PRINCIPAL PARTNERS LARGECAP BLEND FUND INC
485APOS, 2000-12-29
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                                                      Registration No. 333-48740

                       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 LARGECAP BLEND 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
      _____   60 days after filing  pursuant to  paragraph  (a)(1) of Rule 485
      __X__   on March 1, 2001 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 Partners Equity Growth Fund, Inc.
   (formerly Principal Partners Aggressive Growth Fund, Inc.)
Principal Partners LargeCap Blend Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners LargeCap Value Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Partners SmallCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.

INTERNATIONAL GROWTH-ORIENTED FUNDS

Principal European Equity Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Pacific Basin 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 ("Principal Life"). 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....................................14
     MidCap Fund..................................................16
     Partners Equity Growth Fund..................................18
     Partners LargeCap Blend Fund.................................20
     Partners LargeCap Growth Fund................................20
     Partners LargeCap Value Fund.................................20
     Partners MidCap Growth Fund..................................22
     Partners SmallCap Growth Fund................................20
     Real Estate Fund.............................................24
     SmallCap Fund................................................26
     Utilities Fund...............................................28

   International Growth-Oriented Funds............................30
     European Equity Fund.........................................30
     International Emerging Markets Fund..........................32
     International Fund...........................................34
     International SmallCap Fund..................................36
     Pacific Basin Fund...........................................38

   Income Funds...................................................40
     Bond Fund....................................................40
     Government Securities Income Fund............................42
     High Yield Fund..............................................44
     Limited Term Bond Fund.......................................46
     Tax-Exempt Bond Fund.........................................48

   Money Market Fund..............................................50
     Cash Management Fund.........................................50

The Costs of Investing............................................52

Certain Investment Strategies and Related Risks...................59

Management, Organization and Capital Structure....................64

Pricing of Fund Shares............................................66

Dividends and Distributions.......................................67

How To Buy Shares.................................................68

How To Redeem (Sell) Shares.......................................70

How To Exchange Shares Among Principal Mutual Funds...............72

General Information about a Fund Account..........................74

Financial Highlights..............................................76

FUND DESCRIPTIONS.

The   Principal   Mutual  Funds  have  four   categories   of  funds:   domestic
growth-oriented  funds,  international  growth-oriented  funds,  income-oriented
funds and a money market fund. Principal Management Corporation*,  the "Manager"
of each of the Funds,  has selected a Sub-Advisor for certain Funds based on the
Sub-Advisor's experience with the investment strategy for which it was selected.
The Manager seeks to provide a wide range of investment  approaches  through the
Principal Mutual Funds.

<TABLE>
<CAPTION>
     Fund                                                     Sub-Advisor
<S>                                                           <C>
     Balanced (equity securities portion), Blue Chip,         Invista Capital Management, LLC ("Invista")*
     Capital Value, Growth, International, International
     Emerging Markets, International SmallCap,
     LargeCap Stock Index, MidCap, SmallCap and Utilities

     Balanced (fixed-income portion), Government              Principal Capital Income Investors, LLC ("PCII")*
     Securities Income and Limited Term Bond

     European Equity and Pacific Basin                        BT Funds Management (International) Limited ("BT")*

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

     Partners LargeCap Blend                                  Federated Management Corporation ("Federated")

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

     Partners LargeCap Value                                  Alliance Capital Management L.P. through its Bernstein
                                                                Investment Research and Management unit ("Bernstein")

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

     Partners SmallCap Growth                                 Berger LLC ("Berger")
</TABLE>

*    Principal Management  Corporation,  Invista, BT and PCII are members of the
     Principal Financial Group.

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 Funds which have not completed
a fiscal year of  operation).  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  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.

Fund Performance

As  certain  Funds  have been  operating  only for a  limited  period of time 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  return  consisting  of current  income and
long-term growth of capital.

Main Strategies
The Fund seeks growth of capital and current  income by  investing  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 or  instrumentalities)  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 is invested in bonds and cash.

Invista  serves as Sub-Advisor  for the portion of the Fund's  portfolio that is
invested  in  equity  securities.  In making  its  selection  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 may invest up to 25% of its assets in securities of
foreign companies.

PCII  serves as  Sub-Advisor  for the  portion of the Fund's  portfolio  that is
invested in fixed-income  securities.  Fixed-income  securities are purchased to
generate  income and for  capital  appreciation  purposes  when PCII 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 Standard & Poor's Rating Service or Baa by Moody's
Investors Service,  Inc.  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 as well as general  market and
economic conditions. In the short-term,  stock prices can fluctuate dramatically
in response to these factors.  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.

Fixed-income  security  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.

Because  the Fund  invests in both stocks and bonds,  the Fund may  underperform
stock funds when stocks are in favor and underperform  bond funds when bonds are
in favor.  As with all mutual funds,  as the value of the Fund's assets rise and
fall,  the Fund's share price  changes.  If the investor  sells Fund shares when
their value is less than the price the investor paid for them, the investor will
lose money.

Investor Profile
The Fund is generally a suitable investment for investors seeking current income
as well as long-term growth 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

1991      31.72
1992      10.47
1993      9.01
1994      -3.38
1995      23.39
1996      13.00
1997      17.29
1998      11.20
1999      0.63
2000


The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


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

       Highest    11.34% (3-31-1991)
       Lowest    -11.70% (9-30-1990)


Average annual total returns for the period ending December 31, 2000

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 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, 2000.
     ** Period from June 30, 1999, date Class C shares first offered to the public, through December 31, 2000.
</FN>
</TABLE>

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

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 the year ended October 31, 2000.

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      16.65
1999      11.96


The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


The fund's highest/lowest quarterly returns during this time period were:
                           Highest    16.40% (6-30-1997)
                           Lowest     -9.92% (9-30-1998)

Average annual total returns for the period ending December 31, 2000

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 B                      **                 Lipper Large-Cap Value Fund Average(1)
     Class C    ***

<FN>
     *    Period from March 1, 1991,  date Class A shares  through  December 31,
          2000
     **   Period from December 9, 1994, date Class B shares through December 31,
          2000.
     ***  Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 2000.

     (1)  Lipper has discontinued calculation of the Average previously used for
          this  Fund.  first  offered  to the  public,  .  This  chart  reflects
          information  for the  discontinued Average  for  years prior  to 1999.
          The  newly assigned Average will be  reflected  for 1999  and  beyond.
          first offered to the public,
</FN>
</TABLE>

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

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 the year ended October 31, 2000.

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 and other equity securities of large
capitalization  companies.  Under normal market conditions,  the Fund invests at
least 65% of its assets in  companies  with a market  capitalization  of greater
than $10 billion at the time of purchase.  Market  capitalization  is defined as
total current market value of a company's outstanding common stock. Up to 25% of
Fund assets may be invested in foreign securities.

The Fund invests in stocks that, in the opinion of the Sub-Advisor, Invista, are
undervalued in the marketplace at the time of purchase.  This value  orientation
emphasizes buying stocks at less than their investment value and avoiding stocks
whose price has been artificially built up. Value stocks are often characterized
by below average  price/earnings  ratios (P/E) and above average dividend yields
relative to their peers.  The Fund's  investments are selected  primarily on the
basis of  fundamental  security  analysis,  focusing on the company's  financial
stability,  sales,  earnings,  dividend  trends,  return on equity and  industry
trends.  The Fund often invests in stocks  considered  temporarily out of favor.
Investors  often  overreact to bad news and do not respond quickly to good news.
This results in undervalued stocks of the type held by the Fund.

Invista focuses its stock  selections on established  companies that it believes
have a sustainable competitive advantage. Invista constructs a portfolio that is
"benchmark  aware" in that it is sensitive to the sector (companies with similar
characteristics) and security weightings of its benchmark.  However, the Fund is
actively managed and prepared to over- and/or underweight sectors and industries
differently from the benchmark.

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. In response, the price of securities issued by
such companies may decline. These factors contribute to price volatility,  which
is the principal risk of investing in the Fund.

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

In addition,  the Fund is subject to the risk that its principal market segment,
large  capitalization  value stocks,  may underperform  compared to other market
segments or to the equity markets as a whole. The value of the Fund's securities
may fluctuate on a daily basis.  As with all mutual  funds,  as the value of the
Fund's  assets rise and fall,  the Fund's share price  changes.  If the investor
sells Fund shares when their value is less than the price the investor  paid for
them, the investor 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
1991      37.21
1992      9.09
1993      7.56
1994      0.21
1995      31.90
1996      23.42
1997      28.69
1998      12.13
1999      -6.86
2000

The  year-to-date  return as of December  31, 2000 for Class A shares is _____%,
for Class B shares is _____% and for Class C shares is _____%.



The fund's highest/lowest quarterly returns during this time period were:
                            Highest    17.94% (3-31-1991)
                            Lowest    -17.62% (9-30-1990)

Average annual total returns for the period ending December 31, 2000

     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 B                      *                  S&P 500 Barra Value Index(1)
     Class C    **                                   Lipper Large-Cap Value Fund Average(2)

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 2000.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 2000.

     (1)  This index is now the  benchmark  against  which the Fund measures its
          performance.  The  Manager  and  portfolio  manager  believe it better
          represents  the universe of investment  choices open to the Fund under
          its investment philosophy. The index formerly used is also shown.

     (2)  Lipper has discontinued calculation of the Average previously used for
          this  Fund.  This  chart  reflects  information  for the  discontinued
          Average for years prior to 1999.  The newly  assigned  Average will be
          reflected for 1999 and beyond.
</FN>
</TABLE>


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

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 the year ended October 31, 2000.


DOMESTIC GROWTH-ORIENTED FUND

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

Main Strategies
The Fund invests primarily in common stocks and other equity securities of large
capitalization  companies with strong  earnings growth  potential.  Under normal
market conditions, the Fund invests at least 65% of its assets in companies with
a market  capitalization  of greater  than $10 billion at the time of  purchase.
Market  capitalization  is defined as total current  market value of a company's
outstanding common stock.

The  Sub-Advisor,  Invista,  uses  a  bottom-up  approach  in its  selection  of
individual  securities  that it believes  have an above  average  potential  for
earnings  growth.  Selection  is  based on  fundamental  analysis  of a  company
relative to other  companies  with the focus being on  Invista's  assessment  of
current and future sales growth and operating  margins.  Companies meeting these
criteria  typically have progressed beyond the development stage and are focused
on growing  the  business.  Up to 25% of Fund  assets may be invested in foreign
securities.

Invista  places  strong  emphasis on  companies  it believes  are guided by high
quality management teams with a proven ability to execute. In addition, the Fund
attempts to identify  and  emphasize  those  companies  that are market  leaders
possessing  the  ability  to control  pricing  and  margins in their  respective
industries.  Invista constructs a portfolio that is "benchmark aware" in that it
is sensitive to the sector (companies with similar characteristics) and security
weightings of its benchmark.  However, the Fund is actively managed and prepared
to  over-  and/or  underweight  sectors  and  industries  differently  from  the
benchmark.

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. In response, the price of securities issued by
such companies may decline. These factors contribute to price volatility,  which
is the principal risk of investing in the Fund.

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

In addition,  the Fund is subject to the risk that its principal market segment,
large  capitalization  growth stocks, may underperform  compared to other market
segments or to the equity markets as a whole.  The  securities  purchased by the
Fund present greater opportunities for growth because of high potential earnings
growth,  but may also involve greater risks than securities that do not have the
same  potential.  The value of the Fund's  securities  may  fluctuate on a daily
basis.  As with all mutual  funds,  as the value of the Fund's  assets  rise and
fall,  the Fund's share price  changes.  If the investor  sells Fund shares when
their value is less than the price the investor paid for them, the investor will
lose money.

Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth.
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
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      16.13
2000

The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


The fund's highest/lowest quarterly returns during this time period were:
                  Highest    24.39% (3-31-1991)
                  Lowest    -18.61% (9-30-1990)

Average annual total returns for the period ending December 31, 2000

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 B                      *                  Lipper Large-Cap Growth Fund Average(1)
     Class C    **

<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 2000.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 2000.

     (1)  Lipper has discontinued calculation of the Average previously used for
          this  Fund.  This  chart  reflects  information  for the  discontinued
          Average for years prior to 1999.  The newly  assigned  Average will be
          reflected for 1999 and beyond.
</FN>
</TABLE>

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

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 the year ended October 31, 2000.


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL LARGECAP STOCK INDEX FUND, INC.
The Fund seeks to achieve 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 affected
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 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  LargeCap
Stock Index  Fund,  Inc.,  Invista  Capital  Management  LLC or  Principal  Life
Insurance Company.

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

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 the year ended October 31, 2000.
     **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, 2001.
      The  effect of the  waiver  is to  reduce  the  Fund's  annual  operating
      expenses.  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:

                0.90% for Class A Shares
                1.25% for Class B Shares
                1.25% for Class C Shares



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
1991      52.83
1992      14.81
1993      12.29
1994      3.03
1995      34.20
1996      19.13
1997      22.94
1998      -0.23
1999      11.62
2000

The  year-to-date  return as of December  31, 2000 for Class A shares is _____%,
for Class B shares is _____% and for Class C shares is _____%.


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

                                     Highest    25.77% (3-31-1991)
                                     Lowest    -21.24% (9-30-1998)



Average annual total returns for the period ending December 31, 2000

     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 400 MidCap Index(1)              14.72%   23.05%      --  %
     Class B                      *                       S&P 500 Stock Index                  21.04    28.55    18.21
     Class C     **                                       Lipper Mid-Cap Core Fund Average(2)  38.27    21.93    16.28


<FN>
     *    Period from December 9, 1994, date Class B shares first offered to the
          public, through December 31, 2000.
     **   Period from June 30, 1999, date Class C shares to the public,  through
          December 31, 2000.

     (1)  This index is now the  benchmark  against  which the Fund measures its
          performance.  The  Manager  and  portfolio  manager  believe it better
          represents  the universe of investment  choices open to the Fund under
          its  investment  philosophy.  first offered The index formerly used is
          also shown.
     (2)  Lipper has discontinued calculation of the Average previously used for
          this  Fund.  This  chart  reflects  information  for the  discontinued
          Average for years prior to 1999.  The newly  assigned  Average will be
          reflected for 1999 and beyond.
</FN>
</TABLE>

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

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 the year ended October 31, 2000.



DOMESTIC GROWTH-ORIENTED FUND

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

Main Strategies
The Fund seeks to maximize long-term capital appreciation by investing primarily
in 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 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.

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
2000

The  year-to-date  return as of December  31, 2000 for Class A shares is _____%,
for Class B shares  is _____%  and for  Class C shares  is  _____%.

The fund's highest/lowest quarterly returns during this time period were:
                                Highest    25.77% (3-31-1991)
                                Lowest    -21.24% (9-30-1998)



Average annual total returns for the period ending December 31, 2000

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 Five                                                          Past One    Past Five   Past Ten
                 Year         Years                                                              Year         Years      Years

<S>              <C>         <C>                    <C>                                            <C>        <C>         <C>
     Class A     %           %*                     S&P 500 Stock Index                            %          %           %
     Class B                 *                      Lipper LargeCap Growth Fund Average
     Class C                 *
<FN>
* Period from  November 1, 1999,  date shares first  offered to the public,
through December 31, 2000.
</FN>
</TABLE>

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

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 the year ended October 31, 2000.



DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS LARGECAP BLEND FUND, INC.

The Fund seeks long-term growth of capital.

Main Strategies
The Fund  pursues its  investment  objective  by  investing  primarily in equity
securities of companies  that offer  superior  growth  prospects or of companies
whose stock is undervalued.  Under normal market conditions, the Fund invests at
least 65% of its assets in companies with large market  capitalizations.  Market
capitalization  is  defined  as  total  current  market  value  of  a  company's
outstanding common stock.

In selecting  securities for investment,  the Sub-Advisor,  Federated Management
Corporation   ("Federated"),   looks  at  stocks   with  value   and/or   growth
characteristics  and will  construct an  investment  portfolio  that will have a
"blend" of stocks with these  characteristics.  The value orientation emphasizes
buying stocks at less than their intrinsic  investment value and avoiding stocks
whose price has been unjustifiably  built up. The growth orientation  emphasizes
buying stocks of companies whose potential for growth of capital and earnings is
expected to be  above-average.  Federated  attempts to identify  good  long-term
values through disciplined investing and careful fundamental research.

Using its own  quantitative  process,  Federated  rates the  future  performance
potential of companies.  Federated  evaluates each company's earnings quality in
light of its  current  valuation  to narrow  the list of  attractive  companies.
Federated   then  evaluates   product   positioning,   management   quality  and
sustainability  of current growth trends of those companies.  Using this type of
fundamental  analysis,  Federated  selects the most promising  companies for the
Fund's portfolio.

Companies  with  similar  characteristics  may  be  grouped  together  in  broad
categories  called  sectors.  In determining the amount to invest in a security,
Federated  limits the Fund's exposure to each business sector that comprises the
S&P 500 Index.  The Fund's  allocation  to a sector will not be less than 50% or
more than 200% of the Index's  allocation to that sector. The Fund may invest up
to 25% of its assets in securities of foreign companies.

The Fund actively  trades its portfolio  securities in an attempt to achieve its
investment  objective.  Active  trading will cause the Fund to have an increased
portfolio turnover rate which is likely to generate  shorter-term gains (losses)
for its  shareholders,  which are taxed at a higher rate than longer-term  gains
(losses).  Actively trading  portfolio  securities  increases the Fund's trading
costs and may have an adverse impact on the Fund's performance.

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. In response, the price of securities issued by
such companies may decline. These factors contribute to price volatility,  which
is the principal risk of investing in the Fund.

The Fund is also subject to sector risk which is the possibility  that a certain
sector may  underperform  other  sectors or the market as a whole.  As Federated
allocates  more of the Fund's  portfolio  holdings to a particular  sector,  the
Fund's  performance will be more susceptible to any economic,  business or other
developments that generally affect that sector.

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

In addition,  the Fund is subject to the risk that its principal market segment,
large capitalization  stocks, may underperform compared to other market segments
or to the equity markets as a whole. Because certain of the securities purchased
by the Fund  present  greater  opportunities  for growth,  they may also involve
greater risks than securities that do not have the same potential.  The value of
the Fund's equity  securities may fluctuate on a daily basis. As with all mutual
funds,  as the value of the Fund's assets rise and fall,  the Fund's share price
changes.  If you sell Fund  shares  when their  value is less than the price you
paid for them, you will lose money.

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

As the inception date of the Fund is December, 2000, historical performance data
is not available. Estimated annual Fund operating expenses are as follows:

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


Fund Operating Expenses*

     Annual  operating  expenses  for the Fund are  deducted  from  Fund  assets
     (stated as a percentage of Fund assets).  Estimates of the Fund's operating
     expenses  are shown  which are  intended  to help you  compare  the cost of
     investing in a  particular  fund with the cost of investing in other mutual
     funds.

                                     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, 2001. The effect of the waiver is to reduce the
       Fund's annual operating expenses.  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
                % for Class C Shares


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS LARGECAP GROWTH FUND, INC.
The Fund seeks to achieve 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 primarily 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   accelerating   earnings   growth.   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  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 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.

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, volatile fluctuations in
the value of your  investment.  This Fund is designed as a long- term investment
with  growth  potential.  It is not  appropriate  if you are  seeking  income or
short-term conservation of capital.

As the inception date of the Fund is March 1, 2000, historical  performance data
is not available. Estimated annual Fund operating expenses are as follows:

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

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, 2001. The effect of the waiver is to reduce the
       Fund's annual operating expenses.  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:

                1.95% for Class A Shares
                2.70% for Class B Shares
                2.70% for Class C Shares


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS LARGECAP VALUE FUND, INC.

The Fund seeks long-term growth of capital.

Main Strategies
The Fund invests  primarily in undervalued  equity securities of companies among
the 750 largest by market capitalization that the Sub-Advisor,  Alliance Capital
Management L.P.  through its Bernstein  Investment  Research and Management unit
("Bernstein"),  believes  offer  above-average  potential  for  growth in future
earnings.  Under normal market  conditions,  the Fund generally invests at least
65% of its assets in companies with a market  capitalization of greater than $10
billion  at the time of  purchase.  Market  capitalization  is  defined as total
current  market  value of a company's  outstanding  common  stock.  The Fund may
invest up to 25% of its assets in securities of foreign companies.

Bernstein  employs  an  investment  strategy,  generally  described  as  "value"
investing, that involves seeking securities that:
o exhibit low financial ratios (particularly stock price-to-book  value, but
  also stock  price-to-earnings  and stock price-to-cash flow);
o can be  acquired  for  less  than  what  Bernstein  believes  is the  issuer's
  intrinsic value; or
o appear attractive on a dividend discount model.

Value oriented investing entails a strong "sell discipline" in that it generally
requires the sale of  securities  that have reached their  intrinsic  value or a
target financial  ratio.  Value oriented  investments may include  securities of
companies in cyclical  industries  during periods when such securities appear to
Bernstein to have strong  potential  for capital  appreciation  or securities of
"special situation" companies. A special situation company is one that Bernstein
believes  has  potential  for  significant  future  earnings  growth but has not
performed  well in the recent past.  These  situations  include  companies  with
management   changes,   corporate  or  asset   restructuring   or  significantly
undervalued  assets. For Bernstein,  identifying special situation companies and
establishing  an issuer's  intrinsic value involves  fundamental  research about
such companies and issuers.

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.

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

In addition,  the Fund is subject to the risk that its principal market segment,
large  capitalization  value stocks,  may underperform  compared to other market
segments or to the equity markets as a whole. The value of the Fund's securities
may fluctuate on a daily basis.  As with all mutual  funds,  as the value of the
Fund's assets rise and fall,  the Fund's share price  changes.  If you sell Fund
shares when their value is less than the price you paid for them,  you will lose
money.

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

As the inception date of the Fund is December, 2000, historical performance data
is not available. Estimated annual Fund operating expenses are as follows:

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


Fund Operating Expenses*

     Annual  operating  expenses  for the Fund are  deducted  from  Fund  assets
     (stated as a percentage of Fund assets).  Estimates of the Fund's operating
     expenses  are shown  which are  intended  to help you  compare  the cost of
     investing in a  particular  fund with the cost of investing in other mutual
     funds.

                                     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, 2001. The effect of the waiver is to reduce the
       Fund's annual operating expenses.  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
                % for Class C Shares

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC.
The Fund seeks to achieve 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  midsize  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 March 1, 2000, historical  performance data
is not available. Estimated annual Fund operating expenses are as follows:

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

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, 2001. The effect of the waiver is to reduce the
       Fund's annual operating expenses.  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:

                1.95% for Class A Shares
                2.70% for Class B Shares
                2.70% for Class C Shares


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS SMALLCAP GROWTH FUND, INC.
The Fund seeks long-term growth of capital.

Main Strategies
The Fund invests  primarily in a diversified group of equity securities of small
growth  companies.  Generally,  at the time of the Fund's initial  purchase of a
security, the market capitalization of the issuer is less than $1.5 billion.

Under normal market  conditions,  the Fund invests at least 65% of its assets in
equity  securities of small  companies  with the  potential  for rapid  earnings
growth. In selecting securities for investment, the Sub-Advisor, Berger, focuses
on companies which it believes demonstrate the following traits:
o    Long-term appreciation potential: open-ended business opportunity;
o    Strong revenue-driven earnings growth;
o    Seasoned management team: integrity, ability, commitment, execution;
o    Innovative products or services;
o    Defensible barriers to entry:  e.g. proprietary technology;
o    Solid financial statements: profitability, conservative balance sheet and
     accounting;
o    Long-term market share leaders in emerging and growing industries; and
o    Appropriate valuations.

Berger  will  generally  sell  a  security  when  it no  longer  meets  Berger's
investment  criteria or when it has met Berger's  expectations for appreciation.
Portfolio  securities  may be  actively  traded in pursuit  of the Fund's  goal.
Active trading may result in higher brokerage costs to the Fund.

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

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. Settlement periods may be longer for foreign securities and portfolio
liquidity may be affected.

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 and general market and economic  conditions.  In the short term, stock
prices can fluctuate dramatically in response to these factors. Because of these
fluctuations,  principal values and investment  returns vary. As with all mutual
funds, if you sell your shares when their value is less than the price you paid,
you will lose money.

The 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.  This  Fund is  designed  for long  term
investors for a portion of their  investments.  It is not designed for investors
seeking income or conservation of capital.

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.  As the  inception  date of the  Fund  is  December,  2000,
historical  performance  data is not available.  Estimated annual Fund operating
expenses are as follows:
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

Fund Operating Expenses*

     Annual  operating  expenses  for the Fund are  deducted  from  Fund  assets
     (stated as a percentage of Fund assets).  Estimates of the Fund's operating
     expenses  are shown  which are  intended  to help you  compare  the cost of
     investing in a  particular  fund with the cost of investing in other mutual
     funds.

                                     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, 2001. The effect of the waiver is to reduce the
       Fund's annual operating expenses.  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
                % for Class C Shares


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 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      -4.76
2000

The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


The fund's highest/lowest quarterly returns during this time period were:
                             Highest    11.00% (6-30-1999)
                             Lowest     -8.25% (9-30-1999)


      Average annual total returns for the period ending December 31, 2000

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 One Past FivePast Ten
                 Year     Years                                                                 Year     Years   Years

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

     * Period from  December 31, 1997,  date shares first offered to the public,
     through  December  31,  2000.  ** Period from June 30,  1999,  date Class C
     shares first offered to the public, through December 31, 2000.
</TABLE>

                                    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

                            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 the year ended October 31, 2000.


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 $1.5 billion or less at
the time of purchase.

In selecting  securities for  investment,  the  Sub-Advisor,  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    43.22
2000

The  year-to-date  return as of December  31, 2000 for Class A shares is _____%,
for Class B shares is _____% and for Class C shares is _____%.


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

      Highest    23.39% (12-31-1999)
      Lowest    -23.52% (9-30-1998)


      Average annual total returns for the period ending December 31, 2000

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
                 Year     Years

     Class A     %        *
     Class B              *
     Class C             **

                                    Past One Past FivePast Ten
                                      Year     Years   Years

S&P 600 Stock Index                   %        %        %
Lipper SmallCap Core Fund Average(1)

     *    Period from December 31, 1997, date shares  (1)Lipper has discontinued
          calculation  of the  Average  previously  used  for this  Fund.  first
          offered to the public,  through December 31, 2000. This chart reflects
          information for the discontinued Average for years prior to 1999.
     **   Period  from June 30,  1999,  date Class C shares  The newly  assigned
          Average will be reflected  for 1999 and beyond.  first  offered to the
          public, through December 31, 2000.

                                    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


                            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 the year ended October 31, 2000.


DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL UTILITIES FUND, INC.
The Fund seeks to achieve 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    22.50
1999    2.25
2000


The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


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

      Highest    19.24% (12-31-1997)
      Lowest     -9.00% (3-31-1994)


      Average annual total returns for the period ending December 31, 2000

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 B                      **
     Class C              ***

                                             Past One Past FivePast Ten
                                               Year     Years   Years

S&P 500 Stock Index                            %        %        %
Dow Jones Utilities Index with
     Income Fund Average                                            --
Lipper Utilities Fund Average

*    Period from  December  16, 1992,  date Class A shares first  offered to the
     public, through December 31, 2000.
**   Period from  December  9, 1994,  date Class B shares  first  offered to the
     public,  through  December  31, 2000.  *** Period from June 30, 1999,  date
     Class C shares first offered to the public, through December 31, 2000.

                                    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


                            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 the year ended October 31, 2000.


INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL EUROPEAN EQUITY FUND, INC.
The Fund seeks long-term growth of capital.

