a  material  fact  contained  in the  Fund's  registration
        statement  or  prospectus  or arising  out of or based upon any  alleged
        omission  to state a  material  fact  required  to be  stated  in either
        thereof  or  necessary  to make the  statements  in either  thereof  not
        misleading,  except  insofar as such  claims,  demands,  liabilities  or
        expenses arise out of or are based upon any such untrue  statement or in
        conformity with  information  furnished in writing by the Distributor to
        the Fund for use in the Fund's  registration  statement  or  prospectus:
        provided,  however, that this indemnity agreement, to the extent that it
        might require indemnity of any person who is also an officer or director
        of the Fund or who controls the Fund within the meaning of Section 15 of
        the  Securities  Act of 1933,  shall  not inure to the  benefit  of such
        officer,  director or  controlling  person  unless a court of  competent
        jurisdiction  shall  determine,  or it shall  have  been  determined  by
        controlling  precedent  that such  result  would not be  against  public
        policy as expressed in the Securities Act of 1933, and further provided,
        that in no event shall anything  contained  herein be so construed as to
        protect  the  Distributor  against any  liability  to the Fund or to its
        security holders to which the Distributor  would otherwise be subject by
        reason of willful  misfeasance,  bad faith, or gross negligence,  in the
        performance of its duties, or by reason of its reckless disregard of its
        obligations under this Agreement.  The Fund's agreement to indemnify the
        Distributor,  its officers and directors and any such controlling person
        as  aforesaid  is  expressly  conditioned  upon the Fund being  promptly
        notified of any action brought against the Distributor,  its officers or
        directors, or any such controlling person, such notification to be given
        by letter or telegram addressed to the Fund. The Fund agrees promptly to
        notify  the  Distributor  of  the  commencement  of  any  litigation  or
        proceedings  against it or any of its directors in  connection  with the
        issue and sale of any shares of it Capital Stock.

        The  Distributor  agrees to  indemnify,  defend  and hold the Fund,  its
        officers and  directors  and any person who  controls the Fund,  if any,
        within the meaning of Section 15 of the Securities Act of 1933, free and
        harmless from and against any and all claims,  demands,  liabilities and
        expenses  (including the cost of investigating or defending such claims,
        demands   liabilities  and  any  counsel  fees  incurred  in  connection
        therewith)  which  the  Fund,  its  directors  or  officers  or any such
        controlling  person may incur under the  Securities Act of 1933 or under
        common law or otherwise;  but only to the extent that such  liability or
        expense  incurred  by the  Fund,  its  directors  or  officers  or  such
        controlling person resulting from such claims or demands shall arise out
        of or be based upon any  alleged  untrue  statement  of a material  fact
        contained in information  furnished in writing by the Distributor to the
        Fund for use in the Fund's registration statement or prospectus or shall
        arise out of or be based upon any  alleged  omission to state a material
        fact in connection  with such  information  required to be stated in the
        registration   statement  or   prospectus  or  necessary  to  make  such
        information not misleading. The Distributor's agreement to indemnify the
        Fund,  its directors and officers,  and any such  controlling  person as
        aforesaid is expressly  conditioned upon the Distributor  being promptly
        notified  of any  action  brought  against  the Fund,  its  officers  or
        directors or any such controlling person.

17.     DURATION AND TERMINATION OF THIS AGREEMENT

        This Agreement  shall become  effective upon the effective date of the
        Fund's initial registration statement under the Securities Act of 1933
        and will  remain in effect from year to year  thereafter,  but only so
        long as such 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,  provided
        that in either event such  continuation  shall be approved by the vote
        of a majority of the directors who are not  interested  persons of the
        Distributor,  Principal  Life Insurance  Company,  or the Fund cast in
        person at a meeting called for the purpose of voting on such approval.
        This  Agreement  may on 60 days written  notice be  terminated  at any
        time,  without  the  payment of any  penalty,  by the Fund,  or by the
        Distributor. This Agreement shall terminate automatically in the event
        of its  assignment by the  Distributor  and shall not be assignable by
        the Fund without the consent of the Distributor.

        In  interpreting  the  provisions  of this  paragraph,  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.

18.     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.  If the Fund should at any time deem it necessary
        or  advisable in the best  interests  of the Fund that any  amendment of
        this  Agreement be made in order to comply with the  recommendations  or
        requirements  of  the  Securities  and  Exchange   Commission  or  other
        governmental authority or to obtain any advantage under state or federal
        tax  laws  and  should  notify  the  Distributor  of the  form  of  such
        amendment,  and the  reasons  therefor,  and if the  Distributor  should
        decline  to  assent  to such  amendment,  the  Fund may  terminate  this
        Agreement forthwith.  If the Distributor should at any time request that
        a change be made in the Fund's  Certificate of Incorporation or By-laws,
        or in its  method  of  doing  business,  in  order  to  comply  with any
        requirements  of  federal  law  or  regulations  of the  Securities  and
        Exchange Commission or of a national securities association of which the
        Distributor is or may be a member, relating to the sale of shares of the
        Fund,  and the Fund  should  not make  such  necessary  change  within a
        reasonable time, the Distributor may terminate this Agreement forthwith.

19.     ADDRESS FOR PURPOSES 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 Distributor for this purpose shall be The Principal
        Financial Group, Des Moines, Iowa 50392.

        IN WITNESS WHEREOF,  the parties hereof have caused this Agreement to be
executed in duplicate on the day and year first above written.

Principal Partners Aggressive
Growth Fund, Inc.                         Princor Financial Services Corporation

By /s/A. S. Filean                        By /s/R. C. Eucher
   A. S. Filean, Vice President             R. C. Eucher, President

                                CUSTODY AGREEMENT

         Agreement made as of this 28th day of October ,1999,  between PRINCIPAL
PARTNERS  AGGRESSIVE  GROWTH FUND INC.,  a Maryland  corporation  organized  and
existing  under the laws of the State of Maryland,  having its principal  office
and  place  of  business  at  711  High  Street,  Des  Moines,  Iowa  50392-0200
(hereinafter  called  the  "Fund"),  and  THE  BANK  OF  NEW  YORK,  a New  York
corporation authorized to do a banking business, having its principal office and
place of  business at One Wall  Street,  New York,  New York 10286  (hereinafter
called the "Custodian").


                              W I T N E S S E T H :


that for and in consideration of the mutual promises  hereinafter set forth, the
Fund and the Custodian agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS

     Whenever used in this Agreement,  the following  words and phrases,  unless
the context otherwise requires, shall have the following meanings:

     1. "Authorized  Persons" shall be deemed to include any person,  whether or
not such person is an officer or employee of the Fund,  duly  authorized  by the
Board of Directors of the Fund to execute any Certificate,  instruction,  notice
or other instrument on behalf of the Fund and listed in the Certificate  annexed
hereto  as  Appendix  A or such  other  Certificate  as may be  received  by the
Custodian from time to time.

     2. "Book-Entry System" shall mean the Federal  Reserve/Treasury  book-entry
system for  United  States and  federal  agency  securities,  its  successor  or
successors and its nominee or nominees.

     3. "Call  Option"  shall mean an exchange  traded  option  with  respect to
Securities  other than Stock  Index  Options,  Futures  Contracts,  and  Futures
Contract Options  entitling the holder,  upon timely exercise and payment of the
exercise  price, as specified  therein,  to purchase from the writer thereof the
specified underlying Securities.

     4. "Certificate" shall mean any notice, instruction, or other instrument in
writing,  authorized or required by this  Agreement to be given to the Custodian
which is actually  received by the Custodian and signed on behalf of the Fund by
any two  Authorized  Persons,  and  the  term  Certificate  shall  also  include
Instructions.

     5.  "Clearing  Member"  shall mean a  registered  broker-dealer  which is a
clearing member under the rules of O.C.C. and a member of a national  securities
exchange  qualified  to act as a custodian  for an  investment  company,  or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.

     6.  "Collateral  Account"  shall mean a segregated  account so  denominated
which is  specifically  allocated  to a Series and pledged to the  Custodian  as
security for, and in consideration  of, the Custodian's  issuance of (a) any Put
Option guarantee letter or similar document  described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.

     7. "Composite  Currency Unit" shall mean the European  Currency Unit or any
other  composite  unit  consisting  of the  aggregate  of  specified  amounts of
specified Currencies as such unit may be constituted from time to time.

     8. "Covered Call Option" shall mean an exchange traded option entitling the
holder,  upon timely  exercise and payment of the exercise  price,  as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding  Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.

     9.  "Currency"  shall mean money  denominated  in a lawful  currency of any
country or the European Currency Unit.

     10.  "Depository"  shall  mean The  Depository  Trust  Company  ("DTC"),  a
clearing  agency  registered  with the Securities and Exchange  Commission,  its
successor or successors and its nominee or nominees. The term "Depository" shall
further  mean and include any other  person  authorized  to act as a  depository
under the  Investment  Company Act of 1940,  its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Directors  specifically approving deposits therein by the
Custodian.

     11.  "Financial  Futures Contract" shall mean the firm commitment to buy or
sell fixed income securities including, without limitation, U.S. Treasury Bills,
U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar  certificates  of deposit,  during a specified month at an agreed
upon price.

     12. "Futures Contract" shall mean a Financial Futures Contract and/or Stock
Index Futures Contracts.

     13.  "Futures  Contract  Option"  shall  mean an option  with  respect to a
Futures Contract.

     14. "FX  Transaction"  shall mean any  transaction  for the purchase by one
party of an agreed  amount in one  Currency  against the sale by it to the other
party of an agreed amount in another Currency.

     15.  "Instructions" shall mean instructions  communications  transmitted by
electronic     or     telecommunications     media     including     S.W.I.F.T.,
computer-to-computer   interface,   dedicated   transmission   line,   facsimile
transmission signed by an Authorized Person and tested telex.

     16.  "Margin  Account"  shall  mean a  segregated  account in the name of a
broker,  dealer,  futures commission  merchant,  or a Clearing Member, or in the
name of the  Fund  for the  benefit  of a  broker,  dealer,  futures  commission
merchant,  or Clearing  Member,  or otherwise,  in accordance  with an agreement
between  the Fund,  the  Custodian  and a  broker,  dealer,  futures  commission
merchant  or a Clearing  Member (a "Margin  Account  Agreement"),  separate  and
distinct from the custody account,  in which certain  Securities and/or money of
the Fund shall be deposited and withdrawn  from time to time in connection  with
such  transactions as the Fund may from time to time determine.  Securities held
in the  Book-Entry  System  or the  Depository  shall  be  deemed  to have  been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.

     17. "Money Market Security" shall be deemed to include, without limitation,
certain Reverse Repurchase Agreements,  debt obligations issued or guaranteed as
to interest and principal by the  government of the United States or agencies or
instrumentalities  thereof, any tax, bond or revenue anticipation note issued by
any  state or  municipal  government  or  public  authority,  commercial  paper,
certificates  of deposit and bankers'  acceptances,  repurchase  agreements with
respect to the same and bank time deposits,  where the purchase and sale of such
securities normally requires settlement in federal funds on the same day as such
purchase or sale.

     18. "O.C.C." shall mean the Options Clearing Corporation, a clearing agency
registered  under  Section  17A of the  Securities  Exchange  Act of  1934,  its
successor or successors, and its nominee or nominees.

     19.  "Option"  shall mean a Call Option,  Covered Call Option,  Stock Index
Option and/or a Put Option.

     20. "Oral Instructions" shall mean verbal instructions actually received by
the Custodian from an Authorized Person or from a person reasonably  believed by
the Custodian to be an Authorized Person.

     21. "Put  Option"  shall mean an  exchange  traded  option with  respect to
Securities  other than Stock  Index  Options,  Futures  Contracts,  and  Futures
Contract  Options  entitling the holder,  upon timely exercise and tender of the
specified underlying  Securities,  to sell such Securities to the writer thereof
for the exercise price.

     22.  "Reverse  Repurchase  Agreement"  shall mean an agreement  pursuant to
which the Fund sells  Securities and agrees to repurchase  such  Securities at a
described or specified date and price.

     23. "Security" shall be deemed to include, without limitation, Money Market
Securities,  Call Options, Put Options, Stock Index Options, Stock Index Futures
Contracts,  Stock Index Futures Contract Options,  Financial Futures  Contracts,
Financial Futures Contract Options, Reverse Repurchase Agreements, common stocks
and other securities having characteristics similar to common stocks,  preferred
stocks, debt obligations issued by state or municipal  governments and by public
authorities,  (including,  without limitation, general obligation bonds, revenue
bonds,  industrial bonds and industrial  development bonds), bonds,  debentures,
notes, mortgages or other obligations, and any certificates,  receipts, warrants
or other instruments representing rights to receive, purchase, sell or subscribe
for the  same,  or  evidencing  or  representing  any other  rights or  interest
therein, or any property or assets.

     24.  "Senior  Security  Account"  shall  mean  an  account  maintained  and
specifically  allocated  to a Series  under  the  terms of this  Agreement  as a
segregated account,  by recordation or otherwise,  within the custody account in
which certain Securities and/or other assets of the Fund specifically  allocated
to such Series shall be deposited and withdrawn  from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.

     25. "Series" shall mean the various portfolios,  if any, of the Fund listed
on Appendix B hereto as amended from time to time.

     26.  "Shares"  shall mean the shares of capital stock of the Fund,  each of
which is, in the case of a Fund having Series, allocated to a particular Series.

     27.  "Stock  Index  Futures  Contract"  shall  mean a  bilateral  agreement
pursuant  to which the  parties  agree to take or make  delivery of an amount of
cash equal to a specified  dollar amount times the difference  between the value
of a  particular  stock  index  at the  close of the  last  business  day of the
contract and the price at which the futures contract is originally struck.

     28. "Stock Index Option" shall mean an exchange traded option entitling the
holder,  upon  timely  exercise,  to  receive  an amount of cash  determined  by
reference  to the  difference  between the  exercise  price and the value of the
index on the date of exercise.

                                   ARTICLE II.

                            APPOINTMENT OF CUSTODIAN

     1. The Fund hereby  constitutes  and appoints the Custodian as custodian of
the Securities and money at any time owned by the Fund during the period of this
Agreement.

     2. The Custodian hereby accepts appointment as such custodian and agrees to
perform the duties thereof as hereinafter set forth.

                                  ARTICLE III.

                         CUSTODY OF CASH AND SECURITIES

     1.  Except as  otherwise  provided in  paragraph  7 of this  Article and in
Article  VIII,  the Fund will deliver or cause to be delivered to the  Custodian
all  Securities and all money owned by it, at any time during the period of this
Agreement,  and shall  specify  with  respect to such  Securities  and money the
Series  to which  the same  are  specifically  allocated.  The  Custodian  shall
segregate,  keep and maintain the assets of the Series  separate and apart.  The
Custodian  will not be  responsible  for any  Securities  and money not actually
received by it. The  Custodian  will be entitled to reverse any credits  made on
the Fund's behalf where such credits have been  previously made and money is not
finally  collected.  The  Fund  shall  deliver  to  the  Custodian  a  certified
resolution of the Board of Directors of the Fund,  substantially  in the form of
Exhibit A hereto,  approving,  authorizing  and  instructing  the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible  for deposit  therein,  regardless  of the Series to which the same are
specifically  allocated  and to  utilize  the  Book-Entry  System to the  extent
possible  in  connection  with its  performance  hereunder,  including,  without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities and deliveries and returns of Securities  collateral.  Prior
to a deposit of Securities specifically allocated to a Series in the Depository,
the Fund shall deliver to the  Custodian a certified  resolution of the Board of
Directors of the Fund, substantially in the form of Exhibit B hereto, approving,
authorizing  and  instructing  the  Custodian on a continuous  and ongoing basis
until  instructed  to the  contrary by a  Certificate  actually  received by the
Custodian to deposit in the Depository all Securities  specifically allocated to
such Series eligible for deposit  therein,  and to utilize the Depository to the
extent  possible  with  respect  to  such  Securities  in  connection  with  its
performance  hereunder,   including,  without  limitation,  in  connection  with
settlements  of purchases  and sales of  Securities,  loans of  Securities,  and
deliveries and returns of Securities collateral.  Securities and money deposited
in  either  the  Book-Entry  System or the  Depository  will be  represented  in
accounts  which  include  only  assets  held  by the  Custodian  for  customers,
including,  but not  limited  to,  accounts  in which  the  Custodian  acts in a
fiduciary or representative  capacity and will be specifically  allocated on the
Custodian's  books to the separate account for the applicable  Series.  Prior to
the Custodian's accepting,  utilizing and acting with respect to Clearing Member
confirmations  for Options and  transactions in Options for a Series as provided
in this Agreement,  the Custodian shall have received a certified  resolution of
the Fund's Board of  Directors,  substantially  in the form of Exhibit C hereto,
approving,  authorizing  and  instructing  the  Custodian  on a  continuous  and
on-going  basis,  until  instructed  to the contrary by a  Certificate  actually
received by the Custodian,  to accept,  utilize and act in accordance  with such
confirmations as provided in this Agreement with respect to such Series.

     2. The Custodian shall  establish and maintain  separate  accounts,  in the
name of each Series,  and shall  credit to the separate  account for each Series
all  money  received  by it for the  account  of the Fund with  respect  to such
Series.  Money credited to a separate account for a Series shall be disbursed by
the Custodian only:

          (a) as hereinafter provided;

          (b)  pursuant to Certificates setting  forth the name and address
of the person to whom the payment is to be made,  the Series account from which
payment is to be made and the purpose for which payment is to be made; or (c) in
payment of the fees and in reimbursement of the expenses and liabilities of the
Custodian attributable to such Series.

     3. Promptly  after the close of business on each day, the  Custodian  shall
furnish the Fund with confirmations and a summary, on a per Series basis, of all
transfers to or from the account of the Fund for a Series,  either  hereunder or
with any  co-custodian  or  sub-custodian  appointed  in  accordance  with  this
Agreement  during said day. Where  Securities are  transferred to the account of
the Fund for a Series,  the  Custodian  shall also by  book-entry  or  otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities  registered in the name of the Custodian (or its nominee) or shown
on  the  Custodian's  account  on the  books  of the  Book-Entry  System  or the
Depository.  At least monthly and from time to time, the Custodian shall furnish
the Fund with a detailed statement, on a per Series basis, of the Securities and
money held by the Custodian for the Fund.

     4.  Except as  otherwise  provided in  paragraph  7 of this  Article and in
Article VIII, all Securities held by the Custodian  hereunder,  which are issued
or  issuable  only in bearer  form,  except such  Securities  as are held in the
Book-Entry  System,  shall be held by the  Custodian  in that  form;  all  other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed  registered  nominee of the Custodian as the Custodian may
from  time to time  determine,  or in the name of the  Book-Entry  System or the
Depository or their successor or successors,  or their nominee or nominees.  The
Fund agrees to furnish to the Custodian  appropriate  instruments  to enable the
Custodian to hold or deliver in proper form for transfer,  or to register in the
name of its registered  nominee or in the name of the  Book-Entry  System or the
Depository any Securities which it may hold hereunder and which may from time to
time be  registered in the name of the Fund.  The Custodian  shall hold all such
Securities  specifically  allocated  to a  Series  which  are  not  held  in the
Book-Entry System or in the Depository in a separate account in the name of such
Series  physically  segregated  at all times from  those of any other  person or
persons.