Main Strategies
The Fund invests primarily in equity securities of companies domiciled or in the
opinion of the Sub-Advisor,  BT, having their core business in Europe.  The Fund
may also  invest  in other  securities  of such  companies.  The Fund  offers an
opportunity  to  invest in a region  with a wide  spread  of  industries  and in
companies which, in the opinion of BT, may be undervalued.

The Fund  invests  in  securities  listed  on  foreign  or  domestic  securities
exchanges, securities traded in foreign or domestic over-the-counter markets and
depositary receipts.  Under normal market conditions,  the Fund invests at least
65% of its assets in European securities. These include securities of:
o    companies organized under the laws of European countries;
o    companies  for  which  the  principal  securities  trading  market  is in a
     European country; and
o    companies, regardless of where their securities are traded, that derive 50%
     or more of their total  revenue from either  goods or services  produced or
     sales made in European countries.

The  global  equity   investment   philosophy   of  BT  is  to  exploit   market
inefficiencies that arise from differing  interpretations of market information.
As a result, in BT's view, a company's share price does not always represent its
true "business  value." BT actively  invests in those companies that it believes
have  been  mispriced  by  investment   markets.   In  order  to  exploit  these
inefficiencies successfully, BT seeks to enhance investment returns through:
o    rigorous  proprietary  stock  research  which  enables  their  analysts  to
     understand  the:
     o    quality of the company;
     o    nature of its management;
     o    nature of its industry competition; and
     o    business valuation - the true "business value" of the company;
o    maintaining global coverage within the universe of investment choices; and
o    maintaining a medium-term focus.
As a result,  the Fund's  portfolio  reflects  the  opportunities  presented  by
mispriced  companies that offer the potential for strong,  long-term  investment
returns with an acceptable level of investment risk.

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. In addition, 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.  Foreign  securities may be subject to securities  regulators
with less stringent  accounting  and  disclosure  standards than are required of
U.S. companies.

Because foreign securities generally are denominated in foreign currencies,  the
value of the net assets of the Fund as measured in U.S. dollars will be affected
by changes in exchange rates. To protect against future uncertainties in foreign
currency  exchange  rates,  the Fund is authorized to enter into certain foreign
currency exchange transactions.  In addition, the Fund's foreign investments may
be less liquid and their price more volatile than comparable investments in U.S.
securities.  Settlement  periods  may  be  longer  for  foreign  securities  and
portfolio liquidity may be affected.

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

The Fund may invest in  securities  of  companies  with  small to medium  market
capitalizations.  While small  companies  may offer  greater  opportunities  for
capital  growth than  larger,  more  established  companies,  they also  involve
greater risk and should be considered speculative.  Small to 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  securities.
Historically, these securities have fluctuated in price more than larger company
securities, especially over the short-term.

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.  In the  short-term,  stock prices can  fluctuate  dramatically  in
response to these factors. If the investor sells Fund shares when their value is
less than the price the investor paid for them, the investor will lose money.

Investor Profile
The Fund is generally a suitable  investment  for  investors  seeking  long-term
growth of capital in European markets who are 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 the inception date of the Fund is May 1, 2000, historical performance data is
not available. Estimated annual Fund operating expenses are as follows:

                                    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:

                                    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

                            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, 2001.  The effect of the waiver
          is to reduce the Fund's  annual  operating  expenses.  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


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
Zeland 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
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.

Because foreign securities generally are denominated in foreign currencies,  the
value of the net assets of the Fund as measured in U.S. dollars will be affected
by changes in exchange rates. To protect against future uncertainties in foreign
currency  exchange  rates,  the Fund is authorized to enter into certain foreign
currency exchange transactions.  In addition, the Fund's foreign investments may
be less liquid and their price more volatile than comparable investments in U.S.
securities.  Settlement  periods  may  be  longer  for  foreign  securities  and
portfolio liquidity may be affected.

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.

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
and want to invest a  portion  of your  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    67.20
2000

The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


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

      Highest    38.24% (12-31-1999)
      Lowest    -18.97% (9-30-1998)



      Average annual total returns for the period ending December 31, 2000

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
                 Year     Years

     Class A     %       %*
     Class B             *
     Class C             **

                                              Past One Past FivePast Ten
                                                Year     Years   Years

 Morgan Stanley Capital International EMF
    (Emerging  Markets  Free) Index               %         %       %
 Lipper  Emerging Markets  Fund  Average

*    Period  from August 29,  1997,  date  shares  first  offered to the public,
     through December 31, 2000.
**   Period from June 30, 1999, date Class C shares first offered to the public,
     through December 31, 2000.

                                    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

                            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 the year ended October 31, 2000.

     **   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,
          2001.  The  effect  of the  waiver  is to  reduce  the  Fund's  annual
          operating  expenses.  The  waiver  will  maintain  a total  le!vel  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


INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL FUND, INC.
The Fund  seeks to  achieve  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 securities of:
o    companies  with their  principal  place of  business  or  principal  office
     outside the U.S.;
o    companies for which the principal  securities trading market is outside the
     U.S.; and
o    companies,  regardless of where its securities are traded,  that derive 50%
     or more of their total  revenue  from goods or  services  produced or sales
     made outside 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.

Because foreign securities generally are denominated in foreign currencies,  the
value of the net assets of the Fund as measured in U.S. dollars will be affected
by changes in exchange rates. To protect against future uncertainties in foreign
currency  exchange  rates,  the Fund is authorized to enter into certain foreign
currency exchange transactions.  In addition, the Fund's foreign investments may
be less liquid and their price more volatile than comparable investments in U.S.
securities.  Settlement  periods  may  be  longer  for  foreign  securities  and
portfolio liquidity may be affected.

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

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    25.82
2000

The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


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

      Highest    16.78% (12-31-1999)
      Lowest    -18.37% (9-30-1990)


      Average annual total returns for the period ending December 31, 2000

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 B                       *
     Class C              **

                                           Past One Past FivePast Ten
                                             Year     Years   Years

Morgan Stanley Capital International EAFE
    (Europe,  Australia  and Far East)  Index   %        %      %
Lipper International  Fund  Average

*    Period from  December  9, 1994,  date Class B shares  first  offered to the
     public, through December 31, 2000.
**   Period from June 30, 1999, date Class C shares first offered to the public,
     through December 31, 2000.

                                    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

                            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 the year ended October 31, 2000.


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-U.S.  companies  with  comparatively  smaller  market
capitalizations.

Main Strategies The Fund invests in securities of:
o    companies  with their  principal  place of  business  or  principal  office
     outside the U.S.;
o    companies for which the principal  securities trading market is outside the
     U.S.; and
o    companies,  regardless of where its securities are traded,  that derive 50%
     or more of their total  revenue  from goods or  services  produced or sales
     made outside the U.S.

Under normal market  conditions,  the Fund invests at least 65% of its assets in
securities of companies having market capitalizations of $1.5 billion or less at
the time of purchase.  Market  capitalization is defined as total current market
value of a company's outstanding common stock.

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.

Because foreign securities generally are denominated in foreign currencies,  the
value of the net assets of the Fund as measured in U.S. dollars will be affected
by changes in exchange rates. To protect against future uncertainties in foreign
currency  exchange  rates,  the Fund is authorized to enter into certain foreign
currency exchange transactions.  In addition, the Fund's foreign investments may
be less liquid and their price more volatile than comparable investments in U.S.
securities.  Settlement  periods  may  be  longer  for  foreign  securities  and
portfolio liquidity may be affected.

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.

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
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 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    14.40
1999    84.72
2000

The  year-to-date  return as of December  31, 2000 for Class A shares is _____%,
for Class B shares is _____% and for Class C shares is _____%.


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

      Highest    36.96% (12-31-1999)
      Lowest    -19.84% (9-30-1998)


      Average annual total returns for the period ending December 31, 2000

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
                 Year     Years

     Class A     %       %*
     Class B             *
     Class C             **

                                              Past One Past FivePast Ten
                                                Year     Years   Years

 Morgan Stanley Capital International EAFE
     (Europe,  Australia  and Far East) Index     %         %       %
 Lipper International  Small-Cap  Fund Average

*    Period  from August 29,  1997,  date  shares  first  offered to the public,
     through December 31, 2000.
**   Period from June 30, 1999, date Class C shares first offered to the public,
     through December 31, 2000.

                                    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

                            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 the year ended October 31, 2000.


INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL PACIFIC BASIN FUND, INC.
The Fund seeks long-term growth of capital.

Main Strategies
The Fund invests primarily in equity securities (or other securities with equity
characteristics)  of issuers  located in the  Pacific  Basin  region,  including
Japan. The Fund invests in securities  listed on foreign or domestic  securities
exchanges, securities traded in foreign or domestic over-the-counter markets and
depositary receipts.  Under normal market conditions,  the Fund invests at least
65% of its assets in such  securities.  The  Fund's  investments  are  generally
diversified  among  securities of issuers of several  Pacific  Basin  countries,
which  include but are not  limited  to:  Australia,  China,  Hong Kong,  India,
Indonesia,  Japan,  Malaysia,  New Zealand,  Singapore,  Sri Lanka, South Korea,
Thailand, Taiwan and Vietnam. These include securities of:
o    companies organized under the laws of Pacific Basin countries;
o    companies for which the principal securities trading market is in a Pacific
     Basin country; and
o    companies, regardless of where their securities are traded, that derive 50%
     or more of their total  revenue from either  goods or services  produced or
     sales made in Pacific Basin countries.

Under  normal  market  conditions,  the Fund intends to have at least 65% of its
assets  invested  in  companies  in  Pacific  Basin  countries  and  may  have a
significant  portion of its assets  invested in  securities of issuers in Japan.
Criteria for determining the  distribution of investments  include the prospects
for relative  growth among  foreign  countries,  expected  levels of  inflation,
government   policies   influencing   business   conditions  and  the  range  of
opportunities available to international investors.

The global equity  investment  philosophy of BT, the Sub-Advisor,  is to exploit
market  inefficiencies  that  arise  from  differing  interpretations  of market
information.  As a result, in BT's view, a company's share price does not always
represent its true "business value." BT actively invests in those companies that
it believes have been mispriced by investment markets. In order to exploit these
inefficiencies  successfully,  BT seeks to enhance investment returns through:
o    rigorous  proprietary  stock  research  which  enables  their  analysts  to
     understand the:
     o   quality of the company;
     o   nature of its management;
     o   nature of its industry competition; and
     o   business  valuation  - the  true  "business  value"  of the  company;
o    maintaining global coverage within the universe of investment choices; and
o    maintaining a medium-term focus.
As a result,  the Fund's  portfolio  reflects  the  opportunities  presented  by
mispriced  companies that offer the potential for strong,  long-term  investment
returns with an acceptable level of investment risk.

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. In addition, 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.  Foreign  securities may be subject to securities  regulators
with less stringent  accounting  and  disclosure  standards than are required of
U.S. companies.

Because foreign securities generally are denominated in foreign currencies,  the
value of the net assets of the Fund as measured in U.S. dollars will be affected
by changes in exchange rates. To protect against future uncertainties in foreign
currency  exchange  rates,  the Fund is authorized to enter into certain foreign
currency exchange transactions.  In addition, the Fund's foreign investments may
be less liquid and their price more volatile than comparable investments in U.S.
securities.  Settlement  periods  may  be  longer  for  foreign  securities  and
portfolio liquidity may be affected.

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

The Fund may invest in  securities  of  companies  with  small to medium  market
capitalizations.  While small  companies  may offer  greater  opportunities  for
capital  growth than  larger,  more  established  companies,  they also  involve
greater risk and should be considered speculative.  Small to 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  securities.
Historically, these securities have fluctuated in price more than larger company
securities, especially over the short-term.

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.  If the
investor  sells Fund shares when their value is less than the price the investor
paid for them, the investor will lose money.

To the extent  that the assets of the Fund are  concentrated  in  securities  of
issuers in Japan, the value of the shares of the Fund may be more susceptible to
a single economic, political or regulatory occurrence than shares of a Fund less
concentrated in a single country.

Investor Profile
The Fund is generally a suitable  investment  for  investors  seeking  long-term
growth of capital in Pacific  Basin markets who are 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 the inception date of the Fund is May 1, 2000, historical performance data is
not available. Estimated annual Fund operating expenses are as follows:

                                    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

                            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. The
          Manager intends to continue the waiver and, if necessary, pay expenses
          normally  payable by the Fund  through the period  ending  October 31,
          2001.  The  effect  of the  waiver  is to  reduce  the  Fund's  annual
          operating  expenses.  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


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,  2000,  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                    %
                 Aa                     %
                 A                      %
                 Baa                    %
                 Ba                     %

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

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    -3.04

The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


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

       Highest     8.54% (6-30-1995)
       Lowest     -4.06% (3-31-1994)


      Average annual total returns for the period ending December 31, 2000

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 B                       *
     Class C              **

                                               Past One Past FivePast Ten
                                                 Year     Years   Years

  Lehman Brothers BAA Corporate Index            %        %        %
  Lipper Corporate Debt BBB Rated Fund Average

*    Period from  December  9, 1994,  date Class B shares  first  offered to the
     public, through December 31, 2000.
**   Period from June 30, 1999, date Class C shares first offered to the public,
     through December 31, 2000.

                                    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

                            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 the year ended October 31, 2000.


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  Association
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 backed 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

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    0.01
2000

The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


he fund's highest/lowest quarterly returns during this time period were:

     Highest     6.38% (6-30-1995)
     Lowest     -4.38% (3-31-1994)


      Average annual total returns for the period ending December 31, 2000

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 B                       *
     Class C              **

                                             Past One Past FivePast Ten
                                               Year     Years   Years

Lehman Brothers GNMA Index                     %        %        %
Lipper GNMA Fund Average

*    Period from  December  9, 1994,  date Class B shares  first  offered to the
     public, through December 31, 2000.
**   Period from June 30, 1999, date Class C shares first offered to the public,
     through December 31, 2000.

                                    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

                            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 the year ended October 31, 2000.


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, 2000, 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):
 % in securities rated A     % in securities rated Ba   % in securities rated C
 % in securities rated Baa   % in securities rated B    % 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

1991    28.76
1992    13.09
1993    12.10
1994    -0.65
1995    15.61
1996    12.54
1997    9.68
1998    -1.28
1999    0.97
2000

The year-to-date  return as of March 31, 2000 for Class A shares is -4.29%,  for
Class B shares is -4.52% and for Class C shares is -4.77%.


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

        Highest     9.75% (3-31-1991)
        Lowest     -6.52% (9-30-1998)


      Average annual total returns for the period ending December 31, 2000

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 B                       *
     Class C              **

                                             Past One Past FivePast Ten
                                               Year     Years   Years

Lehman Brothers High Yield Composite Bond Index%        %        %
Lipper High Current Yield Fund Average


*    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.

                                    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

                            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 the year ended
       October 31, 2000.


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.

However,  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    6.33
1998    6.70
1999    0.96
2000


The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


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

        Highest     2.99% (9-30-1998)
        Lowest     -0.49% (6-30-1999)


      Average annual total returns for the period ending December 31, 2000

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
                 Year     Years

     Class A     %       %*
     Class B              *
     Class C              **

                                                   Past One Past FivePast Ten
                                                     Year     Years   Years

 Lehman Brothers Intermediate
    Government/Corporate Index                       %        %        %
 Lipper Short-Intermediate Investment Grade Debt
    Fund Average

*    Period from  February  29, 1996,  date shares first  offered to the public,
     through December 31, 2000.
**   Period from June 30, 1999, date Class C shares first offered to the public,
     through December 31, 2000.

                                    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


                            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 the year ended October 31, 2000.


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 and 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 fixed-income  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.

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.

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  monthly,
federally  tax-exempt dividends to produce income or to be reinvested for modest
growth 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

1991    12.07
1992    9.62
1993    12.44
1994    -9.44
1995    20.72
1996    4.60
1997    9.19
1998    5.08
1999    -3.17
2000

The year-to-date return as of December 31, 2000 for Class A shares is ____%, for
Class B shares is ____% and for Class C shares is ____%.


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

      Highest     9.13% (3-31-1995)
      Lowest     -7.08% (3-31-1994)


      Average annual total returns for the period ending December 31, 2000

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 B                       *
     Class C              **

                                             Past One Past FivePast Ten
                                               Year     Years   Years

Lehman Brothers Municipal Bond Index           %        %        %
Lipper General Municipal Debt Fund Average

*    Period from  December  9, 1994,  date Class B shares  first  offered to the
     public, through December 31, 2000.
**   Period from June 30, 1999, date Class C shares first offered to the public,
     through December 31, 2000.

                                    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


                            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 the year ended October 31, 2000.


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  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 maturity (less
     than a week) but may also have a longer maturity; and
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

1991    5.80
1992    3.38
1993    2.63
1994    3.77
1995    5.44
1996    4.96
1997    4.88
1998    5.15
1999    4.63
2000


The 7-day  yield for the period  ended  December  31, 2000 for Class A shares is
____%,  for Class B shares  is ____% and for Class C shares 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, 2000

This table shows the Fund's average annual returns over the periods indicated.

               Past One Past FivePast 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, 2000.
     **   Period from June 30, 1999,  date Class C shares  first  offered to the
          public, through December 31, 2000.


                                    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

                            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 the year ended October 31, 2000.

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>
                                          Class A Shares                    Class B Shares                      Class C Shares
                                                                     Maximum Deferred Sales Charge             Maximum Deferred
                                       Maximum Sales Charge        (as a percentage of the lower of            Sales Charge on
                                           on Purchases               the original purchase price              Purchases (as a
                                        (as a percentage of             or market value at the                  percentage of
                                          offering price)                 time of redemption)                   offering price)

                                                                          Redemptions During                  Redemptions During
                                                                                 Year                               Year 1

                                                                1      2     3      4     5      6     7
                                                 -------------------------------------------------------
<S>                                            <C>            <C>    <C>   <C>    <C>   <C>    <C>   <C>            <C>
   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%
</TABLE>

   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.

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

                                                                                           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 market value at the time of the redemption 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 on shares sold:
o    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 (as of December 31 of the prior year)  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  ("Princor"),  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 affiliates,  and
     their  employees,  officers,  directors  (active  or  retired),  brokers or
     agents. This also includes their immediate family members (spouse, children
     (regardless  of age) and  parents)  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, Principal Capital
     Management LLC and Principal Capital Income Investors LLC;
o    by any employee or Registered  Representative  (and their  employees) of an
     authorized broker-dealer;
o    through a "wrap  account"  offered by  Princor  or 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 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;
o    to the  extent  the  purchase  proceeds  represent  a  distribution  from a
     terminating   401(a)  plan  if  (a)  such   purchase  is  made   through  a
     representative  of Princor  Financial  Services  Corporation  who is a home
     office  employee of  Principal  Life  Insurance  Company  and the  purchase
     proceeds   represent  a  distribution   from  a  terminating   401(a)  plan
     administered by Principal Life Insurance  Company or any of its affiliates,
     or (b) the employer or plan  trustee has entered  into a written  agreement
     with Princor  permitting the group  solicitation of active  employees/ plan
     participants.  Such  purchases  are  subject to the CDSC  which  applies to
     purchases of $1 million or more as described above; and
o    to fund  non-qualified  plans  administered by Principal Life pursuant to a
     written service agreement.

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 Cash  Management  Fund) 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
     (Principal Mutual Fund 403(b),  SIMPLE IRAs, SEPs, SAR-SEPs,  non-qualified
     deferred  compensation  plans,  and Payroll  Deduction  Plans).
     o    Principal  Mutual Fund 401(a) Plans.  The trustee  chooses to fund the
          plan with  either  Class A, Class B or Class C shares when the plan is
          established.
     o    Other employer  sponsored  retirement plans. Each participant  chooses
          Class  A,  Class B or  Class C  shares  at the  time  of  their  first
          contribution into the plan.
     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; 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    Investments  outside of a plan are not  included  with plan  assets to
          determine the applicable sales charge.


Contingent deferred sales charge: Class B and Class C shares
o    The CDSC does not apply to shares  purchased with  reinvested  dividends or
     other distributions.
o    The amount of the CDSC is a percentage based on the number of years you own
     the shares  multiplied by the lesser of the market value at the time of the
     redemption 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 (as of the last  business  day of  December  of the prior  year)
     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.
o    Princor receives the proceeds of any CDSC.


Class B shares
A CDSC may be imposed on Class B shares sold within six years of purchase  (five
years for certain sponsored plans).  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
market  value at the time of  redemption  or the initial  purchase  price of the
shares sold by the appropriate percentage from the table below:


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

                                                                                           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.
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) or 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 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:
<TABLE>
<CAPTION>
<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 (except LargeCap Stock Index and Limited Term Bond)                      1.00%
o    Class C shares of LargeCap Stock Index and Limited Term Bond                            0.50%
</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,  depositary receipts,
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, such
as "junk" bonds,  may have speculative  characteristics  and may 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  Growth-Oriented,  Partners Equity Growth,  Partners LargeCap
Blend, Partners LargeCap Growth, Partners LargeCap Value, Partners MidCap Growth
and  Partners  SmallCap  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. In addition, the European Equity and
Pacific  Basin Funds each may invest a limited  percentage of its assets in such
contracts for  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
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, European Equity, Pacific Basin, Partners
Equity Growth,  Partners  LargeCap Blend,  Partners  LargeCap Value and Partners
SmallCap  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.

Derivatives
To the extent permitted by its investment objectives and policies, each Fund may
invest in securities  that are commonly  referred to as  derivative  securities.
Generally,  a  derivative  is a  financial  arrangement,  the  value of which is
derived  from,  or based on, a  traditional  security,  asset,  or market index.
Certain derivative  securities are described more accurately as index/structured
securities. Index/structured securities are derivative securities whose value or
performance is linked to other equity securities (such as depositary  receipts),
currencies,  interest rates,  indices or other financial  indicators  (reference
indices).

Some derivatives,  such as mortgage-related  and other asset-backed  securities,
are in many  respects  like  any  other  investment,  although  they may be more
volatile or less liquid than more traditional debt securities.

There are many  different  types of  derivatives  and many different ways to use
them. Futures and options are commonly used for traditional  hedging purposes to
attempt to protect a Fund from  exposure to changing  interest  rates,  security
prices,  or  currency  exchange  rates  and for cash  management  purposes  as a
low-cost method of gaining  exposure to a particular  securities  market without
investing directly in those securities.

No Fund may invest in a derivative  security  unless the reference  index or the
instrument  to which it  relates is an  eligible  investment  for the Fund.  For
example,  a security whose  underlying value is linked to the price of oil would
not be a permissible  investment  because the Funds may not invest in oil leases
or futures.

The return on a derivative  security may  increase or decrease,  depending  upon
changes in the  reference  index or  instrument  to which it relates.  The risks
associated with derivative  investments  include:
o    the risk that the underlying security, interest rate, market index or other
     financial asset will not move in the direction the Sub-Advisor anticipated;
o    the possibility that there may be no liquid secondary market which may make
     it difficult or impossible to close out a position when desired;
o    the risk that adverse price movements in an instrument can result in a loss
     substantially greater than a Fund's initial investment; and
o    the counterparty may fail to perform its obligations.

Foreign Securities
Each of the following Funds may invest in securities of foreign  companies.  For
the purpose of this  restriction,  foreign companies are:
o    companies  with their  principal  place of  business  or  principal  office
     outside the U.S.; and
o    companies for which the principal  securities trading market is outside the
     U.S.

Each  Fund  may  invest  its  assets  in  foreign  securities  to the  indicated
percentage of its assets:
o    European   Equity,    International,    International   Emerging   Markets,
     International SmallCap and Pacific Basin Funds - 100%;
o    Partners Equity Growth,  Partners LargeCap Blend, Partners LargeCap Growth,
     Partners  LargeCap Value,  Partners SmallCap 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 U.S. 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.

Foreign  companies may not be subject to the same uniform  accounting,  auditing
and  financial  reporting  practices  as are  required  of  U.S.  companies.  In
addition,  there  may be less  publicly  available  information  about a foreign
company than about a U.S. company. Securities of many foreign companies are less
liquid  and  more  volatile  than  securities  of  comparable  U.S.   companies.
Commissions on foreign  securities  exchanges may be generally higher than those
on U.S.  exchanges,  although each Fund seeks the most  favorable net results on
its portfolio transactions.

Foreign  markets also have different  clearance and settlement  procedures  than
those in U.S. markets. In certain markets there have been times when settlements
have been unable to keep pace with the volume of securities transactions, making
it difficult to conduct these transactions. Delays in settlement could result in
temporary periods when a portion of Fund assets are not invested and are earning
no  return.  If a Fund is  unable to make  intended  security  purchases  due to
settlement problems, the Fund may miss attractive investment  opportunities.  In
addition,  a Fund may incur a loss as a result of a decline  in the value of its
portfolio if it is unable to sell a security.

With  respect  to  certain  foreign  countries,  there  is  the  possibility  of
expropriation  or confiscatory  taxation,  political or social  instability,  or
diplomatic  developments  that  could  affect  a  Fund's  investments  in  those
countries.  In addition,  a Fund may also suffer losses due to  nationalization,
expropriation or differing accounting  practices and treatments.  Investments in
foreign securities are subject to laws of the foreign country that may limit the
amount and types of foreign  investments.  Changes of governments or of economic
or  monetary  policies,  in the U.S.  or  abroad,  changes in  dealings  between
nations,  currency  convertibility  or exchange rates could result in investment
losses for a Fund.  Finally,  even though certain  currencies may be convertible
into U.S. dollars, the conversion rates may be artificial relative to the actual
market values and may be unfavorable to Fund investors.

Foreign  securities  are  often  traded  with less  frequency  and  volume,  and
therefore  may have greater  price  volatility,  than is the case with many U.S.
securities. Brokerage commissions,  custodial services, and other costs relating
to investment in foreign countries are generally more expensive than in the U.S.
Though the Funds intend to acquire the securities of foreign issuers where there
are public trading markets,  economic or political turmoil in a country in which
a  Fund  has a  significant  portion  of  its  assets  or  deterioration  of the
relationship  between the U.S. and a foreign  country may negatively  impact the
liquidity of a Fund's  portfolio.  The Fund may have difficulty  meeting a large
number  of  redemption  requests.  Furthermore,  there  may be  difficulties  in
obtaining or enforcing judgments against foreign issuers.

A Fund may  choose  to  invest in a foreign  company  by  purchasing  depositary
receipts.  Depositary  receipts  are  certificates  of  ownership of shares in a
foreign  based issuer held by a bank or other  financial  institution.  They are
alternatives  to  purchasing  the  underlying  security  but are  subject to the
foreign securities to which they relate.

Investments in companies of developing  countries may be subject to higher risks
than investments in companies in more developed countries.  These risks include:
o    increased social, political and economic instability;
o    a smaller  market for these  securities  and low or  nonexistent  volume of
     trading  that  results  in  a  lack  of  liquidity  and  in  greater  price
     volatility;
o    lack of publicly  available  information,  including reports of payments of
     dividends or interest on outstanding securities;
o    foreign  government  policies  that may restrict  opportunities,  including
     restrictions  on investment in issuers or  industries  deemed  sensitive to
     national interests;
o    relatively new capital market structure or market-oriented economy;
o    the possibility that recent favorable  economic  developments may be slowed
     or reversed by unanticipated political or social events in these countries;
o    restrictions  that may make it difficult or impossible for the Fund to vote
     proxies,  exercise  shareholder rights,  pursue legal remedies,  and obtain
     judgments in foreign courts; and
o    possible  losses  through the holding of securities in domestic and foreign
     custodial banks and depositories.

In addition, many developing countries have experienced substantial, and in some
periods,  extremely high rates of inflation for many years.  Inflation and rapid
fluctuations  in  inflation  rates have had and may  continue  to have  negative
effects on the economies and securities markets of those countries.

Repatriation  of  investment  income,  capital and  proceeds of sales by foreign
investors  may  require  governmental   registration  and/or  approval  in  some
developing  countries.  A Fund  could be  adversely  affected  by delays in or a
refusal  to  grant  any  required  governmental  registration  or  approval  for
repatriation.

Further,  the economies of developing  countries generally are heavily dependent
upon  international  trade and,  accordingly,  have been and may  continue to be
adversely affected by trade barriers,  exchange controls, managed adjustments in
relative currency values and other protectionist  measures imposed or negotiated
by the countries with which they trade.

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 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).
No 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 Funds which have been in existence  for less than six months
(Partners  LargeCap Blend,  Partners LargeCap Value and Partners SmallCap Growth
Funds).  However,  the Partners LargeCap Blend and Partners LargeCap Value Funds
each expect that it may have an annual  turnover rate ranging from 200% to 300%.
Turnover rates for each of the other Funds may be found 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 sub-advisory agreement.

The Manager is an indirect subsidiary of Principal Financial Services,  Inc. and
has managed  mutual  funds since 1969.  As of December  31,  1999,  the funds it
managed had assets of  approximately  $6.42  billion.  The Manager's  address is
Principal Financial Group, Des Moines, Iowa 50392-0200.

The Sub-Advisors

Funds:         Balanced (equity securities  portion),  Blue Chip, Capital Value,
               Growth,    International,    International    Emerging   Markets,
               International SmallCap,  LargeCap Stock Index, MidCap,  SmallCap,
               and Utilities.

Sub-Advisor:   Invista, an indirectly  wholly-owned subsidiary of Principal Life
               Insurance Company and an affiliate of the Manager, was founded in
               1985.  It  manages   investments  for  institutional   investors,
               including  Principal Life. Assets under management as of December
               31, ____ were approximately  $____ billion.  Invista's address is
               1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.

Funds:         Balanced (fixed-income portion), Government Securities Income and
               Limited Term Bond

Sub-Advisor:   Principal  Capital Income  Investors,  LLC ("PCII"),  an indirect
               wholly-owned  subsidiary of Principal Life Insurance  Company and
               an  affiliate  of the  Manager,  was founded in 2000.  It manages
               investments for institutional investors, including Principal Life
               Insurance  Company.  Assets under  management  as of December 31,
               ____ were approximately $____ billion. PCII's address is 1800 Hub
               Tower, 699 Walnut, Des Moines, Iowa 50309.

Funds:         European Equity and Pacific Basin
Sub-Advisor:   BT  is  an  indirectly   wholly  owned  subsidiary  of  BT  Funds
               Management  Limited  ("BTFM")  and  a  member  of  the  Principal
               Financial  Group.  Its  address is The Chifley  Tower,  2 Chifley
               Square,  Sydney 2000 Australia.  As of  ________________,  BT had
               approximately $__ billion under management.

Fund:          Partners Equity Growth
Sub-Advisor:   Morgan  Stanley,  with  principal  offices at 1221  Avenue of the
               Americas, New York, NY 10020, provides a broad range of portfolio
               management  services to customers  in the U.S. and abroad.  As of
               December 31, ____,  Morgan Stanley,  together with its affiliated
               institutional  asset management  companies,  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 Blend
Sub-Advisor:   Federated  Investment   Management  Company  ("Federated")  is  a
               registered  investment  adviser and a wholly-owned  subsidiary of
               Federated  Investors,  Inc., which was founded in 1955. Federated
               is  located  in the  Federated  Investors  Tower at 1001  Liberty
               Avenue,  Pittsburgh,  PA  15222-3779.  As of December  31,  ____,
               Federated managed $___ billion in assets.

Fund:          Partners LargeCap Growth
Sub-Advisor:   Duncan-Hurst  was founded in 1990.  Its address is 4365 Executive
               Drive,  Suite 1520, San Diego, CA 92121. As of December 31, ____,
               Duncan-Hurst  managed  assets of  approximately  $___ billion for
               institutional and individual investors.

Fund:          Partners LargeCap Value
Sub-Advisor:   Alliance  Capital  Management  L.P.   ("Alliance")   through  its
               Bernstein  Investment Research and Management unit ("Bernstein").
               As of December 31, ____, Alliance managed $___ billion in assets.
               Bernstein is located at 767 Fifth Avenue,  New York, NY 10153 and
               Alliance is located at 1345 Avenue of the Americas,  New York, NY
               10105.

Fund:          Partners MidCap Growth
Sub-Advisor:   Turner was founded in 1990.  Its address is 1235 Westlake  Drive,
               Suite 350, Berwyn,  PA 1931. As of December 31, ____,  Turner had
               discretionary  management authority with respect to approximately
               $___ billion in assets.

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


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, 2000 was:

<TABLE>
<CAPTION>
<S>                                     <C>          <C>                           <C>
   Balanced                             0.58%        LargeCap Stock Index
   Blue Chip                            0.46%        Limited Term Bond             0.50%
   Bond                                 0.48%        MidCap                        0.56%
   Capital Value                        0.37%        Pacific Basin
   Cash Management                      0.44%        Partners Equity Growth
   European Equity                                   Partners LargeCap Growth
   Government Securities Income         0.45%        Partners MidCap Growth
   Growth                               0.38%        Real Estate                   0.90%
   High Yield                           0.60%        SmallCap                      0.85%
   International                        0.68%        Tax-Exempt Bond               0.46%
   International Emerging Markets       1.25%        Utilities                     0.59%
   International SmallCap               1.20%
</TABLE>

Each Fund and the Manager,  under an order received from the SEC, may enter into
and materially amend agreements with Sub-Advisors without obtaining  shareholder
approval. For any Fund that is relying on the order, the Manager may:
o    hire one or more Sub-Advisors;
o    change Sub-Advisors; and
o    reallocate management fees between itself and Sub-Advisors.
The Manager will continue to have the ultimate responsibility for the investment
performance of these Funds due to its responsibility to oversee Sub-Advisors and
recommend their hiring,  termination and  replacement.  No Fund will rely on the
order until it receives approval from:
o    its shareholders; or
o    in the case of a new Fund, the Fund's sole initial  shareholder  before the
     Fund is available to the public, and the Fund states in its prospectus that
     it  intends  to rely on the  order.  The  Manager  will not  enter  into an
     agreement with an affiliated Sub-Advisor without that agreement,  including
     the  compensation  to be paid  under  it,  being  similarly  approved.  The
     Partners Equity Growth,  Partners LargeCap Blend, Partners LargeCap Growth,
     Partners  LargeCap  Value,  Partners  MidCap  Growth and Partners  SmallCap
     Growth Funds have received the necessary shareholder approval and intend to
     rely on the order.

THE PORTFOLIO MANAGERS

The investment professionals who manage the assets of each Fund are shown below.
Backed by their  staffs of  experienced  securities  analysts,  they provide the
Funds with professional investment management.

Kelly Alexander
co-manager  of the  Government  Securities  Income  Fund since  July  2000.  Ms.
Alexander shares management  responsibility for nine fixed-income  portfolios at
PCII.  Before assuming her current  position,  she had similar  responsibilities
with Invista from 1992 to 2000. She joined the Principal Financial Group in 1983
to develop the  mortgage-backed  securities trading  department.  Her experience
includes hedging,  securitization,  product development and portfolio management
as well as the risk management in the residential mortgage area.

William C. Armstrong, CFA
co-manager  of the Balanced Fund since January  2001.  Mr.  Armstrong  leads the
multi-sector/core  portfolio  management group for PCII's stable value division.
Mr. Armstrong has been with the Principal  Financial Group since 1992. He earned
his Master's  degree from the University of Iowa and his Bachelor's  degree from
Kearney State  College.  He has earned the right to use the Chartered  Financial
Analyst designation.

William S. Auslander
co-manager  of the Partners  Equity  Growth Fund since its inception in November
1999.  Mr.  Auslander is a Principal of Morgan  Stanley & Co,  Incorporated  and
Morgan  Stanley Dean Witter  Investment  Management  Inc. Mr.  Auslander  joined
Morgan Stanley in 1995 as an equity analyst and currently is a portfolio manager
in Morgan Stanley's  institutional equity group. Prior thereto, he was an equity
analyst  at  Icahn  & Co.,  1986-1995.  He  holds  a BA in  Economics  from  the
University of Wisconsin and an MBA from Columbia University.

Robert Baur, Ph.D.
co-manager  of the LargeCap  Stock Index Fund since its inception in March 2000.
Dr. Baur  joined  Invista in 1995 after  serving a s a professor  of finance and
economics at Drake University and Grand View College. He received his Bachelor's
degree in Mathematics and his Ph.D. in Economics from Iowa State University. Dr.
Baur also did  post-doctoral  studies in finance and economics at the University
of Minnesota.

Scott Bennett, CFA
manager of the Bond Fund since  November  1996.  Mr.  Bennett  has been with the
Principal  Financial  Group  since  1988.  He  holds  an MBA and a BA  from  the
University  of Iowa.  He has  earned  the right to use the  Chartered  Financial
Analyst designation.

Dean Cashman
manager of the Pacific Basin Fund since its inception in May 2000.  Mr.  Cashman
is Executive  Vice President of BR and serves as head of Japanese  equities.  He
joined BT in January 1988,  initially  involved in the liquids and  fixed-income
group, but moved to the European equity group in 1989  specializing in the Latin
Block  countries  including  France,  Italy and  Spain.  He  started  working on
Japanese equities at the end of 1991 and subsequently  took over  responsibility
for the group. Mr. Cashman received a degree in Economics from the University of
Queensland.

Mark P. Denkinger, CFA
manager of the High  Yield  Fund since  April  1998.  Mr.  Denkinger  joined the
Principal  Financial  Group in 1990.  He holds an MBA and BA in Finance from the
University  of Iowa.  He has  earned  the right to use the  Chartered  Financial
Analyst designation.

Marilyn G. Fedak
co-manager of the Partners  LargeCap  Value Fund since its inception in December
2000. Ms. Fedak, Chief Investment Officer of U.S. Value Equities and Chairman of
the U. S. Equity  Investment  Policy Group of the Bernstein  unit since 2000 and
prior to that at Sanford C.  Bernstein & Co., Inc.  ("SCB Inc.") since 1993. She
joined SCB Inc. in 1984 and has managed  portfolio  investments  since 1976. She
has a BA from Smith College and an MBA from Harvard Business School.

Philip W. Friedman
co-manager  of the Partners  Equity  Growth Fund since its inception in November
1999. Mr.  Friedman is a Manager  Director of Morgan Stanley & Co,  Incorporated
and Morgan  Stanley Dean Witter  Investment  Management  Inc. He was a member of
Morgan  Stand & Co.  Incorporated's  equity  research  team  (1990-1995)  before
becoming  Director  of  North  American  research  (1995-1997).  Currently,  Mr.
Friedman is head of Morgan  Stanley's  institution  equity group.  He holds a BA
from Rutgers University and an MBA from the J.L. Kellogg School of Management at
Northwestern University.

Daniel J. Garrett, CFA
co-manager  of the  Limited  Term Bond Fund since  July 2000 and  manager of the
Tax-Exempt Bond Fund since July 1991. Mr. Garrett joined the Principal Financial
Group in 1985 as a  commercial  mortgage  analyst  and was named to his  current
position as portfolio  manager in 1998. Mr. Garrett received his Master's degree
in  Business  and his  Bachelor's  degree in  Computer  Information  Systems and
Finance  from Drake  University.  He has  earned the right to use the  Chartered
Financial Analyst designation.

James E. Grefenstette, CFA
co-manager of the Partners  LargeCap  Blend Fund since its inception in December
2000. Mr. Grefenstette joined Federated in 1992 and has been a Portfolio Manager
and a Vice  President  of  Federated  since  1996.  From 1994  until  1996,  Mr.
Grefenstette  was a  Portfolio  Manager  and  an  Assistant  Vice  President  of
Federated.  Mr. Grefenstette  received his MS in Industrial  Administration from
Carnegie  Mellon  University.  He has  earned  the  right  to use the  Chartered
Financial Analyst designation.

Michael R. Johnson
co-manager of the Cash  Management Fund since March 1983. Mr. Johnson joined the
Principal  Financial  Group in 1982 and took his current  position of  directing
securities   trading  in  1994.  His   responsibilities   include  managing  the
fixed-income trading operations and several short-term money market accounts for
a company of the Principal  Financial Group. He earned his Bachelor's  degree in
Finance from Iowa State University.

Paul A. LaRocco, CFA
manager of the  Partners  SmallCap  Growth Fund since its  inception in December
2000.  Mr. LaRocco joined Berger as Vice President in December 2000. In 2000, he
was  with  Montgomery  Asset  Management.  From  1998 to  2000,  he was a senior
portfolio manager at Founders Asset Management,  with responsibility for several
small and mid-cap growth funds.  Prior to that he was a portfolio  manager for a
number of small and mid-cap funds at Oppenheimer  Funds  (1993-98).  Mr. LaRocco
holds a MBA degree in Finance from the University of Chicago  Graduate School of
Business and a BS in  Physiological  Psychology and a BA in Biological  Sciences
from the University of California, Santa Barbara. He has earned the right to use
the Chartered Financial Analyst designation.

J. Thomas Madden, CFA
co-manager of the Partners  LargeCap  Blend Fund since its inception in December
2000. Mr. Madden joined Federated as a Senior Portfolio  Manager in 1977 and has
been an Executive Vice President of Federated since 1994. Mr. Madden served as a
Senior Vice President of Federated  from 1989 to 1993.  Mr. Madden  received his
MBA with a  concentration  in Finance from the  University  of Virginia.  He has
earned the right to use the Chartered Financial Analyst designation.

David C. Magee
manager of the Partners  LargeCap Growth Fund since its inception in March 2000.
Mr. Magee has been with Duncan-Hurst  Capital Management since 1992. He holds an
MBA in Finance from UCLA and a BS in Economics and Business  Management from the
University of California, Davis.

John McClain
co-manager  of the  SmallCap  Fund since its  inception  in December  1997.  Mr.
McClain is a portfolio  manager  for small  company  and medium  company  growth
products. He joined Invista in 1990. Previously,  he was an investment executive
with  Paine  Webber.  He  earned  an MBA from  Indiana  University  and a BBA in
Economics from the University of Iowa.

Christopher K. McHugh
manager of the Partners  MidCap  Growth Fund since its  inception in March 2000.
Mr.  McHugh joined Turner  Investment  Partners,  Inc. in 1990. He holds a BS in
Accounting  from  Philadelphia  College of  Textiles  and  Science and an MBA in
Finance from St. Joseph's University.

Tom Morabito, CFA
co-manager of the SmallCap Fund since January 2001. Mr.  Morabito joined Invista
in 2000 as the lead small-cap value portfolio manager. He has more than 12 years
of analytical and portfolio management expertise. Since 1994, Mr. Morabito was a
manager for Invesco  Management & Research.  He received his MBA in Finance from
Northeastern  University  and his  Bachelor's  degree in  Economics  from  State
University of New York.  He has earned the right to use the Chartered  Financial
Analyst designation.

Crispin Murray
manager of the European  Equity Fund since its inception in May 2000. Mr. Murray
is  Executive  Vice  President of BT having  joined BR in 1994 as an  investment
analyst.  In 1995,  his role became pure  European  equities  analysis  covering
banks,  telecommunications,  telecommunication  equipment and media. In 1998, he
became  head of  European  Equities  and became  coordinator  for BTFM's  Global
Banking Group. His global sector responsibilities include telecommunications and
banks.  Prior to joining BT, Mr.  Murray  worked for  Equitable  Life  Assurance
Society in the UK as a bond and currency analyst.  He received an Honours degree
in Economics and Human Geography from Reading University in the UK.

K. William Nolin, CFA
manager of the MidCap  Fund since  February  2000.  Mr.  Nolin has  managed  the
domestic  mid-cap  products  since  1999.  His  expertise  is  grounded  in  the
telecommunications,  media &  entertainment,  lodging and consumer  non-durables
sectors. Mr. Nolin joined the Principal Financial Group in 1993 as an investment
credit  analyst.  He earned his MBA from the Yale School of  Management  and his
Bachelor's  degree in Finance  from the  University  of Iowa.  He has earned the
right to use the Chartered Financial Analyst designation.

Scott D. Opsal, CFA
manager of the Blue Chip Fund since July  2000.  Mr.  Opsal is Chief  Investment
Officer of Invista and has been with the  organization  since 1993.  He holds an
MBA from the  University  of Minnesota  and a BS from Drake  University.  He has
earned the right to use the Chartered Financial Analyst designation.

Bernard J. Picchi, CFA
co-manager of the Partners  LargeCap  Blend Fund since its inception in December
2000. Mr. Picchi joined Federated in 1999 as a Senior Vice President/Director of
U.S. Equity Research.  From 1994 to 1999, Mr. Picchi was a Managing  Director of
Lehman  Brothers  where he initially  served as head of the energy sector group.
During  1995-96,  he served as U.S.  Director of Stock Research and in September
1996,  he was named Growth Stock  Strategist.  Mr.  Picchi holds a BS in foreign
service from Georgetown University. He has earned the right to use the Chartered
Financial Analyst designation.

John Pihlblad, CFA
manager of the Capital Value Fund since January 2001.  Mr.  Pihlblad is director
of  quantitative  portfolio  management  for  Invista.  He  has  over  24  years
experience in creating and managing  quantitative  investment systems.  Prior to
joining  Invista in 2000, Mr. Pihlblad was a partner and co-founder of GlobeFlex
Capital  in  San  Diego  where  he  was  responsible  for  the  development  and
implementation  of the  investment  process for both domestic and  international
products.  He received his BA from Westminster  College. He has earned the right
to use the Chartered Financial Analyst designation.

Steven Pisarkiewicz
co-manager of the Partners  LargeCap  Value Fund since its inception in December
2000.  Mr.  Pisarkiewicz  has been with Alliance since October 2000 and prior to
that with SCB Inc.  (since  1989) and has been Senior  Portfolio  Manager  since
1997.  He  holds a BS from  the  University  of  Missouri  and an MBA  from  the
University of California at Berkeley.

Alice Robertson
co-manager of the Cash Management Fund since June 1999. Ms. Robertson joined the
Principal  Financial  Group in 1990 as a credit analyst and moved to her current
position  as  trader  on  the  corporate  fixed-income  trading  desk  in  1993.
Previously  Ms.  Robertson  was  an  assistant  vice-president/commercial  paper
analyst with Duff & Phelps Credit  Company.  Ms.  Robertson  earned her Master's
degree in Finance and Marketing from DePaul University and her Bachelor's degree
in Economics from Northwestern University.

Kelly D. Rush, CFA
manager of the Real Estate Fund since its inception in December  1997.  Mr. Rush
directs the Real Estate  Investment  Trust (REIT)  activity for a company of the
Principal  Financial Group. He has been with the Principal Financial Group since
1987 and has been  dedicated to public real estate  investments  since 1995. His
experience  includes the  structuring  of public real estate  transactions  that
included  commercial  mortgage  loans and the  issuance of unsecured  bonds.  He
received  his  Master's  degree  and  Bachelor's  degree  in  Finance  from  the
University  of Iowa.  He has  earned  the right to use the  Chartered  Financial
Analyst designation.

Martin J. Schafer
co-manager of the Government  Securities  Income Fund since its inception in May
1985 and  co-manager  of the  Limited  Term Bond Fund  since  its  inception  in
February 1996. Mr. Schafer is a portfolio  manager for PCII  specializing in the
management  of  mortgage-backed  securities  utilizing  an active,  total return
approach.  He joined the  Principal  Financial  Group in 1977. He holds a BBA in
Accounting and Finance from the University of Iowa.

Darren K. Sleister, CFA
manager of the International  SmallCap Fund since its inception in May 1997. Mr.
Sleister is a portfolio manager  specializing in the management of international
equity  portfolios.  Mr. Sleister joined Invista in 1993. He received his MBA in
Investment and Corporate Finances from the University of Iowa and his Bachelor's
degree in  communications  from Central College.  He has earned the right to use
the Chartered Financial Analyst designation.


Kurtis D. Spieler, CFA
manager of the  International  Emerging  Markets Fund since its inception in May
1997 and the  International  Fund since March 2000.  Mr.  Spieler is a portfolio
manager  specializing in the management of international  equity portfolios.  He
joined the  Principal  Financial  Group in 1987 in the  Treasury  operation as a
securities  analyst and moved to Invista in 1991. Mr.  Spieler  received his MBA
from Drake University and his BBA in Accounting from Iowa State  University.  He
has earned the right to use the Chartered Financial Analyst designation.

Mary Sunderland, CFA
co-manager  of the Balanced  Fund since  February 2000 and manager of the Growth
Fund since January 2000. Ms. Sunderland  manages the large-cap growth portfolios
for Invista.  She joined  Invista in early 2000  following a 10-year career with
Skandia Asset  Management  where she directed  their more than $2.5 billion U.S.
Equity  Large  Cap  Growth  portfolios  and  U.S.  technology  portfolios.   Ms.
Sunderland  earned  her MBA from the  Columbia  University  Graduate  School  of
Business and her Bachelor's degree from Northwestern University.  She has earned
the right to use the Chartered Financial Analyst designation.

Rhonda VanderBeek
co-manager  of the LargeCap  Stock Index Fund since its inception in March 2000.
Ms. VanderBeek directs trading operations for Invista index accounts. She joined
the Principal  Financial Group in 1983 as a trading  statistical clerk and moved
to Invista  in 1992.  Mr.  VanderBeek  has  extensive  experience  trading  both
domestic and international securities.

Judith A. Vogel, CFA
co-manager  of the  Balanced  Fund since  April 1993.  Ms.  Vogel is a portfolio
manager  for  domestic  core and  balanced  portfolios.  Ms.  Vogel  joined  the
Principal  Financial  Group  in 1982 as a  strategist  and was one of  Invista's
founding  members  in  1985.  She  earned  her  Bachelor's  degree  in  Business
Administration  from  Central  College.  She has  earned  the  right  to use the
Chartered Financial Analyst designation.

Catherine A. Zaharis, CFA
manager of the Utilities Fund since April 1993. Ms.  Zaharis  directs  portfolio
management  for the Invista value team and leads the value research  group.  She
joined Invista in 1985. Ms. Zaharis  received her MBA from Drake  University and
her BBA in Finance from the  University of Iowa. She has earned the right to use
the Chartered Financial Analyst designation.

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.  The NAV of a Fund  investing in foreign  securities  may change when
     shareholders  are unable to purchase or redeem shares.  If the  Sub-Advisor
     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,                                       the business day before               March 19, June 19,
     Real Estate and                                 each payable date                     September 19 and December 19
     Utilities                                                                             (or previous business day)

     Blue Chip                                       the business day before               June 19 and December 19
                                                     each payable date                     (or previous business day)

     Capital Value, European Equity,                 the business day before               December 19
     Growth, International, International            each payable date                     (or previous business day)
     Emerging Markets, International
     SmallCap, LargeCap Stock Index
     MidCap, Pacific Basin, Partners
     Equity Growth, Partners LargeCap
     Blend, Partners LargeCap Growth,
     Partners LargeCap Value, Partners
     Midcap Growth, Partners SmallCap
     Growth and SmallCap

     Bond, Government Securities                     the business day before               monthly on the 19th
     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 second  business day of December.  Payments are made
to  shareholders  of record on the first 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 its 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; 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 for more
       information.

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. However, if your subsequent investments
are made using an Automatic Investment Plan, the investment minimum is $50 ($100
for the Cash Management 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;  retirement  plans  qualified  under
         Internal   Revenue  Code  Section  401(a);   payroll   deduction  plans
         submitting  contributions in an electronic  format devised and approved
         by Princor; 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.

In order for us to process your  purchase  order on the day it is  received,  we
must receive the order (with complete information):
o    on a day that the New York Stock Exchange (NYSE) is open; and
o    prior to the close of trading on the NYSE (normally 3 p.m. Central Time).

Orders received after the close of the NYSE or on days that the NYSE is not open
will be processed on the next day that the NYSE is open for normal trading.

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  paperwork,  completed in a manner
     acceptable to us.

Order by telephone
o    Call us between 7:00 A.M..  and 7:00 P.M.  Central Time on any day that the
     New York Stock Exchange is open.
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.

Note:phone  orders  are  not  available  for  qualified  accounts  or  the  Cash
     Management Fund.

Wire money from your bank
o    Have your  Registered  Representative  call  Principal  Mutual Funds for an
     account number and wiring instructions.
o    For both initial and  subsequent  purchases,  federal funds should be wired
     to:
                           Wells Fargo 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    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 a Direct Deposit Plan
Direct Deposit allows you to deposit  automatically all or part of your paycheck
(or  government   allotment)  to  your  Principal  Mutual  Fund  account(s).
o    Availability of this service must be approved by your payroll department.
o    Have your  Registered  Representative  call  Principal  Mutual Funds for an
     account number,  Automated  Clearing House (ACH)  instructions and the form
     needed to establish Direct Deposit.
o    Give  the  Direct  Deposit  Authorization  Form  to  your  employer  or the
     governmental agency (either of which may charge a fee for this service).
o    Shares will be  purchased  on the day the ACH  notification  is received by
     Wells Fargo Bank Iowa, N.A.
o    On  days  when  the  NYSE  is  closed,  but  the  bank  receiving  the  ACH
     notification  is open,  your purchase will be priced at the next calculated
     share price.

Establish an Automatic Investment Plan
o    Make regular monthly  investments with automatic  deductions from your bank
     or other financial institution account.
o    The  minimum  initial  investment  is  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 to only 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 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.

You should also call Principal  Mutual Funds 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 may 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*
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 the close of
     normal trading on the New York Stock Exchange  (generally 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.

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 $500.
o    Checks are drawn on Wells Fargo 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 Wells Fargo).
o    Only available for non-qualified accounts.

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 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.

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 withdrawal  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 additional 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. The minimun amount that
may be  exchanged  into any  Principal  Mutual  Fund must be at least $300 on an
annual basis. 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. The 90 day holding period requirement is waived if
your  purchase of Limited  Term Bond Fund shares is made  through our  Principal
Path for Income program.

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, 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 to obtain the form).
o    via the Internet at www.principal.com.

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 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.

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
     requirements 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    For an exchange to be  effective  the day we receive your  instruction,  we
     must receive the instruction  before the close of normal trading on the New
     York Stock Exchange (generally 3 p.m. Central Time).

When money is  exchanged or  transferred  from one account  registration  or tax
identification number to another, the account holder is relinquishing his or her
rights to the money.  Therefore  exchanges and transfers can only be accepted by
telephone if the exchange (transfer) is between:
o    accounts with identical ownership;
o    an account with a single owner to one with joint  ownership if the owner of
     the single owner account is also an owner of the jointly owned account;
o    a single  owner to a UTMA  account  if the  owner of the  single  ownership
     account is also the custodian on the UTMA account; or
o    a single or jointly  owned account to an IRA account to fund the yearly IRA
     contribution  of the owner  (or one of the  owners in the case of a jointly
     owned account).

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  (and state)  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.  Principal  Mutual  Fund  401(a)  plan
participants will receive semi-annual  statements which detail account activity.
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 you 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 an 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.

If you need information about your account(s) at other times, you may:
o    call us at  1-800-247-4123,  our office  generally  is open Monday  through
     Friday between 7 A.M.. and 7 P.M. Central Time;
o    call our PrinCall(R)line 24 hours a day at 1-800-421-2298; or
o    access your account on the internet at www.principal.com.

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 or transfer among accounts with different ownerships.

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,
address,  phone number,  social security  number,  birth date, etc.) and sending
written confirmation to the shareholder's address of record.