     5. Except as  otherwise  provided in this  Agreement  and unless  otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry  System or the  Depository  with respect to Securities
held hereunder and therein deposited,  shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:

          (a)  collect all income, dividends and distributions due or payable;

          (b) give notice to the Fund and present payment and collect the amount
payable upon such Securities which are called, but only if either (i) the
Custodian receives a written  notice of such call,  or (ii) notice of such call
appears in one or more of the publications  listed in Appendix C annexed hereto,
which may be amended at any time by the Custodian without the prior notification
or consent of the Fund;

          (c) present for payment and collect the amount payable upon all
Securities which mature;

          (d) surrender Securities in temporary form for definitive Securities;

          (e) execute, as custodian, any necessary declarations or  certificates
of ownership under the Federal Income Tax Laws or the laws or regulations of any
other taxing authority now or hereafter in effect;

          (f) hold directly, or through the Book-Entry System or the Depository
with respect to Securities therein deposited, for the account of a Series, all
rights and  similar  securities  issued  with  respect  to any  Securities  held
by the Custodian for such Series hereunder; and

          (g) deliver to the Fund all notices, proxies, proxy soliciting
materials, consents and other written information (including, without
limitation,  notices of  tender  offers  and  exchange  offers,  pendency  of
calls,  maturities  of Securities  and  expiration of rights)  relating to
Securities  held pursuant to this Agreement  which are actually  received by the
Custodian,  such proxies and other similar  materials to be executed by the
registered  owner (if Securities are registered  otherwise than in the name of
the Fund), but without  indicating the manner in which proxies or consents are
to be voted.

     6. Upon receipt of a Certificate and not otherwise, the Custodian, directly
or through the use of the Book-Entry System or the Depository, shall:

          (a) execute and deliver to such persons as may be designated in such
Certificate proxies,  consents,  authorizations,  and  any  other  instruments
whereby  the authority of the Fund as owner of any Securities held by the
Custodian hereunder for the Series specified in such Certificate may be
exercised;

          (b)  deliver  any  Securities  held by the  Custodian  hereunder  for
the Series specified in such Certificate in exchange for other Securities or
cash issued or paid in connection with the liquidation,  reorganization,
refinancing,  merger, consolidation or  recapitalization  of any  corporation,
or the exercise of any conversion  privilege and receive and hold hereunder
specifically  allocated to such Series any cash or other Securities received in
exchange;

          (c) deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate to any protective committee, reorganization
committee or other person in connection  with the  reorganization,  refinancing,
merger,  consolidation,  recapitalization  or sale of assets of any corporation,
and  receive  and hold  hereunder  specifically  allocated  to such  Series such
certificates of deposit,  interim receipts or other  instruments or documents as
may be issued to it to evidence such delivery;

          (d) make such  transfers or  exchanges of the assets of the Series
specified in such  Certificate,  and  take  such  other  steps as  shall  be
stated  in such Certificate to be for the purpose of  effectuating  any duly
authorized plan of liquidation,  reorganization,  merger,  consolidation or
recapitalization of the Fund; and

          (e) present for payment and collect the amount payable upon Securities
not described in preceding paragraph 5(b) of this Article which may be called as
specified in the Certificate.

     7.  Notwithstanding any provision elsewhere contained herein, the Custodian
shall not be required to obtain  possession  of any  instrument  or  certificate
representing any Futures  Contract,  any Option,  or any Futures Contract Option
until after it shall have determined,  or shall have received a Certificate from
the Fund stating,  that any such instruments or certificates are available.  The
Fund  shall  deliver  to the  Custodian  such a  Certificate  no later  than the
business day preceding the  availability  of any such instrument or certificate.
Prior to such availability, the Custodian shall comply with Section 17(f) of the
Investment  Company Act of 1940, as amended,  in  connection  with the purchase,
sale,  settlement,  closing  out or writing of Futures  Contracts,  Options,  or
Futures  Contract  Options  by  making  payments  or  deliveries   specified  in
Certificates  received by the  Custodian in connection  with any such  purchase,
sale, writing, settlement or closing out upon its receipt from a broker, dealer,
or  futures  commission  merchant  of a  statement  or  confirmation  reasonably
believed  by the  Custodian  to be in the  form  customarily  used  by  brokers,
dealers, or futures commission merchants with respect to such Futures Contracts,
Options,  or Futures Contract Options,  as the case may be, confirming that such
Security  is held by such  broker,  dealer or futures  commission  merchant,  in
book-entry  form or  otherwise,  in the name of the Custodian (or any nominee of
the   Custodian)   as  custodian   for  the  Fund,   provided,   however,   that
notwithstanding  the  foregoing,  payments  to or  deliveries  from  the  Margin
Account,  and payments  with  respect to  Securities  to which a Margin  Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement.  Whenever any such instruments or certificates are available,
the Custodian  shall,  notwithstanding  any  provision in this  Agreement to the
contrary,  make payment for any Futures  Contract,  Option,  or Futures Contract
Option  for which such  instruments  or such  certificates  are  available  only
against the delivery to the Custodian of such  instrument  or such  certificate,
and deliver any Futures  Contract,  Option or Futures  Contract Option for which
such instruments or such  certificates are available only against receipt by the
Custodian of payment therefor.  Any such instrument or certificate  delivered to
the Custodian shall be held by the Custodian  hereunder in accordance  with, and
subject to, the provisions of this Agreement.

                                  ARTICLE IV.

                  PURCHASE AND SALE OF INVESTMENTS OF THE FUND
                    OTHER THAN OPTIONS, FUTURES CONTRACTS AND
                            FUTURES CONTRACT OPTIONS

     1. Promptly  after each  purchase of  Securities by the Fund,  other than a
purchase of an Option, a Futures  Contract,  or a Futures  Contract Option,  the
Fund shall  deliver  to the  Custodian  (i) with  respect  to each  purchase  of
Securities which are not Money Market Securities,  a Certificate,  and (ii) with
respect to each  purchase of Money  Market  Securities,  a  Certificate  or Oral
Instructions,  specifying with respect to each such purchase:  (a) the Series to
which such  Securities  are to be  specifically  allocated;  (b) the name of the
issuer  and the  title  of the  Securities;  (c) the  number  of  shares  or the
principal  amount  purchased  and  accrued  interest,  if any;  (d) the  date of
purchase and  settlement;  (e) the purchase price per unit; (f) the total amount
payable upon such  purchase;  (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (h) the name of the  broker to whom  payment  is to be made.  The  Custodian
shall,  upon  receipt of  Securities  purchased  by or for the Fund,  pay to the
broker  specified  in the  Certificate  out of the money held for the account of
such Series the total amount payable upon such purchase,  provided that the same
conforms to the total amount  payable as set forth in such  Certificate  or Oral
Instructions.

     2. Promptly after each sale of Securities by the Fund, other than a sale of
any Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase
Agreement, the Fund shall deliver to the Custodian (i) with respect to each sale
of Securities  which are not Money Market  Securities,  a Certificate,  and (ii)
with  respect to each sale of Money Market  Securities,  a  Certificate  or Oral
Instructions, specifying with respect to each such sale: (a) the Series to which
such Securities were specifically allocated;  (b) the name of the issuer and the
title of the Security;  (c) the number of shares or principal  amount sold,  and
accrued interest, if any; (d) the date of sale; (e) the sale price per unit; (f)
the total amount  payable to the Fund upon such sale; (g) the name of the broker
through  whom or the  person  to whom  the sale  was  made,  and the name of the
clearing  broker,  if any; and (h) the name of the broker to whom the Securities
are to be delivered.  The Custodian  shall deliver the  Securities  specifically
allocated  to such Series to the broker  specified  in the  Certificate  against
payment of the total amount  payable to the Fund upon such sale,  provided  that
the same conforms to the total amount  payable as set forth in such  Certificate
or Oral Instructions. ARTICLE V.

                                     OPTIONS

     1.  Promptly  after the purchase of any Option by the Fund,  the Fund shall
deliver to the  Custodian a Certificate  specifying  with respect to each Option
purchased:  (a) the Series to which such Option is specifically  allocated;  (b)
the type of Option  (put or call);  (c) the name of the issuer and the title and
number of shares subject to such Option or, in the case of a Stock Index Option,
the stock  index to which such  Option  relates  and the  number of Stock  Index
Options  purchased;  (d) the expiration  date; (e) the exercise  price;  (f) the
dates of purchase and  settlement;  (g) the total amount  payable by the Fund in
connection with such purchase;  (h) the name of the Clearing Member through whom
such Option was purchased;  and (i) the name of the broker to whom payment is to
be made. The Custodian shall pay, upon receipt of a Clearing Member's  statement
confirming  the  purchase of such Option  held by such  Clearing  Member for the
account of the Custodian (or any duly  appointed and  registered  nominee of the
Custodian) as custodian  for the Fund,  out of money held for the account of the
Series to which such Option is to be  specifically  allocated,  the total amount
payable upon such purchase to the Clearing  Member through whom the purchase was
made,  provided that the same conforms to the total amount  payable as set forth
in such Certificate.

     2. Promptly after the sale of any Option  purchased by the Fund pursuant to
paragraph  1 hereof,  the Fund shall  deliver  to the  Custodian  a  Certificate
specifying  with respect to each such sale:  (a) the Series to which such Option
was specifically  allocated;  (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares  subject to such  Option or, in
the case of a Stock Index Option,  the stock index to which such Option  relates
and the number of Stock Index Options sold;  (d) the date of sale;  (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale;  and (h) the name of the  Clearing  Member  through whom the sale was
made.  The  Custodian  shall  consent to the  delivery of the Option sold by the
Clearing  Member  which  previously  supplied  the  confirmation   described  in
preceding  paragraph  1 of this  Article  with  respect to such  Option  against
payment to the Custodian of the total amount payable to the Fund,  provided that
the same conforms to the total amount payable as set forth in such Certificate.

     3. Promptly after the exercise by the Fund of any Call Option  purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian
a  Certificate  specifying  with respect to such Call Option:  (a) the Series to
which such Call Option was  specifically  allocated;  (b) the name of the issuer
and the  title  and  number  of  shares  subject  to the  Call  Option;  (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share;  (f) the total amount to be paid by the Fund upon such exercise;  and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall,  upon receipt of the Securities  underlying the Call Option
which was exercised,  pay out of the money held for the account of the Series to
which such Call Option was  specifically  allocated the total amount  payable to
the Clearing  Member through whom the Call Option was  exercised,  provided that
the same conforms to the total amount payable as set forth in such Certificate.

     4. Promptly  after the exercise by the Fund of any Put Option  purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the Custodian
a  Certificate  specifying  with  respect to such Put Option:  (a) the Series to
which such Put Option was specifically allocated; (b) the name of the issuer and
the title and number of shares  subject to the Put  Option;  (c) the  expiration
date; (d) the date of exercise and settlement; (e) the exercise price per share;
(f) the total amount to be paid to the Fund upon such exercise; and (g) the name
of the Clearing Member through whom such Put Option was exercised. The Custodian
shall,  upon receipt of the amount  payable upon the exercise of the Put Option,
deliver  or  direct  the  Depository  to  deliver  the  Securities  specifically
allocated to such Series,  provided the same  conforms to the amount  payable to
the Fund as set forth in such Certificate.

     5.  Promptly  after  the  exercise  by the Fund of any Stock  Index  Option
purchased by the Fund pursuant to paragraph 1 hereof,  the Fund shall deliver to
the Custodian a Certificate  specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated;  (b)
the type of Stock Index  Option (put or call);  (c) the number of Options  being
exercised;  (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection  with  such  exercise;  and (h) the  Clearing  Member  from whom such
payment is to be received.

     6. Whenever the Fund writes a Covered Call Option,  the Fund shall promptly
deliver to the Custodian a Certificate  specifying  with respect to such Covered
Call Option: (a) the Series for which such Covered Call Option was written;  (b)
the name of the issuer and the title and number of shares for which the  Covered
Call Option was written and which underlie the same;  (c) the  expiration  date;
(d) the exercise price; (e) the premium to be received by the Fund; (f) the date
such Covered Call Option was  written;  and (g) the name of the Clearing  Member
through whom the premium is to be received. The Custodian shall deliver or cause
to be  delivered,  in  exchange  for  receipt of the  premium  specified  in the
Certificate  with  respect to such Covered  Call  Option,  such  receipts as are
required  in  accordance  with the customs  prevailing  among  Clearing  Members
dealing in Covered Call Options and shall  impose,  or direct the  Depository to
impose, upon the underlying Securities specified in the Certificate specifically
allocated to such Series such  restrictions as may be required by such receipts.
Notwithstanding  the foregoing,  the Custodian has the right, upon prior written
notification  to the  Fund,  at any time to refuse  to issue  any  receipts  for
Securities  in the  possession  of the  Custodian  and not  deposited  with  the
Depository underlying a Covered Call Option.

     7. Whenever a Covered Call Option  written by the Fund and described in the
preceding  paragraph  of this  Article is  exercised,  the Fund  shall  promptly
deliver to the Custodian a Certificate  instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and  specifying:  (a) the Series for which such  Covered  Call Option was
written;  (b) the name of the issuer and the title and number of shares  subject
to the Covered  Call  Option;  (c) the  Clearing  Member to whom the  underlying
Securities  are to be  delivered;  and (d) the total amount  payable to the Fund
upon  such  delivery.  Upon  the  return  and/or  cancellation  of any  receipts
delivered pursuant to paragraph 6 of this Article,  the Custodian shall deliver,
or direct the Depository to deliver,  the underlying  Securities as specified in
the  Certificate  against  payment of the amount to be  received as set forth in
such Certificate.

     8. Whenever the Fund writes a Put Option,  the Fund shall promptly  deliver
to the Custodian a Certificate  specifying with respect to such Put Option:  (a)
the Series for which such Put Option was written; (b) the name of the issuer and
the title and number of shares  for which the Put  Option is  written  and which
underlie the same; (c) the  expiration  date;  (d) the exercise  price;  (e) the
premium to be received by the Fund; (f) the date such Put Option is written; (g)
the name of the Clearing  Member  through whom the premium is to be received and
to whom a Put  Option  guarantee  letter is to be  delivered;  (h) the amount of
cash, and/or the amount and kind of Securities,  if any, specifically  allocated
to such Series to be deposited in the Senior  Security  Account for such Series;
and (i) the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be deposited  into the  Collateral  Account for such
Series.  The  Custodian  shall,  after making the deposits  into the  Collateral
Account  specified  in the  Certificate,  issue a Put  Option  guarantee  letter
substantially  in the form  utilized by the  Custodian on the date  hereof,  and
deliver the same to the Clearing  Member  specified in the  Certificate  against
receipt  of the  premium  specified  in said  Certificate.  Notwithstanding  the
foregoing,  the  Custodian  shall be under no obligation to issue any Put Option
guarantee  letter  or  similar  document  if it is  unable  to  make  any of the
representations contained therein.

     9. Whenever a Put Option written by the Fund and described in the preceding
paragraph  is  exercised,  the Fund shall  promptly  deliver to the  Custodian a
Certificate specifying: (a) the Series to which such Put Option was written; (b)
the name of the issuer and title and number of shares subject to the Put Option;
(c) the Clearing Member from whom the underlying  Securities are to be received;
(d) the total amount payable by the Fund upon such  delivery;  (e) the amount of
cash and/or the amount and kind of  Securities  specifically  allocated  to such
Series to be withdrawn from the  Collateral  Account for such Series and (f) the
amount of cash and/or the amount and kind of Securities,  specifically allocated
to such Series, if any, to be withdrawn from the Senior Security  Account.  Upon
the return and/or  cancellation  of any Put Option  guarantee  letter or similar
document  issued  by the  Custodian  in  connection  with such Put  Option,  the
Custodian shall pay out of the money held for the account of the Series to which
such Put Option  was  specifically  allocated  the total  amount  payable to the
Clearing Member  specified in the  Certificate as set forth in such  Certificate
against delivery of such Securities, and shall make the withdrawals specified in
such Certificate.

     10. Whenever the Fund writes a Stock Index Option,  the Fund shall promptly
deliver to the  Custodian a  Certificate  specifying  with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written;  (b)
whether  such Stock Index  Option is a put or a call;  (c) the number of options
written;  (d) the stock index to which such Option  relates;  (e) the expiration
date; (f) the exercise  price;  (g) the Clearing Member through whom such Option
was written;  (h) the premium to be received by the Fund; (i) the amount of cash
and/or the amount and kind of Securities, if any, specifically allocated to such
Series to be deposited in the Senior Security  Account for such Series;  (j) the
amount of cash and/or the amount and kind of  Securities,  if any,  specifically
allocated  to such Series to be  deposited  in the  Collateral  Account for such
Series; and (k) the amount of cash and/or the amount and kind of Securities,  if
any, specifically  allocated to such Series to be deposited in a Margin Account,
and the  name in  which  such  account  is to be or has  been  established.  The
Custodian shall, upon receipt of the premium specified in the Certificate,  make
the  deposits,  if any,  into  the  Senior  Security  Account  specified  in the
Certificate,  and either (1) deliver such receipts,  if any, which the Custodian
has  specifically  agreed to issue,  which are in  accordance  with the  customs
prevailing  among Clearing  Members in Stock Index Options and make the deposits
into  the  Collateral  Account  specified  in the  Certificate,  or (2) make the
deposits into the Margin Account specified in the Certificate.

     11.  Whenever a Stock Index Option written by the Fund and described in the
preceding  paragraph  of this  Article is  exercised,  the Fund  shall  promptly
deliver to the  Custodian a  Certificate  specifying  with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written;  (b)
such  information  as may be  necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised;  (d) the total amount  payable upon such  exercise,  and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or  amount and kind of  Securities,  if any, to be  withdrawn
from the Senior Security Account for such Series;  and the amount of cash and/or
the amount and kind of  Securities,  if any, to be withdrawn from the Collateral
Account for such Series.  Upon the return and/or cancellation of the receipt, if
any,  delivered  pursuant  to the  preceding  paragraph  of  this  Article,  the
Custodian shall pay out of the money held for the account of the Series to which
such Stock  Index  Option was  specifically  allocated  to the  Clearing  Member
specified  in the  Certificate  the total amount  payable,  if any, as specified
therein.

     12.  Whenever  the Fund  purchases  any Option  identical  to a  previously
written  Option  described  in  paragraphs,  6,  8 or 10 of  this  Article  in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the  Custodian a  Certificate  specifying  with  respect to the Option  being
purchased:  (a) that the transaction is a Closing Purchase Transaction;  (b) the
Series  for which the  Option  was  written;  (c) the name of the issuer and the
title and  number of shares  subject to the  Option,  or, in the case of a Stock
Index  Option,  the stock index to which such  Option  relates and the number of
Options held;  (d) the exercise  price;  (e) the premium to be paid by the Fund;
(f) the expiration  date; (g) the type of Option (put or call);  (h) the date of
such purchase;  (i) the name of the Clearing Member to whom the premium is to be
paid;  and (j) the amount of cash and/or the amount and kind of  Securities,  if
any, to be withdrawn from the Collateral Account, a specified Margin Account, or
the Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or  cancellation  of any receipt  issued  pursuant to
paragraphs  6,  8 or 10 of  this  Article  with  respect  to  the  Option  being
liquidated through the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously  imposed  restrictions on the
Securities underlying the Call Option.

     13. Upon the expiration,  exercise or  consummation  of a Closing  Purchase
Transaction  with  respect  to any Option  purchased  or written by the Fund and
described  in this  Article,  the  Custodian  shall  delete such Option from the
statements  delivered to the Fund pursuant to paragraph 3 of Article III herein,
and upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account,  and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.

                                   ARTICLE VI.