Financial Statements
Shareholders will receive annual financial statements 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 derived from
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  1-800-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.
        811-09755         Principal LargeCap Stock Index Fund, Inc.
        811-05171         Principal MidCap Fund, Inc.
        811-09567         Principal Partners Aggressive Growth Fund, Inc.
        811-10187         Principal Partners LargeCap Blend Fund, Inc.
        811-09757         Principal Partners LargeCap Growth Fund, Inc.
        811-10189         Principal Partners LargeCap Value Fund, Inc.
        811-09759         Principal Partners MidCap Growth Fund, Inc.
        811-10193         Principal Partners SmallCap Growth 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

        811-09801         Principal European Equity Fund, Inc.
        811-08249         Principal International Emerging Markets Fund, Inc.
        811-03183         Principal International Fund, Inc.
        811-08251         Principal International SmallCap Fund, Inc.
        811-09803         Principal Pacific Basin 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.
                                   APPENDIX A



RELATED PERFORMANCE OF THE SUB-ADVISORS

The following  tables set forth  historical  information  about client  accounts
managed by a Sub-Advisor that have investment  objectives and strategies similar
to those  of the  corresponding  Fund  the  Sub-Advisor  manages.  These  client
accounts may consist of individuals,  institutions and other mutual funds.  This
composite  data  is  provided  to  illustrate  the  past   performance  of  each
Sub-Advisor in managing  similar accounts and does not represent the performance
of any Fund.

On the following pages  "composite  performance"  is shown for each  Sub-Advisor
with  regard  to  all  of  those  similarly  managed  accounts.   The  composite
performance is computed based upon essentially the Sub-Advisor's  asset weighted
"average"  performance with regard to such accounts.  The composite  performance
information  shown is based on a composite of all  accounts of each  Sub-Advisor
(and  its  predecessor,   if  any)  having   substantially   similar  investment
objectives,  policies and  strategies to the  corresponding  Fund. The composite
results reflect the deduction of all fees and expenses  actually incurred by the
client accounts.

Portions of the information below are based on data supplied by the Sub-Advisors
and from statistical services,  reports or other sources believed by the Manager
to be reliable.  However,  such  information has not been verified or audited by
the Manager.

Some of the accounts  included in the composites are not mutual funds registered
under the 1940 Act.  Those  accounts are not subject to investment  limitations,
diversification  requirements and other restrictions imposed by the 1940 Act and
the  Internal  Revenue  Code.  If such  requirements  were  applicable  to these
accounts, the performance shown may have been lower.

The  performance  data  should  not be  considered  as an  indication  of future
performance of any Fund or any Sub-Advisor.  In addition, the effect of taxes is
not reflected in the  information  below as it will depend on the investor's tax
status.

Please  note  that  1999  was an  exceptionally  good  year  for the  stocks  of
technology  companies  and mutual  funds that  invest in them.  It should not be
expected  that those  stocks and funds will  perform as well every  year.  Stock
prices can change unpredictably and, in fact, they may lose value in some years.

Certain of the Funds  started  operation in December 2000 and have no historical
performance data. When available,  Fund performance for Class A shares is shown.
The  performance  of Class B,  Class C and  Class R shares  will  vary  from the
performance  of Class A shares  based on the  differences  is sales  charges and
fees.

PERFORMANCE RESULTS - DOMESTIC GROWTH FUNDS

<TABLE>
<CAPTION>

                                                                Average Annual Performance
                                                                (through December 31, 2000)
                                                             YTD   1 YR    3 YR    5 YR   10 YR


<S>                                                        <C>     <C>     <C>     <C>    <C>
Principal Balanced Fund, Inc. - Class A
Invista Balanced Composite
PCII Multi-Sector Composite
   S&P 500 Index
   Lehman Brothers Government/Corporate Bond Index
   Average Domestic Hybrid Category (Morningstar)
   Lipper Balanced Fund Average

Principal Blue Chip Fund, Inc. - Class A
Invista Large Cap Composite
   S&P 500 Index
   Average LargeCap Blend  Category (Morningstar)
   Lipper Large-Cap Value Fund Average

Principal Capital Value Fund, Inc. - Class A
Invista Large Cap Value Composite
   S&P/BARRA 500 Value Index
   Average LargeCap Value Category (Morningstar)
   Lipper Large-Cap Value Fund Average

Principal Growth Fund, Inc. - Class A
Invista Large Cap Growth Composite
   S&P 500 Index
   Average LargeCap Growth Category (Morningstar)
   Lipper Large-Cap Growth Fund Average

Principal LargeCap Stock Index Fund, Inc. - Class A
Invista S&P 500 Index Composite
   S&P 500 Index
   Average LargeCap Blend Category (Morningstar)
   Lipper

Principal MidCap Fund, Inc. - Class A
Invista Mid Cap Value Composite
   S&P 400 MidCap Index
   Average MidCap Value Category (Morningstar)
   Lipper Mid-Cap Core Fund Average

Principal Aggressive Growth Fund, Inc. - Class A
Composite
   S&P 500 Index
   Average (Morningstar)
   Lipper Large-Cap Growth Fund Average

Principal Partners LargeCap Blend Fund, Inc. - Class A
Composite
   Index
   Average (Morningstar)
   Lipper

Principal Partners LargeCap Growth Fund, Inc. - Class A
Duncan Hurst ___________Composite
   Index
   Average LargeCap Growth Category (Morningstar)
   Lipper

Principal Partners LargeCap Value Fund, Inc. - Class A
Composite
   Index
   Average (Morningstar)
   Lipper

Principal Partners MidCap Growth Fund, Inc. - Class A
Turner Investment Partners Midcap Growth Composite
   Russell Midcap Growth Index
   Average MidCap Growth Category (Morningstar)
   Lipper

Principal Partners SmallCap Growth Fund, Inc. - Class A
Composite
   Index
   Average (Morningstar)
   Lipper

Principal Real Estate Fund, Inc. - Class A
PCREI Real Estate Composite
   Morgan Stanley REIT Index
   Lipper Real Estate Fund Average

Principal SmallCap Fund, Inc. - Class A
Invista Small Cap Growth Composite
   S&P 600 Index
   Average SmallCap Growth Category (Morningstar)
   Lipper Small-Cap Core Fund Average

Principal Utilities Fund, Inc. - Class A
Composite
   S&P 500 Index
   Dow Jones Utilities Index
   Average (Morningstar)
   Lipper Utilities Fund Average
</TABLE>
<TABLE>
<CAPTION>

                                                                                      Annual Performance
                                                                                  (year ended December 31)
                                                          2000   1999    1998    1997   1996    1995   1994    1993    1992   1991

Principal Balanced Fund, Inc. - Class A
<S>                                                       <C>   <C>     <C>     <C>     <C>    <C>     <C>    <C>     <C>      <C>
Invista Balanced Composite                                        2.20  12.17   20.03   10.69  26.88   -1.63  14.25   10.73    27.19
PCII Multi-Sector Composite                                      -0.57   7.97   10.16    3.94  18.41   -2.05  10.67    8.25    15.89
   S&P 500 Index                                                 21.04  28.58   33.36   22.96  37.58    1.32  10.08    7.62    30.47
   Lehman Brothers Government/Corporate Bond Index
   Average Domestic Hybrid Category (Morningstar)                 8.24  12.50   18.24   13.07  24.87   -2.56  12.07    8.22    23.87
   Lipper Balanced Fund Average

Principal Blue Chip Fund, Inc. - Class A
Invista Large Cap Composite                                       9.57  24.70   29.66   24.35
   S&P 500 Index                                                 21.04  28.58   33.36   22.96  37.58    1.32  10.08    7.62    30.47
   Average LargeCap Blend  Category (Morningstar)                19.72  21.95   27.43   20.37  31.99   -1.08  11.12    7.62    32.13
   Lipper Large-Cap Value Fund Average

Principal Capital Value Fund, Inc. - Class A
Invista Large Cap Value Composite                                -7.12  18.04   28.94   22.18
   S&P/BARRA 500 Value Index                                     12.72  14.68   29.99   21.99  37.00   -0.63  18.60   10.53    22.56
   Average LargeCap Value Category (Morningstar)                  6.63  13.10   27.01   20.79  32.28   -0.81  13.25    9.89    28.51
   Lipper Large-Cap Value Fund Average

Principal Growth Fund, Inc. - Class A
Invista Large Cap Growth Composite
   S&P 500 Index                                                 21.04  28.58   33.36   22.96  37.58    1.32  10.08    7.62    30.47
   Average LargeCap Growth Category (Morningstar)                39.72  33.56   25.00   18.95  32.27   -2.32  10.31    5.83    43.69
   Lipper Large-Cap Growth Fund Average

Principal LargeCap Stock Index Fund, Inc. - Class A
Invista S&P 500 Index Composite                                  20.62  28.16   32.89   22.51  37.07    1.05
   S&P 500 Index                                                 21.04  28.58   33.36   22.96  37.58    1.32  10.08    7.62    30.47
   Average LargeCap Blend Category (Morningstar)                 19.72  21.95   27.43   20.37  31.99   -1.08  11.12    7.62    32.13
   Lipper

Principal MidCap Fund, Inc. - Class A
Invista Mid Cap Value Composite                                  -7.36   3.25   35.49   16.03  41.18    0.98  11.43    7.57    33.54
   S&P 400 MidCap Index
   Average MidCap Value Category (Morningstar)                    7.78   3.92   26.04   20.50  29.27   -1.11  17.11   13.54    29.65
   Lipper Mid-Cap Core Fund Average

Principal Aggressive Growth Fund, Inc. - Class A
Composite
   S&P 500 Index                                                 21.04  28.58   33.36   22.96  37.58    1.32  10.08    7.62    30.47
   Average (Morningstar)
   Lipper Large-Cap Growth Fund Average

Principal Partners LargeCap Blend Fund, Inc. - Class A
Composite
   Index
   Average (Morningstar)
   Lipper

Principal Partners LargeCap Growth Fund, Inc. - Class A
Duncan Hurst ___________Composite
   Index
   Average LargeCap Growth Category (Morningstar)                39.72  33.56   25.00   18.95  32.27   -2.32  10.31    5.83    43.69
   Lipper

Principal Partners LargeCap Value Fund, Inc. - Class A
Composite
   Index
   Average (Morningstar)
   Lipper

Principal Partners MidCap Growth Fund, Inc. - Class A
Turner Investment Partners Midcap Growth Composite              126.09  26.33   41.77   18.25
   Russell Midcap Growth Index                                   51.29  17.86   22.54   17.48  33.98   -2.16  11.19    8.71    47.03
   Average MidCap Growth Category (Morningstar)                  63.90  17.51   17.05   16.99  34.79   -1.03  15.64    9.03    50.97
   Lipper

Principal Partners SmallCap Growth Fund, Inc. - Class A
Composite
   Index
   Average (Morningstar)
   Lipper

Principal Real Estate Fund, Inc. - Class A
PCREI Real Estate Composite                                      -3.01 -10.20   19.83
   Morgan Stanley REIT Index                                     -4.55 -16.90   18.58   35.89  12.90
   Lipper Real Estate Fund Average

Principal SmallCap Fund, Inc. - Class A
Invista Small Cap Growth Composite                               66.37  -2.47   34.77   14.19
   S&P 600 Index
   Average SmallCap Growth Category (Morningstar)                61.45   4.49   18.19   19.99  35.44   -0.28  16.70   11.99    53.64
   Lipper Small-Cap Core Fund Average

Principal Utilities Fund, Inc. - Class A
Composite
   S&P 500 Index                                                 21.04  28.58   33.36   22.96  37.58    1.32  10.08    7.62    30.47
   Dow Jones Utilities Index
   Average (Morningstar)
   Lipper Utilities Fund Average
</TABLE>
<TABLE>
<CAPTION>


PERFORMANCE RESULTS - INTERNATIONAL GROWTH FUNDS
                                                                Average Annual Performance
                                                                (through December 31, 2000)
                                                             YTD   1 YR    3 YR    5 YR   10 YR


Principal European Equity Fund, Inc. - Class A
<S>                                                          <C>    <C>    <C>     <C>    <C>
BT European Composite
   MSCI Europe (15) Index--ND
   Average Europe Category (Morningstar)
   Lipper

Principal International Emerging Markets Fund, Inc. -
   Class A
Invista International Emerging Markets Equity Composite
   MSCI - Emerging Markets Free--ID
   Average Diversified Emerging Market
     Category (Morningstar)
   Lipper Emerging Markets Fund Average

Principal International Fund, Inc. - Class A
Invista International Broad Markets Composite
   MSCI EAFE (Europe, Australia, Far East) Index--ND
   Average Foreign Category (Morningstar)
   Lipper International Fund Average

Principal International SmallCap Fund, Inc. - Class A
Invista International Small Cap Equity Composite
   MSCI EAFE (Europe, Australia, Far East) Index--ND
   Average Foreign Category (Morningstar)
   Lipper International Small-Cap Fund Average

Prinicpal Pacific Basin Fund, Inc. - Class A
   BT Pacific Basin Composite
   MSCI Pacific Free Index--ND
   Average Diversified Pacific/Asia Category (Morningstar)
   Lipper
</TABLE>
<TABLE>
<CAPTION>


                                                                                      Annual Performance
                                                                                  (year ended December 31)
                                                          2000   1999    1998    1997   1996    1995   1994    1993    1992   1991


Principal European Equity Fund, Inc. - Class A
<S>                                                       <C>   <C>    <C>     <C>      <C>   <C>      <C>    <C>    <C>       <C>
BT European Composite                                            33.95  30.86   26.33   41.31   9.36    8.49  43.12
   MSCI Europe (15) Index--ND                                    15.89  28.53   23.80   21.09  21.62    2.28  29.28   -4.71    13.11
   Average Europe Category (Morningstar)                         26.11  21.56   18.42   24.99  16.26    2.52  28.15   -6.82     7.47
   Lipper

Principal International Emerging Markets Fund, Inc. -
   Class A
Invista International Emerging Markets Equity Composite          63.25 -17.59   11.38   25.57   7.46
   MSCI - Emerging Markets Free--ID                              58.89 -35.11   31.64   22.21 -12.83    0.64  53.92   13.41   149.65
   Average Diversified Emerging Market
     Category (Morningstar)                                      71.86 -27.03   -3.68   13.35  -3.45   -9.27  73.26    0.26    18.10
   Lipper Emerging Markets Fund Average

Principal International Fund, Inc. - Class A
Invista International Broad Markets Composite                    25.78  10.47   12.43   24.54  14.07   -2.39  44.83
   MSCI EAFE (Europe, Australia, Far East) Index--ND             26.96  20.00    1.78    6.05  11.21    7.78  32.56  -12.17    12.13
   Average Foreign Category (Morningstar)                        44.49  13.00    5.43   12.39   9.82   -0.40  36.71   -4.54    13.07
   Lipper International Fund Average

Principal International SmallCap Fund, Inc. - Class A
Invista International Small Cap Equity Composite                 86.79  13.24   15.62   40.53   3.61
   MSCI EAFE (Europe, Australia, Far East) Index--ND             26.96  20.00    1.78    6.05  11.21    7.78  32.56  -12.17    12.13
   Average Foreign Category (Morningstar)                        44.49  13.00    5.43   12.39   9.82   -0.40  36.71   -4.54    13.07
   Lipper International Small-Cap Fund Average

Prinicpal Pacific Basin Fund, Inc. - Class A
   BT Pacific Basin Composite                                   132.40   7.35  -27.91
   MSCI Pacific Free Index--ND                                   56.65   2.72  -25.87   -8.30   2.95   12.76  36.21  -18.56    11.46
   Average Diversified Pacific/Asia Category (Morningstar)       92.50  -5.91  -27.90    4.02   2.39   -5.49  59.02   -3.03    15.05
   Lipper
</TABLE>
<TABLE>
<CAPTION>

PERFORMANCE RESULTS - INCOME FUNDS
                                                                Average Annual Performance
                                                                (through December 31, 2000)
                                                             YTD   1 YR    3 YR    5 YR   10 YR
Principal Bond Fund, Inc. - Class A
<S>                                                          <C>   <C>     <C>     <C>   <C>
PCII Multi-Sector Composite
   Lehman Brothers BAA Corporate Index
   Average Intermediate-Term Bond Category (Morningstar)
   Lipper Corporate Debt BBB Rated Fund Average

Principal Government Securities Income Fund, Inc. - Class A
PCII Mortgage-Backed Broad Composite
   Lehman Brothers GNMA Index
   Average Intermediate Government Category (Morningstar)
   Lipper GNMA Fund Average

Principal High Yield Fund, Inc. - Class A
PCII High Quality Long-Term Bond Composite
   Lehman Brothers High Yield Composite Bond Index
   Average Long-Term Bond Category (Morningstar)
   Lipper High Current Yield Fund Average

Principal Limited Term Bond Fund, Inc. - Class A
PCII High Quality Short-Term Bond Composite
   Lehman Brothers Intermediate Government/Corporate Index
   Average Short-Term Bond Category (Morningstar)
   Lipper Short-Intermediate Investment Grade Debt Index

Principal Tax-Exempt Bond Fund, Inc. - Class A
Composite
   Lehman Brothers Municipal Bond Index
   Average (Morningstar)
   Lipper General Municipal Debt Fund Average
 Average Annual Performance
                                                                                     (year ended December 31)
</TABLE>
<TABLE>
<CAPTION>
                                                           2000   1999    1998    1997   1996    1995   1994    1993    1992   1991

Principal Bond Fund, Inc. - Class A
<S>                                                       <C>     <C>    <C>     <C>      <C>   <C>     <C>    <C>      <C>    <C>
PCII Multi-Sector Composite                                       -0.57   7.97   10.16    3.94  18.41   -2.05  10.67    8.25   15.89
   Lehman Brothers BAA Corporate Index
   Average Intermediate-Term Bond Category (Morningstar)          -1.22   7.42    8.76    3.30  17.35   -3.73  10.39    7.20   16.62
   Lipper Corporate Debt BBB Rated Fund Average

Principal Government Securities Income Fund, Inc. - Class A
PCII Mortgage-Backed Broad Composite                               0.22   7.62    9.97    3.90  19.10   -4.41
   Lehman Brothers GNMA Index
   Average Intermediate Government Category (Morningstar)         -1.44   7.45    8.45    2.80  16.42   -4.02   8.03    6.39   14.67
   Lipper GNMA Fund Average

Principal High Yield Fund, Inc. - Class A
PCII High Quality Long-Term Bond Composite                        -7.41  10.39    4.85
   Lehman Brothers High Yield Composite Bond Index
   Average Long-Term Bond Category (Morningstar)                  -2.78   6.51   10.53    3.54  21.33   -6.13  13.34    7.98   17.15
   Lipper High Current Yield Fund Average

Principal Limited Term Bond Fund, Inc. - Class A
PCII High Quality Short-Term Bond Composite                        1.05   6.79    6.64
   Lehman Brothers Intermediate Government/Corporate Index
   Average Short-Term Bond Category (Morningstar)                  2.12   6.28    6.51    4.35  11.48   -0.86   6.86    6.15   13.43
   Lipper Short-Intermediate Investment Grade Debt Index

Principal Tax-Exempt Bond Fund, Inc. - Class A
Composite
   Lehman Brothers Municipal Bond Index
   Average (Morningstar)
   Lipper General Municipal Debt Fund Average
</TABLE>



IMPORTANT NOTES TO THE APPENDIX

Lehman  Brothers  Aggregate  Bond  Index  represents  securities  that  are U.S.
domestic, taxable, and dollar denominated.  The index covers the U.S. investment
grade fixed rate bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed securities. These
major sectors are subdivided into more specific  indices that are calculated and
reported on a regular basis.

Lehman  Brothers  Government/Corporate  Bond Index is composed of all bonds that
are investment grade (rated BAA or higher by Moody's or BBB or higher by S&P, if
unrated  by  Moody's).  Issues  must have at least one year to  maturity.  Total
return comprises price  appreciation/depreciation  and income as a percentage of
the   original   investment.   Indices   are   rebalanced   monthly   by  market
capitalization.

Lehman Brothers Long Term  Gov't./Corporate  Bond Index is composed of all bonds
covered by the Lehman Brothers  Government/Corporate  Bond Index with maturities
of 10 years or greater.  Total return comprises price  appreciation/depreciation
and income as a percentage of the original  investment.  Indices are  rebalanced
monthly by market capitalization.

Lehman Brothers Mortgage-Backed  Securities Index is composed of all fixed-rate,
securitized  mortgage  pools  by  GNMA,  FNMA,  and the  FHLMC,  including  GNMA
Graduated Payment Mortgages. The minimum principal amount required for inclusion
is $50  million.  Total return  comprises  price  appreciation/depreciation  and
income as a  percentage  of the  original  investment.  Indices  are  rebalanced
monthly by market capitalization.

Lehman Brothers Mutual Fund 1-5 Government/Credit  Index is composed of treasury
notes,  agencies, and credits rated BBB or better, and with maturities of 1 year
or greater and 5 years or less. It is a rolling mix of issues, as new issues are
added and issues becoming less than 1 year to maturity are deleted.

Morgan   Stanley   Capital   International   (MSCI)   Europe  (15)  Index  is  a
capitalization-weighted  index.  The index is designed to track the broader MSCI
EMU Benchmark containing stocks in ten EMU member countries.

Morgan   Stanley   Capital   International   Pacific  Free  Index  is  a  market
capitalization-weighted  index  representing  all of the Morgan Stanley  Capital
International  developed  markets  in  the  Pacific.  It  comprises  six  of the
twenty-two   countries  that  are  included  in  the  Morgan   Stanley   Capital
International  World.  This index is created by  aggregating  the six  different
country indexes,  all of which are created separately.  This index is calculated
with gross dividends  reinvested.  The countries  represented by this index are:
Australia,  Hong Kong, Japan,  Malaysia,  New Zealand and Singapore.  The "Free"
aspect indicates that this index includes only securities that are allowed to be
purchased by global investors.

Morgan Stanley REIT Index is a total-return index comprised of the most actively
traded real estate  investment  trusts,  and is designed to be a measure of real
estate equity performance.

Morgan Stanley Capital International (MSCI) EAFE (Europe,  Australia,  Far East)
Index is a stock index designed to measure the  investment  returns of developed
economies outside of North America.

Russell 1000 Growth Index is an index that  measures  the  performance  of those
Russell 1000 companies with higher  price-to-book  ratios and higher  forecasted
growth values.

Russell  1000 Value Index is an index that  measures  the  performance  of those
Russell  1000  companies  with lower price to book  ratios and lower  forecasted
growth values.

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

Russell 2000 Index measures the  performance of the 2,000 smallest  companies in
the Russell 3000 Index,  which  represents  approximately 8% of the total market
capitalization of the Russell 3000 Index. As of the latest  reconstitution,  the
average market  capitalization was approximately $580 million; the median market
capitalization was approximately $466 million.  The largest company in the index
had an approximate market capitalization of $1.5 billion.

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

Russell  Midcap Growth Index  measures the  performance  of those Russell MidCap
companies with lower  price-to-book  ratios and higher forecasted growth values.
The stocks are also members of the Russell 1000 Value index.

Russell  Midcap Value Index is an index that measures the  performance  of those
Russell Midcap companies with lower  price-to-book  ratios and higher forecasted
growth values. The stocks are also members of the Russell 1000 Value index.

S&P 500  Index is a market  capitalization-weighted  index  of 500  widely  held
stocks often used as a proxy for the stock  market.  It measures the movement of
the largest issues.  Standard & Poor's chooses the member  companies for the 500
based on market size, liquidity and industry group representation.  Included are
the stocks of industrial, financial, utility and transportation companies.

S&P/BARRA 400 Value Index is a market  capitalization-weighted  index of all the
stocks  in the  S&P 400  that  have  low  price-to-book  ratios.  The  index  is
rebalanced semi-annually on January 1 and July 1.

S&P/BARRA 500 Growth Index is a market  capitalization-weighted index of all the
stocks in the S&P 500 that have high  price-to-book  ratios.  It is  designed so
that approximately 50% of the SPX market capitalization is in the Growth Index.

S&P/BARRA  500  Value  Index  is a market  capitalization-weighted  index of the
stocks in the S&P 500 Index having the highest book to price  ratios.  The index
consists of approximately half of the S&P 500 on a market capitalization basis.

S&P/BARRA  600  Growth  Index is a market  capitalization-weighted  index of the
stocks in the S&P SmallCap 600 Index having the lowest book to price ratios. The
index  consists  of  approximately  half of the  S&P  SmallCap  600 on a  market
capitalization basis.

S&P Midcap 400 Index includes  approximately  10% of the  capitalization of U.S.
equity  securities.  These are comprised of stocks in the middle  capitalization
range.  Any mid-sized  stocks already  included in the S&P 500 are excluded from
this index.

S&P SmallCap 600 Index  consists of 600 domestic  stocks chosen for market size,
liquidity  and industry  group  representation.  It is a market  weighted  index
(stock  price x shares  outstanding),  with each  stock  affecting  the index in
proportion to its market value.




                          Principal Balanced Fund, Inc.
                         Principal Blue Chip Fund, Inc.
                            Principal Bond Fund, Inc.
                       Principal Capital Value Fund, Inc.
                      Principal Cash Management Fund, Inc.
                      Principal European Equity 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 Pacific Basin Fund, Inc.
                   Principal Partners Equity Growth Fund, Inc.
           (formerly Principal Partners Aggressive Growth Fund, Inc.)
                  Principal Partners LargeCap Blend Fund, Inc.
                  Principal Partners LargeCap Growth Fund, Inc.
                  Principal Partners LargeCap Value Fund, Inc.
                   Principal Partners MidCap Growth Fund, Inc.
                  Principal Partners SmallCap 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



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
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.

                                TABLE OF CONTENTS

         Investment Policies and Restrictions of the Funds..............   4
         Growth-Oriented Funds..........................................   7
         Income-Oriented Funds .........................................  13
         Money Market Fund..............................................  17
         Funds' Investments.............................................  19
         Management of the Funds........................................  32
         Manager and Sub-Advisors.......................................  37
         Cost of Manager's Services.....................................  38
         Brokerage on Purchases and Sales of Securities.................  43
         How to Purchase Shares.........................................  48
         Offering Price of Funds' Shares................................  50
         Distribution Plan..............................................  58
         Determination of Net Asset Value of Funds' Shares .............  61
         Performance Calculation........................................  62
         Tax Treatment of Funds, Dividends and Distributions  ..........  68
         General Information and History................................  70
         Financial Statements ..........................................  71
         Appendix A ....................................................  72
         Appendix B.....................................................  73
         Appendix C.....................................................  76



<PAGE>




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 four categories of Principal Mutual Funds:

Domestic Growth-Oriented Funds which include:
o    seven  Funds  which seek to achieve  growth of  capital  primarily  through
     investments in equity  securities  (Capital Value Fund, Growth Fund, MidCap
     Fund, Partners Equity Growth Fund,  Principal Partners LargeCap Blend Fund,
     Partners  LargeCap  Growth Fund,  Principal  Partners  LargeCap Value Fund,
     Partners MidCap Growth Fund,  Principal  Partners  SmallCap 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).

International  Growth-Oriented  Funds which include five Funds which seek growth
of capital primarily through  investments in equity securities  (European Equity
Fund,  International  Emerging Markets Fund,  International Fund,  International
SmallCap Fund and Pacific Basin 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).

The investment  objectives,  principal investment policies and the main risks of
each  Fund  are  described  in  the  Prospectus.   This  Statement  of  Addition
Information ("SAI") contains  supplemental  information about those policies and
risks and the types of securities each Fund's Sub-Advisor can select. Additional
information is also provided  about the strategies  that the Fund may use to try
to achieve its objective.

The  composition of each Fund and the techniques and strategies  that the Fund's
Sub-Advisor  may use in selecting  securities will vary over time. A Fund is not
required to use all of the investment  techniques and strategies available to it
in seeking its goals.

Unless otherwise indicated,  with the exception of the percentage limitations on
borrowing,  the  restrictions  apply at the time  transactions are entered into.
Accordingly,  any later  increase or decrease  beyond the specified  limitation,
resulting from market fluctuations or in a rating by a rating service,  does not
require elimination of any security from the portfolio.

Except as described below as "Fundamental Restrictions," the investment policies
described  in this  SAI  and the  prospectuses  are not  fundamental  and may be
changed by the Board of Directors without shareholder approval.  The Fundamental
Restrictions  may not be changed without a vote of a majority of the outstanding
voting  securities of the affected Fund. The Investment  Company Act of 1940, as
amended  ("1940  Act")  provides  that "a vote of a majority of the  outstanding
voting  securities"  of a Fund means the  affirmative  vote of the lesser of (1)
more  that  50% of the  outstanding  shares,  or (2) 67% or  more of the  shares
present  at a  meeting  if more  than 50% of the  outstanding  Fund  shares  are
represented at the meeting in person or by proxy.  Each share as one vote,  with
fractional shares voting  proportionately.  Shares of all classes of a Fund will
vote  together as a single  class  except when  otherwise  required by law or as
determined by the Board of Directors.



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  European Equity Fund, Inc.  ("European Equity Fund") seeks to achieve
growth  of  capital.  The Fund  seeks to  achieve  its  objective  by  investing
primarily in equity securities (or other securities with equity characteristics)
of issuers located in Europe.

Principal  Growth Fund, Inc.  ("Growth Fund") seeks to achieve 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 to achieve
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 to
achieve long-term growth of capital.  The Fund attempts to mirror the investment
results of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500").

Principal   MidCap  Fund,   Inc.   ("MidCap  Fund")  seeks  to  achieve  capital
appreciation  by  investing  primarily  in  securities  of  emerging  and  other
growth-oriented companies.

Principal  Pacific  Basin Fund,  Inc.  ("Pacific  Basin  Fund") seeks to achieve
growth  of  capital.  The Fund  seeks to  achieve  its  objective  by  investing
primarily in equity securities (or other securities with equity characteristics)
of issuers located in the Pacific Basin.

Principal  Partners  Equity Growth Fund,  Inc.  ("Partners  Equity Growth Fund")
seeks to achieve long-term capital appreciation by investing primarily in equity
securities.

Principal  Partners LargeCap Blend Fund, Inc.  ("Partners  LargeCap Blend Fund")
seeks  long-term  growth of capital by investing  primarily in common  stocks of
larger capitalization growth and value companies.

Principal Partners LargeCap Growth Fund, Inc.  ("Partners LargeCap Growth Fund")
seeks to achieve  long-term  growth of capital by investing  primarily in common
stocks of larger capitalization domestic companies.

Principal  Partners LargeCap Value Fund, Inc.  ("Partners  LargeCap Value Fund")
seeks  long-term  growth of capital by investing  primarily in common  stocks of
larger capitalization value companies.

Principal  Partners  MidCap Growth Fund,  Inc.  ("Partners  MidCap Growth Fund")
seeks to achieve  long-term  growth of capital by investing  primarily in medium
capitalization U.S. companies with strong earnings growth potential.

Principal Partners SmallCap Growth Fund, Inc.  ("Partners SmallCap Growth Fund")
seeks  long-term  growth of capital by investing in equity  securities  of small
growth companies.

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 achieve 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

European Equity Fund,  LargeCap Stock Index Fund,  Pacific Basin Fund,  Partners
Equity Growth Fund, Partners LargeCap Blend Fund, Partners LargeCap Growth Fund,
Partners LargeCap Value Fund,  Partners MidCap Growth Fund and Partners SmallCap
Growth Fund

Each of the following  numbered  restrictions is a matter of fundamental  policy
and may not be changed without shareholder  approval.  The European Equity Fund,
LargeCap  Stock Index Fund,  Pacific  Basin Fund,  Partners  Equity Growth Fund,
Partners LargeCap Blend Fund,  Partners LargeCap Growth Fund,  Partners LargeCap
Value Fund,  Partners MidCap Growth Fund, and Partners SmallCap 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
     as  this  Fund is not  intended  to  qualify  as a  diversified  management
     investment company as defined by the Investment Company Act of 1940.

(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 500 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.  This
     restriction does not apply to the European Equity Fund or the Pacific Basin
     Fund.

(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)  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.

(3)  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.

(4)  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.

(5)  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.

(6)  Invest in commodities or commodity contracts,  but it may purchase and sell
     financial futures contracts and options on such contracts.

(7)  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.

(8)  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.

(9)  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).

(10) Invest more than 20% of its total assets in securities of foreign issuers.

In addition:

(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% of the value of the securities loaned.

(12)  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 nonrated 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 nongovernmental user, then
such  nongovernmental  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% of
     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."

In selecting  securities  for the Partners  Equity  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.  In its  selection of  securities  for the Partners  Equity Growth
Fund,  Morgan  Stanley  considers  valuation to be of secondary  importance  and
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.

The Sub-Advisor,  BT Funds  Management  (International)  Limited ("BT"),  of the
Pacific Basin and European Equity Funds,  uses a disciplined  active  investment
process which is the core of how BT's assets under  management grew from US $625
million in 1980 to approximately US $25 billion at the turn of the century.

The  cornerstone of this process is the belief that  investment  markets are not
always  efficient  and  that  investment  outperformance  can be  achieved  with
superior  research and analysis.  BT's proprietary  research process allows fund
managers and analysts to identify quality investment  opportunities  before they
are widely  recognized by the market,  investments  which will  potentially  add
value to portfolios, creating wealth for clients.

It  is  truly  a  global   approach,   developed  over  time  to  recognize  the
international  interdependence  of  markets  and  utilize,  under one roof,  the
collective knowledge of the 100-strong investment team.  Investment  specialists
manage  all  asset  classes,  blending  bottom-up  and  top-down  approaches  to
portfolio  construction  along  with fully  integrated  risk  management.  These
professionals are consistently recognized in local and international surveys for
the quality of their investment research and investment product.

Selections  of  equity  securities  for the other  Funds  (except  the  Partners
SmallCap  Growth  Fund)  are made  based on an  approach  described  broadly  as
"company-by-company"  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 SmallCap Growth Fund, these same three
basic steps are followed but in reverse order.

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 net 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    European   Equity,    International,    International   Emerging   Markets,
     International SmallCap and Pacific Basin Funds - 100%;
o    Partners Equity Growth,  Partners LargeCap Blend, Partners LargeCap Growth,
     Partners LargeCap Value,  Partners Small Cap 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%.

Foreign  companies may not be subject to the same uniform  accounting,  auditing
and  financial  reporting  practices  as are  required  of  U.S.  companies.  In
addition,  there  may be less  publicly  available  information  about a foreign
company than about a U.S. company. Securities of many foreign companies are less
liquid  and  more  volatile  than  securities  of  comparable  U.S.   companies.
Commissions on foreign  securities  exchanges may be generally higher than those
on U.S.  exchanges,  although each Fund seeks the most  favorable net results on
its portfolio transactions.

Foreign  markets also have different  clearance and settlement  procedures  than
those in U.S. markets. In certain markets there have been times when settlements
have been unable to keep pace with the volume of securities transactions, making
it difficult to conduct these transactions. Delays in settlement could result in
temporary periods when a portion of Fund assets are not invested and are earning
no  return.  If a Fund is  unable to make  intended  security  purchases  due to
settlement problems, the Fund may miss attractive investment  opportunities.  In
addition,  a Fund may incur a loss as a result of a decline  in the value of its
portfolio if it is unable to sell a security.

With  respect  to  certain  foreign  countries,  there  is  the  possibility  of
expropriation  or confiscatory  taxation,  political or social  instability,  or
diplomatic  developments  that  could  affect  a  Fund's  investments  in  those
countries.  In addition,  a Fund may also suffer losses due to  nationalization,
expropriation or differing accounting  practices and treatments.  Investments in
foreign securities are subject to laws of the foreign country that may limit the
amount and types of foreign  investments.  Changes of governments or of economic
or  monetary  policies,  in the U.S.  or  abroad,  changes in  dealings  between
nations,  currency  convertibility  or exchange rates could result in investment
losses for a Fund.  Finally,  even though certain  currencies may be convertible
into U.S. dollars, the conversion rates may be artificial relative to the actual
market values and may be unfavorable to fund investors.

Foreign  securities  are  often  traded  with less  frequency  and  volume,  and
therefore  may have greater  price  volatility,  than is the case with many U.S.
securities. Brokerage commissions,  custodial services, and other costs relating
to investment in foreign countries are generally more expensive than in the U.S.
Though the Funds intend to acquire the securities of foreign issuers where there
are public trading markets,  economic or political turmoil in a country in which
a  Fund  has a  significant  portion  of  its  assets  or  deterioration  of the
relationship  between the U.S. and a foreign  country may negatively  impact the
liquidity of a Fund's  portfolio.  The Fund may have difficulty  meeting a large
number  of  redemption  requests.  Furthermore,  there  may be  difficulties  in
obtaining or enforcing judgments against foreign issuers.

Investments in companies of developing  countries may be subject to higher risks
than investments in companies in more developed countries. These risks include

o    increased social, political and economic instability;
o    a smaller  market for these  securities  and low or  nonexistent  volume of
     trading  that  results  in  a  lack  of  liquidity  and  in  greater  price
     volatility;
o    lack of publicly  available  information,  including reports of payments of
     dividends or interest on outstanding securities;
o    foreign  government  policies  that may restrict  opportunities,  including
     restrictions  on investment in issuers or  industries  deemed  sensitive to
     national interests;
o    relatively new capital market structure or market-oriented economy;
o    the possibility that recent favorable  economic  developments may be slowed
     or reversed by unanticipated political or social events in these countries;
o    restrictions  that may make it difficult or impossible for the fund to vote
     proxies,  exercise  shareholder rights,  pursue legal remedies,  and obtain
     judgments in foreign courts; and
o    possible  losses  through the holding of securities in domestic and foreign
     custodial banks and depositories.

In addition, many developing countries have experienced substantial, and in some
periods,  extremely high rates of inflation for many years.  Inflation and rapid
fluctuations  in  inflation  rates have had and may  continue  to have  negative
effects on the economies and securities markets of those countries.

Repatriation  of  investment  income,  capital and  proceeds of sales by foreign
investors  may  require  governmental   registration  and/or  approval  in  some
developing  countries.  A Fund  could be  adversely  affected  by delays in or a
refusal  to  grant  any  required  governmental  registration  or  approval  for
repatriation.

Further,  the economies of developing  countries generally are heavily dependent
upon  international  trade and,  accordingly,  have been and may  continue to be
adversely affected by trade barriers,  exchange controls, managed adjustments in
relative currency values and other protectionist  measures imposed or negotiated
by the countries with which they trade.

Depositary Receipts

Depositary  Receipts are  generally  subject to the same sort of risks as direct
investments in a foreign country, such as, currency risk, political and economic
risk,  and market risk,  because  their values  depend on the  performance  of a
foreign security denominated in its home currency.

The Funds that may invest in foreign securities may invest in:
o    American  Depositary  Receipts  ("ADRs")  which are  receipts  issued by an
     American  bank  or  trust  company   evidencing   ownership  of  underlying
     securities  issued by a foreign  issuer.  They are designed for use in U.S.
     securities markets.
o    European  Depositary  Receipts  ("EDRs")  and  Global  Depositary  Receipts
     ("GDRs")  which are  receipts  issued by a  foreign  financial  institution
     evidencing an arrangement similar to that of ADRs.

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 or other liquid assets 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
     Equity 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 other  liquid
     assets (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  European  Equity,  Pacific  Basin and  Partners  Equity
     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  Growth Oriented,  Partners Equity Growth,  Partners LargeCap
Blend,  Partners  LargeCap  Growth,  Partners  LargeCap  Value,  Partners MidCap
Growth,  and  Partners  SmallCap  Growth  Funds may enter into  forward  foreign
currency exchange contracts under various  circumstances.  The Funds (other than
European  Equity and Pacific  Basin) will 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.  The  European  Equity and  Pacific  Basin Funds each may
engage in speculative  forward foreign currency exchange  contracts to a limited
percentage of its assets.

The typical use of a forward contract is to "lock in" the price of a security in
U.S.  dollars  or some  other  foreign  currency  which a Fund is holding in its
portfolio.  By entering into a forward  contract for the purchase or sale, for a
fixed  amount of dollars or other  currency,  of the amount of foreign  currency
involved in the underlying security transactions,  a Fund may be able to protect
itself  against  a  possible  loss  resulting  from  an  adverse  change  in the
relationship  between the U.S.  dollar or other currency which is being used for
the  security  purchase  and the  foreign  currency  in which  the  security  is
denominated  during  the  period  between  the date on  which  the  security  is
purchased or sold and the date on which payment is made or received.

The Sub-Advisor  also may from time to time utilize forward  contracts for other
purposes.  For example, they may be used to hedge a foreign security held in the
portfolio  or a  security  which pays out  principal  tied to an  exchange  rate
between the U.S.  dollar and a foreign  currency,  against a decline in value of
the applicable  foreign  currency.  They also may be used to lock in the current
exchange  rate of the  currency  in which  those  securities  anticipated  to be
purchased  are  denominated.  At times,  a Fund may enter into  "cross-currency"
hedging  transactions  involving currencies other than those in which securities
are held or proposed to be purchased are denominated.

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.  The ability to establish and
close out positions on trading options on currency futures  contracts is subject
to the maintenance of a liquid market that may not always be available.

Although the European Equity and Pacific Basin Funds each value its assets daily
in terms of U.S.  dollars,  they do not  intend to convert  holdings  of foreign
currencies into U.S. dollars on a daily basis.  Each Fund will,  however,  do so
from  time to time,  and  investors  should  be aware of the  costs of  currency
conversion.   Although  foreign  exchange  dealers  do  not  charge  a  fee  for
conversion,  they do realize a profit based on the spread  between the prices at
which they are buying and selling various  currencies.  Thus, a dealer may offer
to sell a foreign  currency to a Fund at one rate,  while offering a lesser rate
of exchange should the Fund desire to resell that currency to the dealer.

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 net  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 will lend its
portfolio securities if as a result the aggregate of such loans made by the Fund
would exceed the limits  established  by the Investment  Company Act.  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 other liquid
assets  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. 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 terminates.  Any gain or loss
in the market value 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 normally  retain voting rights  attendant to securities it has lent,  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.

Industry Concentrations

Each  of the  Funds,  except  the  Real  Estate  and  Utilities  Funds,  may not
concentrate  (invest  more  than  25%  of its  assets)  its  investments  in any
particular  industry.   The  LargeCap  Stock  Index  Fund  may  concentrate  its
investments  in a particular  industry only to the extent that the S&P 500 Index
is so  concentrated.  For purposes of applying the  Partners  LargeCap  Growth's
industry  concentration  restriction,  the Fund uses the industry groups used in
the Data Monitoring System of William O'Neill & Co., Incorporated.  The European
Equity and Pacific Basin Funds use the industry groups of Morgan Stanley Capital
International - Global  Industry  Classification  Standard.  The other Funds use
industry  classifications  based on the  "Directory  of Companies  Filing Annual
Reports with the Securities and Exchange Commission."

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 money market instruments which the Funds may purchase 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
          Cooperatives,  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 B, 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  securities  sales necessary
to meet cash  requirements  for redemptions of Fund shares.  This need to redeem
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 Partners LargeCap Blend, Partners LargeCap
Value,  and Partners  SmallCap  Growth Funds as they have been in existence  for
less than six months.

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                                   % and 24.2%
                                             ----
 Blue Chip Fund                                  % and 16.4%
                                             ----
 Bond Fund                                       % and 48.9%
                                             ----
 Capital Value Fund                              % and 44.5%
                                             ----
 European Equity Fund                            % and     %
                                             ----      ----
 Government Securities Income Fund               % and 19.4%
                                             ----
 Growth Fund                                     % and 32.4%
                                             ----
 High Yield Fund                                 % and 86.1%
                                             ----
 International Emerging Markets Fund             % and 95.8%
                                             ----
 International Fund                              % and 58.7%
                                             ----
 International SmallCap Fund                     % and 191.5%
                                             ----
 LargeCap Stock Index                            % and     %
                                             ----      ----
 Limited Term Bond Fund                          % and 20.9%
                                             ----
 MidCap Fund                                     % and 59.9%
                                             ----
 Pacific Basin                                   % and     %
                                             ----      ----
 Partners Equity Growth                          % and     %
                                             ----      ----
 Partners LargeCap Growth                        % and     %
                                             ----      ----
 Partners MidCap Growth                          % and     %
                                             ----      ----
 Real Estate Fund                                % and 55.1%
                                             ----
 SmallCap Fund                                   % and 100.7%
                                             ----
 Tax-Exempt Bond Fund                            % and 15.6%
                                             ----
 Utilities Fund                                  % and 23.5%
                                             ----


MANAGEMENT OF THE FUNDS

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  (except
Aschenbrenner,  Gilbert and Kimball who do not serve as  directors  of Principal
Special  Markets Fund,  Inc.) also has the same position with Principal  Special
Markets Fund,  Inc. and Principal  Variable  Contracts Fund, Inc. which are 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,  51, 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,  67,  Director.  4940  Center  Court,  Bettendorf,  Iowa.
     Attorney. Vice President, Deere and Company, Retired.

*&   Ralph C. Eucher, 48, 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, 57, Director.  4112 River Oaks Drive, Des Moines, Iowa.
     Professor of  Mathematics,  Grinnell  College  since 1998.  Prior  thereto,
     President, Grinnell College.

     Richard W.  Gilbert,  60,  Director.  5040 Arbor  Lane,  #302,  Northfield,
     Illinois.  President,  Gilbert  Communications,   Inc.  since  1993.  Prior
     thereto, President and Publisher, Pioneer Press.

*&   J. Barry Griswell,  52,  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, 53, Director. 4700 Westown Parkway, Suite 300, West Des
     Moines, Iowa. Chairman and CEO, Medicap Pharmacies,  Inc. since 1998. Prior
     thereto, President and CEO.

@    Barbara A.  Lukavsky,  60,  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,  49,  Treasurer.  Second Vice  President  and  Treasurer,
     Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
     Prior thereto, Associate Treasurer.

*    Ronald L. Danilson, 50, Executive Vice President.  Executive Vice President
     and Chief Operating Officer, Princor Financial Services Corporation,  since
     2000.  Vice  President,   Principal  Life  Insurance  Company  since  2000.
     President and Chief Executive Officer, Delaware Charter Guarantee and Trust
     company, 1996-2000. Prior thereto, Chief Operating Officer.

*    Arthur S. Filean, 62, Vice President and Secretary.  Senior Vice President,
     Princor   Financial   Services   Corporation   and   Principal   Management
     Corporation,   since  2000.  Vice  President,  Princor  Financial  Services
     Corporation,  1990-2000. Vice President,  Principal Management Corporation,
     1996-2000.

*    Ernest  H.  Gillum,  45,  Vice  President  and  Assistant  Secretary.  Vice
     President - Product Development, Princor Financial Services Corporation and
     Principal Management  Corporation,  since 2000. Vice President - Compliance
     and  Product  Development,   Princor  Financial  Services  Corporation  and
     Principal Management Corporation,  1998-2000. Prior thereto, Assistant Vice
     President,   Registered  Products,   1995-1998.   Prior  thereto,   Product
     Development and Compliance Officer.

*    Jane E. Karli, 43, Assistant Treasurer. Assistant Treasurer, Principal Life
     Insurance Company since 1998;  Senior Accounting and Custody  Administrator
     1994-1998; Prior thereto, Senior Investment Cost Accountant.

*    Layne A. Rasmussen,  42, Controller.  Controller - Mutual Funds,  Principal
     Management Corporation since 1995.

*    Sarah J. Pitts, 55, Assistant  Counsel.  Counsel,  Principal Life Insurance
     Company since 1997. Counsel, Principal Capital Income Investors, LLC.

*    Michael D. Roughton,  49,  Counsel.  Vice  President and Senior  Securities
     Counsel,  Principal Life Insurance Company,  since 1999. Counsel 1994-1999.
     Counsel,  Invista  Capital  Management,  LLC,  Princor  Financial  Services
     Corporation and Principal Management Corporation.

*    Jean B. Schustek,  49,  Assistant  Vice President and Assistant  Secretary.
     Assistant  Vice  President  -  Registered  Products,  Principal  Management
     Corporation  since 2000.  Prior  thereto,  Compliance  Officer - Registered
     Products.

*    Kirk L. Tibbetts,  45, Senior Vice President and Chief  Financial  Officer.
     Senior  Vice  President  and Chief  Financial  Officer,  Princor  Financial
     Services  Corporation  since 2000.  Second Vice  President,  Principal Life
     Insurance Company since 2000. Prior thereto, Partner with KPMG LLP.

*    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.)

<TABLE>
<CAPTION>
                               COMPENSATION TABLE*
                       fiscal year ended October 31, 2000

    Compensation from                            Compensation from                            Compensation from
       Director                             Each Principal Mutual Fund                  Pacific Basin, European Equity,
     Fund Complex                                                                    LargeCap Stock Index, Partners LargeCap
                                        Except for Pacific Basin, European Equity,       Growth, Partners MidCap Growth
                                      LargeCap Stock Index, Partners LargeCap Growth,
                                         Partners MidCap Growth, Partners LargeCap
                                             Blend, Partners LargeCap Value, &
                                                   Partners SmallCap Growth


<S>                                                               <C>                                               <C>
         James D. Davis                                           $                                                 $450
         Pamela A. Ferguson                                                                                          450
         Richard W. Gilbert                                                                                          450
         Barbara A. Lukavsky                                                                                         450

<FN>
     * None of the Funds provide retirement benefits for any of the directors.
</FN>
</TABLE>

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
 European Equity 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
 Pacific Basin Fund
 Partners Equity Growth Fund
 Partners LargeCap Blend Fund
 Partners LargeCap Growth Fund
 Partners LargeCap Value Fund
 Partners MidCap Growth Fund
 Partners SmallCap Growth Fund
 Real Estate Fund
 SmallCap Fund
 Tax-Exempt Bond Fund
 Utilities Fund


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:
Percentage     ---------------------------

Name    Address    of    Ownership
*************INSERT 2001 INFORMATION!!!!!!!!!!!!!!**************

MANAGER AND SUB-ADVISORS

The  Manager  of  each of the  Funds  is  Principal  Management  Corporation,  a
wholly-owned  subsidiary of Princor Financial Services  Corporation  ("Princor")
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 (equity securities  portion),  Blue Chip, Capital Value, Growth,
     International,   International  Emerging  Growth,  International  SmallCap,
     LargeCap Stock Index, 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  December  31, 2000 were
     approximately $ billion.  Invista's  address is 1800 Hub Tower, 699 Walnut,
     Des Moines, Iowa 50309.

Funds:  European  Equity  and  Pacific  Basin  Funds.
Sub-Advisor: BT Funds Management(International)  Limited ("BT") is an indirectly
     wholly  owned  subsidiary  of BT Funds  Management  Limited  ("BTFM") and a
     member of the Principal Financial Group. A global active investment manager
     dedicated to delivering  superior  investment  returns,  BT,  together with
     BTFM, has approximately $24 billion under management as of . Its address is
     The Chifley Tower, 2 Chifley Square, Sydney 2000 Australia.

Funds:  Balanced  (fixed-income  portion),  Government  Securities  Income,  and
     Limited Term Bond
Sub-Advisor:  Principal  Capital  Income  Investors,  LLC ("PCII"),  an indirect
     wholly-owned   subsidiary  of  Principal  Life  Insurance  Company  and  an
     affiliate of the Manager,  was founded in 2000. It manages  investments for
     institutional investors, including Principal Life Insurance Company. Assets
     under  management as of December 31, 2000,  were  approximately  $ billion.
     PCII's address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.

Fund: Partners Equity Growth Fund
Sub-Advisor:  Morgan  Stanley  with  principal  offices  at 1221  Avenue  of the
     Americas,  New  York,  NY  10020,  provides  a  broad  range  of  portfolio
     management services to customers in the U.S. and abroad. As of December 31,
     2000,  Morgan  Stanley,  together with its affiliated  institutional  asset
     management  companies,  managed  investments of  approximately $ 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  was founded in 1990.  Its address is 4365  Executive
     Drive,   Suite  1520,  San  Diego  CA  92121.  As  of  December  31,  2000,
     Duncan-Hurst  managed assets of  approximately $ billion for  institutional
     and individual investors.

Fund: Partners MidCap Growth Fund
Sub-Advisor:  Turner was founded in 1990.  Its address is 1235  Westlake  Drive,
     Suite  350,  Berwyn  PA  19312.  As  of  December  31,  2000,   Turner  had
     discretionary  management authority with respect to approximately $ billion
     in assets.

Fund: Partners LargeCap Blend
Sub-Advisor:   Federated  Investment   Management  Company  ("Federated")  is  a
     registered  investment  adviser and a wholly-owned  subsidiary of Federated
     Investors,  Inc.,  which was founded in 1955.  Federated  is located in the
     Federated   Investors  Tower  at  1001  Liberty  Avenue,   Pittsburgh,   PA
     15222-3779.  As of October 31,  2000,  Federated  managed  $131  billion in
     assets.

Fund: Partners LargeCap Value
Sub-Advisor: Alliance Capital Management L.P. ("Alliance") through its Bernstein
     Investment Research and Management unit ("Bernstein").  As of September 30,
     2000, Alliance managed $470 billion in assets.  Bernstein is located at 767
     Fifth Avenue,  New York, NY 10153 and Alliance is located at 1345 Avenue of
     the Americas, New York, NY 10105.

Fund: Partners SmallCap Growth
Sub-Advisor: Berger LLC ("Berger"), 210 University Boulevard, Suite 900, Denver,
     CO 80206. It serves as investment  advisor,  sub-advisor,  administrator or
     sub-administrator to mutual funds and institutional investors.  Berger is a
     wholly owned subsidiary of Kansas City Southern Industries,  Inc. ("KCSI").
     KCSI is a publicly traded holding company with principal operations in rail
     transportation,  through it  subsidiary  the Kansas City  Southern  Railway
     Company, and financial asset management businesses. Assets under management
     for Berger as of October 31, 2000, were approximately $8.3 billion.

The Boards of Directors of the Manager, Princor (as principal underwriter of the
Funds),  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 of the Manager,  Princor,  each of the Sub-Advisors and each
of the Funds  periodically  review their respective Code of Ethics. The Codes of
Ethics are on file  with,  and  available  from,  the  Securities  and  Exchange
Commission.