                                FUTURES CONTRACTS

     1.  Whenever the Fund shall enter into a Futures  Contract,  the Fund shall
deliver to the Custodian a Certificate  specifying  with respect to such Futures
Contract, (or with respect to any number of identical Futures Contract(s)):  (a)
the Series for which the Futures Contract is being entered;  (b) the category of
Futures   Contract  (the  name  of  the  underlying  stock  index  or  financial
instrument); (c) the number of identical Futures Contracts entered into; (d) the
delivery or settlement date of the Futures Contract(s); (e) the date the Futures
Contract(s)  was (were) entered into and the maturity date; (f) whether the Fund
is buying (going long) or selling (going short) on such Futures Contract(s); (g)
the  amount of cash  and/or the amount  and kind of  Securities,  if any,  to be
deposited in the Senior  Security  Account for such Series;  (h) the name of the
broker, dealer, or futures commission merchant through whom the Futures Contract
was entered into;  and (i) the amount of fee or  commission,  if any, to be paid
and the name of the broker,  dealer, or futures commission merchant to whom such
amount is to be paid.  The  Custodian  shall make the  deposits,  if any, to the
Margin Account in accordance with the terms and conditions of the Margin Account
Agreement.  The  Custodian  shall  make  payment  out of the money  specifically
allocated  to such Series of the fee or  commission,  if any,  specified  in the
Certificate  and  deposit in the Senior  Security  Account  for such  Series the
amount of cash  and/or  the  amount  and kind of  Securities  specified  in said
Certificate.

     2.   (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding  Futures  Contract,  shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.

          (b) Any variation margin payment or similar payment from a broker,
dealer, or  futures  commission  merchant  to the Fund with  respect  to an
outstanding Futures  Contract,  shall  be  received  and  dealt  with  by the
Custodian  in accordance with the terms and conditions of the Margin Account
Agreement.

     3. Whenever a Futures Contract held by the Custodian  hereunder is retained
by the Fund until delivery or settlement is made on such Futures  Contract,  the
Fund shall deliver to the Custodian a  Certificate  specifying:  (a) the Futures
Contract and the Series to which the same  relates;  (b) with respect to a Stock
Index Futures Contract, the total cash settlement amount to be paid or received,
and with respect to a Financial Futures  Contract,  the Securities and/or amount
of cash  to be  delivered  or  received;  (c) the  broker,  dealer,  or  futures
commission  merchant  to or  from  whom  payment  or  delivery  is to be made or
received;  and (d) the amount of cash and/or Securities to be withdrawn from the
Senior Security Account for such Series. The Custodian shall make the payment or
delivery specified in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein.

     4.  Whenever  the Fund  shall  enter  into a Futures  Contract  to offset a
Futures Contract held by the Custodian hereunder,  the Fund shall deliver to the
Custodian a Certificate  specifying:  (a) the items of information required in a
Certificate  described  in  paragraph  1 of this  Article,  and (b) the  Futures
Contract  being  offset.  The  Custodian  shall  make  payment  out of the money
specifically  allocated  to  such  Series  of the  fee or  commission,  if  any,
specified in the Certificate  and delete the Futures  Contract being offset from
the  statements  delivered  to the Fund  pursuant to  paragraph 3 of Article III
herein,  and make such  withdrawals  from the Senior  Security  Account for such
Series as may be specified in such Certificate.  The withdrawals,  if any, to be
made from the Margin  Account shall be made by the Custodian in accordance  with
the terms and conditions of the Margin Account Agreement.

     5.  Notwithstanding  any other provision in this Agreement to the contrary,
the Custodian shall deliver cash and Securities to a futures commission merchant
upon  receipt of a  Certificate  from the Fund  specifying:  (a) the name of the
futures  commission  merchant;  (b)  the  specific  cash  and  Securities  to be
delivered;  (c) the date of such  delivery;  and (d) the  date of the  agreement
between the Fund and such futures  commission  merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall  constitute (x) a  representation  and warranty by
the Fund that the Rule 17f-6  agreement has been duly  authorized,  executed and
delivered by the Fund and the futures commission merchant and complies with Rule
17f-6,  and (y) an agreement by the Fund that the Custodian  shall not be liable
for the acts or omissions of any such futures commission merchant.

                                  ARTICLE VII.

                            FUTURES CONTRACT OPTIONS

     1. Promptly after the purchase of any Futures  Contract Option by the Fund,
the Fund shall promptly  deliver to the Custodian a Certificate  specifying with
respect to such Futures Contract Option:  (a) the Series to which such Option is
specifically  allocated;  (b) the type of Futures Contract Option (put or call);
(c) the type of Futures Contract and such other  information as may be necessary
to  identify  the  Futures  Contract  underlying  the  Futures  Contract  Option
purchased;  (d) the expiration  date; (e) the exercise  price;  (f) the dates of
purchase and  settlement;  (g) the amount of premium to be paid by the Fund upon
such purchase; (h) the name of the broker or futures commission merchant through
whom such  option  was  purchased;  and (i) the name of the  broker,  or futures
commission merchant,  to whom payment is to be made. The Custodian shall pay out
of the money specifically  allocated to such Series, the total amount to be paid
upon such purchase to the broker or futures  commissions  merchant  through whom
the purchase was made,  provided  that the same conforms to the amount set forth
in such Certificate.

     2. Promptly after the sale of any Futures  Contract Option purchased by the
Fund  pursuant to  paragraph 1 hereof,  the Fund shall  promptly  deliver to the
Custodian  a  Certificate  specifying  with  respect to each such sale:  (a) the
Series to which such Futures Contract Option was specifically allocated; (b) the
type of Futures  Contract Option (put or call); (c) the type of Futures Contract
and such other  information as may be necessary to identify the Futures Contract
underlying  the  Futures  Contract  Option;  (d) the date of sale;  (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker or futures commission merchant through
whom the sale was made. The Custodian  shall consent to the  cancellation of the
Futures  Contract  Option being closed  against  payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.

     3.  Whenever a Futures  Contract  Option  purchased by the Fund pursuant to
paragraph 1 is exercised  by the Fund,  the Fund shall  promptly  deliver to the
Custodian  a  Certificate  specifying:  (a) the  Series  to which  such  Futures
Contract Option was specifically allocated;  (b) the particular Futures Contract
Option  (put or  call)  being  exercised;  (c)  the  type  of  Futures  Contract
underlying the Futures Contract Option; (d) the date of exercise; (e)the name of
the broker or futures  commission  merchant  through  whom the Futures  Contract
Option is exercised;  (f) the net total amount, if any, payable by the Fund; (g)
the  amount,  if any,  to be  received  by the Fund;  and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior  Security
Account  for such  Series.  The  Custodian  shall  make,  out of the  money  and
Securities  specifically allocated to such Series, the payments, if any, and the
deposits,  if  any,  into  the  Senior  Security  Account  as  specified  in the
Certificate.  The  deposits,  if any, to be made to the Margin  Account shall be
made by the Custodian in accordance  with the terms and conditions of the Margin
Account Agreement.

     4.  Whenever  the Fund  writes a Futures  Contract  Option,  the Fund shall
promptly deliver to the Custodian a Certificate  specifying with respect to such
Futures Contract  Option:  (a) the Series for which such Futures Contract Option
was written; (b) the type of Futures Contract Option (put or call); (c) the type
of Futures  Contract and such other  information as may be necessary to identify
the Futures Contract  underlying the Futures Contract Option; (d) the expiration
date;  (e) the exercise  price;  (f) the premium to be received by the Fund; (g)
the name of the broker or futures  commission  merchant through whom the premium
is to be  received;  and (h) the  amount of cash  and/or  the amount and kind of
Securities,  if any, to be  deposited  in the Senior  Security  Account for such
Series.  The  Custodian  shall,  upon  receipt of the premium  specified  in the
Certificate, make out of the money and Securities specifically allocated to such
Series the deposits into the Senior  Security  Account,  if any, as specified in
the Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance  with the terms and conditions of the Margin
Account Agreement.

     5. Whenever a Futures  Contract  Option written by the Fund which is a call
is  exercised,  the Fund shall  promptly  deliver to the Custodian a Certificate
specifying:   (a)  the  Series  to  which  such  Futures   Contract  Option  was
specifically  allocated;  (b) the particular  Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures  commission  merchant  through  whom such  Futures
Contract Option was exercised;  (e) the net total amount, if any, payable to the
Fund upon such exercise;  (f) the net total amount,  if any, payable by the Fund
upon such  exercise;  and (g) the  amount of cash  and/or the amount and kind of
Securities to be deposited in the Senior Security  Account for such Series.  The
Custodian  shall,  upon its receipt of the net total amount payable to the Fund,
if any,  specified  in such  Certificate  make  the  payments,  if any,  and the
deposits,  if  any,  into  the  Senior  Security  Account  as  specified  in the
Certificate.  The  deposits,  if any, to be made to the Margin  Account shall be
made by the Custodian in accordance  with the terms and conditions of the Margin
Account Agreement.

     6.  Whenever  a Futures  Contract  Option  which is written by the Fund and
which is a put is exercised,  the Fund shall promptly deliver to the Custodian a
Certificate  specifying:  (a) the Series to which such  Option was  specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract  underlying such Futures  Contract Option;  (d) the name of the
broker or futures commission  merchant through whom such Futures Contract Option
is exercised;  (e) the net total amount,  if any,  payable to the Fund upon such
exercise;  (f) the net  total  amount,  if any,  payable  by the Fund  upon such
exercise;  and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security  Account for such Series,  if any. The
Custodian  shall,  upon its receipt of the net total amount payable to the Fund,
if any,  specified  in the  Certificate,  make out of the money  and  Securities
specifically  allocated to such Series, the payments,  if any, and the deposits,
if any, into the Senior Security  Account as specified in the  Certificate.  The
deposits to and/or withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance  with the terms and conditions of the Margin Account
Agreement.

     7. Whenever the Fund purchases any Futures  Contract Option  identical to a
previously written Futures Contract Option described in this Article in order to
liquidate  its position as a writer of such Futures  Contract  Option,  the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically  allocated;  (b) that the transaction is a closing  transaction;
(c) the type of Futures Contract and such other  information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f) the expiration date;
(g) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior  Security  Account for such Series.  The
Custodian  shall  effect  the  withdrawals  from  the  Senior  Security  Account
specified  in the  Certificate.  The  withdrawals,  if any,  to be made from the
Margin  Account shall be made by the Custodian in accordance  with the terms and
conditions of the Margin Account Agreement.

     8. Upon the expiration,  exercise, or consummation of a closing transaction
with respect to, any Futures  Contract  Option  written or purchased by the Fund
and  described  in this  Article,  the  Custodian  shall (a) delete such Futures
Contract Option from the statements  delivered to the Fund pursuant to paragraph
3 of Article III herein and, (b) make such  withdrawals  from and/or in the case
of an  exercise  such  deposits  into  the  Senior  Security  Account  as may be
specified in a Certificate.  The deposits to and/or  withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.

     9. Futures Contracts acquired by the Fund through the exercise of a Futures
Contract Option described in this Article shall be subject to Article VI hereof.

     10.  Notwithstanding any other provision in this Agreement to the contrary,
the Custodian shall deliver cash and Securities to a futures commission merchant
upon  receipt of a  Certificate  from the Fund  specifying:  (a) the name of the
futures  commission  merchant;  (b)  the  specific  cash  and  Securities  to be
delivered;  (c) the date of such  delivery;  and (d) the  date of the  agreement
between the Fund and such futures  commission  merchant entered pursuant to Rule
17f-6 under the Investment Company Act 1940, as amended. Each delivery of such a
Certificate by the Fund shall  constitute (x) a  representation  and warranty by
the Fund that the Rule 17f-6  agreement has been duly  authorized,  executed and
delivered by the Fund and the futures commission merchant and complies with Rule
17f-6,  and (y) an agreement by the Fund that the Custodian  shall not be liable
for the acts or omissions of any such futures commission merchant.

                                  ARTICLE VIII.

                                   SHORT SALES

     1. Promptly after any short sales by any Series of the Fund, the Fund shall
promptly deliver to the Custodian a Certificate  specifying:  (a) the Series for
which such short sale was made;  (b) the name of the issuer and the title of the
Security;  (c) the  number of shares  or  principal  amount  sold,  and  accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit;  (f) the total amount  credited to the Fund upon such sale,
if any, (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin  Account and the name in which such Margin
Account  has been or is to be  established;  (h) the  amount of cash  and/or the
amount and kind of  Securities,  if any, to be  deposited  in a Senior  Security
Account,  and (i) the name of the broker  through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker  confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as  specified in the  Certificate  is held by such broker for the account of the
Custodian (or any nominee of the  Custodian)  as custodian of the Fund,  issue a
receipt or make the  deposits  into the Margin  Account and the Senior  Security
Account specified in the Certificate.

     2. In connection  with the  closing-out  of any short sale,  the Fund shall
promptly deliver to the Custodian a Certificate  specifying with respect to each
such closing out: (a) the Series for which such  transaction  is being made; (b)
the name of the issuer and the title of the  Security;  (c) the number of shares
or the principal amount, and accrued interest or dividends,  if any, required to
effect  such  closing-out  to be  delivered  to the  broker;  (d) the  dates  of
closing-out and  settlement;  (e) the purchase price per unit; (f) the net total
amount  payable  to the Fund upon  such  closing-out;  (g) the net total  amount
payable  to the  broker  upon such  closing-out;  (h) the amount of cash and the
amount and kind of Securities to be withdrawn,  if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of  Securities,  if any, to be
withdrawn  from the  Senior  Security  Account;  and (j) the name of the  broker
through whom the Fund is effecting such  closing-out.  The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such  closing-out,  and
the return and/or cancellation of the receipts,  if any, issued by the Custodian
with respect to the short sale being  closed-out,  pay out of the money held for
the  account  of the Fund to the  broker  the net total  amount  payable  to the
broker, and make the withdrawals from the Margin Account and the Senior Security
Account, as the same are specified in the Certificate.

                                  ARTICLE IX.

                          REVERSE REPURCHASE AGREEMENTS

     1. Promptly after the Fund enters into a Reverse Repurchase  Agreement with
respect to Securities and money held by the Custodian hereunder,  the Fund shall
deliver to the Custodian a Certificate,  or in the event such Reverse Repurchase
Agreement  is a Money  Market  Security,  a  Certificate  or  Oral  Instructions
specifying:  (a) the  Series  for  which the  Reverse  Repurchase  Agreement  is
entered;  (b) the  total  amount  payable  to the Fund in  connection  with such
Reverse Repurchase Agreement and specifically  allocated to such Series; (c) the
broker or  dealer  through  or with whom the  Reverse  Repurchase  Agreement  is
entered;  (d) the amount and kind of  Securities  to be delivered by the Fund to
such broker or dealer;  (e) the date of such Reverse Repurchase  Agreement;  and
(f) the  amount  of cash  and/or  the  amount  and kind of  Securities,  if any,
specifically  allocated  to such  Series to be  deposited  in a Senior  Security
Account for such Series in connection  with such Reverse  Repurchase  Agreement.
The  Custodian  shall,  upon  receipt  of the total  amount  payable to the Fund
specified  in the  Certificate  or Oral  Instructions  make the  delivery to the
broker or dealer,  and the  deposits,  if any, to the Senior  Security  Account,
specified in such Certificate or Oral Instructions.

     2. Upon the  termination  of a Reverse  Repurchase  Agreement  described in
preceding  paragraph  1 of this  Article,  the Fund  shall  promptly  deliver  a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security,  a Certificate or Oral Instructions to the Custodian  specifying:  (a)
the Reverse Repurchase  Agreement being terminated and the Series for which same
was entered;  (b) the total amount  payable by the Fund in connection  with such
termination;  (c) the amount and kind of  Securities  to be received by the Fund
and specifically  allocated to such Series in connection with such  termination;
(d) the  date of  termination;  (e) the name of the  broker  or  dealer  with or
through whom the Reverse Repurchase  Agreement is to be terminated;  and (f) the
amount of cash and/or the amount and kind of Securities to be withdrawn from the
Senior Securities  Account for such Series. The Custodian shall, upon receipt of
the amount and kind of  Securities  to be received by the Fund  specified in the
Certificate or Oral Instructions,  make the payment to the broker or dealer, and
the  withdrawals,  if any, from the Senior Security  Account,  specified in such
Certificate or Oral Instructions.

                                   ARTICLE X.

                    LOAN OF PORTFOLIO SECURITIES OF THE FUND

     1. Promptly after each loan of portfolio Securities  specifically allocated
to a Series held by the Custodian hereunder,  the Fund shall deliver or cause to
be delivered to the Custodian a Certificate specifying with respect to each such
loan: (a) the Series to which the loaned Securities are specifically  allocated;
(b) the name of the  issuer and the title of the  Securities,  (c) the number of
shares or the principal  amount loaned,  (d) the date of loan and delivery,  (e)
the total  amount  to be  delivered  to the  Custodian  against  the loan of the
Securities,  including the amount of cash  collateral  and the premium,  if any,
separately  identified,  and (f) the name of the broker,  dealer,  or  financial
institution  to  which  the loan was  made.  The  Custodian  shall  deliver  the
Securities  thus  designated to the broker,  dealer or financial  institution to
which the loan was made upon  receipt of the total  amount  designated  as to be
delivered  against the loan of  Securities.  The Custodian may accept payment in
connection  with a delivery  otherwise  than  through the Book- Entry  System or
Depository  only in the form of a certified or bank  cashier's  check payable to
the order of the Fund or the Custodian  drawn on New York  Clearing  House funds
and may deliver  Securities  in  accordance  with the customs  prevailing  among
dealers in securities.

     2. Promptly  after each  termination of the loan of Securities by the Fund,
the Fund shall  deliver or cause to be delivered to the  Custodian a Certificate
specifying with respect to each such loan  termination and return of Securities:
(a) the Series to which the loaned  Securities are specifically  allocated;  (b)
the name of the issuer and the title of the  Securities to be returned,  (c) the
number  of  shares  or the  principal  amount  to be  returned,  (d) the date of
termination,  (e) the total amount to be delivered by the  Custodian  (including
the  cash  collateral  for such  Securities  minus  any  offsetting  credits  as
described  in said  Certificate),  and (f) the name of the  broker,  dealer,  or
financial institution from which the Securities will be returned.  The Custodian
shall  receive all  Securities  returned from the broker,  dealer,  or financial
institution to which such  Securities were loaned and upon receipt thereof shall
pay, out of the money held for the account of the Fund, the total amount payable
upon such return of Securities as set forth in the Certificate.

                                  ARTICLE XI.

                   CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
                        ACCOUNTS, AND COLLATERAL ACCOUNTS

     1. The  Custodian  shall,  from  time to time,  make such  deposits  to, or
withdrawals  from,  a Senior  Security  Account as  specified  in a  Certificate
received by the Custodian.  Such Certificate  shall specify the Series for which
such  deposit  or  withdrawal  is to be made and the  amount of cash  and/or the
amount  and kind of  Securities  specifically  allocated  to such  Series  to be
deposited in, or withdrawn from,  such Senior Security  Account for such Series.
In the event that the Fund fails to specify in a  Certificate  the  Series,  the
name of the issuer,  the title and the number of shares or the principal  amount
of any particular Securities to be deposited by the Custodian into, or withdrawn
from, a Senior Securities Account, the Custodian shall be under no obligation to
make any such deposit or withdrawal and shall so notify the Fund.

     2. The Custodian shall make deliveries or payments from a Margin Account to
the broker,  dealer,  futures  commission  merchant or Clearing  Member in whose
name,  or for whose  benefit,  the account was  established  as specified in the
Margin Account Agreement.

     3.  Amounts  received by the  Custodian as payments or  distributions  with
respect to  Securities  deposited in any Margin  Account  shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.