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)
Craig L. Bassett       Treasurer                                        Treasurer (Manager)
Ronald L. Danilson     Executive Vice President                         Executive Vice President & Chief Operating Officer (Manager)
Ralph C. Eucher        Director and President                           Director and President (Manager)
Arthur S. Filean       Vice President and Secretary                     Senior Vice President (Manager)
Ernest H. Gillum       Vice President and Assistant Secretary           Vice President - Product Development (Manager)
J. Barry Griswell      Director and Chairman of the Board               Director and Chairman of the Board (Manager)
Layne A. Rasmussen     Controller                                       Controller - Mutual Funds (Manager)
Michael D. Roughton    Counsel                                          Counsel (Manager; Invista)
Jean B. Schustek       Assistant Vice President and Assistant Secretary Assistant Vice President - Registered Products (Manager)
Kirk L. Tibbetts       Senior Vice President & Chief Financial Officer  Senior Vice President & Chief Financial Officer (Manager)
</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
                  Fund                       $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 Equity Growth, Partners LargeCap        .75               .70              .65               .60               .55
   Blend and Partners LargeCap Value Funds
International Fund                               .85               .80              .75               .70               .65
Partners SmallCap Growth Fund                    .90               .85              .80               .75               .70
</TABLE>
<TABLE>
<CAPTION>

                                                                           Net Asset Value of Fund

                                                 First             Next             Next              Next             Over
                  Fund                       $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>

                  Fund                        Overall Fee

LargeCap Stock Index Fund                        .35%
Partners LargeCap Growth Fund                    .90%
Partners MidCap Growth Fund                      .90%
<TABLE>
<CAPTION>

                                                                           Net Asset Value of Fund

                                                 First             Next             Next              Next
                  Fund                       $250,000,000      $250,000,000     $250,000,000      $250,000,000      Thereafter


<S>                                             <C>               <C>              <C>               <C>               <C>
European Equity Fund                            0.90%             0.85%            0.80%             0.75%             0.70%
Pacific Basin Fund                              1.10              1.05             1.00              0.95              0.90
</TABLE>

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,  2000  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           For Fiscal Year Ended
           Fund                 October 31, 2000             October 31, 2000

Balanced Fund                           $                            %
Blue Chip Fund
Bond Fund
Capital Value Fund
Cash Management Fund
European Equity 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
Pacific Basin Fund
Partners Equity Growth Fund
Partners LargeCap Growth Fund
Partners MidCap Growth Fund
Real Estate Fund
SmallCap Fund
Tax-Exempt Bond Fund
Utilities Fund

     * 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.

COST OF SUB-ADVISORY SERVICES

For providing the investment  advisory  services,  and specified other services,
the Sub-Advisory, under the terms of the Sub-Advisory Agreement for the 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 Account
                                 First              Next              Next             Next
      Account                 $250 million      $250 million      $250 million     $250 million      Thereafter
<S>                                 <C>              <C>               <C>              <C>               <C>
European Equity                     0.50%            0.475%            0.450%           0.425%            0.40%
Pacific Basin                       0.60%            0.575%            0.550%           0.525%            0.50%
</TABLE>

                                                   Overall Fee
Partners LargeCap Growth                             0.5000%
Partners MidCap Growth                               0.5000%
Balanced (equity securities portion)                 0.0700%
Blue Chip                                            0.0700
Capital Value                                        0.0700
Growth                                               0.0700
International                                        0.1100
International Emerging Markets                       0.6300
International SmallCap                               0.6100
LargeCap Stock Index                                 0.0275
MidCap                                               0.0950
SmallCap                                             0.2370
Utilities                                            0.0700
Balanced (fixed-income portion)                      0.0860
Government Securities Income                         0.0600
Limited Term Bond                                    0.1060


                               First            Next             Over
         Account            $200 million     $100 million      $300 million
Partners Equity Growth             0.30%             0.25%             0.20%


                 Sub-Advisor Fees For Years Ended December 31,
           2000                      1999                       1998


Fees paid for investment  management  services during the periods indicated were
as follows:
<TABLE>
<CAPTION>

                                                         Management Fees For Fiscal Years Ended October 31,

           Fund                                    2000                          1999                       1998

<S>                                            <C>                           <C>                       <C>
Balanced Fund                                  $                             $    914,378              $    750,616
Blue Chip Fund                                                                  1,142,839                   764,784
Bond Fund                                                                         909,902                   782,241(1)
Capital Value Fund                                                              2,570,792                 2,349,118
Cash Management Fund                                                            1,526,404                 2,127,595(1)
European Equity Fund
Government Securities Income Fund                                               1,283,959                 1,239,644
Growth Fund                                                                     2,283,089                 1,863,070
High Yield Fund                                                                   259,764                   287,858
International Emerging Markets Fund                                               216,500                   157,324
International Fund                                                              2,673,903                 2,492,037
International SmallCap Fund                                                       358,891                   242,403
LargeCap Stock Index Fund
Limited Term Bond Fund                                                            160,694(1)                133,825(1)
MidCap Fund                                                                     2,461,880                 2,548,924
Pacific Basin Fund
Partners Equity Growth Fund
Partners LargeCap Growth Fund
Partners MidCap Growth Fund
Real Estate Fund                                                                  114,693                    87,653(3)
SmallCap Fund                                                                     412,361                   147,083(3)
Tax-Exempt Bond Fund                                                              972,660                   974,740
Utilities Fund                                                                    685,175                   531,644(1)
<FN>

   (1)   Before waiver.
   (2)   Period from December 11, 1997 (Date Operations Commenced) through October 31, 1998.
</FN>
</TABLE>

The Manager waived $ , $66,728 and $100,270 of its fee for the Limited Term Bond
Fund for the years ended  October 31,  2000,  1999 and 1998,  respectively.  The
Manager waived  $172,366 of its fee for the Bond Fund for the year ended October
31, 1998. The Manager also waived $1,343 of its fee for the Cash Management Fund
for the year ended October 31, 1998.  The Manager also waived $82,515 of its fee
for the Utilities Fund for the year ended October 31, 1998.



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,

                                                          2000                    1999                         1998

<S>                                                                           <C>                        <C>
Balanced Fund $                                                               $  664,179                 $  521,852
Blue Chip Fund                                                                 1,336,983                    832,394
Bond Fund                                                                        534,104                    482,817
Capital Value Fund                                                             1,415,788                  1,247,865
Cash Management Fund                                                             788,303                    854,575
European Equity Fund
Government Securities Income Fund                                                544,396                    499,207
Growth Fund                                                                    1,613,707                  1,421,948
High Yield Fund                                                                  170,349                    217,020
International Emerging Markets Fund                                              148,065                    119,948
International Fund                                                             1,111,335                  1,168,106
International SmallCap Fund                                                      168,397                    153,320
LargeCap Stock Index Fund
Limited Term Bond Fund                                                           123,038                     90,187
MidCap Fund                                                                    1,733,436                  1,840,474
Pacific Basin Fund
Partners LargeCap Growth Fund
Partners MidCap Growth Fund
Real Estate Fund                                                                  93,688                     76,546(2)
SmallCap Fund                                                                    348,721                    199,807(2)
Tax-Exempt Bond Fund                                                             165,845                    199,780
Utilities Fund                                                                   390,699                    304,813
</TABLE>

(1)  Period from December 11, 1997 (Date Operations  Commenced)  through October
     31,  1998.  The  Manager  has  agreed to waive a portion of its fee for the
     following  Funds and  continue the waiver and, if  necessary,  pay expenses
     normally  payable by each of the listed  Funds  through  the period  ending
     October  31,  2001.  The waiver will  maintain a total  level of  operating
     expenses (expressed as a percentage of average net assets attributable to a
     Class on an annualized basis) not to exceed the following percentages:
<TABLE>
<CAPTION>

         Fund                               Class A           Class B           Class C          ClassR
         ----                                ------           -------           -------          ------
<S>                                             <C>              <C>               <C>              <C>
Partners MidCap Growth                          1.95%            2.70%             2.70%            2.45%
Partners LargeCap Growth                        1.95             2.70              2.70             2.45
International Emerging Markets                  2.50             3.25              3.25             3.00
European Equity                                 2.50             3.25              3.25             3.00
Pacific Basin                                   2.50             3.25              3.25             3.00
LargeCap Stock Index                            0.90             1.25              1.25             1.40
</TABLE>


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 or  applicable  Sub-Advisor  either by
vote of 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.

Shareholders  approved the Management  Agreement as follows:  European  Equity -
April 28, 2000;  Growth - November 9, 1999;  LargeCap Stock Index - February 25,
2000;  MidCap - December 10,  1999;  Pacific  Basin - April 28,  2000;  Partners
Equity Growth - November 1, 1999;  Partners  LargeCap Blend - December 22, 2000;
Partners LargeCap Growth - February 25, 2000; Partners LargeCap Value - December
22, 2000;  Partners  MidCap  Growth - February  25, 2000 and  Partners  SmallCap
Growth - December 22, 2000.  The  Management  Agreement  for the other Funds was
last approved by shareholders of the applicable Fund on November 2, 1999.

The  agreements  for each Fund were last  approved by the Board of Directors for
that Fund as follows:
<TABLE>
<CAPTION>

                                    Investment Service       Management      Sub-Advisory
         Fund                            Agreement            Agreement        Agreement

<S>                                        <C>                 <C>               <C>
   Balanced                                9/11/00             9/11/00           9/11/00
   Blue Chip                               9/11/00             9/11/00           9/11/00
   Bond                                    9/11/00             9/11/00           9/11/00
   Capital Value                           9/11/00             9/11/00           9/11/00
   Cash Management                         9/11/00             9/11/00           9/11/00
   European Equity                         9/11/00             9/11/00           9/11/00
   Government Securities Income            9/11/00             9/11/00           9/11/00
   Growth                                  9/11/00             9/11/00           9/11/00
   High Yield                              9/11/00             9/11/00           9/11/00
   International                           9/11/00             9/11/00           9/11/00
   International Emerging Markets          9/11/00             9/11/00           9/11/00
   International SmallCap                  9/11/00             9/11/00           9/11/00
   LargeCap Stock Index                    9/11/00             9/11/00           9/11/00
   Limited Term Bond                       9/11/00             9/11/00           9/11/00
   MidCap                                  9/11/00             9/11/00           9/11/00
   Pacific Basin                           9/11/00             9/11/00           9/11/00
   Partners Equity Growth                      N/A             9/11/00           9/11/00
   Partners LargeCap Blend                     N/A            12/11/00          12/11/00
   Partners LargeCap Growth                    N/A             9/11/00           9/11/00
   Partners LargeCap Value                     N/A            12/11/00          12/11/00
   Partners MidCap Growth                      N/A             9/11/00           9/11/00
   Partners SmallCap Growth                    N/A            12/11/00          12/11/00
   Real Estate                             9/11/00             9/11/00           9/11/00
   SmallCap                                9/11/00             9/11/00           9/11/00
   Tax-Exempt Bond                         9/11/00             9/11/00           9/11/00
   Utilities                               9/11/00             9/11/00           9/11/00
</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 may give  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 also
pay additional  commission amounts for research services.  Such statistical data
and research information received from brokers or dealers as described above 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 obtained 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 most recent
fiscal year 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                                       $
Capital Value
Growth
International Emerging Markets
International
International SmallCap
MidCap
SmallCap


Subject  to the  rules  promulgated  by the  SEC,  as well as  other  regulatory
requirements,  a  Sub-Advisor  may also  allocate  orders on behalf of a Fund to
broker-dealers affiliated with the Sub-Advisor.  The Sub-Advisor shall determine
the amounts and proportions of orders allocated to the Sub-Advisor or affiliate.
The Boards of  Directors  of the Fund will  receive  quarterly  reports on these
transactions.

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 marketmakers 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                              2000           1999             1998

Balanced Fund                          $             $50,867         $70,261
Blue Chip Fund                                       149,945          41,024
Capital Value Fund                                   695,270         331,316
Growth Fund                                          438,476         276,004
International Emerging Markets Fund                  125,801          51,821
International Fund                                 1,201,021         758,808
International SmallCap Fund                          306,636         101,485
MidCap Fund                                          517,173         242,311
Real Estate Fund                                      36,634          40,791*
SmallCap Fund                                        154,031          46,957*
Utilities Fund                                        95,017          39,470

*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
Balanced Fund
<S>      <C>                            <C>                        <C>                           <C>
         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%
</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
Balanced Fund
<S>      <C>                            <C>                       <C>                           <C>
         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
Balanced Fund
<S>      <C>                            <C>                        <C>                           <C>
         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>

Goldman Sachs Asset Management, a separate operating division of Goldman Sachs &
Co.,  acts as  sub-advisor  for an account of the Principal  Variable  Contracts
Fund, Inc. In addition,  J.P. Morgan Investment Management Inc., an affiliate of
J.P.  Morgan  Securities,  acts as a sub-advisor  of an account of the Principal
Variable Contracts Fund, Inc.

Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management, which
acts as sub-advisor to two accounts of the Principal Variable Contracts Fund and
one fund included in the Fund Complex.  On December 1, 1998 Morgan Stanley Asset
Management  Inc.  changed  its name to Morgan  Stanley  Dean  Witter  Investment
Management Inc. but continues to do business in certain instances using the name
Morgan Stanley Asset Management.

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.

For the Bond, Cash  Management,  High Yield and Tax-Exempt Bond Funds as well as
those for which  Invista  serves as  Sub-Advisor,  the  following  describes the
allocation  process used. 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 (including orders for accounts in which Registrant,
its affiliates and/or its personnel have beneficial interests). 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)  shall  compose,  before
entering an aggregated order, a written Allocation Statement as to how the order
will be allocated among the various accounts.  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 accordance with the Allocation  Statement.  If the order is
partially  filled,  it  shall be  allocated  pro  rata  based on the  Allocation
Statement.  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.


Invista  expects  aggregation  or  "bunching" of orders,  on average,  to reduce
slightly the cost of execution.  Invista will not aggregate a client's order if,
in a  particular  instance,  it believes  that  aggregation  will  increase  the
client's cost of execution.  In some cases,  aggregation or "bunching" of orders
may  increase  the price a client pays or receives  for a security or reduce the
amount of securities purchased or sold for a client account.

Invista  may enter  aggregated  orders  for shares  issued in an initial  public
offering  (IPO).  In  determining  whether  to enter an order for an IPO for any
client account,  Invista considers the account's investment  restrictions,  risk
profile,  asset  composition  and cash level.  Accordingly,  it is unlikely that
every client account will  participate in every available IPO.  Partially filled
orders for IPOs will be allocated to  participating  accounts in accordance with
the procedures set out above. Often, however, the amount of shares designated by
an underwriter  for Invista's  clients are  insufficient to provide a meaningful
allocation to each participating  account. In such cases, Invista will employ an
allocation  system  it  feels  treats  all  participating  accounts  fairly  and
equitably over time.

The following  describes the allocation  process utilized by the Sub-Advisor for
the European Equity and Pacific Basin Funds:

Client monies are assigned to BT portfolio  managers and are  generally  grouped
into product types.  All  portfolios  within each product type will have similar
investment  objectives,  although  individual  portfolios  may  have  investment
objectives  and  restrictions  that  differ  to some  extent  from  the  overall
objectives for that product type.

The  portfolio  manager  will  decide,  prior to  trading,  which  products  and
therefore  which  portfolios  will take part in the subsequent  allocation.  All
portfolios  within a product  managed by a  particular  portfolio  manager  will
participate in the allocation except in the following circumstances:
o where  client  cash  flow  mean  that a  client's  portfolio  has to be traded
separately;  o where there are specific  client  restrictions  which preclude an
allocation;  o where a  non-standard  benchmark or target  results in a security
being deemed  unsuitable for that  portfolio;  o where,  in the case of sales, a
particular  portfolio  does not  hold the  security;  and o where  the  trade is
partially filled, either for normal trading or for an Initial Public Offering.
In these cases,  if there is no  indication  on the order form as to priority of
allocation then BT will allocate on a pro-rata basis.  Priority of allocation on
the order forms may be set due to sensitivity to transaction  costs, tax status,
tolerance for small holding,  tolerance for large holdings or specific exposures
(proximity to limits) and turnover considerations.

The following  describes the allocation  process utilized by the Sub-Advisor for
the Partners Equity Growth Fund:

Transactions for each portfolio  account advised by Morgan Stanley generally are
completed independently.  Morgan Stanley, however, may purchase or sell the same
securities  or  instruments  for  a  number  of  portfolio  accounts,  including
portfolios of its affiliates, simultaneously. These accounts will include pooled
vehicles,  including  partnerships  and  investment  companies  for which Morgan
Stanley and related  persons of Morgan  Stanley  act as  investment  manager and
administrator,  and in which Morgan  Stanley,  its  officers,  employees and its
related  persons  have a  financial  interest,  and  accounts  of pension  plans
covering   employees  of  Morgan  Stanley  and  its   affiliates   ("Proprietary
Accounts").  When  possible,  orders  for the  same  security  are  combined  or
"batched" to facilitate  test execution and to reduce  brokerage  commissions or
other costs. Morgan Stanley effects batched transactions in a manner designed to
ensure that no participating  portfolio,  including any Proprietary  Account, is
favored over any other portfolio.  Specifically,  each portfolio  (including the
Partners  Equity Growth Fund) that  participates in a batched  transaction  will
participate at the average share price for all of Morgan Stanley `s transactions
in that  security on that  business  day,  with respect to that  batched  order.
Securities  purchased or sold in a batched  transaction are allocated  pro-rata,
when possible, to the participating portfolio accounts in proportion to the size
of the order placed for each account.  Morgan Stanley may, however,  increase or
decrease  the amount of  securities  allocated  to each  account if necessary to
avoid  holding  odd-lot or small  numbers of shares for  particular  portfolios.
Additionally, if Morgan Stanley is unable to fully execute a batched transaction
and Morgan Stanley  determines  that it would be impractical to allocate a small
number of securities  among the accounts  participating  in the transaction on a
pro-rata  basis,  Morgan  Stanley  may  allocate  such  securities  in a  manner
determined in good faith to be a fair allocation.

The following  describes the allocation  process utilized by the Sub-Advisor for
the Partners LargeCap Growth Fund:

Where  Duncan-Hurst buys or sells the same security for two or more clients,  it
may place concurrent orders with a single broker, to be


The following  describes the allocation  process utilized by the Sub-Advisor for
the Partners MidCap Growth Fund:

Turner has  developed  an  allocation  system for limited  opportunities:  block
orders that cannot be filled in one day and IPOs.  Allocation  of all  partially
filled trades will be done pro-rata, unless the small size would cause excessive
ticket charges. In that case, allocation will begin with the next account on the
rotational account listing.  Any directed  brokerage  arrangement will result in
the  inability of Turner to, in all cases,  include  trades for that  particular
client in block  orders if the block  transaction  is executed  through a broker
other  than the one  that  has  been  directed.  The  benefits  of that  kind of
transaction, a sharing of reduced cost and possible more attractive prices, will
not  extend  to the  directed  client.  Allocations  exceptions  may be  made if
documented  and  approved  timely by the  firm's  compliance  officer.  Turner's
proprietary accounts may trade in the same block with client accounts,  if it is
determined to be advantageous to the client to do so.

The following  describes the allocation  process utilized by the Sub-Advisor for
the Partners LargeCap Blend:

     With respect to IPOs,  Federated combines all purchase orders made for each
     Fund for which it serves as advisor and places a single  purchase  order on
     such terms and at such time as Federated reasonably expects to maximize the
     Funds'  participation in the IPOs.  Prior to entering the order,  Federated
     will  prepare a record of which Funds will  participate  in the IPO and the
     amount  of  securities  they  have  been   authorized  to  purchase.   Upon
     confirmation  of the amount of  securities  received in the IPO,  Federated
     allocates such securities  among the  participating  Funds in proportion to
     their participation in the order and notifies the portfolio manager of each
     participating  Fund of that preliminary  allocation.  The portfolio manager
     may request the purchase of additional  securities up to a specified price,
     or sell  some or all the  securities  allocated  to the Fund for  which the
     portfolio  manager  serves at or above a  specified  price.  The  portfolio
     manager  may  also  withdraw  from  the  IPO if  the  size  of  the  Fund's
     participation  in  the  order  does  not  justify  the  administrative  and
     transactional  expense  of  accepting  and  selling  the  securities,   but
     withdrawal  will be  permitted  only to the extent  that orders from Fund's
     wishing  to  purchase  the IPO  securities  exceed  request  to  sell  such
     securities.

     With respect to transactions among multiple Funds authorized to purchase or
     sell  the  same  equity  securities  on a  securities  exchange  or in  the
     "over-the-counter"  market,  Federated will combine all purchase orders and
     all sell  orders and will  attempt to sell or  purchase  sufficient  equity
     securities  to fill  all  outstanding  orders.  The  allocation  of  equity
     securities  purchased  or  sold is in  proportion  to  each  Fund's  order.
     Federated will not change the allocation unless all participating portfolio
     managers  or  Federated's  Chief  Investment   Officer  authorizes  another
     allocation   before  the  trade  tickets  are  transmitted  to  the  Fund's
     custodian, and any such reallocation is reviewed by Federated's Director of
     Compliance.  If  Federated  is  attempting  to fill an order  for an equity
     security and a portfolio manager delivers a new order for the same security
     during the trading day,  the new order will be added to the combined  order
     if there has been no material  change in the price of equity  security from
     any trade previously executed that day. If there has been a material change
     (a  change  of 2  percent  or  more)  the new  order  will be  added to the
     unexecuted balance of original orders.

     With respect to transactions  for Fund's with a common  portfolio  manager,
     the  portfolio  manager must balance the  competing  interests of the Funds
     when  allocating  securities.  Typically,  a portfolio  manager  will place
     orders for equity  securities  on behalf of Funds with the same  investment
     objectives,  strategies  and policies in  proportion to the market value of
     their   portfolios.   However,   among  Funds  with  different   investment
     objectives, strategies or policies, a portfolio manager may give precedence
     to the Funds for which an equity  security is best  suited.  Factors that a
     portfolio manager may consider when placing different proportion orders for
     equity  securities  on behalf  Funds  include  (but are limited  to),  with
     respect to each Fund, current cash availability and anticipated cash flows,
     available alternative investments, current exposure to the issuer, industry
     or sector,  whether the expected effect on strategy or performance would be
     minimal or whether a proportionate  allocation  would result in an economic
     order quantity.

The following  describes the allocation  process utilized by the Sub-Advisor for
the Partners LargeCap Value Fund:

       If, in carrying  out the  investment  objectives  of the Fund,  occasions
       arise when  purchases  or sales of the same equity  securities  are to be
       made for the Fund and any other accounts managed by the Sub-Advisor,  the
       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
       (including orders for accounts in which Registrant, its affiliates and/or
       its personnel have  beneficial  interests).  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 Sub-Advisor
       shall compose,  before entering an aggregated order, a written Allocation
       Statement  as to how  the  order  will be  allocated  among  the  various
       accounts.  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 Fund and other  client  accounts  whose  individual
       orders for purchase or sale make up the  aggregate or "bunched"  order by
       filling the Fund's or other client account's order in accordance with the
       Allocation  Statement.  If the  order is  partially  filled,  it shall be
       allocated  pro  rata  based  on  the  Allocation  Statement.   Securities
       purchased  for the Fund and other  client  accounts  participating  in an
       aggregate  or  "bunched"  order  will be  placed  into the Fund and other
       client accounts at a price equal to the average of the prices achieved in
       the course of filling that aggregate or "bunched" order.

       The Sub-Advisor  expects aggregation or "bunching" of orders, on average,
       to  reduce  slightly  the cost of  execution.  The  Sub-Advisor  will not
       aggregate a client's order if, in a particular instance, it believes that
       aggregation will increase the client's cost of execution.  In some cases,
       aggregation  or "bunching" of orders may increase the price a client pays
       or receives for a security or reduce the amount of  securities  purchased
       or sold for a client account.

       The  Sub-Advisor  may enter  aggregated  orders for  shares  issued in an
       initial public offering  (IPO). In determining  whether to enter an order
       for  an IPO  for  any  client  account,  the  Sub-Advisor  considers  the
       account's investment  restrictions,  risk profile,  asset composition and
       cash level.  Accordingly,  it is unlikely that every client  account will
       participate in every available IPO. Partially filled orders for IPOs will
       be allocated to participating  accounts in accordance with the procedures
       set out above.  Often,  however,  the amount of shares  designated  by an
       underwriter for the  Sub-Advisor's  clients are insufficient to provide a
       meaningful  allocation to each participating  account. In such cases, the
       Sub-Advisor  will  employ  an  allocation  system  it  feels  treats  all
       participating accounts fairly and equitably over time.

If the purchase or sale of securities  consistent with the investment objectives
of the  Partners  SmallCap  Growth  Fund  and one or more  of the  other  client
accounts for which  Berger acts as  investment  sub-advisor  or advisor is to be
made at the same time, the securities are purchased or sold  proportionately  in
accordance with the amount of such security to be purchased or sold at that time
for each account or client.

HOW TO PURCHASE SHARES

Each Fund, except the Partners LargeCap Blend, Partners LargeCap Value, Partners
SmallCap  Growth and  Tax-Exempt  Bond Funds,  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 Partners  LargeCap Blend,  Partners LargeCap
Value,  Partners SmallCap Growth and Tax-Exempt Bond Funds each offer 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.  Share  certificates will
be only issued to shareholders upon request.  Certificates are not available for
the Cash Management Fund.

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% (.65% for
the LargeCap Stock Index Fund) 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),  49
months 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 and employer
welfare  benefit plans  serviced by Principal  Life  Insurance  Company;  or own
individual  life or  disability  insurance  policies  issued by  Principal  Life
Insurance  Company;  or have  mortgages  which are  serviced by  Principal  Life
Insurance  Company;  or are  customers  of  Principal  Bank;  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.  Class R shares are currently  available through
certain registered representatives of Princor Financial Services Corporation who
are also employees of Principal Life Insurance Company.

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                     Sales Charge for
                                                  All Funds Except
                                              LargeCap Stock Index and             LargeCap Stock Index and
                                               Limited Term Bond Funds              Limited Term Bond Funds

                                                Sales Charge as % of:                Sales Charge as % of:
                                             Offering           Amount            Offering           Amount
     Amount of Purchase                        Price           Invested             Price           Invested

<S>                                            <C>              <C>                <C>               <C>
Less than $50,000                              4.75%            4.99%              1.50%             1.52%
$50,000 but less than $100,000                 4.25             4.44               1.25              1.27
$100,000 but less than $250,000                3.75             3.90               1.00              1.01
$250,000 but less than $500,000                2.50             2.56               0.75              0.76
$500,000 but less than $1,000,000              1.50             1.52               0.50              0.50
$1,000,000 or more                        No Sales Charge       0.00           No Sales Charge       0.00
</TABLE>

<TABLE>
<CAPTION>

                                                                                               Payroll Deduction Plan
                                                     Dealer Allowance as                         Dealer Allowance as
                                                     % of Offering Price                         % of Offering Price
                                                 All Funds         LargeCap                  All Funds           LargeCap

                                              Except LargeCap     Stock Index             Except LargeCap       Stock Index

                                                Stock Index       and Limited               Stock Index         and Limited
                                                and Limited          Term                   and Limited            Term
     Amount of Purchase                       Term Bond Funds     Bond Funds               Term Bond Funds      Bond Funds

<S>                                               <C>               <C>                         <C>               <C>
Less than $50,000                                 4.00%             1.25%                       3.00%             1.00%
$50,000 but less than $100,000                    3.75              1.00                        3.00              0.75
$100,000 but less than $250,000                   3.25              0.75                        3.00              0.50
$250,000 but less than $500,000                   2.00              0.50                        1.75              0.25
$500,000 but less than $1,000,000                 1.25              0.25                        1.00              0.25
$1,000,000 or more                                0.75              0.25                        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 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 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 affiliates,  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,  Principal  Capital  Management  LLC, and
     Principal  Capital  Income  Investors  LLC;
o    by any employee or Registered  Representative  (and their  employees) of an
     authorized broker-dealer;
o    through a "wrap  account"  offered by  Princor  or 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;
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 active
     employees/participants.  Such  purchases  are  subject  to the  CDSC  which
     applies to purchases of $1 million or more as described above; and
o    to fund  nonqualified  plans  administered  by Principal Life pursuant to a
     written service agreement.

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 and ending , 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 may
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>
                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
</TABLE>

<TABLE>
<CAPTION>

                                    Schedule 2
<S>             <C>                                                    <C>
                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>

                                                 Contingent Deferred Sales Charge as a
                                                  Percentage of Dollar Amount Subject
                                                      For Certain Sponsored Plans
                                                        Commenced After 2/1/98
<CAPTION>

                                           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 MadeBond 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.
<TABLE>
<CAPTION>

Selected dealers may be paid a concession as shown:                                     % of Offering Price
     All purchases other than through Payroll Deduction Plans (PDP)
<S>                                                                                             <C>
         All Funds except Cash Management, LargeCap Stock Index and Limited Term Bond           4.00%
         LargeCap Stock Index and Limited Term Bond                                             1.25%
     PDP
         All Funds except Cash Management, LargeCap Stock Index and Limited Term Bond           3.00%
         LargeCap Stock Index and Limited Term Bond                                             0.75%
</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>

                      Contingent Deferred Sales Charge as a
                  Percentage of Dollar Amount Subject to Charge

<CAPTION>
                                                                                           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.
<TABLE>
<CAPTION>

Selected dealers may be paid a concession as shown:                                      % of Offering Price

     All purchases other than through Payroll Deduction Plans (PDP)
<S>                                                                                              <C>
         All Funds except Cash Management, LargeCap Stock Index and Limited Term Bond            1.00%
         LargeCap Stock Index and Limited Term Bond                                              0.50%
     PDP
         All Funds except Cash Management, LargeCap Stock Index and Limited Term Bond            1.00%
         LargeCap Stock Index and Limited Term Bond                                              0.50%
</TABLE>


As principal  underwriter,  Princor received  underwriting fees from the sale of
shares for the periods indicated as follows:
<TABLE>

                                                          Underwriting Fees for
                                                      Fiscal Years Ended October 31,

<CAPTION>
      Fund                                       2000            1999               1998

<S>                                          <C>              <C>              <C>
Balanced Fund                                $                 $689,518           $716,315
Blue Chip Fund                                                1,419,225         1,230, 098
Bond Fund                                                       800,916            887,870
Capital Value Fund                                            1,647,688          1,769,043
Cash Management Fund                                             76,773             19,171
European Equity Fund
Government Securities Income Fund                               940,825            846,821
Growth Fund                                                   2,515,833          2,079,726
High Yield Fund                                                 200,747            335,156
International Emerging Markets Fund                             111,950            114,325
International Fund                                            1,032,623          1,369,016
International SmallCap Fund                                     156,120            197,039
LargeCap Stock Index Fund
Limited Term Bond Fund                                           89,515             77,191
MidCap Fund                                                   1,677,041          2,447,638
Pacific Basin Fund
Partners Equity Growth Fund
Partners LargeCap Growth Fund
Partners MidCap Growth Fund
Real Estate Fund                                                 50,841          53,280(1)
SmallCap Fund                                                   453,831         398,391(1)
Tax-Exempt Bond Fund                                            576,841            667,756
Utilities Fund                                                  513,501            339,353
<FN>

   (1)   Period from December 11, 1997 (Date Operations Commenced) through October 31, 1998.
</FN>
</TABLE>

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  Partners  LargeCap
Blend,  Partners  LargeCap Value,  Partners  SmallCap Growth and Tax-Exempt Bond
Funds, 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, 2000 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>

                                                                  Expenditures
<CAPTION>

                                   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
European  Equity
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International  SmallCap
LargeCap  Stock Index
Limited Term Bond
MidCap
Pacific Basin
Partners  Equity Growth
Partners  LargeCap  Growth
Partners MidCap Growth
Real Estate
SmallCap
Tax-Exempt  Bond
Utilities
</TABLE>

The amount  received  from each Fund and  retained by Princor  during the period
ended October 31, 2000 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>

                                                                    Expenditures
<CAPTION>

                                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
European Equity
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
LargeCap Stock Index
Limited Term Bond
MidCap
Pacific Basin
Partners Equity Growth
Partners LargeCap Growth
Partners MidCap Growth
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>

The amount  received  from each Fund and  retained by Princor  during the period
ended October 31, 2000 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>

                                                                             Expenditures
<CAPTION>

                                             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
European Equity
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
LargeCap Stock Index
Limited Term Bond
MidCap
Pacific Basin
Partners Equity Growth
Partners LargeCap Growth
Partners MidCap Growth
Real Estate
SmallCap
Tax-Exempt Bond
Utilities
</TABLE>

The amount  received  from each Fund and  retained by Princor  during the period
ended October 31, 2000 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>

                                                                             Expenditures
<CAPTION>

                            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
European Equity
Government Securities Income
Growth
High Yield
International Emerging Markets
International
International SmallCap
LargeCap Stock Index
Limited Term Bond
MidCap
Pacific Basin
Partners Equity Growth
Partners LargeCap Growth
Partners MidCap Growth
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
Class A, B, C and R shares were last  approved by the Boards of Directors of all
Funds  (except  Partners  LargeCap  Blend,  Partners  LargeCap  Value,  Partners
SmallCap Growth and Tax Exempt Bond), including a majority of the non-interested
directors, on December 11, 2000. The Board of Directors of the Partners LargeCap
Blend,  Partners  LargeCap Value,  Partners  SmallCap Growth and Tax-Exempt Bond
Funds, including a majority of the non-interested directors,  approved Plans for
Class A, B and C shares on December 11, 2000.

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 Fund Average
o    Lehman Brothers BAA Corporate Index
o    Lehman Brothers GNMA Index
o    Lehman Brothers High Yield Composite Bond Index
o    Lehman Brothers Municipal Bond Index
o    Lehman Brothers Revenue Bond Index
o    Lehman Brothers Mutual Fund Short Government/Corporate Index
o    Lehman Brothers Intermediate Government/Corporate Index
o    Lehman Brothers Government/Corporate Bond Index
o    Lipper Balanced Fund Average Lipper Corporate Debt BBB Rated Fund Average
o    Lipper Emerging Markets Fund Average Lipper General Municipal Debt Fund
o    Average Lipper GNMA Fund Average Lipper High Current Yield Fund Average
o    Lipper International Fund Average Lipper International SmallCap Fund
o    Average Lipper LargeCap Growth Fund Average Lipper LargeCap Value Fund
o    Average Lipper MidCap Core Fund Average Lipper Real Estate Fund Average
o    Lipper Short-Intermediate Investment Grade Debt Fund Average
o    Lipper SmallCap Core Fund Average
o    Lipper Utilities Fund Average
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 Capital International European 15 Index
o    Morgan Stanley Capital International Pacific Free Index
o    Morgan Stanley REIT Index
o    Russell 1000 Growth Index
o    Russell 2000 Index
o    Russell 2000 Growth Index
o    Russell 2000 Value Index
o    Russell MidCap Value Index
o    Salomon Brothers Investment Grade Bond Index
o    S&P 400 MidCap Index
o    S&P 500 Index
o    S&P 600 Index
o    S&P Barra Value 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, 2000 average annual returns (net of
sales  charge)  for  Class A  shares  for  each  of the  Funds  for the  periods
indicated.  The  returns  do not  include a sales  charge  which  would make the
returns less than those shown.  Class A shares are  generally  sold subject to a
sales charge.
     Fund                                1-Year         5-Year        10-Year

Balanced Fund                             %              %             %
Blue Chip Fund
Bond Fund
Capital Value Fund
European Equity 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
Pacific Basin Fund
Partners Equity Growth Fund
Partners LargeCap Growth Fund
Partners MidCap Growth Fund
Real Estate Fund
SmallCap Fund
Tax-Exempt Bond Fund
Utilities Fund

     (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, 2000  average  annual  returns for
Class B shares for each of the Funds for the period indicated:

     Fund                                  1-Year                   5-Year

   Balanced Fund                                %                       %
   Blue Chip Fund
   Bond Fund
   Capital Value Fund
   European Equity 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
   Pacific Basin Fund
   Partners Equity Growth Fund
   Partners LargeCap Growth Fund
   Partners MidCap Growth Fund
   Real Estate Fund
   SmallCap Fund
   Tax-Exempt Bond Fund
   Utilities Fund

(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, 2000  average  annual  returns for
Class C shares for each of the Funds for the period indicated:

     Fund                                                 1-Year(1)

Balanced Fund                                               %
Blue Chip Fund
Bond Fund
Capital Value Fund
European Equity 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
Pacific Basin Fund
Partners Equity Growth Fund
Partners LargeCap Growth Fund
Partners MidCap Growth Fund
Real Estate Fund
SmallCap Fund
Tax-Exempt Bond Fund
Utilities Fund

(1)  Period beginning June 30, 1999 and ending October 31, 1999.

The  following  table shows as of October 31, 2000  average  annual  returns for
Class R shares for each of the Funds for the period indicated:

     Fund                                   1-Year               5-Year

   Balanced Fund                                 %                    %
   Blue Chip Fund
   Bond Fund
   Capital Value Fund
   European Equity 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
   Pacific Basin Fund
   Partners Equity Growth Fund
   Partners LargeCap Growth Fund
   Partners MidCap Growth Fund
   Real Estate Fund
   SmallCap Fund
   Utilities Fund

(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, 2000 the yield for each class of
shares for each of the Income-Oriented Funds:

                                           Yield as of October 31, 2000

     Fund                              Class A   Class B   Class C   Class R

Bond Fund                                    %         %         %         %
Government Securities Income Fund
High Yield Fund
Limited Term Bond Fund
Tax-Exempt Bond Fund

The  Tax-Exempt   Bond  Fund  may  advertise  a   tax-equivalent   yield.   Your
tax-equivalent yield would be calculated by:

[(Tax-exempt portion 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, 2000 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

                              %          %          %                   %



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, 2000 the yield for each class of
shares for the Cash Management Fund:

                              Yield as of October 31, 2000

     Fund                Class A   Class B   Class C   Class R

Cash Management Fund           %         %         %         %

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, 2000 the  effective  yield for each
class of shares for the Cash Management Fund:

                          Effective Yield as of October 31, 2000

     Fund               Class A    Class B    Class C    Class R

Cash Management Fund          %          %          %          %

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

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,  2000, as reported
in the Federal  Reserve  Bulletin) and an inflation rate of % (rate of inflation
for the 12-month period ended October 31, 2000 as measured by the Consumer Price
Index) and an income tax bracket of 28% would be $( ).

($10,000 x 6.65%) / 2 = $333 Interest for six-month period
                       -  47 Federal income taxes (28%)
                       -170 Inflation's impact on invested principal
                       $(10,000 x 3.4%) / 2
                      ($116) 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 Growth-Oriented Funds

     In each fiscal year when,  at the close of such year,  more than 50% of the
     value of the total  assets of these  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
European Equity Fund                    January 18, 2000
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
Pacific Basin Fund                      January 18, 2000
Partners Equity Growth Fund             August 10, 1999
Partners LargeCap Blend Fund            December 13, 2000
Partners LargeCap Growth Fund           November 24, 1999
Partners LargeCap Value Fund            December 13, 2000
Partners MidCap Growth Fund             November 24, 1999
Partners SmallCap Growth Fund           December 13, 2000
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
certain of the Funds:
<TABLE>

     Old Fund Name                                   New Fund Name
<CAPTION>
<S>                                             <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
Partners  LargeCap Blend,  Partners LargeCap Value, and Partners SmallCap Growth
Funds) for the year  ended  October  31,  2000 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 LargeCap Blend, Principal
Partners  LargeCap  Value,  and Principal  Partners  SmallCap Growth Funds as of
December 22, 2000 are provided herein following the Appendixes.

APPENDIX A

The  following  table  shows the  symbol  assigned  by the  Nasdaq  Mutual  Fund
Quotation Service to eligible classes of Funds as of :


   Symbol                               Fund

   PRMGX            Principal Balanced Fund, Inc. Class A
   PBABX            Principal Balanced Fund, Inc. Class B

   PBLCX            Principal Blue Chip Fund, Inc. Class A
   PBLBX            Principal Blue Chip Fund, Inc. Class B

   PRBDX            Principal Bond Fund, Inc. Class A
   PROBX            Principal Bond Fund, Inc. Class B

   PCACX            Principal Capital Value Fund, Inc. Class A
   PCCBX            Principal Capital Value Fund, Inc. Class B

   PCSXX            Principal Cash Management Fund, Inc. Class A

   PRGVX            Principal Government Securities Income Fund, Inc. Class A
   PGVBX            Principal Government Securities Income Fund, Inc. Class B

   PRGWX            Principal Growth Fund, Inc. Class A
   PRGBX            Principal Growth Fund, Inc. Class B

   PHYLX            Principal High Yield Fund, Inc. Class A
   PRIYX            Principal High Yield Fund, Inc. Class B

   PRIAX            Principal International Emerging Markets Fund, lnc. Class A
   PIEBX            Principal International Emerging Markets Fund, lnc. Class B

   PRWLX            Principal International Fund, Inc. Class A
   PRBWX            Principal International Fund, Inc. Class B

   PRSAX            Principal International SmallCap Fund, Inc. Class A
   PISFX            Principal International SmallCap Fund, Inc. Class B

   PLTBX            Principal Limited Term Bond Fund, Inc. Class A

   PEMGX            Principal MidCap Fund, Inc. Class A
   PRMBX            Principal MidCap Fund, Inc. Class B

   PGGAX            Principal Partners Equity Growth Fund, Inc. Class A
   PBAGX            Principal Partners Equity Growth Fund, Inc. Class B

   PRRAX            Principal Real Estate Fund, Inc. Class A

   PLLAX            Principal SmallCap Fund, Inc. Class A
   PLLBX            Principal SmallCap Fund, Inc. Class B

   PTBDX            Principal Tax-Exempt Bond Fund, Inc. Class A

   PUTLX            Principal Utilities Fund, Inc. Class A
   PRUBX            Principal Utilities Fund, Inc. Class B


APPENDIX B

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.


APPENDIX C

The following information  summarizes the portfolio of each Fund (as of December
31, 2000) except the Cash  Management  Fund.  The  information  provided for the
Growth-Oriented  Funds  shows the  largest  industry  holdings*  and the largest
equity  holdings*.  In  addition,  country  concentrations*  are  shown  for the
International  Growth-Oriented  Funds.  The information for the  Growth-Oriented
Funds includes the portfolio composition* and the maturity profile.

*    as a percent of Fund assets

                         Principal Balanced Fund, Inc.

     Top Industry

Computer & Office Equipment                %
Mortgage Pass Thru Securities              %
Commercial Banks                           %
Drugs                                      %
Computer & Data Processing                 %
Other                                      %

     Top Holdings

CISCO Systems                               %
Intel Corp.                                 %
General Electric Co.                        %
Citigroup Inc.                              %
NationsBank Corp.                           %
DLJ Comm. Mort. Corp.                       %
Microsoft Corp.                             %
Nortel Networks Corp.                       %
MCI Worldcom Inc.                           %
GMAC Commercial Mort.                       %
Percent of Total Holdings                   %

                           Principal Blue Chip Fund, Inc.

     Top Industry

Computer & Office Equipment                %
Drugs                                      %
Telephone Communication                    %
Computer & Data Processing                 %
Petroleum Refining                         %
Other                                      %

     Top Holdings

Cisco Systems                               %
General Electric Co.                        %
Hewlett-Packard Co.                         %
Motorola, Inc.                              %
Dell Computer Corp.                         %
Williams Cos Inc.                           %
Oracle Systems Corp.                        %
Intel Corp.                                 %
American International                      %
Citigroup Inc.                              %
Percent of Total Holdings                   %

                           Principal Bond Fund, Inc.

     Portfolio Composition        Maturity Profile

Corporate Bonds:          %       Average Bond Quality:           Baa1
Asset-backed Securities:  %       Average Bond Maturity:          years
Commercial Paper:         %       Average Duration:               years

                        Principal Capital Value Fund, Inc.

     Top Industry

Commercial Banks                           %
Petroleum Refining                         %
Telephone Communication                    %
Drugs                                      %
Electric Services                          %
Other                                      %

     Top Holdings

Chevron Corp.                               %
Exxon Mobil Corp.                           %
Texaco                                      %
Atlantic Richfield Co.                      %
AT&T Corp.                                  %
Merck & Co.                                 %
Enron Corp.                                 %
Weyerhauser Co.                             %
Kimberly Clark Corp.                        %
Chase Manhattan                             %
Percent of Total Holdings                   %

             Principal Government Securities Income Fund, Inc.


     Portfolio Composition         Maturity Profile

U.S. Government Bonds:   %         Average Bond Quality:            AAA+
Commercial Paper:        %         Average Bond Maturity:           years
                                   Average Duration:                years

                       Principal Growth Fund, Inc.

     Top Industry

Computer & Office Equipment                %
Electronic Components & Access.            %
Computer & Data Processing                 %
Communications Equipment                   %
Telephone Communication                    %
Other                                      %

     Top Holdings

CISCO Systems                               %
Intel Corp.                                 %
Citigroup INc.                              %
Nortel Networks Corp.                       %
Pfizer, Inc.                                %
General Electric Co.                        %
Sun Microsystems, Inc.                      %
Guidant Corp.                               %
Home Depot Inc                              %
Microsoft Corp.                             %
Percent of Total Holdings                   %

                         Principal High Yield Fund, Inc.

     Portfolio Composition              Maturity Profile

Corporate Bonds:       %                Average Bond Quality:         Ba3
Commercial Paper:      %                Average Bond Maturity:        years
Preferred Stock:       %                Average Duration:             years

            Principal International Emerging Markets Fund, Inc.

                                Investments by
     Top Industry                   Country            Top Holdings

Telephone Communication         %   Korea    %  Samsung Electronics       %
Commercial Banks                %   Taiwan   %  Tele Mex (ADR's)          %
Electronic Components & Access. %   Mexico   %  Compal Electronics, Inc.  %
Computer & Office Equipment     %   Brazil   %  Taiwan Semiconductor      %
Computer & Data Processing      %   India    %  Asustek Computer, Inc.    %
Other                           %   Other    %  United Microelectronics   %
                                                The India Fund Inc.       %
                                                Acer Peripherals, Inc.    %
                                                Matav RT ADR              %
                                                China Telecom             %
                                                Percent of Total Holdings %


<TABLE>
                    Principal International Fund, Inc.
<CAPTION>

                                  Investments by
      Top Industry                   Country                  Top Holdings

<S>                             <C>                 <C>                            <C>
Telephone Communication         %  United Kingdom    %  Philips Electronics        %
Commercial Banks                %  Japan             %  Ericsson LM B Shares       %
Electronic Components & Access. %  France            %  Vodafone Group             %
Computer & Office Equipment     %  Netherlands       %  Koninklijke KPN NV         %
Computer & Data Processing      %  Sweden            %  Nokia Corp. A ADR          %
Other                           %  Other             %  NEC Corp.                  %
                                                        Cap Gemini SA              %
                                                        Alcatel Alsthom            %
                                                        News Corp. Ltd. ADS        %
                                                        Getronics NV               %
                                                        Percent of Total Holdings  %
</TABLE>

                  Principal International SmallCap Fund, Inc.

                                 Investments by
      Top Industry                  Country            Top Holdings

Computer & Data Processing      %  Japan        %  Creo Products, Inc.        %
Federal & Federally Sponsored   %  Canada       %  Davnet Ltd.                %
Telephone Communication         %  Germany      %  Mosaic Group, Inc.         %
Electronic Components & Access. %  Netherlands  %  C-Mac Industries, Inc.     %
Advertising                     %  Australia    %  Urban Corp.                %
Other                           %  Other        %  Mikron Holding Ag          %
                                                   Prodisc Internatio, Inc.   %
                                                   H.I.S. Co. Ltd.            %
                                                   Esat Telecom Group ADR     %
                                                   Swisslog Holding AG        %
                                                   Percent of Total Holdings  %

                  Principal LargeCap Stock Index Fund, Inc.

     Top Holdings

Microsoft Corp.                        %
CISCO Systems                          %
General Electric Co.                   %
Intel Corp.                            %
Exxon Mobil Corp.                      %
Wal-Mart Stores, Inc.                  %
Oracle Systems  Corp.                  %
IBM Corp.                              %
Citigroup Inc.                         %
Lucent Technologies                    %
Percent of Total Holdings              %

                     Principal Limited Term Bond Fund, Inc.

     Portfolio Composition                Maturity Profile

Corporate Bonds:           %   Average Bond Quality:        AA3
U.S. Government Bonds:     %   Average Bond Maturity:       years
Asset-backed Securities:   %   Average Duration:            years
Commercial Paper:          %

                      Principal MidCap Fund, Inc.

     Top Industry                         Top Holdings

Computer & Data Processing       %   Veritas Software               %
Electronic Components & Access.  %   Comverse Technology, Inc.      %
Telephone Communication          %   Intermedia Communications      %
Drugs                            %   Altera Corp.                   %
Commercial Banks                 %   Jabil Circuit Inc.             %
Other                            %   Brocade Communications         %
                                     American Power Conversion      %
                                     Family Dollar Stores           %
                                     State Street Corp.             %
                                     Maxim Integrated Products      %
                                     Percent of Total Holdings      %

              Principal Partners Equity Growth Fund, Inc.

     Top Industry                          Top Holdings

Drugs                            %   Tyco International Ltd.        %
Electronic Components & Access.  %   CISCO Systems                  %
Computer & Data Processing       %   General Electric               %
Computer & Office Equipment      %   Microsoft Corp.                %
General Industrial Machines      %   Intel Corp.                    %
Other                            %   United Technologies            %
                                     Home Depot Inc.                %
                                     Warner-Lambert Co.             %
                                     Time Warner, Inc.              %
                                     Clear Channel Comm.            %
                                     Percent of Total Holdings      %

                  Principal Partners LargeCap Blend Fund, Inc.

        Top Industry                              Top Holdings


                Principal Partners LargeCap Growth Fund, Inc.

     Top Holdings

Juniper Networks, Inc.                 %
CISCO Systems                          %
Echostar Comm. Corp.                   %
JDS Uniphase Corp.                     %
Veritas Software                       %
AT&T Corp. Liberty Media               %
Broadcom Corp. Class A                 %
Nokia Corp. A ADR                      %
Intel Corp.                            %
Nextel Communications Inc.             %
Percent of Total Holdings              %

                  Principal Partners LargeCap Value Fund, Inc.

        Top Industry                              Top Holdings

                   Principal Partners MidCap Growth Fund, Inc.

     Top Holdings

JDS Uniphase Corp.                     %
Veritas Software                       %
Exodus Communications Inc.             %
SDL Inc.                               %
PMC Sierra, Inc.                       %
Broadcom Corp, Class A                 %
Nextel Communications                  %
Medimmune Inc.                         %
KLA-Tencor Corp.                       %
PE Corp.-PE Biosystems                 %
Percent of Total Holdings              %

                 Principal Partners SmallCap Growth Fund, Inc.

     Top Industry                        Top Holdings

                   Principal Real Estate Fund, Inc.

     Top Industry                       Top Holdings

Apartment                     %   Spieker Properties, Inc.     %
Hotels & Motels               %   Equity Residential Prop      %
Real Estate Operators         %   Cornerstone Properties       %
Personal Credit Institutions  %   Prologis Trust               %
Other                         %   AMB Property Corp.           %
                                  Simon Property Group         %
                                  Apartment Investment         %
                                  Mirage Resorts, Inc.         %
                                  Equity Office Properties     %
                                  Duke-Weeks Realty Corp.      %
                                  Percent of Total Holdings    %

                   Principal SmallCap Fund, Inc.

     Top Industry                             Top Holdings

Computer & Data Processing        %   Hot Topic Inc.                 %
Personal Credit Institution       %   Digene Corp.                   %
Electronic Components & Access    %   Matriteck Inc.                 %
Communications Equipment          %   Hadco Corp.                    %
Drugs                             %   ICG Communications Inc.        %
Other                             %   Bindview Dev. Corp.            %
                                      American Eagle Outfitters      %
                                      Intervoice-Brite, Inc.         %
                                      Internet Pictures Corp.        %
                                      Quintus Corp.                  %
                                      Percent of Total Holdings      %

              Principal Tax-Exempt Bond Fund, Inc.

     Top Industry                                Top Holdings

Long-term Municipal Bonds: %    Average Bond Quality:       A
Borrowed Funds             %    Average Bond Maturity:      years
                                Average Duration:           years

                     Principal Utilities Fund, Inc.

     Top Industry                            Top Holdings

Electric Services                 %    Enron Corp.                   %
Telephone Communication           %    FPL Group, Inc.               %
Combination Utility Services      %    Duke Energy Corp.             %
Gas Production & Distribution     %    Niagara Mohawk Holdings       %
Radio & Television Broadcasting   %    AES Corp.                     %
Other                             %    Peco Energy Co.               %
                                       Calpine Corp.                 %
                                       DQE Inc.                      %
                                       Dynegy, Inc.                  %
                                       Pinnacle West Capital Cor     %
                                       Percent of Total Holdings     %


<PAGE>

                  PRINCIPAL PARTNERS LARGECAP BLEND FUND, INC.

                           PART C. OTHER INFORMATION

Item 23.  Exhibits.
--------  ---------

              (a)             Articles of Incorporation (filed 10/27/00)

               (b)            By-laws (Filed 10/27/00)

               (c)            Specimen Share Certificate  (filed 12/22/2000)

               (d)  (1)       Management Agreement (filed 12/22/2000)
                    (2)       Berger Sub-Advisory Agreement (filed 12/22/2000)

               (e)  (1)       Distribution Agreement (filed 12/22/2000)
                    (2)       (a)  Selling Agreement (A, B & C Shares)
                                        (filed 10/27/00)
                              (b)  Selling Agreement (R Shares) (filed 10/27/00)

               (f)            N/A

               (g)            Custodian Agreement**

               (h)            N/A

               (i)            Legal Opinion (filed 12/22/2000)

               (j)            Consent of Independent Auditors **

               (k)            Financial Statements Included in this registration
                    (1)       Part A:  None
                    (2)       Part B:  Initial Capital Statements**

               (l)            Initial Capital Agreement (filed 12/22/2000)

               (m)            Rule 12b-1 Plan

                    (1)       A Share Plan (filed 12/22/2000)
                    (2)       B Share Plan (filed 12/22/2000)
                    (3)       C Share Plan (filed 12/22/2000)

               (27)           Financial Data Schedule (N/A)

               (n)            Rule 18f-3 Plan (filed 12/22/2000)

               (p)            Code of Ethics
                    (1)       Principal Management Corporation (Filed 10/27/00)
                    (2)       Berger (Filed 10/27/00)

*    Filed herein.
**   To be filed by amendment.
***  Incorporated by reference.


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 stock
               life insurance  company  engaged in the business of insurance and
               retirement services.

          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 Group  (Mauritius) Ltd. a Mauritius  holding
               company.

          e.   Principal  Pensions Co., Ltd. (Japan) a Japan company who engages
               in the  management,  investment and  administration  of financial
               assets and any services incident thereto.

          f.   Principal Financial Services  (Australia),  Inc. (an Iowa holding
               company)  formed to facilitate the  acquisition of the Australian
               business of BT Australia.

          g.   Principal Financial Services (NZ), Inc. (an Iowa holding company)
               formed to facilitate the acquisition of the New Zealand  business
               of BT Australia.

          h.   Principal Capital Management  (Singapore)  Limited  (a  Singapore
               corporation) a company engaging in funds management.

          i.   Principal  Capital  Management  (Europe) Limited a United Kingdom
               company that engages in European  representation  and distributor
               of the Principal Investments Funds.

          j.   Principal Capital Management (Ireland) Limited an Ireland company
               that engages in fund management.

          k.   Principal Financial Group Investments  (Australia) Pty Limited an
               Australia holding company.

          Subsidiary wholly-owned by Princor Financial Services Corporation:

          a.   Principal   Management   Corporation  (an  Iowa   Corporation)  a
               registered investment advisor.