     4. The Custodian shall have a continuing lien and security  interest in and
to any  property at any time held by the  Custodian  in any  Collateral  Account
described  herein.  In accordance  with applicable law the Custodian may enforce
its lien and  realize  on any such  property  whenever  the  Custodian  has made
payment  or  delivery  pursuant  to any Put Option  guarantee  letter or similar
document or any receipt  issued  hereunder  by the  Custodian.  In the event the
Custodian  should  realize on any such property net proceeds which are less than
the Custodian's  obligations  under any Put Option  guarantee  letter or similar
document or any receipt,  such deficiency  shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.

     5. On each  business  day the  Custodian  shall  furnish  the  Fund  with a
statement  with respect to each Margin  Account in which money or Securities are
held  specifying  as of the close of business on the previous  business day: (a)
the name of the  Margin  Account;  (b) the amount  and kind of  Securities  held
therein;  and (c) the amount of money held  therein.  The  Custodian  shall make
available upon request to any broker,  dealer,  or futures  commission  merchant
specified in the name of a Margin Account a copy of the statement  furnished the
Fund with respect to such Margin Account.

     6. Promptly  after the close of business on each business day in which cash
and/or  Securities  are maintained in a Collateral  Account for any Series,  the
Custodian  shall  furnish  the  Fund  with a  statement  with  respect  to  such
Collateral  Account  specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such statement,  the Fund shall furnish to the Custodian
a Certificate  specifying the then market value of the  Securities  described in
such statement. In the event such then market value is indicated to be less than
the Custodian's  obligation with respect to any outstanding Put Option guarantee
letter or similar document, the Fund shall promptly specify in a Certificate the
additional cash and/or Securities to be deposited in such Collateral  Account to
eliminate such deficiency.

                                  ARTICLE XII.

                      PAYMENT OF DIVIDENDS OR DISTRIBUTIONS

     1. The Fund shall furnish to the Custodian a copy of the  resolution of the
Board of Directors  of the Fund,  certified  by the  Secretary or any  Assistant
Secretary, either (i) setting forth with respect to the Series specified therein
the date of the declaration of a dividend or  distribution,  the date of payment
thereof,  the record date as of which shareholders  entitled to payment shall be
determined,  the amount payable per Share of such Series to the  shareholders of
record as of that date and the total amount  payable to the  Dividend  Agent and
any sub-dividend  agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and  distributions  on a daily basis and  authorizing the Custodian to
rely on  Oral  Instructions  or a  Certificate  setting  forth  the  date of the
declaration of such dividend or distribution,  the date of payment thereof,  the
record date as of which  shareholders  entitled to payment shall be  determined,
the amount payable per Share of such Series to the  shareholders of record as of
that date and the total  amount  payable to the  Dividend  Agent on the  payment
date.

     2. Upon the payment date specified in such resolution, Oral Instructions or
Certificate,  as the case may be, the Custodian  shall pay out of the money held
for the account of each Series the total amount  payable to the  Dividend  Agent
and any sub-dividend agent or co-dividend agent of the Fund with respect to such
Series.

                                 ARTICLE XIII.

                          SALE AND REDEMPTION OF SHARES

     1.  Whenever  the Fund  shall  sell any  Shares,  it shall  deliver  to the
Custodian a Certificate duly specifying:

          (a) the Series, the number of Shares sold, trade date, and price; and

          (b) the amount of money to be received by the Custodian for the sale
of such Shares and  specifically  allocated to the separate  account in the name
of such Series.

     2. Upon receipt of such money from the Transfer Agent,  the Custodian shall
credit  such money to the  separate  account in the name of the Series for which
such money was received.

     3. Upon  issuance of any Shares of any Series  described  in the  foregoing
provisions of this Article,  the Custodian  shall pay, out of the money held for
the account of such  Series,  all original  issue or other taxes  required to be
paid by the  Fund in  connection  with  such  issuance  upon  the  receipt  of a
Certificate specifying the amount to be paid.

     4. Except as provided hereinafter,  whenever the Fund desires the Custodian
to make payment out of the money held by the  Custodian  hereunder in connection
with a redemption of any Shares, it shall furnish to the Custodian a Certificate
specifying:

          (a) the number and Series of Shares redeemed; and

          (b) the amount to be paid for such Shares.

     5. Upon  receipt  from the Transfer  Agent of an advice  setting  forth the
Series and number of Shares  received by the Transfer  Agent for  redemption and
that such  Shares  are in good form for  redemption,  the  Custodian  shall make
payment to the Transfer  Agent out of the money held in the separate  account in
the name of the Series the total  amount  specified  in the  Certificate  issued
pursuant to the foregoing paragraph 4 of this Article.

     6.  Notwithstanding  the above  provisions  regarding the redemption of any
Shares,  whenever  any  Shares are  redeemed  pursuant  to any check  redemption
privilege  which may from time to time be  offered by the Fund,  the  Custodian,
unless otherwise  instructed by a Certificate,  shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check  redemption  procedure,  honor the check
presented as part of such check  redemption  privilege  out of the money held in
the separate account of the Series of the Shares being redeemed.

                                  ARTICLE XIV.

                           OVERDRAFTS OR INDEBTEDNESS

     1. If the Custodian  should in its sole discretion  advance funds on behalf
of any  Series  which  results  in an  overdraft  because  the money held by the
Custodian in the separate  account for such Series shall be  insufficient to pay
the total amount payable upon a purchase of Securities specifically allocated to
such  Series,  as set  forth in a  Certificate  or Oral  Instructions,  or which
results in an overdraft  in the  separate  account of such Series for some other
reason,  or if the Fund is for any other reason  indebted to the Custodian  with
respect to a Series,  including any  indebtedness  to The Bank of New York under
the Fund's Cash Management and Related  Services  Agreement  (except a borrowing
for  investment  or for  temporary or emergency  purposes  using  Securities  as
collateral  pursuant to a separate  agreement  and subject to the  provisions of
paragraph 2 of this Article),  such overdraft or indebtedness shall be deemed to
be a loan made by the  Custodian  to the Fund for such Series  payable on demand
and shall bear  interest  from the date incurred at a rate per annum (based on a
360-  day  year for the  actual  number  of days  involved)  equal to 1/2%  over
Custodian's prime commercial lending rate in effect from time to time, such rate
to be  adjusted  on the  effective  date of any change in such prime  commercial
lending rate but in no event to be less than 6% per annum. In addition, the Fund
hereby  agrees  that  the  Custodian  shall  have a  continuing  lien,  security
interest,  and  security  entitlement  in  and  to any  property  including  any
investment property or any financial asset specifically allocated to such Series
at any time held by it for the  benefit of such  Series or in which the Fund may
have an interest  which is then in the  Custodian's  possession or control or in
possession or control of any third party acting in the Custodian's  behalf.  The
Fund authorizes the Custodian, in its sole discretion, at any time to charge any
such overdraft or  indebtedness  together with interest due thereon  against any
balance of account standing to such Series' credit on the Custodian's  books. In
addition, the Fund hereby covenants that on each Business Day on which either it
intends to enter a Reverse  Repurchase  Agreement and/or otherwise borrow from a
third  party,  or which next  succeeds  a Business  Day on which at the close of
business  the Fund had  outstanding  a Reverse  Repurchase  Agreement  or such a
borrowing,  it shall prior to 9 a.m., New York City time,  advise the Custodian,
in writing,  of each such borrowing,  shall specify the Series to which the same
relates,  and shall not incur any  indebtedness not so specified other than from
the Custodian.

     2. The  Fund  will  cause  to be  delivered  to the  Custodian  by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from  which it  borrows  money for  investment  or for  temporary  or  emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings,  a notice or undertaking in the form currently  employed by any such
bank  setting  forth the amount  which  such bank will loan to the Fund  against
delivery of a stated amount of collateral.  The Fund shall  promptly  deliver to
the Custodian a Certificate specifying with respect to each such borrowing:  (a)
the Series to which such  borrowing  relates;  (b) the name of the bank, (c) the
amount and terms of the borrowing,  which may be set forth by  incorporating  by
reference an attached  promissory note, duly endorsed by the Fund, or other loan
agreement,(d)  the time and date,  if known,  on which the loan is to be entered
into,  (e) the date on which the loan  becomes  due and  payable,  (f) the total
amount  payable  to the Fund on the  borrowing  date,  (g) the  market  value of
Securities  to be delivered as collateral  for such loan,  including the name of
the issuer,  the title and the number of shares or the  principal  amount of any
particular  Securities,  and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in  conformance  with  the  Investment  Company  Act  of  1940  and  the  Fund's
prospectus.  The Custodian  shall deliver on the borrowing  date  specified in a
Certificate the specified  collateral and the executed  promissory note, if any,
against  delivery by the lending bank of the total  amount of the loan  payable,
provided that the same conforms to the total amount  payable as set forth in the
Certificate.  The Custodian  may, at the option of the lending  bank,  keep such
collateral in its possession, but such collateral shall be subject to all rights
therein  given  the  lending  bank  by  virtue  of any  promissory  note or loan
agreement.  The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to  collateralize  further any  transaction
described in this paragraph.  The Fund shall cause all Securities  released from
collateral  status to be returned  directly to the Custodian,  and the Custodian
shall  receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer,  the title and number of shares or the  principal  amount of
any particular  Securities to be delivered as collateral by the  Custodian,  the
Custodian shall not be under any obligation to deliver any Securities.

                                  ARTICLE XV.

                                  INSTRUCTIONS

     1. With  respect to any  software  provided by the  Custodian  to a Fund in
order for the Fund to transmit  Instructions to the Custodian (the  "Software"),
the Custodian grants to such Fund a personal,  nontransferable  and nonexclusive
license to use the Software solely for the purpose of transmitting  Instructions
to, and receiving  communications  from,  the  Custodian in connection  with its
account(s).  The Fund shall use the  Software  solely for its own  internal  and
proper  business  purposes,  and not in the operation of a service  bureau,  and
agrees  not  to  sell,  reproduce,  lease  or  otherwise  provide,  directly  or
indirectly,  the Software or any portion  thereof to any third party without the
prior written consent of the Custodian. The Fund acknowledges that the Custodian
and its suppliers have title and exclusive  proprietary  rights to the Software,
including any trade secrets or other ideas, concepts,  know how,  methodologies,
or information  incorporated therein and the exclusive rights to any copyrights,
trademarks  and  patents   (including   registrations   and   applications   for
registration of either) or statutory or legal protections available with respect
thereof. The Fund further acknowledges that all or a part of the Software may be
copyrighted  or trademarked  (or a  registration  or claim made therefor) by the
Custodian or its  suppliers.  The Fund shall not take any action with respect to
the Software inconsistent with the foregoing acknowledgments, nor shall the Fund
attempt to decompile,  reverse engineer or modify the Software. The Fund may not
copy, sell, lease or provide, directly or indirectly, any of the Software or any
portion  thereof to any other  person or entity  without the  Custodian's  prior
written  consent.  The Fund may not remove any statutory  copyright  notice,  or
other notice including the software or on any media containing the Software. The
Fund shall  reproduce  any such notice on any  reproduction  of the Software and
shall add  statutory  copyright  notice or other notice to the Software or media
upon the  Bank's  request.  Custodian  agrees to  provide  reasonable  training,
instruction manuals and access to Custodian's "help desk" in connection with the
Fund's user support  necessary to use of the  Software.  At the Fund's  request,
Custodian agrees to permit reasonable testing of the Software by the Fund.

     2. The Fund  shall  obtain and  maintain  at its own cost and  expense  all
equipment and services,  including but not limited to  communications  services,
necessary  for it to utilize  the  Software  and  transmit  Instructions  to the
Custodian.   The  Custodian  shall  not  be  responsible  for  the  reliability,
compatibility  with  the  Software  or  availability  of any such  equipment  or
services or the  performance or  nonperformance  by any nonparty to this Custody
Agreement.

     3. The Fund acknowledges  that the Software,  all data bases made available
to the Fund by utilizing the Software  (other than data bases relating solely to
the  assets  of the  Fund  and  transactions  with  respect  thereto),  and  any
proprietary data, processes, information and documentation (other than which are
or become part of the public domain or are legally required to be made available
to  the  public)  (collectively,  the  "Information"),  are  the  exclusive  and
confidential  property  of the  Custodian.  The Fund shall keep the  Information
confidential  by using  the same  care and  discretion  that the Fund  uses with
respect to its own  confidential  property and trade  secrets and shall  neither
make nor  permit  any  disclosure  without  the  prior  written  consent  of the
Custodian.  Upon  termination of this Agreement or the Software  license granted
hereunder  for any reason,  the Fund shall return to the Custodian all copies of
the  Information  which are in its  possession or under its control or which the
Fund  distributed  to third  parties.  The  provisions of this Article shall not
affect the copyright  status of any of the Information  which may be copyrighted
and shall apply to all Information whether or not copyrighted.

     4. The  Custodian  reserves the right to modify,  at its own  expense,  the
Software  from time to time without  prior notice and the Fund shall install new
releases of the  Software as the  Custodian  may direct.  The Fund agrees not to
modify or attempt to modify the Software  without the Custodian's  prior written
consent.  The Fund acknowledges that any modifications to the Software,  whether
by the  Fund or the  Custodian  and  whether  with or  without  the  Custodian's
consent, shall become the property of the Custodian.

     5. The Custodian and its  manufacturers and suppliers make no warranties or
representations  of any kind with  regard to the  Software or the  method(s)  by
which the Fund may transmit  Instructions to the Custodian,  express or implied,
including  but not  limited to any  implied  warranties  of  merchantability  or
fitness for a particular purpose.

     6. EXPORT  RESTRICTIONS.  EXPORT OF THE  SOFTWARE IS  PROHIBITED  BY UNITED
STATES LAW.  THE FUND AGREES  THAT IT WILL NOT UNDER ANY  CIRCUMSTANCES  RESELL,
DIVERT,  TRANSFER,  TRANSSHIP OR OTHERWISE DISPOSE OF THE SOFTWARE (IN ANY FORM)
IN OR TO ANY OTHER COUNTRY.  IF THE CUSTODIAN  DELIVERS THE SOFTWARE TO THE FUND
OUTSIDE THE UNITED  STATES,  THE SOFTWARE WAS EXPORTED FROM THE UNITED STATES IN
ACCORDANCE WITH EXPORT  ADMINISTRATIVE  REGULATIONS.  DIVERSION CONTRARY TO U.S.
LAWS  PROHIBITED.  The Fund hereby  authorizes  Custodian to report its name and
address to  government  agencies to which  Custodian is required to provide such
information by law.

     7. Where the method for  transmitting  Instructions by the Fund involves an
automatic  systems  acknowledgment  by the  Custodian  of its  receipt  of  such
Instructions, then in the absence of such acknowledgment the Custodian shall not
be liable for any failure to act pursuant to such Instructions, the Fund may not
claim that such Instructions were received by the Custodian,  and the Fund shall
deliver a Certificate by some other means.

     8.   (a) The Fund agrees that where it delivers to the Custodian
Instructions hereunder,  it shall be the  Fund's  sole  responsibility to ensure
that only persons duly authorized by the Fund transmit such Instructions to the
Custodian. The Fund will cause all persons  transmitting  Instructions  to the
Custodian to treat applicable user and authorization codes, passwords and
authentication keys with extreme care, and irrevocably authorizes the Custodian
to act in accordance with and rely upon Instructions received by it pursuant
hereto.

          (b) The Fund hereby represents, acknowledges and agrees that it is
fully informed of the protections and risks associated  with the various methods
of transmitting  Instructions  to the  Custodian  and that there may be more
secure methods  of  transmitting  instructions  to the  Custodian  than  the
method(s) selected by the Fund.  The Fund hereby agrees that the security
procedures  (if any) to be followed in connection  with the Fund's  transmission
of Instructions provide to it a  commercially  reasonable  degree of  protection
in light of its particular needs and circumstances.

     9. The Fund hereby represents, warrants and covenants to the Custodian that
this Agreement has been duly approved by a resolution of its Board of Directors,
and that its  transmission  of  Instructions  pursuant hereto shall at all times
comply with the Investment Company Act.

     10. The Fund  shall  notify  the  Custodian  of any  errors,  omissions  or
interruptions  in,  or  delay  or   unavailability   of,  its  ability  to  send
Instructions as promptly as practicable,  and in any event within 24 hours after
the earliest of (i) discovery thereof,  (ii) the Business Day on which discovery
should have occurred  through the exercise of  reasonable  care and (iii) in the
case of any error,  the date of actual  receipt  of the  earliest  notice  which
reflects  such error,  it being agreed that  discovery and receipt of notice may
only occur on a business  day.  The  Custodian  shall  promptly  advise the Fund
whenever the Custodian  learns of any errors,  omissions or interruption  in, or
delay or unavailability of, the Fund's ability to send Instructions.

     11. Custodian will indemnify and hold harmless the Fund with respect to any
liability,  damages, loss or claim incurred by or brought against Fund by reason
any claim or  infringement  against  any  patent,  copyright,  license  or other
property right arising out or by reason of the Fund's use of the Software in the
form provided under this Section.  Custodian at its own expense will defend such
action or claim  brought  against Fund to the extent that it is based on a claim
that the  Software in the form  provided by  Custodian  infringes  any  patents,
copyrights, license or other property right, provided that Custodian is provided
with  reasonable  written  notice of such claim,  provided that the Fund has not
settled, compromised or confessed any such claim without the Custodian's written
consent,  in  which  event  Custodian  shall  have no  liability  or  obligation
hereunder,  and  provided  Fund  cooperates  with and assists  Custodian  in the
defense of such claim.  Custodian shall have the right to control the defense of
all such claims, lawsuits and other proceedings. If, as a result of any claim of
infringement  against any patent,  copyright,  license or other property  right,
Custodian is enjoined from using the Software, or if Custodian believes that the
System is likely to become the subject of a claim of infringement,  Custodian at
its option may in its sole  discretion  either (a) at its  expenses  procure the
right for the Fund to continue to use the  Software,  or (b),  replace or modify
the Software so as to make it non-infringing, or (c) may discontinue the license
granted herein upon written notice to Fund.

                                  ARTICLE XVI.

                DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
                 OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES

     1. The Custodian is authorized and instructed to employ,  as  sub-custodian
for each Series'  Securities  for which the primary market is outside the United
States   ("Foreign   Securities")   and  other  assets,   the  foreign   banking
institutions,   foreign   branches  of  U.S.  banks,   and  foreign   securities
depositories  and clearing  agencies  designated on Schedule I hereto  ("Foreign
Sub-Custodians").  The Fund may designate any additional  foreign  sub-custodian
with  which  the  Custodian  has an  agreement  for  such  entity  to act as the
Custodian's  agent,  as  its  sub-custodian  and  any  such  additional  foreign
sub-custodian shall be deemed added to Schedule I. Upon receipt of a Certificate
from the Fund,  the  Custodian  shall  cease the  employment  of any one or more
Foreign  Sub-Custodians  for  maintaining  custody of the Fund's assets and such
Foreign Sub-Custodian shall be deemed deleted from Schedule I.

     2. Each  delivery of a Certificate  to the  Custodian in connection  with a
transaction  involving  the use of a Foreign  Sub-Custodian  shall  constitute a
representation  and  warranty  by the Fund that its Board of  Directors,  or its
third  party  foreign  custody  manager  as  defined  in Rule  17f-5  under  the
Investment  Company Act of 1940, as amended,  if any, has determined that use of
such Foreign Sub-Custodian satisfies the requirements of such Investment Company
Act of 1940 and such Rule 17f-5 thereunder.

     3. The Custodian shall identify on its books as belonging to each Series of
the  Fund  the  Foreign   Securities   of  such  Series  held  by  each  Foreign
Sub-Custodian.  At  the  election  of the  Fund,  it  shall  be  entitled  to be
subrogated to the rights of the Custodian with respect to any claims by the Fund
or any Series  against a Foreign  Sub-Custodian  as a  consequence  of any loss,
damage,  cost, expense,  liability or claim sustained or incurred by the Fund or
any Series if and to the extent  that the Fund or such  Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.

     4. Upon request of the Fund, the Custodian will,  consistent with the terms
of the applicable  Foreign  Sub-Custodian  agreement,  use reasonable efforts to
arrange for the independent accountants of the Fund to be afforded access to the
books and records of any Foreign Sub-Custodian insofar as such books and records
relate to the performance of such Foreign Sub-Custodian under its agreement with
the Custodian on behalf of the Fund.

     5. The  Custodian  will  supply to the Fund from time to time,  as mutually
agreed upon,  statements in respect of the  securities  and other assets of each
Series  held  by  Foreign  Sub-Custodians,  including  but  not  limited  to  an
identification of entities having possession of each Series' Foreign  Securities
and other  assets,  and advices or  notifications  of any  transfers  of Foreign
Securities  to  or  from  each  custodial   account   maintained  by  a  Foreign
Sub-Custodian for the Custodian on behalf of the Series.

     6. The Custodian shall transmit  promptly to the Fund all notices,  reports
or  other  written  information   received  pertaining  to  the  Fund's  Foreign
Securities,  including without limitation,  notices of corporate action, proxies
and proxy solicitation materials.

     7.  Notwithstanding  any  provision  of  this  Agreement  to the  contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing  practices and procedures in the  jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser  thereof or to a dealer  therefor  (or an agent for such  purchaser or
dealer)  against a receipt with the  expectation of receiving  later payment for
such securities from such purchaser or dealer.

     8.  Notwithstanding  any other provision in this Agreement to the contrary,
with respect to any losses or damages  arising out of or relating to any actions
or omissions of any Foreign  Sub-Custodian the sole responsibility and liability
of the Custodian  shall be to take  appropriate  action at the Fund's expense to
recover  such loss or damage from the  Foreign  Sub-Custodian.  It is  expressly
understood and agreed that the  Custodian's  sole  responsibility  and liability
shall be limited to amounts so recovered from the Foreign Sub-Custodian.

                                  ARTICLE XVII.

                                 FX TRANSACTIONS

     1.  Whenever  the Fund shall enter into an FX  Transaction,  the Fund shall
promptly deliver to the Custodian a Certificate or Oral Instructions  specifying
with respect to such FX Transaction: (a) the Series to which such FX Transaction
is specifically  allocated;  (b) the type and amount of Currency to be purchased
by the Fund; (c) the type and amount of Currency to be sold by the Fund; (d) the
date on which the Currency to be purchased is to be  delivered;  (e) the date on
which the Currency to be sold is to be delivered; and (f) the name of the person
from whom or through whom such  currencies are to be purchased and sold.  Unless
otherwise instructed by a Certificate or Oral Instructions,  the Custodian shall
deliver, or shall instruct a Foreign  Sub-Custodian to deliver,  the Currency to
be sold on the date on which such  delivery  is to be made,  as set forth in the
Certificate,  and shall receive, or instruct a Foreign Sub-Custodian to receive,
the Currency to be purchased on the date as set forth in the Certificate.

     2. Where the  Currency to be sold is to be delivered on the same day as the
Currency to be purchased,  as specified in the Certificate or Oral Instructions,
the Custodian or a Foreign  Sub-Custodian  may arrange for such  deliveries  and
receipts to be made in accordance with the customs  prevailing from time to time
among brokers or dealers in Currencies, and such receipt and delivery may not be
completed simultaneously.  The Fund assumes all responsibility and liability for
all credit risks involved in connection with such receipts and deliveries, which
responsibility and liability shall continue until the Currency to be received by
the Fund has been received in full.

     3. Any FX  Transaction  effected by the Custodian in  connection  with this
Agreement may be entered with the Custodian, any office, branch or subsidiary of
The Bank of New York  Company,  Inc.,  or any  Foreign  Sub-Custodian  acting as
principal or otherwise through customary banking channels.  The Fund may issue a
standing  Certificate  with  respect to FX  Transaction  but the  Custodian  may
establish  rules or limitations  concerning any foreign  exchange  facility made
available to the Fund.  The Fund shall bear all risks of investing in Securities
or holding  Currency.  Without  limiting the foregoing,  the Fund shall bear the
risks that rules or  procedures  imposed by a Foreign  Sub-Custodian  or foreign
depositories, exchange controls, asset freezes or other laws, rules, regulations
or orders  shall  prohibit or impose  burdens or costs on the transfer to, by or
for the account of the Fund of  Securities  or any cash held  outside the Fund's
jurisdiction or denominated in Currency other than its home  jurisdiction or the
conversion of cash from one Currency into another currency.  The Custodian shall
not be  obligated to  substitute  another  Currency for a Currency  (including a
Currency   that  is  a   component   of  a   Composite   Currency   Unit)  whose
transferability,  convertibility  or availability has been affected by such law,
regulation,   rule  or   procedure.   Neither  the  Custodian  nor  any  Foreign
Sub-Custodian shall be liable to the Fund for any loss resulting from any of the
foregoing events.

                                 ARTICLE XVIII.

                            CONCERNING THE CUSTODIAN

     1. Except as hereinafter  provided,  or as provided in Article XVI, neither
the Custodian nor its nominee shall be liable for any loss or damage,  including
counsel fees, resulting from its action or omission to act or otherwise,  either
hereunder  or under any Margin  Account  Agreement,  except for any such loss or
damage  arising out of its own  negligence  or willful  misconduct.  In no event
shall  the  Custodian  be liable  to the Fund or any  third  party for  special,
indirect or consequential  damages or lost profits or loss of business,  arising
under or in connection with this Agreement,  even if previously  informed of the
possibility of such damages and regardless of the form of action.  The Custodian
may,  with  respect to  questions  of law arising  hereunder or under any Margin
Account Agreement, apply for and obtain the advice and opinion of counsel to the
Fund,  or of its own  counsel,  at the  expense of the Fund,  and shall be fully
protected  with  respect  to  anything  done or  omitted  by it in good faith in
conformity  with such advice or opinion.  The  Custodian  shall be liable to the
Fund for any loss or damage  resulting from the use of the Book-Entry  System or
any Depository  arising by reason of any negligence or willful misconduct on the
part of the Custodian or any of its employees or agents.

     2. Without limiting the generality of the foregoing, the Custodian shall be
under no obligation to inquire into, and shall not be liable for:

          (a) the validity of the issue of any Securities  purchased,  sold, or
written by or for the Fund, the legality of the purchase, sale or writing
thereof,  or the propriety of the amount paid or received therefor;

          (b) the legality of the sale or  redemption  of any Shares,  or the
propriety of the amount to be received or paid therefor;

          (c) the legality of the declaration or payment of any dividend by the
Fund;

          (d) the legality of any borrowing by the Fund using Securities as
collateral;

          (e) the  legality of any loan of portfolio Securities, nor  shall  the
Custodian be under any duty or obligation to see to it that any cash  collateral
delivered to it by a broker,  dealer, or financial  institution or held by it at
any  time as a  result  of such  loan of  portfolio  Securities  of the  Fund is
adequate  collateral  for the Fund against any loss it might sustain as a result
of such loan. The Custodian  specifically,  but not by way of limitation,  shall
not be under any duty or  obligation  periodically  to check or notify  the Fund
that the amount of such cash  collateral  held by it for the Fund is  sufficient
collateral  for  the  Fund,  but  such  duty or  obligation  shall  be the  sole
responsibility of the Fund. In addition, the Custodian shall be under no duty or
obligation  to see that any broker,  dealer or  financial  institution  to which
portfolio  Securities  of the  Fund  are  lent  pursuant  to  Article  X of this
Agreement  makes payment to it of any dividends or interest which are payable to
or for the  account  of the  Fund  during  the  period  of  such  loan or at the
termination of such loan, provided,  however,  that the Custodian shall promptly
notify the Fund in the event that such  dividends  or interest  are not paid and
received when due; or

          (f) the sufficiency or value of any amounts of money and/or Securities
held in any Margin Account,  Senior Security Account or Collateral Account in
connection with transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker,  dealer,  futures commission
merchant or Clearing  Member makes  payment to the Fund of any variation  margin
payment or similar  payment  which the Fund may be entitled to receive from such
broker, dealer,  futures commission merchant or Clearing Member, to see that any
payment received by the Custodian from any broker,  dealer,  futures commission
merchant or Clearing  Member is the amount the Fund is entitled to receive,
or to notify the Fund of the Custodian's receipt or non-receipt of any such
payment.

     3. The Custodian shall not be liable for, or considered to be the Custodian
of,  any  money,  whether  or not  represented  by any  check,  draft,  or other
instrument for the payment of money,  received by it on behalf of the Fund until
the Custodian actually receives and collects such money directly or by the final
crediting  of the account  representing  the Fund's  interest at the  Book-Entry
System or the Depository.

     4. The Custodian shall have no  responsibility  and shall not be liable for
ascertaining or acting upon any calls,  conversions,  exchange offers,  tenders,
interest  rate changes or similar  matters  relating to  Securities  held in the
Depository, unless the Custodian shall have actually received timely notice from
the  Depository.  In no event shall the  Custodian  have any  responsibility  or
liability  for the  failure  of the  Depository  to  collect,  or for  the  late
collection  or late  crediting  by the  Depository  of any amount  payable  upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable.  However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian  shall not be under any  obligation to appear in,  prosecute or defend
any  action,  suit  or  proceeding  in  respect  to any  Securities  held by the
Depository  which in its opinion may involve it in expense or liability,  unless
indemnity  satisfactory  to it against all expense and liability be furnished as
often as may be required.

     5. The  Custodian  shall not be under any duty or obligation to take action
to effect  collection  of any amount due to the Fund from the Transfer  Agent of
the Fund  nor to take any  action  to  effect  payment  or  distribution  by the
Transfer  Agent of the Fund of any amount paid by the  Custodian to the Transfer
Agent of the Fund in accordance with this Agreement.

     6. The  Custodian  shall not be under any duty or obligation to take action
to effect  collection of any amount if the Securities  upon which such amount is
payable  are  in  default,  or  if  payment  is  refused  after  due  demand  or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.

     7.  The   Custodian   may  in  addition  to  the   employment   of  Foreign
Sub-Custodians  pursuant to Article XVI appoint one or more banking institutions
as  Depository or  Depositories,  as  Sub-Custodian  or Sub-  Custodians,  or as
Co-Custodian   or   Co-Custodians   including,   but  not  limited  to,  banking
institutions  located in foreign countries,  of Securities and money at any time
owned by the  Fund,  upon such  terms and  conditions  as may be  approved  in a
Certificate or contained in an agreement executed by the Custodian, the Fund and
the appointed institution.

     8. The Custodian shall not be under any duty or obligation (a) to ascertain
whether any Securities at any time delivered to, or held by it or by any Foreign
Sub-Custodian,  for the  account  of the Fund and  specifically  allocated  to a
Series are such as  properly  may be held by the Fund or such  Series  under the
provisions  of its then  current  prospectus,  or (b) to  ascertain  whether any
transactions  by the Fund,  whether or not  involving  the  Custodian,  are such
transactions as may properly be engaged in by the Fund.

     9. The Custodian shall be entitled to receive and the Fund agrees to pay to
the Custodian all out-of-pocket  expenses and such compensation as may be agreed
upon from time to time between the  Custodian  and the Fund.  The  Custodian may
charge such  compensation  and any expenses with respect to a Series incurred by
the  Custodian  in the  performance  of its duties  pursuant  to such  agreement
against any money  specifically  allocated to such Series.  Unless and until the
Fund  instructs the Custodian by a  Certificate  to apportion any loss,  damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be  entitled  to charge  against  any money held by it for the account of a
Series such Series' pro rata share (based on such Series, net asset value at the
time of the charge to the  aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to  reimbursement  under the  provisions  of this
Agreement.   The  expenses  for  which  the  Custodian   shall  be  entitled  to
reimbursement  hereunder shall include,  but are not limited to, the expenses of
sub-custodians  and  foreign  branches  of the  Custodian  incurred  in settling
outside  of New  York  City  transactions  involving  the  purchase  and sale of
Securities of the Fund.

     10. The Custodian shall be entitled to rely upon any Certificate, notice or
other instrument in writing received by the Custodian and reasonably believed by
the Custodian to be a Certificate.  The Custodian shall be entitled to rely upon
any Oral Instructions  actually received by the Custodian  hereinabove  provided
for.  The Fund agrees to forward to the  Custodian a  Certificate  or  facsimile
thereof   confirming  such  Oral  Instructions  in  such  manner  so  that  such
Certificate or facsimile  thereof is received by the Custodian,  whether by hand
delivery,  telecopier or other  similar  device,  or otherwise,  by the close of
business of the same day that such Oral Instructions are given to the Custodian.
The  Fund  agrees  that the  fact  that  such  confirming  instructions  are not
received,  or that contrary instructions are received, by the Custodian shall in
no  way  affect  the  validity  of the  transactions  or  enforceability  of the
transactions  hereby  authorized by the Fund. The Fund agrees that the Custodian
shall incur no liability to the Fund in acting upon Oral  Instructions  given to
the Custodian hereunder concerning such transactions  provided such instructions
reasonably appear to have been received from an Authorized Person.

     11.  The  Custodian   shall  be  entitled  to  rely  upon  any  instrument,
instruction or notice  received by the Custodian and reasonably  believed by the
Custodian to be given in accordance  with the terms and conditions of any Margin
Account  Agreement.  Without  limiting  the  generality  of the  foregoing,  the
Custodian  shall be under no duty to inquire into,  and shall not be liable for,
the  accuracy  of any  statements  or  representations  contained  in  any  such
instrument or other notice including,  without limitation,  any specification of
any  amount to be paid to a  broker,  dealer,  futures  commission  merchant  or
Clearing Member.

     12.  The  books  and  records  pertaining  to  the  Fund  which  are in the
possession  of the Custodian  shall be the property of the Fund.  Such books and
records shall be prepared and maintained as required by the  Investment  Company
Act of 1940,  as amended,  and other  applicable  securities  laws and rules and
regulations.  The Fund,  or the Fund's  authorized  representatives,  shall have
access to such books and records during the  Custodian's  normal business hours.
Upon the  reasonable  request of the Fund,  copies of any such books and records
shall  be  provided  by the  Custodian  to the  Fund  or the  Fund's  authorized
representative,  and the Fund shall  reimburse  the  Custodian  its  expenses of
providing such copies.  Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on  micro-film,  whichever  the  Custodian  elects,  any
records included in any such delivery which are maintained by the Custodian on a
computer  disc, or are similarly  maintained,  and the Fund shall  reimburse the
Custodian for its expenses of providing such hard copy or micro-film.

     13. The Custodian  shall  provide the Fund with any report  obtained by the
Custodian  on the  system of  internal  accounting  control  of the Book-  Entry
System,  the  Depository or O.C.C.,  and with such reports on its own systems of
internal  accounting  control as the Fund may  reasonably  request  from time to
time.

     14.  The Fund  agrees  to  indemnify  the  Custodian  against  and save the
Custodian harmless from all liability,  claims,  losses and demands  whatsoever,
including  attorney's  fees,  howsoever  arising  or  incurred  because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of  checks  pursuant  to  paragraph  6 of  Article  XIII as  part  of any  check
redemption privilege program of the Fund, except for any such liability,  claim,
loss and  demand  arising  out of the  Custodian's  own  negligence  or  willful
misconduct.  The Custodian  shall promptly after receipt of notice of a claim or
commencement  of any  action,  notify  the Fund in  writing  of the claim or the
commencement  of such  action,  and in the event that such prompt  notice is not
provided  the Fund  shall  not be liable to the  extent  the delay in  providing
prompt  notice  increases the  liability of the Fund.  The  Custodian  shall not
settle any claim or action  without  the Fund's  prior  written  consent,  which
consent shall not be unreasonably withheld.

     15.  Subject to the  foregoing  provisions  of this  Agreement,  including,
without  limitation,  those  contained in Article XVI and XVII the Custodian may
deliver and receive  Securities,  and receipts with respect to such  Securities,
and arrange for payments to be made and received by the  Custodian in accordance
with the customs  prevailing  from time to time among brokers or dealers in such
Securities.  When the  Custodian is  instructed  to deliver  Securities  against
payment,  delivery of such Securities and receipt of payment therefor may not be
completed simultaneously.  The Fund assumes all responsibility and liability for
all credit  risks  involved  in  connection  with the  Custodian's  delivery  of
Securities  pursuant  to  instructions  of the Fund,  which  responsibility  and
liability  shall  continue  until final payment in full has been received by the
Custodian.

     16.  The  Custodian  shall  have no duties or  responsibilities  whatsoever
except such duties and  responsibilities  as are  specifically set forth in this
Agreement,  and no covenant  or  obligation  shall be implied in this  Agreement
against the Custodian.

                                  ARTICLE XIX.

                                   TERMINATION

     1. Either of the parties  hereto may terminate  this Agreement by giving to
the other  party a notice in writing  specifying  the date of such  termination,
which  shall be not less than  ninety (90) days after the date of giving of such
notice.  In the event such notice is given by the Fund, it shall be  accompanied
by a copy of a resolution  of the Board of  Directors of the Fund,  certified by
the Secretary or any Assistant  Secretary,  electing to terminate this Agreement
and  designating a successor  custodian or custodians,  each of which shall be a
bank or trust company having not less than $2,000,000 aggregate capital, surplus
and undivided profits.  In the event such notice is given by the Custodian,  the
Fund shall, on or before the termination  date,  deliver to the Custodian a copy
of a  resolution  of the  Board  of  Directors  of the  Fund,  certified  by the
Secretary  or any  Assistant  Secretary,  designating  a successor  custodian or
custodians.  In the absence of such  designation  by the Fund, the Custodian may
designate a successor  custodian  which shall be a bank or trust company  having
not less than $2,000,000 aggregate capital,  surplus and undivided profits. Upon
the date set  forth in such  notice  this  Agreement  shall  terminate,  and the
Custodian  shall  upon  receipt  of a  notice  of  acceptance  by the  successor
custodian  on  that  date  deliver  directly  to  the  successor  custodian  all
Securities  and money then owned by the Fund and held by it as Custodian,  after
deducting all fees,  expenses and other amounts for the payment or reimbursement
of which it shall then be entitled.

     2. If a successor  custodian is not designated by the Fund or the Custodian
in  accordance  with  the  preceding  paragraph,  the Fund  shall  upon the date
specified in the notice of  termination  of this Agreement and upon the delivery
by the Custodian of all Securities (other than Securities held in the Book-Entry
System  which  cannot be delivered to the Fund) and money then owned by the Fund
be deemed to be its own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement,  other than the duty
with  respect  to  Securities  held in the Book  Entry  System  which  cannot be
delivered to the Fund to hold such Securities  hereunder in accordance with this
Agreement.

                                  ARTICLE XX.

                                  MISCELLANEOUS

     1.  Annexed  hereto as  Appendix  A is a  Certificate  signed by two of the
present  Authorized  Persons of the Fund under its seal, setting forth the names
and the  signatures  of the  present  Authorized  Persons of the Fund.  The Fund
agrees to furnish to the  Custodian  a new  Certificate  in similar  form in the
event that any such present  Authorized Person ceases to be an Authorized Person
of the Fund,  or in the event that other or  additional  Authorized  Persons are
elected  or  appointed.  Until  such  new  Certificate  shall be  received,  the
Custodian  shall be fully  protected  in  acting  under the  provisions  of this
Agreement or Oral Instructions upon the signatures of the Authorized  Persons as
set forth in the last delivered Certificate.