          Subsidiary 42% owned by PFG DO Brasil LTDA

          a.   Brasilprev    Previdencia   Privada    S.A.(Brazil)   a   pension
               fund company.

          Subsidiary wholly-owned by Principal Financial Group (Mauritius) Ltd.

          a.   IDBI Principal  Asset  Management  Company  (India) a India asset
               management  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.   BT Financial Group Pty Ltd. an Australia holding company.

          Subsidiary  wholly-owned by BT Financial Group Pty Ltd:

          a.   BT  Investments  (Australia)  Limited  a Delaware  holding
               company.

          Subsidiary wholly-owned by BT Investments (Australia) Limited:

          a.   BT  Australia   (Holdings)   Ltd  an  Australia   commercial  and
               investment banking and asset management company.

          Subsidiary wholly-owned by BT  Australia   (Holdings)   Ltd:

          a.   BT  Australia  Limited  an  Australia  company  engaged  in asset
               management and trustee/administrative activites.

          Subsidiaries wholly-owned by BT Australia Limited:

          a.   BT Life Limited an Australia  company  engaged in commercial  and
               investment linked life insurance policies.

          b.   BT Funds  Management  Limited  an  Australia  company  engaged in
               institutional and retail money management.

          c.   BT Funds Management  (International) Limited an Australia company
               who manages  international funds (New Zealand,  Singapore,  Asia,
               North America and United Kingdom).

          d.   BT Securities  Limited an Australia  company that engages in loan
               finance secured against share and managed fund portfolios.

          e.   BT Portfolio  Services Limited an Australia  company that engages
               in processing and transaction services for financial planners and
               financial intermediaries.

          f.   BT Australia  Corporate Services Pty Limited an Australia holding
               company for internal service companies.

          g.   QV1 Pty Limited an Australia company.

          Subsidiaries wholly-owned by BT Portfolio Services Limited:

          a.   BT Custodial Services Pty Ltd an Australia  custodian nominee for
               investment management activities.

          b.   National  Registry  Services Pty Ltd. an  Australia  company that
               engages in registry services.

          c.   National  Registry Services (WA) Pty Limited an Australia company
               that engages in registry services.

          d.   BT  Finance  &  Investments  Pty  Ltd  an  Australia  trustee  of
               wholesale cash management trust.

          Subsidiaries organized and wholly-owned by BT Australia  Corporate
          Services Pty Limited:

          a.   BT Finance Pty Limited an Australia  provider of finance by loans
               and leases.

          b.   Chifley Services Pty Limited an Australia company that engages in
               staff car leasing management.

          c.   BT Nominees Pty Limited an Australia  company that  operates as a
               trustee of staff superannuation fund (pension plan).

          Subsidiary organized and wholly-owned by BT Funds Management Limited:

          a.   BT Tactical  Asset  Management  Pty Limited an Australia  company
               that engages in management of futures positions.

          b.   Oniston Pty Ltd an Australia company that is a financial services
               investment vehicle.

          Subsidiary organized and wholly-owned by BT Securities Limited:

          a.   BT (Queensland) Pty Limited an Australia trustee company.

          Subsidiary  organized and  wholly-owned  by BT Custodial  Services Pty
          Ltd:

          a.   BT Hotel  Group Pty Ltd an  Australia  corporation  - an inactive
               shelf corporation to be wound up.

          b.   BT  Custodians  Ltd an  Australia  manager and trustee of various
               unit trusts.

          c.   Dellarak Pty Ltd an Australia trustee company.

          Subsidiary  organized and wholly-owned by Principal Financial Services
          (NZ), Inc.

          a.   BT Financial Group (NZ) Limited a New Zealand holding company.

          Subsidiary  organized and  wholly-owned  by BT Financial Group (NZ)
          Limited:

          a.   BT  Portfolio  Service  (NZ)  Limited a New Zealand  company that
               provides third party administration and registry services.

          b.   BT New Zealand Nominees Limited a New Zealand company who acts as
               a custodian for local assets.

          c.   BT Funds Management (NZ) Limited a New Zealand funds manager.

          Subsidiary  organized and  wholly-owned  by Principal Financial Group
          Investments (Australia) Pty Limited:

          a.   Principal Hotels Holdings Pty Ltd. a holding company.

          Subsidiary  organized and  wholly-owned  by Principal Hotels Holdings
          Pty Ltd.:

          a.   Principal Hotels Australia Pty Ltd. a holding company.

          Subsidiary  organized and  wholly-owned  by Principal Hotels Australia
          Pty Ltd.:

          a.   BT Hotel  Limited an  Australia  corporation,  which is the hotel
               operating/managing company of the BT Hotel Group.

          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)  0.06% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 11, 2000.

               Principal Blue Chip Fund, Inc.(a Maryland  Corporation)  0.03% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 11, 2000.

               Principal Bond Fund, Inc.(a Maryland Corporation) 0.64% of shares
               outstanding owned by Principal Life Insurance Company  (including
               subsidiaries and affiliates) on December 11, 2000.

               Principal  Capital  Value Fund,  Inc.  (a  Maryland  Corporation)
               28.32% of  outstanding  shares owned by Principal  Life Insurance
               Company  (including   subsidiaries  and  affiliates)on  December
               11,2000

               Principal Cash  Management  Fund,  Inc. (a Maryland  Corporation)
               13.13% of  outstanding  shares owned by Principal  Life Insurance
               Company  (including  subsidiaries  and  affiliates)  on December
               11,2000

               Principal  European  Equity Fund,  Inc. (a Maryland  Corporation)
               72.02% of  outstanding  shares owned by Principal Life Insurance
               Company  (including  subsidiaries  and  affiliates)  on December
               11, 2000.

               Principal  Government  Securities  Income Fund,  Inc. (a Maryland
               Corporation)  0.04% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 11, 2000.

               Principal  Growth Fund,  Inc. (a Maryland  Corporation)  0.01% of
               outstanding  shares owned by  Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 11, 2000.

               Principal High Yield Fund, Inc. (a Maryland  Corporation)  8.12%
               of shares  outstanding  owned by Principal Life Insurance Company
               (including subsidiaries and affiliates) on December 11, 2000.

               Principal  International  Emerging Markets Fund, Inc. (a Maryland
               Corporation) 30.06% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 11, 2000.

               Principal  International  Fund,  Inc.  (a  Maryland  Corporation)
               24.47% of shares  outstanding  owned by Principal  Life Insurance
               Company  (including  subsidiaries  and  affiliates)  on December
               11, 2000.

               Principal   International   SmallCap   Fund,   Inc.  (a  Maryland
               Corporation) 6.75% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 11, 2000.

               Principal  Limited Term Bond Fund, Inc. (a Maryland  Corporation)
               15.99% of shares  outstanding  owned by Principal  Life Insurance
               Company (including  subsidiaries and affiliates) on December 11,
               2000.

               Principal   LargeCap   Stock   Index   Fund,   Inc.  (a  Maryland
               Corporation)  13.39% of shares  outstanding  owned by  Principal
               Life Insurance Company (including subsidiaries and affiliates) on
               December 11, 2000.

               Principal  MidCap Fund,  Inc. (a Maryland  Corporation)  0.02% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 11, 2000

               Principal  Pacific  Basin Fund,  Inc.  (a  Maryland  Corporation)
               76.62% of  outstanding  shares owned by Principal  Life Insurance
               Company (including  subsidiaries and affiliates) on December 11,
               2000.

               Principal  Partners   Aggressive  Growth  Fund,  Inc.(a  Maryland
               Corporation) 4.24% of shares outstanding owned by Principal Life
               Insurance  Company  (including  subsidiaries  and  affiliates) on
               December 11, 2000

               Principal   Partners   LargeCap  Growth  Fund,   Inc.(a  Maryland
               Corporation)  23.61% of shares  outstanding  owned by  Principal
               Life Insurance Company (including subsidiaries and affiliates) on
               December 11, 2000

               Principal   Partners   MidCap   Growth  Fund,   Inc.(a   Maryland
               Corporation) 15.82% of shares  outstanding  owned by  Principal
               Life Insurance Company (including subsidiaries and affiliates) on
               December 11, 2000

               Principal Real Estate Fund, Inc. (a Maryland  Corporation) 51.89%
               of shares  outstanding  owned by Principal Life Insurance Company
               (including subsidiaries and affiliates) on December 11, 2000

               Principal SmallCap Fund, Inc.(a Maryland  Corporation)  1.41% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 11, 2000.

               Principal  Investors Fund, Inc. (f/k/a Principal  Special Markets
               Fund, Inc. (a Maryland  Corporation) 84.44% of shares outstanding
               of the International  Emerging Markets  Portfolio,  47.79% of the
               shares  outstanding of the  International  Securities  Portfolio,
               100.00%  of  shares  outstanding  of the  International  SmallCap
               Portfolio, 100% of the shares outstanding of the Mortgage-Backed-
               Securities  Portfolio  and 100% of the  shares of the  following:
               Principal  Balanced Fund,  Principal Bond & Mortgage  Securitites
               Fund, Principal European Fund, Principal  Governement  Securities
               Fund,  Principal  High  Quality   Intermediate-Term   Bond  Fund,
               Principal  High  Quality  Long-Term  Bond  Fund,  Principal  High
               Quality Short-Term Bond Fund,  Principal  International  Emerging
               Markets  Fund,   Principal   International   Fund  I,   Principal
               International  Fund II,  Principal  International  SmallCap Fund,
               Principal  LargeCap Blend Fund,  Principal  LargeCap Growth Fund,
               Principal  LargeCap  Value  Fund,  Principal  MidCap  Blend Fund,
               Principal  MidCap  Growth  Fund,  Principal  MidCap S&P 400 Index
               Fund,  Principal MidCap Value Fund,  Principal Money Market Fund,
               Principal Pacific Basin Fund,  Principal  Partners LargeCap Blend
               Fund,  Principal  Partners  LargeCap  Growth  Fund  I,  Principal
               Partners  LargeCap Growth Fund II,  Principal  Partners  LargeCap
               Value Fund,  Principal  Partners  MidCap  Growth Fund,  Principal
               Partners MidCap Value Fund,  Principal  Partners  SmallCap Growth
               Fund I, Principal  Partners  SmallCap  Growth Fund II,  Principal
               Real  Estate  Fund,  Principal  SmallCap  Blend  Fund,  Principal
               SmallCap  Growth  Fund,  Principal  SmallCap  S&P 600 Index Fund,
               Principal  SmallCap Value Fund,  Principal  Technology Fund, were
               owned by Principal Life Insurance Company (including subsidiaries
               and affiliates) on December 11, 2000

               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 11,
               2000.

               Principal Utilities Fund, Inc. (a Maryland  Corporation) 0.06% of
               shares  outstanding  owned by Principal  Life  Insurance  Company
               (including subsidiaries and affiliates) on December 11, 2000.

               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  11,  2000:   Aggressive   Growth,   Asset  Allocation,
               Balanced,  Blue Chip, Bond, Capital Value, Government Securities,
               Growth,  High  Yield,   International,   International   Emerging
               Markets, International SmallCap, LargeCap Growth, LargeCap Growth
               Equity,  LargeCap Stock Index (f/k/a Stock Index 500),  MicroCap,
               MidCap,  MidCap Growth, MidCap Growth Equity, MidCap Value, Money
               Market, Real Estate,  SmallCap,  SmallCap Growth, SmallCap Value,
               and Utilities.


          Subsidiaries  organized and  wholly-owned  by Principal Life Insurance
          Company:

          a.   Principal  Holding  Company (an Iowa  Corporation)  a  downstream
               holding company for Principal Life Insurance Company.

          b.   Principal Development  Investors,  LLC (a Delaware Corporation) a
               limited liability company engaged in acquiring and improving real
               property through development and redevelopment.

          c.   Principal  Capital  Management,  LLC (a Delaware  Corporation)  a
               limited liability  company that provides private  mortgage,  real
               estate  &  fixed-income   securities  services  to  institutional
               clients.

          d.   Principal Net Lease  Investors,  LLC (a Delaware  Corporation)  a
               limited liability company which operates as a buyer and seller of
               net leased investments.

          Subsidiaries  organized and  90% owned  by Principal Life Insurance
          Company:

          a.   PT Asuransi Jiwa Principal Indonesia (an Indonesia Corporation) a
               life  insuranced  corporation  which offers group and  individual
               products.

          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   portfolio   management   on   behalf  of
               institutional   clients   for   structuring,   underwriting   and
               management of entity-level  investments in real estate  operating
               companies (REOCs).

          c.   Principal Commercial  Acceptance,  LLC (a Delaware Corporation) a
               limited  liability  company that provides  private  market bridge
               financing and other secondary market opportunities.

          d.   Principal  Capital  Real  Estate   Investors,   LLC  (a  Delaware
               Corporation) a registered investment advisor.

          e.   Principal  Commercial  Funding,  LLC (a Delaware  Corporation)  a
               limited   liability   company   engaged   in   the   structuring,
               warehousing,    securitization    and    sale    of    commercial
               mortgage-backed securities.

          f.   Principal  Generation  Plant,  LLC an inactive  Delaware  limited
               liability company.

          g.   Principal  Capital  Income  Investors,  LLC  a  Delaware  limited
               liability   company  which  provides   investment  and  financial
               services.

          h.   Principal  Capital Futures Trading Advisor,  LLC a Delaware funds
               management limited liability company.

          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   partnerships   and  limited
               liability companies.

          h.   HealthRisk  Resource Group,  Inc. (an Iowa Corporation) a general
               business  corporation  that engages in investment  transactions,
               including limited partnerships and limited liability companies

          i.   Invista  Capital  Management,  LLC (an  Delaware  Corporation)  a
               limited  liability  company  which  is  a  registered  investment
               adviser.

          j.   Principal Residential Mortgage, Inc. (an Iowa Corporation) a full
               service  mortgage  banking company that makes and services a wide
               variety of loan types on a nationwide basis.

          k.   Principal Asset Markets, Inc. (an Iowa Corporation) a corporation
               which is currently inactive.

          l.   Principal  Portfolio  Services,  Inc.  (an  Iowa  Corporation)  a
               corporation which is currently inactive.

          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
               corporation which is currently inactive.

          o.   Principal Product Network, Inc. (a Delaware corporation) an
               insurance broker.

          p.   Principal Health Care, Inc. (an Iowa  Corporation) a managed care
               company.

          q.   Dental-Net,  Inc. (an Arizona  Corporation) 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 corporation that
               administers  individual  and  group  retirement  plans  for stock
               brokerage firm clients and mutual fund distributors.

          t.   Professional  Pensions,   Inc.  (a  Connecticut   Corporation)  a
               corporation  engaged in sales,  marketing and  administration  of
               group insurance plans and third-party  administrator  for defined
               contribution plans.

          u.   Principal  Investors  Corporation  (a New Jersey  Corporation)  a
               corporation which is currently inactive.

          v.   Principal  International,  Inc. (an Iowa  Corporation)  a company
               engaged in international business development.

          Subsidiaries  organized and  wholly-owned  by PT Asuransi Jiwa
          Principal Indonesia:

          a.   PT Jasa Principal Indonesia an Indonesia pension company.

          b.   PT Principal  Capital  Management  Indonesia  an Indonesia  funds
               management company.

          Subsidiary wholly-owned by Invista Capital Management, LLC:

          a.   Principal  Capital  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.

          b.   Principal Mortgage Reinsurance Company (a Vermont corporation)
               a mortgage reinsurance company.

          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  limited to the sale of open-end mutual
               funds and variable insurance products.

          c.   Boston  Insurance  Trust,  Inc. (a  Massachusetts  corporation) a
               corporation  which  serves  as a  trustee  and  administrator  of
               insurance trusts and arrangements.

          Subsidiaries wholly-owned by Principal International, Inc.:

          a.   Principal International Espana, S.A. de Seguros de Vida (Spain) a
               life insurance, annuity, and accident and health company.

          b.   Zao Principal International (a Russia Corporation) inactive.

          c.   Principal   International    Argentina,    S.A.   (an   Argentina
               corporation) a holding  company that owns Argentina  corporations
               offering annuities, group and individual insurance policies.

          d.   Principal  Asset  Management  Company  (Asia) Ltd. (Hong Kong) an
               asset management company.

          e.   Principal  International (Asia) Limited (Hong Kong) a corporation
               operating as a regional headquarters for Asia.

          f.   Principal Trust Company (Asia) Limited (Hong Kong) (an Asia trust
               company).

          g.   Principal International de Chile, S.A. (Chile) a holding company.

          h.   Principal  Mexico  Compania de Seguros,  S.A. de C.V.  (Mexico) a
               life insurance company.

          i.   Principal Pensiones, S.A. de C.V. (Mexico) a pension company.

          j.   Principal Afore, S.A. de C.V. (Mexico), a pension company.

          k.   Principal   Consulting   (India)   Private   Limited   (an  India
               corporation) an India consulting company.

          Subsidiaries 88% owned by Principal International, Inc.:

          a.   Principal  Insurance  Company  (Hong  Kong)  Limited (a Hong Kong
               Corporation) a company that sells insurance and pension products.

          Subsidiary  wholly-owned by Principal  International  Espana,  S.A. de
          Seguros de Vida (Spain):

          a.   Princor  International  Espana S.A. de Agencia de Seguros (Spain)
               an insurance agency.

          Subsidiary  wholly-owned  by Principal  International  (Asia)  Limited
          (Hong Kong):

          a.   Principal  Capital  Management (Asia)  Limited (Hong  Kong) Asian
               representative  and  distributor  for  the  Principal  Investment
               Funds.

          Subsidiaries  wholly-owned by Principal International Argentina,  S.A.
          (Argentina):

          a.   Principal Retiro Compania de Seguros de Retiro, S.A.  (Argentina)
               an annuity company.

          b.   Principal  Life  Compania de  Seguros,  S.A.  (Argentina)  a life
               insurance company.

          Subsidiary wholly-owned by Principal International de Chile, S.A.:

          a.   Principal  Compania  de Seguros de Vida Chile S.A.  (Chile)  life
               insurance company.

          Subsidiary 60% owned by Principal Compania de Seguros de Vida Chile
          S.A. (Chile):

          a.   Andueza  &  Principal   Creditos   Hipotecarios  S.A.  (Chile)  a
               residential mortgage company.

          Subsidiary wholly-owned by Principal Afore, S.A. de C.V.:

          a.   Siefore  Principal,  S.A.  de C.V.  (Mexico) an  investment  fund
               company.

Item 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.

   John E. Aschenbrenner        Principal         Executive Vice President
   Director                     Financial Group   Principal Life Insurance
                                                  Company

   Patricia A. Barry            Same              Counsel
   Assistant Corporate                            Principal Life Insurance
   Secretary                                      Company

  *Craig L. Bassett             Same              See Part B
   Treasurer

   Michael T. Daley             Same              Executive Vice President
   Director                                       Principal Life Insurance
                                                  Company

  *Ronald L. Danilson           Same              See Part B
   Executive Vice President &
   Chief Operating Officer

   David J. Drury               Same              Chairman of the Board
   Director                                       Principal Life
                                                  Insurance Company

  *Ralph C. Eucher              Same              See Part B
   President and Director

  *Arthur S. Filean             Same              See Part B
   Sr. 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 - Product
   Development

  *J. Barry Griswell            Same              See Part B
   Chairman of the Board
   and Director

   Joyce N. Hoffman             Same              Senior Vice President and
   Vice President and                             Corporate Secretary
   Corporate Secretary                            Principal Life
                                                  Insurance Company

   John R. Lepley               Same              Senior Vice President -
   Senior Vice President -                        Marketing & Distribution
   Marketing & Distribution                       Princor Financial Services
                                                  Corporation

   Kelly A. Paul                Same              Assistant Vice President -
   Assistant Vice President -                     Business Systems & Technology
   Business Systems &                             Princor Financial Services
   Technology                                     Corporation

   Richard L. Prey              Same              Executive Vice President
   Director                                       Principal Life Insurance
                                                  Company

   Layne A. Rasmussen           Same              Controller
   Controller -                                   Princor Financial Services
   Mutual Funds                                   Corporation

   Elizabeth R. Ring            Same              Controller
   Controller                                     Princor Financial Services
                                                  Corporation

  *Michael D. Roughton          Same              See Part B
   Counsel

   James F. Sager               Same              Vice President
   Vice President                                 Princor Financial Services
                                                  Corporation

   Karen E. Shaff               Same              Senior Vice President &
   Director                                       General Counsel
                                                  Principal Life Insurance
                                                  Company

  *Jean B. Schustek             Same              See Part B
   Assistant Vice President -
   Registered Products

  *Kirk L. Tibbetts             Same              See Part B
   Senior Vice President &
   Chief Financial Officer


     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 European Equity
Fund, Inc., Principal International Fund, Inc., Principal International SmallCap
Fund,  Inc.,  Principal  Investors Fund, Inc. (f/k/a  Principal  Special Markets
Fund, Inc.),  Principal LargeCap Stock Index Fund, Inc.,  Principal Limited Term
Bond Fund,  Inc.,  Principal  Pacific Basin Fund,  Inc.,  Principal MidCap Fund,
Inc.,  Principal  Partners  Aggressive  Growth Fund,  Inc.,  Principal  Partners
LargeCap  Blend Fund,  Inc.,  Principal  Partners  LargeCap  Growth Fund,  Inc.,
Principal  Partners LargeCap Value Fund, Inc.  Principal  Partners MidCap Growth
Fund, Inc., Principal Partners SmallCap Growth Fund, Inc., Principal Real Estate
Fund, Inc., Principal SmallCap 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  European
Equity 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  Investors  Fund,  Inc.  (f/k/a
Principal  Special  Markets Fund,  Inc.),  Principal  LargeCap Stock Index Fund,
Inc.,  Principal  Limited Term Bond Fund,  Inc.,  Principal  MidCap Fund,  Inc.,
Principal Pacific Basin Fund Inc.,  Principal  Partners  Aggressive Growth Fund,
Inc.,  Principal Partners LargeCap Blend Fund, Inc., Principal Partners LargeCap
Growth Fund,  Inc.,  Principal  Partners  LargeCap Value Fund,  Inc.,  Principal
Partners  SmallCap  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.,  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)
                               Positions
                               and offices
  Name and principal           with principal
  business address             underwriter

     Thomas E. Ackerman       Regional Vice President -
     The Principal            Variable Annuities
     Financial Group
     Des Moines, IA 50392

     Lindsay L. Amadeo        Assistant Director -
     The Principal            Marketing Services
     Financial Group
     Des Moines, IA 50392

     John E. Aschenbrenner    Director
     The Principal
     Financial Group
     Des Moines, IA 50392

     Robert W. Baehr          Marketing Services
     The Principal            Officer
     Financial Group
     Des Moines, IA 50392

     Patricia A. Barry        Assistant Corporate Secretary
     The Principal
     Financial Group
     Des Moines, IA 50392

     Craig L. Bassett         Treasurer
     The Principal
     Financial Group
     Des Moines, IA 50392

     David J. Brown           Vice President
     The Principal
     Financial Group
     Des Moines, IA 50392

     Michael T. Daley         Director
     The Principal
     Financial Group
     Des Moines, IA 50392

     Ronald L. Danilson       Executive Vice President and
     The Principal            Chief Operating Officer
     Financial Group
     Des Moines, IA 50392

     Mark B. Davis            Assistant Director - Compliance
     The Principal
     Financial Group
     Des Moines, IA 50392

     David J. Drury           Director
     The Principal
     Financial Group
     Des Moines, IA 50392

     Ralph C. Eucher          Director and
     The Principal            President
     Financial Group
     Des Moines, IA  50392

     Arthur S. Filean         Senior Vice President
     The Principal
     Financial Group
     Des Moines, IA 50392

     Dennis P. Francis        Director
     The Principal
     Financial Group
     Des Moines, IA  50392

     Paul N. Germain          Vice President -
     The Principal            Mutual Fund Operations
     Financial Group
     Des Moines, IA  50392

     Ernest H. Gillum         Vice President -
     The Principal            Product Development
     Financial Group
     Des Moines, IA 50392

     Thomas D. Gualdoni       Vice President - National Sales
     The Principal            Manager/Variable Annuities
     Financial Group
     Des Moines, IA 50392

     J. Barry Griswell        Director and
     The Principal            Chairman of the
     Financial Group          Board
     Des Moines, IA 50392

     Susan R. Haupts          Marketing Officer
     The Principal
     Financial Group
     Des Moines, IA  50392

     Joyce N. Hoffman         Vice President and
     The Principal            Corporate Secretary
     Financial Group
     Des Moines, IA 50392

     Jeffrey L. Kane          Marketing Officer
     The Principal
     Financial Group
     Des Moines, IA 50392

     Peter R. Kornweiss       Vice President
     The Principal
     Financial Group
     Des Moines, IA 50392

     Kraig L. Kuhlers         Regional Sales Director
     The Principal
     Financial Group
     Des Moines, IA  50392

     John R. Lepley           Senior Vice
     The Principal            President - Marketing
     Financial Group          and Distribution
     Des Moines, IA 50392

     Kelly A. Paul            Assistant Vice President -
     The Principal            Business Systems and Technology
     Financial Group
     Des Moines, IA 50392

     Elise M. Pilkington      Assistant Director -
     The Principal            Retirement Consulting
     Financial Group
     Des Moines, IA  50392

     Richard L. Prey          Director
     The Principal
     Financial Group
     Des Moines, IA 50392

     Martin R. Richardson     Operations Officer -
     The Principal            Broker/Dealer Services
     Financial Group
     Des Moines, IA 50392

     Elizabeth R. Ring        Controller
     The Principal
     Financial Group
     Des Moines, IA 50392

     Michael D. Roughton      Counsel
     The Principal
     Financial Group
     Des Moines, IA 50392

     James F. Sager           Vice President
     The Principal
     Financial Group
     Des Moines, IA 50392

     Kyle R. Selberg          Vice President-Marketing
     The Principal
     Financial Group
     Des Moines, IA 50392

     Karen E. Shaff           Director
     The Principal
     Financial Group
     Des Moines, IA 50392

     Minoo Spellerberg        Assistant Vice President and
     The Principal            Compliance Officer
     Financial Group
     Des Moines, IA  50392

     Paul D. Steingreaber     Director of National Sales
     The Principal
     Financial Group
     Des Moines, IA 50392

     Kirk L. Tibbetts         Senior Vice President and
     The Principal            Chief Financial Officer
     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.


                                   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, 2000.

                             Principal Partners LargeCap Blend 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)      12/29/2000



  (J. B. Griswell)*
_____________________________      Director and
J. B. Griswell                     Chairman of the Board              12/29/2000


/s/ K. L. Tibbetts
_____________________________      Senior Vice President and          12/29/2000
K. L. Tibbetts                     Chief Financial Officer
                                   Principal Financial and
                                   Accounting Officer)


   (J. E. Aschenbrenner)*
_____________________________      Director
J. E. Aschenbrenner                                                   12/29/2000


   (J. D. Davis)*
_____________________________      Director
J. D. Davis                                                           12/29/2000


   (P. A. Ferguson)*
_____________________________      Director
P. A. Ferguson                                                        12/29/2000


   (R. W. Gilbert)*
_____________________________      Director
R. W. Gilbert                                                         12/29/2000


   (W. C. Kimball)*
_____________________________      Director
W. C. Kimball                                                         12/29/2000


   (B. A. Lukavsky)*
_____________________________      Director
B. A. Lukavsky                                                        12/29/2000





                                         By    /s/ R. C. Eucher
                                           -------------------------------------
                                           R. C. Eucher
                                           President and Director


                                        *Pursuant to Powers of Attorney
                                         Previously Filed or Included


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