     2. Any notice or other  instrument  in writing,  authorized  or required by
this  Agreement to be given to the  Custodian,  shall be  sufficiently  given if
addressed  to the  Custodian  and mailed or delivered to it at its offices at 90
Washington  Street,  New York,  New York  10286,  or at such other  place as the
Custodian may from time to time designate in writing.

     3. Any notice or other  instrument  in writing,  authorized  or required by
this Agreement to be given to the Fund shall be sufficiently  given if addressed
to the Fund and mailed or  delivered  to it at its office at the address for the
Fund first  above  written,  or at such other place as the Fund may from time to
time designate in writing.

     4. This  Agreement may not be amended or modified in any manner except by a
written  agreement  executed by both  parties  with the same  formality  as this
Agreement and approved by a resolution of the Board of Directors of the Fund.

     5. This  Agreement  shall  extend to and shall be binding  upon the parties
hereto, and their respective  successors and assigns;  provided,  however,  that
this Agreement  shall not be assignable by the Fund without the written  consent
of the Custodian,  or by the Custodian  without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.

     6. This  Agreement  shall be construed in  accordance  with the laws of the
State of New York without giving effect to conflict of laws principles  thereof.
Each party  hereby  consents  to the  jurisdiction  of a state or federal  court
situated  in New York City,  New York in  connection  with any  dispute  arising
hereunder and hereby waives its right to trial by jury.

     7. This  Agreement may be executed in any number of  counterparts,  each of
which shall be deemed to be an original,  but such counterparts shall, together,
constitute only one instrument.

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

                           PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC.
[SEAL]                     By:      /s/ A. S. Filean
                                   Arthur S. Filean
                                   Vice President and Secretary

Attest:
/s/ Barbara R. Duncan
                           THE BANK OF NEW YORK
[SEAL]                     By:
                           Name:  /s/ Stephen E. Grunston
                           Title: Vice President
Attest:
/s/ Marjorie McLaughlin


                                   APPENDIX A


         I,  Michael J. Beer,  Financial  Officer  and I,  Arthur S. Filean Vice
President and  Secretary of PRINCIPAL  PARTNERS  AGGRESSIVE  GROWTH FUND INC., a
Maryland corporation (the "Fund"), do hereby certify that:

         The following  persons have been duly authorized in conformity with the
Fund's Declaration of Trust and By-Laws to execute any Certificate, instruction,
notice or other  instrument on behalf of the Fund,  and the signatures set forth
opposite their respective names are their true and correct signatures:

      Name                        Position                    Signature
Ralph C. Eucher           President                    /s/ Ralph C. Eucher

Arthur S. Filean          Vice President and Secretary /s/ A. S. Filean

Michael J. Beer           Financial Officer            /s/ Mike Beer

Craig L. Bassett          Treasurer                    /s/ C. L. Bassett

Michael D. Roughton       Counsel                      /s/ Michael Roughton

Michael W. Cumings        Assistant Counsel            /s/ Michael W. Cumings

Jane E. Karli             Assistant Treasurer          /s/ J. E. Karli

Ernest H. Gillum          Assistant Secretary          /s/ Ernest H. Gillum


                                   APPENDIX B


                                     SERIES


                                   APPENDIX C


     I, M.  McLaughlin,  a Vice  President  with THE BANK OF NEW YORK do  hereby
designate the following publications:


The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney  Municipal Bond Service
London  Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal


                                    EXHIBIT A

                                  CERTIFICATION

         The undersigned,  Arthur S. Filean,  hereby certifies that he or she is
the duly elected and acting Vice  President and Secretary of PRINCIPAL  PARTNERS
AGGRESSIVE  GROWTH FUND INC., a Maryland  corporation (the "Fund"),  and further
certifies that the following resolution was adopted by the Board of Directors of
the Fund at a meeting duly held on September  13, 1999, at which a quorum was at
all times  present and that such  resolution  has not been modified or rescinded
and is in full force and effect as of the date hereof.

                  RESOLVED,  that The Bank of New York, as Custodian pursuant to
         a Custody  Agreement between The Bank of New York and the Fund dated as
         of October 28 , 1999,  (the  "Custody  Agreement")  is  authorized  and
         instructed  on a  continuous  and  ongoing  basis  to  deposit  in  the
         Book-Entry System, as defined in the Custody Agreement,  all securities
         eligible  for deposit  therein,  regardless  of the Series to which the
         same are specifically  allocated,  and to utilize the Book-Entry System
         to the extent possible in connection  with its performance  thereunder,
         including,  without  limitation,  in  connection  with  settlements  of
         purchases and sales of securities,  loans of securities, and deliveries
         and returns of securities collateral.

         IN  WITNESS  WHEREOF,  I have  hereunto  set my hand  and the  seal of
         PRINCIPAL  PARTNERS  AGGRESSIVE  GROWTH  FUND  INC.,  as of the day of
         November 16, 1999.


                                     /s/ A. S. Filean
                                     Arthur S. Filean
                                     Vice President and Secretary

[SEAL]

/s/ Barbara R. Duncan


                                    EXHIBIT B


                                  CERTIFICATION


         The undersigned,  Arthur S. Filean,  hereby certifies that he or she is
the duly elected and acting of PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND INC., a
Maryland  corporation  (the "Fund"),  and further  certifies  that the following
resolution  was adopted by the Board of  Directors of the Fund at a meeting duly
held on September  13, 1999, at which a quorum was at all times present and that
such  resolution  has not been  modified or  rescinded  and is in full force and
effect as of the date hereof.

                  RESOLVED,  that The Bank of New York, as Custodian pursuant to
         a Custody  Agreement between The Bank of New York and the Fund dated as
         of October 28,  1999,  (the  "Custody  Agreement")  is  authorized  and
         instructed  on a  continuous  and  ongoing  basis until such time as it
         receives a  Certificate,  as defined in the Custody  Agreement,  to the
         contrary  to deposit  in the  Depository,  as  defined  in the  Custody
         Agreement,  all securities eligible for deposit therein,  regardless of
         the Series to which the same are specifically allocated, and to utilize
         the  Depository  to  the  extent   possible  in  connection   with  its
         performance thereunder,  including,  without limitation,  in connection
         with  settlements  of  purchases  and  sales  of  securities,  loans of
         securities, and deliveries and returns of securities collateral.

         IN  WITNESS  WHEREOF,  I have  hereunto  set my hand  and the  seal of
         PRINCIPAL  PARTNERS  AGGRESSIVE  GROWTH  FUND  INC.,  as of the day of
         November 16, 1999.

                                     /s/ A. S. Filean
                                     Arthur S. Filean
                                     Vice President and Secretary

[SEAL]

/s/ Barbara R. Duncan


                                   EXHIBIT B-1


                                  CERTIFICATION


         The undersigned,  Arthur S. Filean,  hereby certifies that he or she is
the duly elected and acting Vice  President and Secretary of PRINCIPAL  PARTNERS
AGGRESSIVE  GROWTH FUND INC., a Maryland  corporation (the "Fund"),  and further
certifies that the following resolution was adopted by the Board of Directors of
the Fund at a meeting duly held on September  13, 1999, at which a quorum was at
all times  present and that such  resolution  has not been modified or rescinded
and is in full force and effect as of the date hereof.

                  RESOLVED,  that The Bank of New York, as Custodian pursuant to
         a Custody  Agreement between The Bank of New York and the Fund dated as
         of  October  28,1999,  (the  "Custody  Agreement")  is  authorized  and
         instructed  on a  continuous  and  ongoing  basis until such time as it
         receives a  Certificate,  as defined in the Custody  Agreement,  to the
         contrary to deposit in the Participants Trust Company as Depository, as
         defined in the Custody Agreement,  all securities  eligible for deposit
         therein,  regardless  of the Series to which the same are  specifically
         allocated,  and to utilize the Participants Trust Company to the extent
         possible in  connection  with its  performance  thereunder,  including,
         without  limitation,  in connection  with  settlements of purchases and
         sales of securities, loans of securities, and deliveries and returns of
         securities collateral.

         IN  WITNESS  WHEREOF,  I have  hereunto  set my hand  and the  seal of
         PRINCIPAL  PARTNERS  AGGRESSIVE  GROWTH  FUND  INC.,  as of the day of
         November 16, 1999.

                                     /s/ A. S. Filean
                                     Arthur S. Filean
                                     Vice President and Secretary

[SEAL]

/s/ Barbara R. Duncan


                                    EXHIBIT C


                                  CERTIFICATION


         The undersigned,  Arthur S. Filean,  hereby certifies that he or she is
the duly elected and acting Vice  President and Secretary of PRINCIPAL  PARTNERS
AGGRESSIVE  GROWTH FUND INC., a Maryland  corporation (the "Fund"),  and further
certifies that the following resolution was adopted by the Board of Directors of
the Fund at a meeting duly held on September  13, 1999, at which a quorum was at
all times  present and that such  resolution  has not been modified or rescinded
and is in full force and effect as of the date hereof.

                  RESOLVED,  that The Bank of New York, as Custodian pursuant to
         a Custody  Agreement between The Bank of New York and the Fund dated as
         of October 28,  1999,  (the  "Custody  Agreement")  is  authorized  and
         instructed  on a  continuous  and  ongoing  basis until such time as it
         receives a  Certificate,  as defined in the Custody  Agreement,  to the
         contrary,  to accept,  utilize and act with respect to Clearing  Member
         confirmations for Options and transaction in Options, regardless of the
         Series to which the same are specifically  allocated, as such terms are
         defined in the Custody Agreement, as provided in the Custody Agreement.

         IN  WITNESS  WHEREOF,  I have  hereunto  set my hand  and the  seal of
         PRINCIPAL  PARTNERS  AGGRESSIVE  GROWTH  FUND  INC.,  as of the day of
         November 16, 1999.

                                     /s/ A. S. Filean
                                     Arthur S. Filean
                                     Vice President and Secretary

[SEAL]

/s/ Barbara R. Duncan

                                    EXHIBIT D


         The undersigned,  Arthur S. Filean,  hereby certifies that he or she is
the duly elected and acting Vice  President and Secretary of PRINCIPAL  PARTNERS
AGGRESSIVE  GROWTH  FUND INC.,  a Maryland  corporation  (the  "Fund"),  further
certifies that the following  resolutions were adopted by the Board of Directors
of the Fund at a meeting duly held on September  13, 1999, at which a quorum was
at all  times  present  and that  such  resolutions  have not been  modified  or
rescinded and are in full force and effect as of the date hereof.

                  RESOLVED,  that The Bank of New York, as Custodian pursuant to
         the Custody  Agreement  between The Bank of New York and the Fund dated
         as of October 28, 1999 (the  "Custody  Agreement")  is  authorized  and
         instructed on a continuous and ongoing basis to act in accordance with,
         and to rely on Instructions (as defined in the Custody Agreement).

                  RESOLVED, that the Fund shall establish access codes and grant
         use of such  access  codes  only to  Authorized  Persons of the Fund as
         defined in the Custody Agreement,  shall establish internal safekeeping
         procedures   to   safeguard   and  protect  the   confidentiality   and
         availability  of user and access codes,  passwords  and  authentication
         keys,  and  shall  use  Instructions  only in a  manner  that  does not
         contravene the Investment Company Act of 1940, as amended, or the rules
         and regulations thereunder.

         IN  WITNESS  WHEREOF,  I have  hereunto  set my hand  and the  seal of
         PRINCIPAL  PARTNERS  AGGRESSIVE  GROWTH  FUND  INC.,  as of the day of
         November 16, 1999.

                                     /s/ A. S. Filean
                                     Arthur S. Filean
                                     Vice President and Secretary

[SEAL]

/s/ Barbara R. Duncan


                                                                 THE
New York                                                         BANK OF
October 1999        Global Network Management                    NEW
                           SCHEDULE 1                           YORK
- ------------------ --------------------------------------
Country/
Market             Subcustodian(s)
- ------------------ -------------------------------------
Argentina             BankBoston, N.A.
Australia             Commonwealth Bank of Australia/
                      National Australia Bank Limited
Austria               Bank Austria AG
Bahrain               The British Bank of the Middle East
Bangladesh            Standard Chartered Bank
Belgium               Banque Bruxelles Lambert
Bermuda               Bank of Bermuda Limited
Bolivia               Citibank, N.A.
Botswana              Stanbic Bank Botswana Limited
Brazil                BankBoston, N.A.
Bulgaria              ING Bank
Canada                Royal Bank of Canada
Chile                 BankBoston, N.A.
China                 Standard Chartered Bank
Colombia              Cititrust Colombia S.A.
Costa Rica            Banco BCT
Croatia               Privredna Banka Zagreb d.d.
Cyprus                Bank of Cyprus
Czech Republic        Ceskoslovenska Obchodni Banka A.S.
Denmark               Den Danske Bank
EASDAQ                Banque Bruxelles Lambert
Ecuador               Citibank, N.A.
Egypt                 Citibank, N.A.
Estonia               Hansabank Limited
Euromarket            Cedelbank
Euromarket            Euroclear
Finland               Merita Bank plc
France                Paribas
Germany               Dresdner Bank AG
Ghana                 Merchant Bank (Ghana) Limited
Greece                Paribas
Hong Kong             HSBC
Hungary               Citibank Budapest Rt.
Iceland               Landsbanki Islands
India                 HSBC / Deutsche Bank AG
Indonesia             HSBC
Ireland               Allied Irish Banks, plc
Israel                Bank Leumi LE - Israel B.M.
Italy                 Banca Commerciale Italiana /
                      Paribas
Ivory Coast           Societe Generale de Banques en Cote
                      d'Ivoire
Jamaica               CIBC Trust & Merchant Bank Jamaica
                      Ltd.
Japan                 The Bank of Tokyo-Mitsubishi
                      Limited/
                      The Fuji Bank, Limited
Jordan                HSBC
Kazakhstan            ABN/AMRO
Kenya                 Stanbic Bank Kenya Limited
Latvia                Hansabanka Limited
Lebanon               The British Bank of the Middle East
Lithuania             Vilniaus Bankas
Luxembourg            Banque et Caisse dEpargne de
                      lEtat
Malaysia              HongKong Bank Malaysia Berhad
Malta                 Mid-Med Bank
Mauritius             HSBC
Mexico                Banco Nacional de Mexico
Morocco               Banque Commerciale du Maroc
Namibia               Stanbic Bank Namibia Limited
Netherlands           MeesPierson
New Zealand           Australia and New Zealand Banking
                      Group
Nigeria               Stanbic Merchant Bank Nigeria
                      Limited
Norway                Den norske Bank ASA
Oman                  The British Bank of the Middle East
Pakistan              Standard Chartered Bank
Peru                  Citibank, N.A.
Philippines           HSBC
Poland                Bank Handlowy W Warszawie S.A.
Portugal              Banco Comercial Portugus
Romania               ING Bank
Russia                Vneshtorgbank (Min Fin Bonds only)/
                      Credit Suisse First Boston AO
Singapore             United Overseas Bank Limited/
                      The Development Bank of Singapore
                      Ltd.
Slovakia              Ceskoslovenska Obchodni Banka, a.s.
Slovenia              Bank Austria Creditanstalt d.d.
                      Ljubljana
South Africa          The Standard Bank of South Africa
                      Limited
South Korea           Standard Chartered Bank
Spain                 Banco Bilbao Vizcaya
Sri Lanka             Standard Chartered Bank
Swaziland             Stanbic Bank Swaziland Limited
Sweden                Skandinaviska Enskilda Banken
Switzerland           Union Bank of Switzerland /
                      Credit Suisse First Boston
Taiwan                HSBC
Thailand              Standard Chartered Bank/
                      Bangkok Bank Public Company Limited
Trinidad & Tobago     Republic Bank Limited
Tunisia               Banque Internationale Arabe de
                      Tunisie
Turkey                Osmanli Bankasi A.S. (Ottoman Bank)
Ukraine               ING Bank
United Kingdom        The Bank of New York /
                      First Chicago Clearing Center
United States         The Bank of New York
Uruguay               BankBoston, N.A.
Venezuela             Citibank, N.A.
Zambia                Stanbic Bank Zambia Limited
Zimbabwe              Stanbic Bank Zimbabwe Limited

                          TRANSFER AGENCY AGREEMENT AND
                         SHAREHOLDER SERVICES AGREEMENT

     AGREEMENT  to be  effective  October 27,  1999,  by and  between  PRINCIPAL
PARTNERS  AGGRESSIVE  GROWTH  FUND,  INC., a Maryland  corporation  (hereinafter
called the "Fund") and PRINCIPAL  MANAGEMENT  CORPORATION,  an Iowa  corporation
(hereinafter called "the Manager").

                              W I T N E S S E T H:

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

     (a)  Certificate of Incorporation of the Fund;

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

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

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

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

1.   SERVICES FURNISHED BY THE MANAGER

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

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

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

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

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

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

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

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

2.   LIMITATION OF LIABILITY OF THE MANAGER

     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.

3.   DURATION AND TERMINATION OF THIS AGREEMENT

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

4.   AMENDMENT OF THIS AGREEMENT

     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.

5.   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.

6.   MISCELLANEOUS

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

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

                              Principal Partners Aggressive Growth Fund, Inc.

                              BY/s/Arthur S. Filean
                               ARTHUR S. FILEAN, VICE PRESIDENT


                              Principal Management Corporation

                              BY /s/Ralph C. Eucher
                                     Ralph C. Eucher, President

                  PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
                     DISTRIBUTION AND SHAREHOLDER SERVICING
                               PLAN AND AGREEMENT
                                 CLASS A SHARES

      PLAN  AND  AGREEMENT  made as of the  27th day of  October,  1999,  by and
between PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC., a Maryland  corporation
(the "Fund"),  and PRINCOR FINANCIAL SERVICES  CORPORATION,  an Iowa corporation
(the "Underwriter").

      WHEREAS,  Rule 12b-1 under the Investment Company Act of 1940 (the "Act"),
provides  that  a  registered   open-end   management   investment  company  may
participate  in financing  the  distribution  of  securities  of which it is the
issuer; and

      WHEREAS,  any payments made by the Fund in accordance with Rule 12b-1 must
be made  pursuant  to a written  plan  describing  all  material  aspects of the
proposed financing of distribution; and

      WHEREAS, the Underwriter acts as the underwriter for the Fund; and various
broker-dealers  (the "Dealers"),  including the Underwriter,  sell shares of the
Fund and provide services to existing shareholders; and

      WHEREAS,  the Board of Directors of the Fund has determined  that the Fund
should  make direct  payments to the  Underwriter  for  transmission  to Dealers
(including  the  Underwriter)  in connection  with selling class A shares of the
Fund and the rendering of services to class A shareholders and that such payment
should be separate  from the  investment  advisory  and  management  fee paid to
Princor Management Corporation; and

      WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable  likelihood  that the  adoption of the Plan will benefit the Fund and
its class A shareholders;

      NOW,  THEREFORE,  the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its class A
shares.

      Section  1.  The  Fund  is  hereby  authorized  to  make  payments  to the
Underwriter  from that portion of the Fund's assets  attributable to its class A
shares for the purpose of compensating the Underwriter and other selling Dealers
for (i)  providing  shareholder  services  to  existing  class  A  shareholders,
including  without  limitation,  furnishing  information  as to  the  status  of
shareholder accounts,  requests,  responding to telephone and written inquiries,
and assisting  class A  shareholders  with tax  information  and (ii)  rendering
assistance  in the  distribution  and promotion of the sale of class A shares to
the public.

      In consideration of the activities described above, the Fund shall pay the
Underwriter a fee after the end of each month at the annual rate of 0.25% of the
daily net asset value of the Fund's class A shares. The Underwriter shall retain
such  amounts  as are  appropriate  to  compensate  the  Underwriter  for actual
expenses  incurred in  distributing  and promoting the sale of class A shares to
the  public  and remit  such  amounts  as are  appropriate  to other  Dealers in
recognition  of  their  services  and  assistance  as  described  above.  If the
aggregate  payments  received by the  Underwriter  under this Plan in any fiscal
year exceed the  expenditures  made by the  Underwriter  in such fiscal year for
these purposes, the Underwriter shall promptly reimburse the Fund for the amount
of such excess.

      Section 2. This Plan shall not take effect until it has been  approved (1)
by a vote of at least a  majority  (as  defined  in the Act) of the  outstanding
class A shares  of the Fund  and (2) by  votes of the  majority  of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not  "interested  persons" (as
defined  in the Act) of the Fund and who have no  direct or  indirect  financial
interest in the  operation of this Plan or any  agreements  related to this Plan
(the  "Disinterested  Directors"),  cast in person at a meeting  called  for the
purpose of voting on this Plan or such agreements.

      Section 3. Unless sooner terminated pursuant to Section 5, this Plan shall
continue in effect for a period of twelve  months from the date it takes  effect
and  thereafter  shall  continue  in  effect  so  long as  such  continuance  is
specifically  approved at least annually in the manner  provided for approval of
this Plan in Section 2(2).

      Section 4. A representative  of the Underwriter shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.

      Section 5. This Plan may be  terminated  at any time by vote of a majority
of the Disinterested Directors, or by vote of a majority (as defined in the Act)
of the Fund's outstanding class A shares.

      Section  6. Any  agreement  of the Fund  related  to this Plan shall be in
writing and shall provide:

      A.   That such agreement may be terminated at any time, without payment of
           any  penalty,  by vote of a majority  of the  members of the Board of
           Directors of the Fund who are not interested  persons of the Fund and
           have no direct or indirect financial interest in the operation of the
           Plan  or in any  agreements  related  to the  Plan  or by a vote of a
           majority  (as defined in the  Investment  Company Act of 1940) of the
           Fund's  outstanding  class A shares  on not  more  than  sixty  days'
           written notice to any other party to the agreement; and

     B.   That such agreement shall terminate  automatically in the event of its
          assignment.

      Section 7. While the Plan is in effect,  the selection  and  nomination of
Directors  who are not  interested  persons  (as defined in the Act) of the Fund
shall be committed to the  discretion of the  Directors  who are not  interested
persons.

      Section 8. The Fund  shall  preserve  copies of this Plan and any  related
agreements  and all reports  made  pursuant to  Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.

      Section 9. This Plan may not be amended to increase  materially the amount
of distribution  expenses provided for in Section 1 hereof unless such amendment
is approved in the manner provided for initial  approval in Section 2 hereof and
no other  material  amendment to this Plan shall be made unless  approved in the
manner provided for initial approval in Section 2(2) hereof.

      IN WITNESS  WHEREOF,  the parties  hereto have executed and delivered this
Plan as of the first date written above.

                             Principal Partners Aggressive Growth Fund, Inc.

                             By: /s/A. S. Filean
                                   A. S. Filean, Vice President and Secretary


                             Princor Financial Services Corporation

                             By: /s/M. J. Beer
                                   M. J. Beer, Executive Vice President

                 PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
                     DISTRIBUTION AND SHAREHOLDER SERVICING
                               PLAN AND AGREEMENT
                                 CLASS B SHARES

     PLAN AND AGREEMENT made as of the 27th day of October, 1999, by and between
PRINCIPAL  PARTNERS  AGGRESSIVE  GROWTH FUND, INC., a Maryland  corporation (the
"Fund"),  and PRINCOR FINANCIAL SERVICES  CORPORATION,  an Iowa corporation (the
"Underwriter").

     WHEREAS,  Rule 12b-1 under the Investment  Company Act of 1940 (the "Act"),
provides  that  a  registered   open-end   management   investment  company  may
participate  in financing  the  distribution  of  securities  of which it is the
issuer; and

     WHEREAS,  any payments made by the Fund in accordance  with Rule 12b-1 must
be made  pursuant  to a written  plan  describing  all  material  aspects of the
proposed financing of distribution; and

     WHEREAS,  the Underwriter acts as the underwriter for the Fund; and various
broker-dealers  (the "Dealers"),  including the Underwriter,  sell shares of the
Fund and provide services to existing shareholders; and

     WHEREAS,  the Board of Directors of the Fund has  determined  that the Fund
should  make direct  payments to the  Underwriter  for  transmission  to Dealers
(including  the  Underwriter)  in connection  with selling Class B shares of the
Fund and the rendering of services to Class B shareholders and that such payment
should be separate  from the  investment  advisory  and  management  fee paid to
Princor Management Corporation; and

     WHEREAS,  the Board of Directors of the Fund has determined that there is a
reasonable  likelihood  that the  adoption of the Plan will benefit the Fund and
its Class B shareholders;

     NOW, THEREFORE, the following shall constitute the written Plan pursuant to
which the Fund shall  participate in financing the  distribution  of its Class B
shares.

     Section  1.  The  Fund  is  hereby  authorized  to  make  payments  to  the
Underwriter  from that portion of its assets  attributable to its Class B shares
for the  purpose of  reimbursing  the  Underwriter  for  commissions  it pays to
registered  representatives  and Dealers in connection with sales of the Class B
shares and to  compensate  the  Underwriter  and other  selling  Dealers for (i)
providing  shareholder  services to  existing  Class B  shareholders,  including
without  limitation,  furnishing  information  as to the  status of  shareholder
accounts, requests, responding to telephone and written inquiries, and assisting
shareholders  with  tax  information  and  (ii)  rendering   assistance  in  the
distribution and promotion of the sale of Class B shares to the public.

     In consideration of the activities  described above, the Fund shall pay the
Underwriter a fee after the end of each month at the annual rate of 1.00% of the
daily net asset value of the Fund's Class B shares. The Underwriter shall retain
such  amounts  as are  appropriate  to  compensate  the  Underwriter  for actual
expenses  incurred in  distributing  and promoting the sale of Class B shares to
the public and remit such amounts (not to exceed 0.25% annually of the daily net
asset  value of the  Fund=s  shares)  as are  appropriate  to other  Dealers  in
recognition  of  their  services  and  assistance  as  described  above.  If the
aggregate  payments  received by the  Underwriter  under this Plan in any fiscal
year exceed the  expenditures  made by the  Underwriter  in such fiscal year for
these purposes, the Underwriter shall promptly reimburse the Fund for the amount
of such excess.

     Section 2. This Plan shall not take effect  until is has been  approved (1)
by a vote of at least a  majority  (as  defined  in the Act) of the  outstanding
Class B shares  of the Fund  and (2) by  votes of the  majority  of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not  "interested  persons" (as
defined  in the Act) of the Fund and who have no  direct or  indirect  financial
interest in the  operation of this Plan or any  agreements  related to this Plan
(the  "Disinterested  Directors"),  cast in person at a meeting  called  for the
purpose of voting on this Plan or such agreements.

     Section 3. Unless sooner terminated  pursuant to Section 5, this Plan shall
continue in effect for a period of twelve  months from the date it takes  effect
and  thereafter  shall  continue  in  effect  so  long as  such  continuance  is
specifically  approved at least annually in the manner  provided for approval of
this Plan in Section 2(2).

     Section 4. A representative  of the Underwriter  shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.

     Section 5. This Plan may be terminated at any time by vote of a majority of
the Disinterested Directors, or by vote of a majority (as defined in the Act) of
the Fund's outstanding Class B shares.

     Section  6. Any  agreement  of the Fund  related  to this Plan  shall be in
writing and shall provide:

     A.    That such agreement may be terminated at any time, without payment of
           any  penalty,  by vote of a majority  of the  members of the Board of
           Directors of the Fund who are not interested  persons of the Fund and
           have no direct or indirect financial interest in the operation of the
           Plan  or in any  agreements  related  to the  Plan  or by a vote of a
           majority  (as defined in the  Investment  Company Act of 1940) of the
           Fund's  outstanding  Class B shares  on not  more  than  sixty  days'
           written notice to any other party to the agreement; and

     B.   That such agreement shall terminate  automatically in the event of its
          assignment.

     Section 7. While the Plan is in effect,  the  selection  and  nomination of
Directors  who are not  interested  persons  (as defined in the Act) of the Fund
shall be committed to the  discretion of the  Directors  who are not  interested
persons.

     Section  8. The Fund  shall  preserve  copies of this Plan and any  related
agreements  and all reports  made  pursuant to  Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.

     Section 9. This Plan may not be amended to increase  materially  the amount
of distribution  expenses provided for in Section 1 hereof unless such amendment
is approved in the manner provided for initial  approval in Section 2 hereof and
no other  material  amendment to this Plan shall be made unless  approved in the
manner provided for initial approval in Section 2(2) hereof.

     IN WITNESS  WHEREOF,  the parties  hereto have executed and delivered  this
Plan as of the first date written above.

                               Principal Partners Aggressive Growth Fund, Inc.

                               By: /s/A. S. Filean
                                   A. S. Filean, Vice President and Secretary


                               Princor Financial Services Corporation

                               By: /s/M. J. Beer
                                   M. J. Beer, Executive Vice President

                 PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
                     DISTRIBUTION AND SHAREHOLDER SERVICING
                               PLAN AND AGREEMENT
                                 CLASS C SHARES

      PLAN AND  AGREEMENT  made as of the 27th of October,  1999, by and between
PRINCIPAL PARTNERS  AGGRESSIVE GROWTH FUNDS,  INC., a Maryland  corporation (the
"Fund"),  and PRINCOR FINANCIAL SERVICES  CORPORATION,  an Iowa corporation (the
"Underwriter").

      WHEREAS,  Rule 12b-1 under the Investment Company Act of 1940 (the "Act"),
provides  that  a  registered   open-end   management   investment  company  may
participate  in financing  the  distribution  of  securities  of which it is the
issuer; and

      WHEREAS,  any payments made by the Fund in accordance with Rule 12b-1 must
be made  pursuant  to a written  plan  describing  all  material  aspects of the
proposed financing of distribution; and

      WHEREAS, the Underwriter acts as the underwriter for the Fund; and various
broker-dealers  (the "Dealers"),  including the Underwriter,  sell shares of the
Fund and provide services to existing shareholders; and

      WHEREAS,  the Board of Directors of the Fund has determined  that the Fund
should  make direct  payments to the  Underwriter  for  transmission  to Dealers
(including  the  Underwriter)  in connection  with selling Class C shares of the
Fund and the rendering of services to Class C shareholders and that such payment
should be separate  from the  investment  advisory  and  management  fee paid to
Principal Management Corporation; and

      WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable  likelihood  that the  adoption of the Plan will benefit the Fund and
its Class C shareholders;

      NOW,  THEREFORE,  the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its Class C
shares.

      Section  1.  The  Fund  is  hereby  authorized  to  make  payments  to the
Underwriter  from that portion of its assets  attributable to its Class C shares
for the purpose of paying the  Underwriter for its activities in connection with
sales of the Class C shares and to compensate the  Underwriter and other selling
Dealers for (i) providing shareholder services to existing Class C shareholders,
including  without  limitation,  furnishing  information  as to  the  status  of
shareholder accounts,  requests,  responding to telephone and written inquiries,
and assisting shareholders with tax information and (ii) rendering assistance in
the distribution and promotion of the sale of Class C shares to the public.

     (a)  Service  Fee. The Fund will pay a service fee (the  "Service  Fee") as
          defined in Section 26 of the Rules of Fair  Practice  of the  National
          Association of Securities  Dealers,  Inc. (or any successor  provision
          thereto) as in effect from time to time (the "NASD Rule") at an annual
          rate not to  exceed  0.25% of the  fund's  average  daily  net  assets
          attributable  to the Class C shares.  The Service Fee shall be accrued
          daily and paid  monthly or at such other  intervals  as the  directors
          shall  determine.  The  Underwriter  may pay all or any portion of the
          Service Fee to securities dealers or other  organizations  (including,
          but not limited to, any affiliate of the Underwriters) as service fees
          pursuant to agreements with such  organizations for providing personal
          services  to  investors  in Class C  shares  of the  Fund  and/or  the
          maintenance of shareholder accounts, and may retain all or any portion
          of the Service Fee as compensation for providing  personal services to
          investors  in Class C shares of the Fund  and/or  the  maintenance  of
          shareholder  accounts.  All  payments  under  this  Section  1(a)  are
          intended to qualify as "service fees" as defined in the NASD Rule.

     (b)  Distribution  Fees.  In addition to the Service Fee, the Fund will pay
          to the Underwriter a fee (the "Distribution Fee") at an annual rate of
          0.75% (unless reduced as contemplated by and permitted pursuant to the
          next  sentence   hereof)  of  the  Fund's  average  daily  net  assets
          attributable  to the Class C shares in  consideration  of the services
          rendered  in   connection   with  the  sale  of  such  shares  by  the
          Underwriter.  The Fund  will not  terminate  the  Distribution  Fee in
          respect of Fund assets attributable to Class C shares, or pay such fee
          at an annual rate of less than 0.75% of the Fund's  average  daily net
          assets  attributable to the Class C shares,  unless it has ceased, and
          not  resumed,   paying  the  Service  Fee  to  the  Underwriter.   The
          Distribution  Fee shall be accrued  daily and paid  monthly or at such
          other intervals as the Directors shall determine.

          The obligation of the Fund to pay the Distribution Fee shall terminate
          upon  the  termination  of  this  Plan  or the  relevant  distribution
          agreement  between the Distributor and the Fund in accordance with the
          terms hereof or thereof,  but until any such termination  shall not be
          subject to any dispute, offset, counterclaim or defense whatsoever (it
          being  understood  that  nothing  in this  sentence  shall be deemed a
          waiver by the Fund of its right separately to pursue any claims it may
          have  against  the  Distributor  and enforce  such claims  against any
          assets  of the  Distributor  (other  than  its  right  to be paid  the
          Distribution Fee and to be paid contingent deferred sales charges)).

          The Underwriter may pay all or any portion of the  Distribution Fee to
          securities dealers or other organizations (including,  but not limited
          to, any affiliate of the Underwriter as commissions, asset-based sales
          charges  or other  compensation  with  respect  to the sale of Class C
          shares of the Fund may retain all or any  portion of the  Distribution
          Fee as  compensation  for  the  Underwriter's  services  as  principal
          underwriter of the Class C shares of the Fund. All payments under this
          Section 1(b) are intended to qualify as "asset-based sales charges" as
          defined in the NASD Rule.

      Section 2. This Plan shall not take effect until it has been  approved (a)
by a vote of at least a  majority  (as  defined  in the Act) of the  outstanding
Class C shares  of the Fund  and (b) by  votes of the  majority  of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not  "interested  persons" (as
defined  in the Act) of the Fund and who have no  direct or  indirect  financial
interest in the  operation of this Plan or any  agreements  related to this Plan
(the  "Disinterested  Directors"),  cast in person at a meeting  called  for the
purpose of voting on this Plan or such agreements.

      Section 3. Unless sooner terminated pursuant to Section 5, this Plan shall
continue in effect for a period of twelve  months from the date it takes  effect
and  thereafter  shall  continue  in  effect  so  long as  such  continuance  is
specifically  approved at least annually in the manner  provided for approval of
this Plan in Section 2(b).

      Section 4. A representative  of the Underwriter shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.

      Section 5. This Plan may be  terminated  at any time by vote of a majority
of the Disinterested Directors, or by vote of a majority (as defined in the Act)
of the Fund's outstanding Class C shares.

      Section  6. Any  agreement  of the Fund  related  to this Plan shall be in
writing and shall provide:

      A.  That such agreement may be terminated at any time,  without payment of
          any  penalty,  by vote of a  majority  of the  members of the Board of
          Directors of the Fund who are not  interested  persons of the Fund and
          have no direct or indirect  financial interest in the operation of the
          Plan  or in any  agreements  related  to the  Plan  or by a vote  of a
          majority  (as  defined in the  Investment  Company Act of 1940) of the
          Fund's  outstanding  Class C shares on not more than ninety (90) days'
          written notice to any other party to the agreement); and

      B.  That such agreement shall terminate  automatically in the event of its
          assignment.

      Section 7. While the Plan is in effect,  the selection  and  nomination of
Directors  who are not  interested  persons  (as defined in the Act) of the Fund
shall be committed to the  discretion of the  Directors  who are not  interested
persons.

      Section 8. The Fund  shall  preserve  copies of this Plan and any  related
agreements  and all reports  made  pursuant to  Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.

      Section 9. This Plan may not be amended to increase  materially the amount
of Service Fees or Distribution Fees provided for in Section 1(a) and (b) hereof
unless such amendment is approved in the manner provided for initial approval in
Section 2 hereof  and no other  material  amendment  to this Plan  shall be made
unless  approved in the manner  provided  for initial  approval in Section  2(b)
hereof.

      IN WITNESS  WHEREOF,  the parties  hereto have executed and delivered this
Plan as of the first date written above.

                           Principal Partners Aggressive Growth Fund, Inc.

                           By: /s/A. S. Filean
                                 A. S. Filean, Vice President and Secretary


                           PRINCOR FINANCIAL SERVICES CORPORATION

                           By: /s/M. J. Beer
                                 M. J. Beer, Executive Vice President

                 PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC.
                     DISTRIBUTION AND SHAREHOLDER SERVICING
                               PLAN AND AGREEMENT
                                 CLASS R SHARES

      PLAN  AND  AGREEMENT  made as of the  27th day of  October,  1999,  by and
between PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND, INC., a Maryland  corporation
(the "Fund"),  and PRINCOR FINANCIAL SERVICES  CORPORATION,  an Iowa corporation
(the "Underwriter").

      WHEREAS,  Rule 12b-1 under the Investment Company Act of 1940 (the "Act"),
provides  that  a  registered   open-end   management   investment  company  may
participate  in financing  the  distribution  of  securities  of which it is the
issuer; and

      WHEREAS,  any payments made by the Fund in accordance with Rule 12b-1 must
be made  pursuant  to a written  plan  describing  all  material  aspects of the
proposed financing of distribution; and

      WHEREAS, the Underwriter acts as the underwriter for the Fund; and various
broker-dealers  (the "Dealers"),  including the Underwriter,  sell shares of the
Fund and provide services to existing shareholders; and

      WHEREAS,  the Board of Directors of the Fund has determined  that the Fund
should  make direct  payments to the  Underwriter  for  transmission  to Dealers
(including  the  Underwriter)  in connection  with selling Class R shares of the
Fund and the rendering of services to Class R shareholders and that such payment
should be separate  from the  investment  advisory  and  management  fee paid to
Princor Management Corporation; and

      WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable  likelihood  that the  adoption of the Plan will benefit the Fund and
its Class R shareholders;

      NOW,  THEREFORE,  the following shall constitute the written Plan pursuant
to which the Fund shall participate in financing the distribution of its Class R
shares.

      Section  1.  The  Fund  is  hereby  authorized  to  make  payments  to the
Underwriter  from that portion of its assets  attributable to its Class R shares
for the  purpose  of  reimbursing  the  Underwriter  for  expenses  it incurs in
connection  with sales of the Class R shares and to compensate  the  Underwriter
and other  selling  Dealers for (i) providing  shareholder  services to existing
Class R shareholders, including without limitation, furnishing information as to
the status of  shareholder  accounts,  requests,  responding  to  telephone  and
written  inquiries,  and assisting  shareholders  with tax  information and (ii)
rendering  assistance in the  distribution  and promotion of the sale of Class R
shares to the public.

      In consideration of the activities described above, the Fund shall pay the
Underwriter a fee after the end of each month at the annual rate of 0.75% of the
daily net asset value of the Fund's Class R shares.  The  Underwriter  shall (A)
retain such amounts as are  appropriate  to (i)  reimburse the  Underwriter  for
expenses  it  incurs  in  connection  with  sales  of Class R  shares,  and (ii)
compensate the  Underwriter for providing  services and rendering  assistance in
the distribution and promotion of the sale of Class R shares to the public,  and
(B) remit such amounts as are  appropriate  to other Dealers in  recognition  of
their services and assistance as described  above in the first paragraph of this
Section 1;  provided  however,  the  Underwriter  shall not retain for itself or
remit to selling Dealers in recognition of the services provided to shareholders
an amount in excess of 0.25% annually of the daily net asset value of the Fund=s
Class R shares. If the aggregate payments received by the Underwriter under this
Plan in any fiscal year exceed the expenditures  made by the Underwriter in such
fiscal year for these  purposes,  the Underwriter  shall promptly  reimburse the
Fund for the amount of such excess.

      Section 2. This Plan shall not take effect until it has been  approved (1)
by a vote of at least a  majority  (as  defined  in the Act) of the  outstanding
Class R shares  of the Fund  and (2) by  votes of the  majority  of both (i) the
Board of Directors of the Fund, and (ii) those Directors of the Fund who, except
for their positions as Directors of the Fund, are not  "interested  persons" (as
defined  in the Act) of the Fund and who have no  direct or  indirect  financial
interest in the  operation of this Plan or any  agreements  related to this Plan
(the  "Disinterested  Directors"),  cast in person at a meeting  called  for the
purpose of voting on this Plan or such agreements.

      Section 3. Unless sooner terminated pursuant to Section 5, this Plan shall
continue in effect for a period of twelve  months from the date it takes  effect
and  thereafter  shall  continue  in  effect  so  long as  such  continuance  is
specifically  approved at least annually in the manner  provided for approval of
this Plan in Section 2(2).

      Section 4. A representative  of the Underwriter shall provide to the Board
and the Board shall review at least quarterly a written report of the amounts so
expended and the purposes for which such expenditures were made.

      Section 5. This Plan may be  terminated  at any time by vote of a majority
of the Disinterested Directors, or by vote of a majority (as defined in the Act)
of the Fund's outstanding Class R shares.

      Section  6. Any  agreement  of the Fund  related  to this Plan shall be in
writing and shall provide:

      A.  That such agreement may be terminated at any time, without payment of
          any  penalty,  by vote of a majority  of the  members of the Board of
          Directors of the Fund who are not interested  persons of the Fund and
          have no direct or indirect financial interest in the operation of the
          Plan  or in any  agreements  related  to the  Plan  or by a vote of a
          majority  (as defined in the  Investment  Company Act of 1940) of the
          Fund's  outstanding  Class R shares  on not  more  than  sixty  days'
          written notice to any other party to the agreement; and

      B.  That such agreement shall terminate  automatically in the event of its
          assignment.

      Section 7. While the Plan is in effect,  the selection  and  nomination of
Directors  who are not  interested  persons  (as defined in the Act) of the Fund
shall be committed to the  discretion of the  Directors  who are not  interested
persons.

      Section 8. The Fund  shall  preserve  copies of this Plan and any  related
agreements  and all reports  made  pursuant to  Paragraph 4, for a period of not
less than six years from the date of the Plan, or the agreements or such report,
as the case may be, the first two years in an easily accessible place.

      Section 9. This Plan may not be amended to increase  materially the amount
of distribution  expenses provided for in Section 1 hereof unless such amendment
is approved in the manner provided for initial  approval in Section 2 hereof and
no other  material  amendment to this Plan shall be made unless  approved in the
manner provided for initial approval in Section 2(2) hereof.

      IN WITNESS  WHEREOF,  the parties  hereto have executed and delivered this
Plan as of the first date written above.

                            Principal Partners Aggressive Growth Fund, Inc.

                            By: /s/A. S. Filean
                                  A. S. Filean, Vice President and Secretary


                            Princor Financial Services Corporation

                            By: /s/M. J. Beer
                                  M. J. Beer, Executive Vice President

                        PRINCIPAL FAMILY OF MUTUAL FUNDS
                        MULTIPLE CLASS DISTRIBUTION PLAN

Princor Financial Services Corporation ("The Distributor"), Principal Management
Corporation  ("Adviser") and each of the funds listed on Exhibit 1 (the "Fund or
Funds") seek to allow each of the Funds to issue  multiple  separate  classes of
shares under this Multiple Class Distribution Plan (the "Plan") in reliance upon
Rule 18f-3 of the Investment Company Act of 1940.

This Plan enables each Fund to offer certain  investors the option of purchasing
shares subject to: (i) a conventional  front-end sales charge ("Class A shares")
or (ii) a contingent  deferred sales charge ("Class B shares"/"Class C Shares").
The Plan also permits each Fund,  except  Principal  Tax Exempt Cash  Management
Fund, Inc., to offer  distributees of retirement plans administered by Principal
Mutual Life Insurance  Company,  and other classes of customers  identified from
time-to-time by the Funds' management,  a class of shares that is not subject to
either a front-end or contingent deferred sales charge ("Class R shares").  Each
Class represents an interest in the same portfolio of investments of a Fund.

SALES CHARGES

Class A shares

Class A shares of the  Money  Market  Funds are sold to the  public at net asset
value;  no sales charge applies to purchases of the Money Market Funds.  Class A
shares of the Growth-Oriented and Income-Oriented Funds, except the Limited Term
Bond  Fund,  are sold to the public at the net asset  value plus a sales  charge
which ranges from a high 4.75% to a low of 0% of the offering price  (equivalent
to a range of 4.99% to 0% of the net amount invested)  according to the schedule
below.  Class A shares of the  Limited  Term Bond Fund are sold to the public at
the net asset value plus a sales  charge  which ranges from a high of 1.50% to a
low of 0% of the offering price according to the schedule below. An investor who
purchases  $1 million or more of Class A shares  does not pay a sales  charge at
the time of purchase.  However,  a redemption of such shares occurring within 18
months from the date of purchase will be subject to a contingent  deferred sales
charge ("CDSC") at the rate of .75% (.25% for the Limited Term Bond Fund) of the
lesser of the value of the shares redeemed (exclusive of reinvested dividend and
capital gain distributions) or the total cost of such shares.  Shares subject to
the CDSC which are  exchanged  into another  Principal  Fund will continue to be
subject to the CDSC until the original 18 month period expires. However, no CDSC
is payable with respect to the  redemptions  of Class A shares to fund a Princor
401(a) or Princor 401(k) retirement plan, except redemptions  resulting from the
termination of the plan or transfer of plan assets. Certain purchases of Class A
shares qualify for reduced sales charges.

                                           Sales Charge for
                                           All Funds Except
                                        Limited Term Bond Fund
                                       ------------------------
                                         Sales Charge as % of:
                                       ------------------------
                                         Offering        Amount
        Amount of Purchase                Price         Invested
        ------------------                -----         --------
Less than $50,000                          4.75%          4.99%
$50,000 but less than $100,000             4.25%          4.44%
$100,000 but less than $250,000            3.75%          3.90%
$250,000 but less than $500,000            2.50%          2.56%
$500,000 but less than $1,000,000          1.50%          1.52%
$1,000,000 or more                   No Sales Charge      0.00%



                                           Sales Charge for
                                        Limited Term Bond Fund
                                       ------------------------
                                        Sales Charge as % of:
                                       -------------------------
                                       Offering          Amount
        Amount of Purchase               Price          Invested
        ------------------               -----          --------
Less than $50,000                        1.50%            1.52%
$50,000 but less than $100,000           1.25%            1.27%
$100,000 but less than $250,000          1.00%            1.01%
$250,000 but less than $500,000          0.75%            0.76%
$500,000 but less than $1,000,000        0.50%            0.50%
$1,000,000 or more                  No Sales Charge       0.00%


                                            Dealer Allowance
                                            as % of Offering
                                    --------------------------------
                                      All Funds
                                    Except Limited      Limited Term
        Amount of Purchase          Term Bond Fund        Bond Fund
        ------------------          --------------        ---------
Less than $50,000                        4.00%              1.25%
$50,000 but less than $100,000           3.75%              1.00%
$100,000 but less than $250,000          3.25%              0.75%
$250,000 but less than $500,000          2.00%              0.50%
$500,000 but less than $1,000,000        1.25%              0.25%
$1,000,000 or more                       0.75%              0.25%

Class B shares

Class B shares are sold without an initial sales charge, although a CDSC will be
imposed on shares redeemed within six years of purchase.  The following types of
shares  may be  redeemed  without  charge at any time:  (i) shares  acquired  by
reinvestment of distributions and (ii) shares otherwise exempt from the CDSC, as
described below. Subject to the foregoing  exclusions,  the amount of the charge
is determined  as a percentage of the lesser of the current  market value or the
cost of the shares being  redeemed.  Therefore,  when a share is  redeemed,  any
increase  in its value above the  initial  purchase  price is not subject to any
CDSC. The amount of the CDSC will depend on the number of years shares have been
owned and the dollar amount being redeemed, according to the following table:

================================================================================
                        Contingent Deferred Sales Charge
                               as a Percentage of
                         Dollar Amount Subject to Charge
================================================================================
                                           All Funds
       Years Since Purchase           Except Limited Term         Limited Term
          Payments Made                    Bond Fund                Bond Fund
       --------------------           -------------------         ------------
2 years or less                               4.0%                     1.25%
more than 2 years, up to  4 years             3.0%                     0.75%
more than 4 years, up to  5 years             2.0%                     0.50%
more than 5 years, up to 6 years              1.0%                     0.25%
more than 6 years                             None                    None
================================================================================

                                   =========================================
                                           For Certain Sponsored Plans
                                             Commenced After 2/1/1998
                                   =========================================
                                           All Funds
       Years Since Purchase           Except Limited Term         Limited Term
          Payments Made                    Bond Fund                Bond Fund
       --------------------           -------------------         ------------
2 years or less                           3.00%                     0.75%
more than 2 years, up to  4 years         2.00%                     0.50%
more than 4 years, up to  5 years         1.00%                     0.25%
more than 5 years, up to 6 years           None                     None
more than 6 years                          None                     None
================================================================================

In determining whether a CDSC is payable on any redemption,  the Fund will first
redeem shares not subject to any charge, and then shares held longest during the
six-year  period.  The CDSC will be waived on  redemptions  of Class B shares in
connection with the following types of transactions:

          a.   Shares redeemed due to a shareholder's death;

          b.   Shares redeemed due to the shareholder's  disability,  as defined
               in the Internal Revenue Code of 1986 (the "Code"), as amended;

          c.   Shares  redeemed  from   retirement   plans  to  satisfy  minimum
               distribution rules under the Code;

          d.   Shares redeemed to pay surrender charges;

          e.   Shares redeemed to pay retirement plan fees;

          f.   Shares redeemed involuntarily from small balance accounts (values
               of less than $300);

          g.   Shares redeemed through a systematic withdrawal plan that permits
               up to 10% of the  value of a  shareholder's  Class B shares  of a
               particular Fund on the last business day of December of each year
               to be  withdrawn  automatically  in  equal  monthly  installments
               throughout the year;

          h.   Shares  redeemed  from a  retirement  plan  to  assure  the  plan
               complies  with  Sections  401(k),  401(m),  408(k) and 415 of the
               Code; or

          i.   Shares  redeemed from  retirement  plans  qualified under Section
               401(a)  of  the  Code  due  to  the  plan  participant's   death,
               disability, retirement or separation from service after attaining
               age 55.

Class C shares

Class C shares do not have a sales charge at time of purchase.  However,  a CDSC
is imposed at a rate of 1% for  redemptions  within 1st year  (0.50% for Limited
Term Bond). No CDSC is imposed on redemptions after the first year.

Class R shares

Class R shares are  purchased  without an initial  sales  charge or a contingent
deferred sales charge.

EXPENSE ALLOCATION

The Fund will pay to the  distributor a distribution  fee pursuant to the Fund's
Rule  12b-1  distribution  plan at an  annual  rate of (i) up to .25%  (.15% for
Principal  Limited Term Bond Fund, Inc.) of the average daily net asset value of
the Class A shares; (ii) up to 1.00% (.50% for Principal Limited Term Bond Fund,
Inc.) of the average  daily net asset  value of the Class B shares;  (iii) up to
1.00 % of daily net asset value  (0.50% for  Limited  Term Bond) Class C shares;
and (iv) up to .75% of the average daily net asset value of Class R shares.  For
accounting  purposes,  the classes of a Fund are  identical  except that the net
asset value and expenses each class will reflect the Distribution  Plan expenses
(if any) and any Class  Expenses,  as defined below,  attributable to the class.
"Class  Expenses" are limited to: (i) transfer agency fees, as identified by the
Funds' transfer agent as being  attributable to a specific class;  (ii) blue sky
registration  fees  incurred  with  respect  to a class of shares;  (iii)  state
registration fees incurred with respect to a class of shares;  (iv) the expenses
of administrative  personnel and services as required to provide services to the
shareholders  of a specific  class  (depending  on the type of service  provided
administrative  expenses are allocated to specific classes based on the relative
percentage  of  shareholder  transactions  and net asset values  compared to the
total of both share classes); (v) litigation or other legal expenses or audit or
other accounting expenses relating solely to one class of shares (vi) Directors'
fees incurred as a result of issues  relating to one class of shares;  and (vii)
printing and postage expenses  related to preparing and  distributing  materials
such as shareholder reports, prospectuses and proxies to current shareholders of
a given class.

Any additional  incremental expenses not specifically  identified above that are
subsequently  identified and determined to be properly allocated to one class of
shares  will  not be so  allocated  unless  and  until  approved  by the  Funds'
directors.  Certain  expenses  may be allocated  differently  if their method of
imposition  changes;  thus,  if a  Class  Expense  of a Fund  can no  longer  be
attributed to a class it will be allocated to the Fund as a whole.

The net asset value of all  outstanding  shares of each class is  determined  by
dividing  the ending  total net  assets  applicable  to a specific  class by the
number of shares outstanding relating to the class. Expenses are attributable to
each class of shares  depending on the nature of the expenditure and are accrued
on a daily basis.  These fall into two categories:  (1) fund level expenses that
are  attributable  to each class that are  allocated  based on net assets at the
beginning  of the day (i.e.,  legal,  audit,  etc.) and (2) certain  class level
expenses  that may have a different  cost for one class  versus the other (i.e.,
12b-1 fees).  Because of the additional expenses that will be borne by the Class
B shares,  Class C shares and Class R shares, the net income attributable to and
the dividends payable on Class B shares,  Class C shares and Class R shares will
be lower than the net income  attributable to and the dividends payable on Class
A shares.

CONVERSION FEATURES

Class A shares.  Class A shares do not convert into any other class of shares at
any time.

Class B shares.  Class B shares  will  automatically  convert to Class A shares,
based on relative  net asset value on the first  business  day of the 85th month
(61st month for certain sponsored plans) after the purchase date. Class B shares
acquired by exchange from Class B shares of another  Principal fund will convert
into Class A shares based on the time of the initial purchase. At the same time,
a pro rata portion of all shares purchased through reinvestment of dividends and
distributions would convert into Class A shares, with that portion determined by
the ratio that the  shareholder's  Class B shares converting into Class A shares
bears to the  shareholder's  total Class B shares that were not acquired through
dividends  and  distributions.  The  conversion  of Class B to Class A shares is
subject to the  continuing  availability  of a ruling from the Internal  Revenue
Service  or an  opinion of counsel  that such  conversions  will not  constitute
taxable  events for Federal tax  purposes.  There can be no assurance  that such
ruling or opinion will be  available,  and the  conversion  of Class B shares to
Class A shares  will not occur if such  ruling or opinion is not  available.  In
such event,  Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.

Class C shares.  Class C shares do not  automatically  convert  nor will they be
manually converted to any other class shares.

Class R shares.  Class R shares  will  automatically  convert to Class A shares,
based on relative net asset value,  on the first  business day of the 49th month
after the purchase date. Class R shares acquired by exchange from Class R shares
of another  Principal fund will convert into Class A shares based on the time of
the  initial  purchase.  At the same  time,  a pro rata  portion  of all  shares
purchased through reinvestment of dividends and distributions would convert into
Class A shares, with that portion determined by the ratio that the shareholder's
Class R shares converting into Class A shares bears to the  shareholder's  total
Class R shares that were not acquired through dividends and  distributions.  The
conversion  of Class R shares to Class A shares  is  subject  to the  continuing
availability  of a ruling  from the  Internal  Revenue  Service or an opinion of
counsel that such conversions will not constitute taxable events for Federal tax
purposes.  There  can  be no  assurance  that  such  ruling  or  opinion  is not
available.  In such event, Class R shares would continue to be subject to higher
expenses than Class A shares for an indefinite period.

EXCHANGE FEATURES

Class A shares.  Class A shares of any Fund  (except the Money  Market Funds and
the Limited  Term Bond Fund) may be exchanged at the net asset value for Class A
shares of any other Principal Fund at any time.

Class A shares of the Limited Term Bond Fund may be exchanged at net asset value
for Class A shares of any Fund at any time three  months  after the  purchase of
such shares.

The CDSC that might  apply to certain  Class A shares upon  redemption  will not
apply if these shares are  exchanged for shares of another  Fund.  However,  for
purposes of computing the CDSC on the shares acquired through this exchange, the
length of time the  acquired  shares  have been owned by a  shareholder  will be
measured from the date the exchanged  shares were  purchased.  The amount of the
CDSC will be  determined  by reference to the CDSC table to which the  exchanged
shares were subject.

Class A shares of Principal Cash  Management  Fund or Principal  Tax-Exempt Cash
Management Fund acquired by direct purchase may not be exchanged for other Class
A shares. However, Class A shares of these two Funds acquired by exchange of any
other Principal Fund shares, or by conversion of Class B or Class R shares,  and
additional  shares which have been purchased by reinvesting  dividends earned on
such shares,  may be exchanged for other Class A shares  without a sales charge.
In  addition,  Class A shares  of the  Money  Market  Funds  acquired  by direct
purchase or  reinvestment of dividends on such shares may be exchanged for Class
B shares of any Growth-Oriented or Income-Oriented Fund.

Class B shares. Class B shares for all Funds may be exchanged at net asset value
at any time for Class B shares of any Fund.

The CDSC that might  apply to Class B shares upon  redemption  will not apply if
these shares are exchanged for shares of another Fund. However,  for purposes of
computing the CDSC on the shares acquired  through this exchange,  the length of
time the acquired shares have been owned by a shareholder  will be measured from
the date the  exchanged  shares were  purchased.  The amount of the CDSC will be
determined  by  reference to the CDSC table to which the  exchanged  shares were
subject.

Class C shares. Class C shares for all Funds may be exchanged at net asset value
at any time for Class C shares of any Fund.

The CDSC that might  apply to Class C shares upon  redemption  will not apply if
these shares are exchanged for shares of another Fund. However,  for purposes of
computing the CDSC on the shares acquired  through this exchange,  the length of
time the acquired shares have been owned by a shareholder  will be measured from
the date the  exchanged  shares were  purchased.  The amount of the CDSC will be
determined  by  reference to the CDSC table to which the  exchanged  shares were
subject.

Class R shares. Class R shares for all Funds may be exchanged at net asset value
at any time for Class R shares of any Fund. For purposes of computing the length
of time Class R shares  acquired by the exchange are held prior to conversion to
Class A shares,  the  length of time the  acquired  shares  have been owned by a
shareholder will be measured from the date the exchanged shares were purchased.

                                    Exhibit 1

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


© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission