PRINCIPAL GROWTH FUND INC /MD/, 497, 2000-05-15

PRINCIPAL GROWTH FUND INC /MD/
497, 2000-05-15

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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 Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal 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.

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 the Money Market Fund.

The date of this Prospectus is March 1, 2000
as revised through May 1, 2000.

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

TABLE OF CONTENTS

Fund Descriptions..............................................................4
Domestic Growth-Oriented Funds
Balanced Fund.........................................................6
Blue Chip Fund........................................................8
Capital Value Fund...................................................10
Growth Fund .........................................................12
LargeCap Stock Index Fund............................................14
MidCap Fund..........................................................16
Partners Aggressive Growth Fund......................................18
Partners LargeCap Growth Fund........................................20
Partners MidCap Growth Fund..........................................22
Real Estate Fund.....................................................24
SmallCap Fund........................................................26
Utilities Fund.......................................................28

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

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

Money Market Fund
Cash Management Fund.................................................48

The Costs of Investing........................................................50

Certain Investment Strategies and Related Risks...............................53

Management, Organization and Capital Structure................................58

Pricing of Fund Shares........................................................60

Dividends and Distributions...................................................61

How To Buy Shares.............................................................62

How To Sell Shares............................................................64

How To Exchange Shares Among Principal Mutual Funds...........................67

General Information About a Fund Account......................................68

Financial Highlights..........................................................70

Principal Life Insurance Company Master Individual Retirement Account Plan
and Custody Agreement....................................................93

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 full range of investment approaches through the
Principal Mutual Funds.

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

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

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

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

Partners MidCap Growth Turner Investment Partners, Inc. ("Turner")
</TABLE>

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

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

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

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

Annual operating expenses
The annual operating expenses for each Fund are deducted from Fund assets
(stated as a percentage of Fund assets) and are shown as of the end of the most
recent fiscal year (estimates of expenses are shown for 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.

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

Fund Performance
As certain Funds have been operating only for a limited period of time, no
historical information is available for those Funds. If historical information
is available, the Fund's description includes a bar chart and a set of tables.

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

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

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

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

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

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

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

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

Note: Class R shares are offered only to individuals (and his/her spouse,
child, parent, grandchild and trusts primarily for their benefit) who:
o receive lump sum distributions from retirement or employer welfare
benefit plans serviced by Principal Life Insurance Company;
o are participants in retirement or employer welfare benefit plans
serviced by the Principal Life;
o own life or disability insurance policies issued by the Principal
Life;
o are customers of Principal Residential Mortgage, Inc.;
o are customers of Principal Bank; and
o have existing Principal Mutual Fund Class R share accounts.

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

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

Bond values change daily. Their prices reflect changes in interest rates, market
conditions and announcements of other economic, political or financial
information. When interest rates fall, the price of a bond rises and when
interest rates rise, the price declines.

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

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

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

Annual Total Returns

1999 0.63
1998 11.20
1997 17.29
1996 13.00
1995 23.39
1994 -3.38
1993 9.01
1992 10.47
1991 31.72
1990 -5.18

The year-to-date return as of March 31, 2000 for Class A shares is 0.81% and for
Class R shares is 0.62%.

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A -4.10% 11.77% 9.75%
Class R 0.11 9.78*

Past One Past Five Past Ten
Year Years Years

S&P 500 Stock Index 21.04% 28.55% 18.21%
Lehman Brothers Government/Corporate Bond Index -2.15 7.61 7.65
Lipper Balanced Fund Average 8.69 16.39 11.94

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

Fund Operating Expenses

Class A Class R

Management Fees................ 0.58% 0.58%
12b-1 Fees..................... 0.25 0.74
Other Expenses................. 0.45 0.52

Total Fund Operating Expenses 1.28% 1.84%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $599 $862 $1,144 $1,947
Class R 187 579 931 1,756

You would pay the following expenses if you did not redeem your shares:

Class A 599 862 1,144 1,947
Class R 187 579 931 1,756

Day-to-day Fund Management

Since December 1997 Co-Manager: Martin J. Schafer. Mr. Schafer
joined the Principal in 1977 and has broad experience in
residential mortgage related securities. He served as
Director of Investment Securities at the Principal prior to
joining Invista Capital Management in 1992. He holds a BBA
in Accounting and Finance from the University of Iowa.

Since April 1993 Co-Manager: Judith A. Vogel, CFA. Ms. Vogel
joined Invista Capital Management in 1987. She holds an
undergraduate degree in Business Administration from Central
College. She has earned the right to use the Chartered
Financial Analyst designation.

Since February 2000 Co-Manager: Mary Sunderland, CFA. Prior to
joining Invista Capital Management in 1999, Ms. Sunderland
managed growth and technology portfolios for Skandia Asset
Management for 10 years. She holds an MBA in Finance from
Columbia University Graduate School of Business and an
undergraduate degree from Northwestern University. She has
earned the right to use the Chartered Financial Analyst
designation.

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 easy access to credit
o superior management structure
o established history of earnings and dividends
o good industry position

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 Funds 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

1999 11.96
1998 16.65
1997 26.25
1996 16.78
1995 33.19
1994 3.39
1993 2.62
1992 6.09

The year-to-date return as of March 31, 2000 for Class A shares is -2.97% and
for Class R shares is -3.10%.

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

Highest 16.40% (6-30-1997)
Lowest -9.92% (9-30-1998)

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

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

Past One Past Five Past Ten
Year Years Years

Class A 6.70% 19.55% 13.91%*
Class R 11.37 17.06**

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

Past One Past Five Past Ten
Year Years Years

S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper Large-Cap Value Fund Average(1) 11.23 22.56 15.06

(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.

Fund Operating Expenses

Class A Class R

Management Fees*............... 0.46% 0.46%
12b-1 Fees..................... 0.25 0.75
Other Expenses................. 0.55 0.60

Total Fund Operating Expenses 1.26% 1.81%

* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31, 2000.
The 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:

1.20% for Class A Shares
1.70% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $597 $856 $1,134 $1,925
Class R 184 569 917 1,731
You would pay the following expenses if you did not redeem your shares:
Class A 597 856 1,134 1,925
Class R 184 569 917 1,731

Day-to-day Fund Management

Since March 1991 Mark T. Williams, CFA. Mr. Williams joined Invista Capital
(Fund's inception) Management in 1989. He holds an MBA from Drake University
and a BA in Finance from the University of the State of
New York. He has earned the right to use the Chartered
Financial Analyst designation.

DOMESTIC GROWTH-ORIENTED FUND

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

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

Securities chosen for investment may include those of companies which Invista
believes can be expected to share in the growth of the nation's economy over the
long term. In making selections for the Fund's investment portfolio, Invista
uses an approach described as "fundamental analysis." The basic steps involved
in this analysis are:

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

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

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

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

Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The current
price reflects the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors. 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 risks of investing in common stocks but also
prefer investing in companies that appear to be considered undervalued relative
to similar companies.

Annual Total Returns

1999 -6.86
1998 12.13
1997 28.69
1996 23.42
1995 31.90
1994 0.21
1993 7.56
1992 9.09
1991 37.21
1990 -10.64

The year-to-date return as of March 31, 2000 for Class A shares is -2.17% and
for Class R shares is -2.31%.

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A -11.24% 15.83% 11.64%
Class R -7.42 12.32*

Past One Past Five Past Ten
Year Years Years

S&P 500 Stock Index 21.04% 28.55% 18.21%
S&P 500 Barra Value Index(1) 12.72 22.94 15.37
Lipper Large-Cap Value Fund Average(2) 11.23 22.56 15.06

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

(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.

Fund Operating Expenses

Class A Class R

Management Fees................ 0.37% 0.37%
12b-1 Fees..................... 0.18 0.71
Other Expenses................. 0.20 0.35

Total Fund Operating Expenses 0.75% 1.43%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $548 $703 $872 $1,361
Class R 146 452 702 1,202
You would pay the following expenses if you did not redeem your shares:
Class A 548 703 872 1,361
Class R 146 452 702 1,202

Day-to-day Fund Management

Since November 1996 Catherine A. Zaharis, CFA. Ms. Zaharis joined Invista
Capital Management in 1987. She holds a BA in Finance
from the University of Iowa and an MBA from Drake
University. She has earned the right to use the
Chartered Financial Analyst designation.

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 seeks to achieve its objective by investing in common stocks and other
equity securities. In selecting securities for investment, the Sub-Advisor,
Invista, looks at stocks it believes have prospects for above average growth
over an extended period of time. Invista uses an approach described as
"fundamental analysis" as it selection process.

The three basic steps of fundamental analysis are:
1) research - consideration of economic prospects over the next one to two
years rather than focusing on near term expectations. This approach is
designed to provide insight into a company's real growth potential.
2) valuation - use of the research to allow Invista to identify segments of
the market for investment. Invista considers various factors including
sustainable, superior earnings growth and above average or accelerating
rates of growth.
3) stock selection - Invista buys and sells stocks using its research and
valuation as the basis. It attempts to identify the individual issuers that
it considers to have high growth potential, that are market share leaders
and/or have high quality management with consistent track records and solid
balance sheets.

Main Risks
Prices of equity securities rise and fall in response to a number of factors
including events that affect entire financial markets or industries (for
example, changes in inflation or consumer demand) as well as events impacting a
particular issuer (for example, news about the success or failure of a new
product). 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 Fund may invest
in companies with limited product lines, markets or financial resources. As a
result, these securities may change in value more than those of larger, more
established companies. As the value of the stocks owned by the Fund changes, the
Fund share price changes. In the short-term, the price can fluctuate
dramatically.

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 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.

Annual Total Returns
1999 16.13
1998 20.37
1997 28.41
1996 12.23
1995 33.47
1994 3.21
1993 7.51
1992 10.16
1991 56.61
1990 -1.41

The year-to-date return as of March 31, 2000 for Class A shares is 5.38% and for
Class R shares is 5.23%.

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A 10.67% 20.71% 17.07%
Class R 15.46 18.24*

* Period from February 29, 1996, date Class R shares

Past One Past Five Past Ten
Year Years Years

S&P 500 Stock Index 21.04% 28.55% 18.21%
Lipper Large-Cap Growth Fund Average(1) 38.09 30.55 19.73

(1) Lipper has discontinued calculation of the Average previously used for this
Fund. first offered to eligible purchasers, through December 31, This chart
reflects information for the discontinued Average for years prior to 1999.
The newly 1999. assigned Average will be reflected for 1999 and beyond.

Fund Operating Expenses

Class A Class R

Management Fees................ 0.38% 0.38%
12b-1 Fees..................... 0.23 0.74
Other Expenses................. 0.28 0.34

Total Fund Operating Expenses 0.89% 1.46%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $562 $745 $945 $1,519
Class R 149 462 731 1,321
You would pay the following expenses if you did not redeem your shares:
Class A 562 745 945 1,519
Class R 149 462 731 1,321

Day-to-day Fund Management

Since January 2000 Mary Sunderland, CFA. Prior to joining Invista Capital
Management in 1999, Ms. Sunderland managed growth and
technology portfolios for Skandia Asset Management for
10 years. She holds an MBA in Finance from Columbia
University Graduate School of Business and an undergraduate
degree from Northwestern University. She has earned the
right to use the Chartered Financial Analyst designation.

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.

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:

Fund Operating Expenses*

Class A Class R

Management Fees**.............. 0.35% 0.35%
12b-1 Fees..................... 0.15 0.65
Other Expenses................. 1.43 1.62

Total Fund Operating Expenses 1.93% 2.62%

* Total Fund Operating Expenses are estimated.

** TheManager has agreed to waive a portion of its fee for the Fund from the
date operations commenced. The Manager intends to continue the waiver and,
if necessary, pay expenses normally payable by the Fund through the period
ending October 31, 2000. The 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:

0.80% for Class A Shares
1.30% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $343 $747 N/A N/A
Class R 265 814 N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A 343 747 N/A N/A
Class R 265 814 N/A N/A

Day-to-day Fund Management

Since March 2000 Co-Manager: Robert Baur, Ph.D. Dr. Baur joined
(Fund's inception) Invista Capital Management in 1995. Prio to
joining the firm, he was a Professor of Finance
and Economics at Drake University and Grand View
College. He received his Ph.D. in Economics
from Iowa State University and did post-doctoral
study at the University of Minnesota. He also
holds a BS in Mathematics from Iowa State
University.

Since March 2000 Co-Manager: Rhonda VanderBeek. Ms. VanderBeek
(Fund's inception) joined Invista Capital Management in 1983. She
directs trading operations for the firm and has
extensive experience trading both domestic and
international securities.

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.

Annual Total Returns

1999 11.62
1998 -0.23
1997 22.94
1996 19.13
1995 34.20
1994 3.03
1993 12.29
1992 14.81
1991 52.83
1990 -6.33

The year-to-date return as of March 31, 2000 for Class A shares is 12.40% and
for Class R shares is 12.22%.

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A 6.37% 15.84% 14.77%
Class R 10.98 11.38*

* Period from February 29, 1996, date Class R sharesfirst offered to
eligible purchasers, through December 31, 1999.

Past One Past Five Past Ten
Year Years Years

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

Fund Operating Expenses

Class A Class R

Management Fees................ 0.56% 0.56%
12b-1 Fees..................... 0.25 0.74
Other Expenses................. 0.41 0.55

Total Fund Operating Expenses 1.22% 1.85%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $593 $844 $1,113 $1,882
Class R 188 582 929 1,716
You would pay the following expenses if you did not redeem your shares:
Class A 593 844 1,113 1,882
Class R 188 582 929 1,716

Day-to-day Fund Management

Since February 2000 K. William Nolin, CFA. Mr. Nolin joined Invista
Capital Management in 1996. He holds an MBA from
The Yale School of Management and a BA in Finance
from the University of Iowa. He has earned the
right to use the Chartered Financial Analyst
designation.

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS AGGRESSIVE 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.

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

As the inception date of the Fund is November 1, 1999, only limited historical
performance data is available.

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

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

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

Class A 6.57%* S&P 500 Stock Index 21.04% 28.55% 18.21%
Class R 11.90** Lipper Large-Cap Growth
Fund Average 38.09 30.55 19.73

* Period from November 1, 1999, date A shares first offered to the public,
through December 31, 1999.
** Period from November 1, 1999, date R shares first offered to eligible
purchasers, through December 31, 1999.

Fund Operating Expenses*

Class A Class R
Management Fees **............. 0.75% 0.75%
12b-1 Fees..................... 0.25 0.50
Other Expenses................. 1.13 1.16

Total Fund Operating Expenses 2.13% 2.41%

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund from the
date operations commenced. The Manager intends to continue the waiver and,
if necessary, pay expenses normally payable by the Fund through the period
ending October 31, 2000. The 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:

1.60% for Class A Shares
2.10% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $681 $1,110 N/A N/A
Class R 244 751 N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A 681 1,110 N/A N/A
Class R 244 751 N/A N/A

Day-to-day Fund Management

Since November 1999 Co-Manager: William S. Auslander, Portfolio
(Fund's Inception) Manager and Principal of Morgan Stanley & Co.
Incorporated and Morgan Stanley Dean Witter
Investment Management Inc. Prior thereto, equity
analyst since 1995. Equity analyst at Icahn &
Co., 1986-1995. He holds a BA in Economics from
the University of Wisconsin and an MBA from
Columbia University.

Co-Manager: Philip W. Friedman, Managing
Director of Morgan Stanley & Co. Incorporated
and Morgan Stanley Dean Witter Investment
Management Inc. since 1997. Member of Morgan
Stanley & Co. Research since 1990, served as
Director of North America Research 1995-1997.
Prior thereto, Assistant to the
Controller and Chief Equity Financial Officer,
Arthur Andersen & Company. He holds a BA from
Rutgers University and an MBA from Northwestern -
J.L. Kellogg School.

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 earnings growth at an above-average rate. In making this
determination, Duncan-Hurst considers certain characteristics of a particular
company including new product development, management change and competitive
market dynamics.

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

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

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

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

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

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

Fund Operating Expenses*

Class A Class R
Management Fees**.............. 0.90% 0.90%
12b-1 Fees..................... 0.25 0.50
Other Expenses................. 1.43 1.62

Total Fund Operating Expenses 2.58% 3.02%

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund from the
date operations commenced. The Manager intends to continue the waiver and,
if necessary, pay expenses normally payable by the Fund through the period
ending October 31, 2000. The 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:

1.80% for Class A Shares
2.30% for Class R 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 $724 $1,239 N/A N/A
Class R 305 933 N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A 724 1,239 N/A N/A
Class R 305 933 N/A N/A

Since March 2000 David C. Magee. Mr. Magee has been with
(Fund's inception) 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.

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

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

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

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

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

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

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

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

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

Fund Operating Expenses*

Class A Class R
Management Fees**.............. 0.90% 0.90%
12b-1 Fees..................... 0.25 0.50
Other Expenses................. 1.43 1.62

Total Fund Operating Expenses 2.58% 3.02%

* Total Fund Operating Expenses are estimated.

1.80% for Class A Shares
2.30% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $724 $1,239 N/A N/A
Class R 305 933 N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A 724 1,239 N/A N/A
Class R 305 933 N/A N/A

Day-to-day Fund Management

Since March 2000 Christopher K. McHugh. Mr. McHugh joined Turner
(Fund's inception) 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.

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.

Annual Total Returns
1999 -4.76
1998 -13.62

The year-to-date return as of March 31, 2000 for Class A shares is 2.50% and for
Class R shares is 2.52%.

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, 1999

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

Past One Past Five
Year Years

Class A -9.24% -11.46%*
Class R -5.16% -9.44%**

Past One Past Five Past Ten
Year Years Years

Morgan Stanley REIT Index -4.55% 7.61% -- %
Lipper Real Estate Fund Average -3.14 8.38 6.62

* Period from December 31, 1997, date A shares first offered to the public,
through December 31, 1999.

** Period from December 31, 1997, date R shares first offered to eligible
purchasers, through December 31, 1999.

Fund Operating Expenses
Class A Class R

Management Fees*............... 0.90% 0.90%
12b-1 Fees..................... 0.23 0.56
Other Expenses................. 1.06 1.07

Total Fund Operating Expenses 2.19% 2.53%

1.90% for Class A Shares
2.40% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $687 $1,128 $1,594 $2,879
Class R 256 788 1,308 2,639
You would pay the following expenses if you did not redeem your shares:
Class A 687 1,128 1,594 2,879
Class R 256 788 1,308 2,639

Day-to-day Fund Management

Since December 1997 Kelly D. Rush, CFA. Mr. Rush has been with
(Fund's inception) the Principal organization since 1995. He
holds an MBA and a BA in Finance from the
University of Iowa. He has earned the
right to use the Chartered Financial
Analyst.

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
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. Market capitalization is defined as total current market
value of a company's outstanding common stock.

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.

Annual Total Returns
1999 43.22
1998 -5.68

The year-to-date return as of March 31, 2000 for Class A shares is 16.12% and
for Class R shares is 15.91%.

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, 1999

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

Past One Past Five
Year Years

Class A 36.49% 13.46%*
Class R 42.90% 16.09%**

* Period from December 31, 1997, date Class A shares first offered to the
public, through December 31, 1999.
** Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.

Past One Past Five Past Ten
Year Years Years

S&P 600 Stock Index 12.40% 17.05% 13.04%
Lipper Small-Cap Core Fund Average(1) 28.43 17.88 13.39

Fund Operating Expenses

Class A Class R
Management Fees*............... 0.85% 0.85%
12b-1 Fees..................... 0.21 0.60
Other Expenses................. 0.86 0.86

Total Fund Operating Expenses 1.92% 2.31%

1.80% for Class A Shares
2.30% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $661 $1,049 $1,462 $2,612
Class R 234 721 1,192 2,380
You would pay the following expenses if you did not redeem your shares:
Class A 661 1,049 1,462 2,612
Class R 234 721 1,192 2,380

Day-to-day Fund Management

Since December 1997 Co-Manager: John F. McClain. Mr. McClain joined
(Fund's inception) Invista Capital Management as a Portfolio Analyst
in 1990. He holds an undergraduate degree in
Economics from the University of Iowa and an
MBA from Indiana University.

Since December 1997 Co-Manager: Mark T. Williams, CFA. Mr. Williams
(Fund's inception) joined Invista Capital Management in 1989. He
holds an MBA from Drake University and a BA in
Finance from the University of the State of New
York. He has earned the right to use the
Chartered Financial Analyst designation.

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
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.

Annual Total Returns

1999 2.25
1998 22.50
1997 29.58
1996 4.56
1995 33.87
1994 -11.09
1993 -8.42

The year-to-date return as of March 31, 2000 for Class A shares is 6.50% and for
Class R shares is 6.35%.

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A -2.56% 16.71% 11.29%*
Class R 1.61 13.98**

Past One Past FivePast Ten
Year Years Years

S&P 500 Stock Index 21.04% 28.55% 18.21%
Dow Jones Utilities Index with Income
Fund Average -5.73 14.74 --
Lipper Utilities Fund Average 15.82 18.70 12.80

* Period from December 16, 1992, date Class A shares first offered to the
public, through December 31, 1999.
** Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 1999.

Fund Operating Expenses

Class A Class R

Management Fees................ 0.59% 0.59%
12b-1 Fees..................... 0.25 0.75
Other Expenses................. 0.36 0.53

Total Fund Operating Expenses 1.20% 1.87%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $591 $838 $1,103 $1,860
Class R 190 588 934 1,709
You would pay the following expenses if you did not redeem your shares:
Class A 591 838 1,103 1,860
Class R 190 588 934 1,709

Day-to-day Fund Management

Since April 1993 Catherine A. Zaharis, CFA. Ms. Zaharis joined
Invista Capital Management in 1987. She holds a
BA in Finance from the University of Iowa and
an MBA from Drake University. She has earned the
right to use the Chartered Financial Analyst
designation.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL EUROPEAN EQUITY FUND, INC.
The Fund seeks to achieve growth of capital by investing 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 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
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.

The Fund anticipates that its portfolio turnover will typically range from 200%
to 300%. 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 large, 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. 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.

Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
in markets outside of the U.S. and are willing to accept short-term foreign
stock market fluctuations. The Fund invests for growth and generally does not
pursue income producing securities.

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:

Fund Operating Expenses*

Management Fees**.............. 0.90% 0.90%
12b-1 Fees..................... 0.25 0.75
Other Expenses................. 1.48 1.85

Total Fund Operating Expenses 2.63% 3.50%

* Total Fund Operating Expenses are estimated.

* The Manager has agreed to waive a portion of its fee for the Fund from the
date operations commenced. The Manager intends to continue the waiver and,
if necessary, pay expenses normally payable by the Fund through the period
ending October 31, 2000. The 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
3.00% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $728 $1,254 N/A N/A
Class R 353 1,074 N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A 728 1,254 N/A N/A
Class R 353 1,074 N/A N/A

Day-to-day Fund Management

Since May 1, 2000 Crispin Murray, Executive Vice President, BT
(Fund's inception) Funds Management Limited. Mr. Murray joined BT in
1994. Prior to joining the firm, he was a bond
and currency analyst for Equitable Life
Assurance Society in the United Kingdom. He
holds an Honour degree in Economics and Human
Geography from Reading University in the United
Kingdom.

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

Under normal conditions, at least 65% of the Fund's assets are invested in
emerging market country equity securities. The Fund invests in securities of:
o companies with their principal place of business or principal office in
emerging market countries;
o companies for which the principal securities trading market is an emerging
market country; or
o companies, regardless of where its securities are traded, that derive 50%
or more of their total revenue from either goods or services produced in
emerging market countries or sales made in emerging market countries.

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.

Annual Total Returns

1999 67.20
1998 -17.42

The year-to-date return as of March 31, 2000 for Class A shares is 7.07% and for
Class R shares is 7.08%.

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, 1999

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

Past One Past Five
Year Years

Class A 59.34% 6.96%*
Class R 67.69 9.11**

Past One Past FivePast Ten
Year Years Years

Morgan Stanley Capital International EMF
(Emerging Markets Free) Index 66.41% 2.00% 11.04%
Lipper Emerging Markets Fund Average 70.77 5.11 7.47

* Period from August 29, 1997, date A shares first offered to the public,
through December 31, 1999.

** Period from August 29, 1997, date R shares first offered to eligible
purchasers, through December 31, 1999.

Fund Operating Expenses

Class A Class R
Management Fees*............... 1.25% 1.25%
12b-1 Fees..................... 0.17 0.38
Other Expenses................. 1.33 1.04

Total Fund Operating Expenses 2.75% 2.67%

* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31, 2000.
The 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
3.00% for Class R 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 $740 $1,288 $1,860 $3,409
Class R 270 829 1,429 3,087
You would pay the following expenses if you did not redeem your shares:
Class A 740 1,288 1,860 3,409
Class R 270 829 1,429 3,087

Day-to-day Fund Management

Since May 1997 Kurtis D. Spieler, CFA. Mr. Spieler joined
(Fund'sinception) Invista Capital Management in 1995. He
holds an MBA from Drake University and a BBA
from Iowa State University. He has earned the
right to use the Chartered Financial Analyst
designation.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL INTERNATIONAL FUND, INC.

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

Main Strategies The Fund invests in 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.

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.

Annual Total Return

1999 25.82
1998 8.48
1997 12.22
1996 23.76
1995 11.56
1994 -5.26
1993 46.34
1992 0.81
1991 15.25
1990 -9.51

The year-to-date return as of March 31, 2000 for Class A shares is 3.04% and
for Class R shares is 2.94%.

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A 19.91% 15.05% 11.38%
Class R 25.06 15.76*

Past One Past FivePast Ten
Year Years Years

Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International Fund Average 40.80 15.37 10.54

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

Fund Operating Expenses

Class A Class R

Management Fees................ 0.68% 0.68%
12b-1 Fees..................... 0.21 0.74
Other Expenses................. 0.33 0.51

Total Fund Operating Expenses 1.22% 1.93%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $593 $844 $1,113 $1,882
Class R 196 606 961 1,746
You would pay the following expenses if you did not redeem your shares:
Class A 593 844 1,113 1,882
Class R 196 606 961 1,746

Day-to-day Fund Management

Since April 1994 Co-Manager: Scott D. Opsal, CFA. Mr. Opsal
is Chief Investment Officer of Invista Capital
Management and has been with the organization
since 1993. He holds an MBA from the University
of Minnesota and BS from Drake University.
He has earned the right to use the Chartered
Financial Analyst designation.

Since March 2000 Co-Manager: Kurtis D. Spieler, CFA. Mr. Spieler
joined Invista Capital Management in 1995. He
holds an MBA from Drake University and a BBA
from Iowa State University. He has earned the
right to use the Chartered Financial Analyst
designation.

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.

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.

Annual Total Returns

1999 84.72
1998 14.40

The year-to-date return as of March 31, 2000 for Class A shares is 16.35% and
for Class R shares is 16.30%.

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, 1999

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

Past One Past Five
Year Years

Class A 76.04% 33.94%*
Class R 84.83 36.87**

Past One Past FivePast Ten
Year Years Years

Morgan Stanley Capital International EAFE
(Europe, Australia and Far East) Index 26.96% 12.83% 7.01%
Lipper International Small-Cap Fund Average 75.41 19.91 13.04

* Period from August 29, 1997, date A shares first offered to the public,
through December 31, 1999.
** Period from August 29, 1997, date R shares first offered to eligible
purchasers, through December 31, 1999.

Fund Operating Expenses

Class A Class R

Management Fees................ 1.20% 1.20%
12b-1 Fees..................... 0.21 0.17
Other Expenses................. 0.80 0.75

Total Fund Operating Expenses 2.21% 2.12%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $688 $1,133 $1,603 $2,898
Class R 215 664 1,149 2,513
You would pay the following expenses if you did not redeem your shares:
Class A 688 1,133 1,603 2,898
Class R 215 664 1,149 2,513

Day-to-day Fund Management

Since March 2000 Co-Manager: Dan J. Sherman, CFA. Mr. Sherman
joined Invista Capital Management in 1998.
Prior to joining the firm, he led a regional
research team for Salomon Smith Barney. He holds
an MBA from the University of Wisconsin. He has
earned the right to use the Chartered Financial
Analyst designation.

Since May 1997 Co-Manager: Darren K. Sleister, CFA. Mr. Sleister
(Fund's inception) joined Invista Capital Management as a Portfolio
Strategist in 1993. He holds an MBA from the
University of Iowa, and an undergraduate degree
from Central College. He has earned the right to
use the Chartered Financial Analyst designation.

INTERNATIONAL GROWTH-ORIENTED FUND

PRINCIPAL PACIFIC BASIN FUND, INC.
The Fund seeks to achieve growth of capital. It invests primarily in equity
securities (or other securities with equity characteristics) of issuers located
in the Pacific Basin region, including Japan.

Main Strategies
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:
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 its securities are traded, that derive 50%
or more of their total revenue from either goods or services produced in
Pacific Basin countries 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.

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.

In addition, 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 large, 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. 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.

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:

Fund Operating Expenses*

Class A Class R
Management Fees**.............. 1.10% 1.10%
12b-1 Fees..................... 0.25 0.75
Other Expenses................. 1.48 1.85

Total Fund Operating Expenses 2.83% 3.70%

* Total Fund Operating Expenses are estimated.

** TheManager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31, 2000.
The 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
3.00% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years
Class A $747 $1,310 N/A N/A
Class R 379 1,166 N/A N/A
You would pay the following expenses if you did not redeem your shares:
Class A 747 1,310 N/A N/A
Class R 379 1,166 N/A N/A

Day-to-day Fund Management

Since May 1, 2000 Dean Cashman, Executive Vice President, BT Funds
(Fund's inception) Management Limited. Mr. Cashman joined BT in
1988. He holds a Bachelor of Economics from the
University of Queensland.

INCOME-ORIENTED FUND

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

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

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

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

During the fiscal year ended October 31, 1999, the average ratings of this
Fund's assets based on market value at each month-end, were as follows (all
ratings are by Moody's):
Aaa 0.05%
Aa 2.90%
A 21.87%
Baa 66.12%
Ba 9.06%

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

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

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

Annual Total Returns

1999 -3.04
1998 7.14
1997 10.96
1996 2.27
1995 22.28
1994 -4.35
1993 12.77
1992 8.61
1991 17.45
1990 4.64

The year-to-date return as of March 31, 2000 for Class A shares is 0.77% and for
Class R shares is 0.72%.

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A -7.60% 6.56% 7.06%
Class R -3.64 4.46*

Past One Past FivePast Ten
Year Years Years

Lehman Brothers BAA Corporate Index -0.82% 8.49% 8.48%
Lipper Corporate Debt BBB Rated Fund Average -1.68 7.71 8.01

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

Fund Operating Expenses

Class A Class R

Management Fees................ 0.48% 0.48%
12b-1 Fees..................... 0.26 0.72
Other Expenses................. 0.30 0.41

Total Fund Operating Expenses 1.04% 1.61%

Examples

Class A $576 $790 $1,022 $1,686
Class R 164 508 810 1,492
You would pay the following expenses if you did not redeem your shares:
Class A 576 790 1,022 1,686
Class R 164 508 810 1,492

Day-to-day Fund Management

Since November 1996 Scott A. Bennett, CFA. Mr. Bennett has been with
the Principal organization 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.

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 shaes 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

1999 0.01
1998 7.19
1997 9.69
1996 3.85
1995 19.19
1994 -4.89
1993 9.16
1992 6.13
1991 16.83
1990 9.52

The year-to-date return as of March 31, 2000 for Class A shares is 1.83% and for
Class R shares is 1.77%.

The 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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A -4.69% 6.76% 6.94%
Class R -0.57 4.87*

Past One Past FivePast Ten
Year Years Years

Lehman Brothers GNMA Index 1.93% 8.08% 7.87%
Lipper GNMA Fund Average 0.11 7.03 7.02

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

Fund Operating Expenses

Class A Class R

Management Fees................ 0.45% 0.45%
12b-1 Fees..................... 0.22 0.74
Other Expenses................. 0.22 0.34

Total Fund Operating Expenses 0.89% 1.53%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $562 $745 $945 $1,519
Class R 156 483 760 1,348
You would pay the following expenses if you did not redeem your shares:
Class A 562 745 945 1,519
Class R 156 483 760 1,348

Since May 1985 Martin J. Schafer. Mr. Schafer joined the
(Fund's inception) Principal in 1977 and has broad experience in
residential
mortgage related securities. He served as
Director of Investment Securities at the
Principal prior to joining Invista Capital
Management in 1992. He holds a BBA in Accounting
and Finance from the University of Iowa.

INCOME-ORIENTED FUND

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

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

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

During the fiscal year ended October 31, 1999, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Moody's):
0.74% in securities rated A
2.62% in securities rated Baa
43.83% in securities rated Ba
50.07% in securities rated B
2.64% in securities rated C
0.10% in securities rated D
The above percentage for securities rated Ba includes 2.89% of unrated
securities and securities rated B includes 2.52% of unrated securities which
have been determined by the Manager to be of comparable quality.

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

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

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

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

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

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

Annual Total Returns

1999 0.97
1998 -1.28
1997 9.68
1996 12.54
1995 15.61
1994 -0.65
1993 12.10
1992 13.09
1991 28.74
1990 -11.66

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

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, 1999

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

Past One Past FivePast Ten
Year Years Years

Class A -3.77% 6.27% 6.86%
Class R 0.33 4.09*

Past One Past FivePast Ten
Year Years Years

Lehman Brothers High Yield Composite Bond Index2.39% 9.31% 10.72%
Lipper High Current Yield Fund Average 4.53 8.89 10.08

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

Fund Operating Expenses

Class A Class R

Management Fees................ 0.60% 0.60%
12b-1 Fees..................... 0.24 0.68
Other Expenses................. 0.47 0.81

Total Fund Operating Expenses 1.31% 2.09%

Examples

1 Year 3 Years 5 Years 10 Years

Class A $602 $87 $1,159 $1,979
Class R 212 655 1,036 1,871
You would pay the following expenses if you did not redeem your shares:
Class A 602 870 1,159 1,979
Class R 212 655 1,036 1,871

Day-to-day Fund Management

Since April 1998 Mark P. Denkinger, CFA. Mr. Denkinger joined the
Principal organization 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.

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.

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

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

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

Annual Total Return
1999 0.96
1998 6.70
1997 6.33

The year-to-date return as of March 31, 2000 for Class A shares is 0.93% and for
Class R shares is 0.82%.

The fund's highest/lowest quarterly returns 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, 1999

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

Past One Past Five
Year Years

Class A -0.56% 4.48%*
Class R 0.25 4.26**

Past One Past FivePast Ten
Year Years Years

Lehman Brothers Intermediate Government/
Corporate Index 0.39% 7.10% 7.26%
Lipper Short-Intermediate Investment Grade Debt
Fund Average 0.89 6.23 6.55

* Period from February 29, 1996, date A shares first offered to the public,
through December 31, 1999.
** Period from February 29, 1996, date R shares first offered to eligible
purchasers, through December 31, 1999.

Fund Operating Expenses

Class A Class R
Management Fees*............... 0.50% 0.50%
12b-1 Fees..................... 0.15 0.74
Other Expenses................. 0.49 0.78

Total Fund Operating Expenses 1.14% 2.02%

1.00% for Class A Shares
1.60% for Class R Shares

Examples

1 Year 3 Years 5 Years 10 Years

Class A $265 $510 $77 $1,527
Class R 158 490 798 1,551
Youwould pay the following expenses if you did not redeem your shares:
Class A 265 510 773 1,527
Class R 158 490 798 1,551

Day-to-day Fund Management

Since February 1996 Martin J. Schafer. Mr. Schafer joined the
(Fund's inception) Principal in 1977 and has broad experience in
residential mortgage related securities. He
served as Director of Investment Securities
at the Principal prior to joining Invista
Capital Management in 1992. He holds a BBA in
Accounting and Finance from the University
of Iowa.

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 duration (less
than a week) but may also have a longer duration.
o taxable municipal obligations which are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.

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

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

Annual Total Returns
1999 4.63
1998 5.15
1997 4.88
1996 4.96
1995 5.44
1994 3.77
1993 2.63
1992 3.38
1991 5.80
1990 7.63

The 7-day yield for the period ended March 31, 2000 for Class A shares is 5.30%
and for Class R shares is 4.82%. To obtain the Fund's current yield information,
please call 1-800-247-4123.

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

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

Past One Past FivePast Ten
Year Years Years

Class A 4.63% 5.10% 4.78%
Class R 4.10 4.46*

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

Fund Operating Expenses

Class A Class R

Management Fees................ 0.44% 0.44%
12b-1 Fees..................... None 0.44
Other Expenses................. 0.25 0.27

Total Fund Operating Expenses 0.69% 1.15%

Examples

Class A $ 70 $221 $384 $ 859
Class R 117 365 579 1,045
You would pay the following expenses if you did not redeem your shares:
Class A 70 221 384 859
Class R 117 365 579 1,045

Day-to-day Fund Management

Since June 1999 Co-Manager: Alice Robertson. Ms. Robertson has
been with the Principal organization since 1990.
She holds an MBA from DePaul and a BA in
Economics from Northwestern University.

Since March 1983 Co-Manager: Michael R. Johnson. Mr. Johnson has
been with the Principal organization since 1982.
He holds a BA from Iowa State University. He is a
Fellow of the Life Management Institute.

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

Maximum Sales Load Imposed Contingent
on Purchases of Class R share Redemption Exchange Deferred Sales
Fund (as a percentage of offering price) Fee* Fee Charge

<S><C> <C> <C> <C> <C>
All Funds None None None None

<FN>
* A wire charge of $6.00 will be deducted for all wire transfers.
</FN>
</TABLE>

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

Class R shares of the Principal Mutual Funds are sold without a front-end sales
charge and do not have a contingent deferred sales charge. There is no sales on
shares of any of the Funds purchased with reinvested dividends or other
distributions.

Class R shares automatically convert into Class A shares (based on share prices,
not numbers of shares) 49 months after purchase. Class R shares provide you the
benefit of putting all your dollars to work from the time of investment, but
(until conversion) have higher ongoing fees and lower dividends than Class A
shares.

Only Class R shares are offered in this prospectus. Class A shares are only
described because Class R shares convert to Class A shares. Orders for Class R
shares of $500,000 or more are treated as orders for Class A shares (unless you
include a written instruction that the order should be treated as an order for
Class R shares.)

Class A shares of the Cash Management Fund are sold without a sales charge.
Class A shares of the other Funds are sold with a sales charge that is a
variable percentage based on the amount of the purchase. This table shows the
sales charge for those funds which is based on the amount of your purchase.

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

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

The front-end sales charge is waived on an investment of $1 million or more in
Class A shares. There may be a CDSC on shares sold within 18 months of the
purchase date. The CDSC does not apply to shares purchased with reinvested
dividends or other distributions. The CDSC is calculated as 0.75% (0.25% for the
LargeCap Stock Index and Limited Term Bond Funds) of the lesser of the current
market value or the initial purchase price of the shares sold. The CDSC is
waived on shares sold to fund a Principal Mutual Fund 401(a) or Principal Mutual
Fund 401(k) retirement plan, except redemptions which are the result of
termination of the plan or transfer of plan assets.

The CDSC is also waived on shares sold:
o to satisfy IRS minimum distribution rules
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 an front-end
sales charge are determined by and paid for by Princor.

SALES CHARGE WAIVER OR REDUCTION

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

Waiver of sales charge. A Fund's Class A shares may be purchased without a sales
charge:
o by its Directors, Principal Life and its subsidiaries and affiliates, and
their employees, officers, directors (active or retired), brokers or
agents. This also includes their immediate family members (spouses,
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 and Principal
Capital Management 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 (except for shares of Tax-Exempt Bond Fund);
o to the extent the investment represents the proceeds of a total surrender
of certain Principal Life issued unregistered group annuity contracts to
fund an employer plan if Principal Life waives any applicable CDSC or other
contract surrender charge;
o using cash payments received from 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 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 investments must represent the sales proceeds from other mutual fund
shares (you must have paid a front-end sales charge or a CDSC) and the sale
must occur within the 180 day period; and
o you must indicate on your Principal Mutual Fund application that you are
eligible for waiver of the front-end sales charge.
o You must send Princor either:
o the check for the sales proceeds (endorsed to Principal Mutual Funds)
or
o a copy of the confirmation statement from the other mutual fund
showing the sale transaction. If you place your order to buy Principal
Mutual Fund shares on the telephone, you must send us a copy of the
confirmation within 21 days of placing the order. If we do not receive
the confirmation within 21 days, we will sell enough of your Class A
shares to pay the sales charge that otherwise would have been charged.

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

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

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

The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
o Class R shares (except LargeCap Stock Index Fund) 0.75%
o Class R shares of the LargeCap Stock Index Fund 0.65%
o Class A shares (except Cash Management, LargeCap Stock Index
and Limited Term Bond Funds) 0.25%
o Class A shares of the LargeCap Stock Index and
Limited Term Bond Funds 0.15%

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

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

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

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

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

Bond prices are also affected by the credit quality of the issuer. Investment
grade debt securities are medium and high quality securities. Some bonds, 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 Aggressive Growth, Partners LargeCap
Growth and Partners MidCap Growth Funds may each enter into forward currency
contracts, currency futures contracts and options, and options on currencies for
hedging and other non-speculative purposes. 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 a Fund's Manager or
Sub-Advisor hedges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investment, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or to increase
return. These techniques may increase the volatility of a Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these techniques could result in a loss if the other party to the
transaction does not perform as promised. Additionally, there is the risk of
government action through exchange controls that would restrict the ability of
the Fund to deliver or receive currency.

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

Warrants
Each of the Funds (except Cash Management and Government Securities Income) may
invest up to 5% of its assets in warrants. Up to 2% of a Fund's assets may be
invested in warrants which are not listed on either the New York or American
Stock Exchanges.

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

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

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

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

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

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

Options
Each of the Funds (except Cash Management) may buy and sell certain types of
options. Each type is more fully discussed in the SAI.

Foreign Securities
Each of the following Funds may invest in 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.;
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.

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 Aggressive Growth, Partners LargeCap Growth and Real Estate Funds
- 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%; and
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

The Cash Management Fund does not invest in foreign securities other than those
that are 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 companies growth prospects. As a result, investment decisions for these
securities may place a greater emphasis on current or planned product lines and
the reputation and experience of the companies management and less emphasis on
fundamental valuation factors than would be the case for more mature growth
companies. In addition, many unseasoned issuers also may be small companies and
involve the risks and price volatility associated with smaller companies.

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

Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount
of trading that occurs in a Fund's portfolio during the year. For example, a
100% turnover rate means that on average every security in the portfolio has
been replaced once during the year. Funds with high turnover rates (more than
100%) often have higher transaction costs (which are paid by the Fund) and may
generate short-term capital gains (on which you pay taxes even if you don't sell
any of your shares during the year).

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
(European Equity, LargeCap Stock Index, Partners Aggressive Growth, Partners
LargeCap Growth, Partners MidCap Growth and Pacific Basin) however, the European
Equity and Pacific Basin 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 subadvisory 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, Blue Chip, Capital Value, Government Securities
Income, Growth, International, International Emerging Markets,
International SmallCap, LargeCap Stock Index, Limited Term
Bond, MidCap, SmallCap, and Utilities.
Sub-Advisor: Invista, 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, 1999 were approximately $35.3 billion.
Invista's address is 1800 Hub Tower, 699 Walnut, Des Moines,
Iowa 50309.

Fund: 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 January 2000, BT,
together with BTFM, had approximately $24 billion under
management for more than 410,000 institutional and individual
clients. Offering institutional investment products since the
early 1970s, BT manages all asset classes from its
headquarters in Sydney, Australia. It has specialized
expertise in European and Asian regional equity portfolios as
well as global equities, global and Australian fixed-income
securities, currency management and Australian real estate.

Fund: Partners Aggressive 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, 1999, Morgan Stanley, together with
its affiliated institutional asset management companies,
managed investments totaling approximately $184.9 billion as
named fiduciary or fiduciary adviser. On December 1, 1998,
Morgan Stanley Assets Management Inc. changed its name to
Morgan Stanley Dean Witter Investment Management Inc. but
continues to do business in certain instances using the name
Morgan Stanley Asset Management.

Fund: Partners LargeCap Growth
Sub-Advisor: Duncan-Hurst was founded in 1990. Its address is 4365
Executive Drive, Suite 1520, San Diego, CA 92121. As of
December 31, 1999, Duncan-Hurst managed assets of
approximately $5.9 billion for institutional and individual
investors.

Fund: Partners MidCap Growth
Sub-Advisor: Turner was founded in 1990. Its address is 1235 Westlake
Drive, Suite 350, Berwyn, PA 19312. As of December 31, 1999,
Turner had discretionary management authority with respect to
approximately $5.7 billion in assets.

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

The Manager is paid a fee by the Fund for its services, which includes any fee
paid to the Sub-Advisor. The fee paid by each Fund (as a percentage of the
average daily net assets) for the fiscal year ended October 31, 1999 was:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Balanced 0.58% International 0.68%
Blue Chip 0.46% International Emerging Markets 1.25%
Bond 0.48% International SmallCap 1.20%
Capital Value 0.37% Limited Term Bond 0.50%
Cash Management 0.44% MidCap 0.56%
Government Securities Income 0.45% Real Estate 0.90%
Growth 0.38% SmallCap 0.85%
High Yield 0.60% Utilities 0.59%
</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 Accounts 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 shareholder; 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 Aggressive Growth, Partners LargeCap Growth and Partners MidCap
Growth Funds have received the necessary shareholder approval and intend to
rely on the order.

PRICING OF FUND SHARES

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

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

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

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

DIVIDENDS AND DISTRIBUTIONS

The Growth-Oriented and Income-Oriented Funds pay most of their net dividend
income to you every year. The payment schedule is:
<TABLE>
<CAPTION>
Funds Record Date Payable Date

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

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

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

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

Net realized capital gains, if any, are distributed annually. Generally the
distribution is made on the fourth business day of December. Payments are made
to shareholders of record on the third business day prior to the payable date.
Capital gains may be taxable at different rates, depending on the length of time
that the Fund holds 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 a Fund, whether received in cash or reinvested in
additional shares, may be subject to federal (and state) income tax.

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

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

HOW TO BUY SHARES

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

Fill out the Principal Mutual Fund or Principal Mutual Fund IRA application
completely. You must include:
o the name(s) you want to appear on the account;
o the Principal Mutual Fund(s) you want to invest in;
o the amount of the investment;
o your Social Security number or Taxpayer I.D. number; and
o other required information (may include corporate resolutions, trust
agreements, etc.).

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

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

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

Wire money from your bank
o Have your Registered Representative call Principal Mutual Funds
(1-800-247-4123) for an account number and wiring instructions.
o For both initial and subsequent purchases, federal funds should be wired
to:
Norwest Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA No.: 073000228
For credit to: Principal Mutual Funds
Account No.: 3000499968
For credit: Principal ________ Fund, Class ____
Shareholder Account No. __________________
Shareholder Registration __________________
o Give the number and instructions to your bank (which may charge a wire
fee).
o 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
(1-800-247-4123) 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
Norwest 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 (1-800-247-4123) if telephone
services apply to the originating account; or
o in writing (a signature guarantee may be required).
o You may discontinue your Dividend Relay election with a written notice to
Principal Mutual Funds.
o There may be a delay of up to 10 days before the Dividend Relay plan is
discontinued.
o The receiving Fund must meet fund minimums. If it does not, the Fund
reserves the right to close the account if it is not brought up to the
minimum investment amount within 90 days of sending you a deficiency
notice.

HOW TO SELL SHARES

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

Your request for a distribution from your IRA must be in writing. You may obtain
a distribution form by telephoning us (1-800-247-4123) or writing to Princor at
P.O. Box 10423, Des Moines, Iowa 50309. Distributions from an IRA may be taken
as:
o lump sum of the entire interest in the IRA;
o partial interest in the IRA; or
o periodic payments of either a fixed amount of amounts based on certain life
expectancy calculations.

Tax penalties may apply to distributions before the IRA participant reaches age
591/2.

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

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

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

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

Within 60 days after the sale of shares, the amount of the sale proceeds can be
reinvested in any Principal Mutual Funds' Class R shares (or Class A shares
acquired by conversion of Class R shares into Class A shares) without a sales
charge. The transaction is considered a sale for federal (and state) income tax
purposes even if the proceeds are reinvested. If a loss is realized on the sale,
the reinvestment may be subject to the "wash sale" rules resulting in the
postponement of the recognition of the loss for tax purposes.

Sell shares by mail
o Send a letter or distribution form (call us at 1-800-247-4123 for the form)
which is signed by the owner of the account to
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Specify the Fund and account number.
o Specify the number of shares or the dollar amount to be sold.
o A signature guarantee* will be required if the:
o sell order is for more than $100,000;
o account address has been changed within one month of the sell order;
or
o check is payable to a party other than the account shareholder(s) or
Principal Life Insurance Company.

* If required, the signature(s) must be guaranteed by a commercial bank,
trust company, credit union, savings and loan, national securities
exchange member or brokerage firm. A signature guaranteed by a notary
public or savings bank is not acceptable.

Sell shares in amounts of $100,000 or less by telephone* (1-800-247-4123)
o The address on the account must not have been changed within the last month
and telephone privileges must apply to the account from which the shares
are being sold.
o If our phone lines are busy, you may need to send in a written sell order.
o To sell shares the same day, the order must be received before 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, certain employee benefit plans, or on shares for which
certificates have been issued.
o If previously authorized, checks can be sent to a shareholder's U.S. bank
account.
o Shares in IRA accounts may not be sold over the telephone.

* The Fund and transfer agent reserve the right to refuse telephone
orders to sell shares. The shareholder is liable for a loss resulting
from a fraudulent telephone order that the Fund reasonably believes is
genuine. Each Fund will use reasonable procedures to assure
instructions are genuine. If the procedures are not followed, the Fund
may be liable for loss due to unauthorized or fraudulent transactions.
The procedures include: recording all telephone instructions,
requesting personal identification information (name, phone number,
social security number, birth date, etc.) and sending written
confirmation to the address on the account.

Sell shares by checkwriting (Class A shares of Cash Management Fund only)
o Checkwriting must be elected on initial application or by written request
to Principal Mutual Funds.
o The Fund can only sell shares after your check making the Fund investment
has cleared your bank.
o Checks must be written for at least $100.
o Checks are drawn on Norwest Bank Iowa, N.A. and its rules concerning
checking accounts apply.
o If the account does not have sufficient funds to cover the check, it is
marked "Insufficient Funds" and returned (the Fund may revoke checkwriting
on accounts on which "Insufficient Funds" checks are drawn).
o Accounts may not be closed by withdrawal check (accounts continue to earn
dividends until checks clear and the exact value of the account is not
known until the check is received by Norwest).
o Not available for Principal Mutual Funds IRAs, 403(b)s, SEPs, SIMPLES,
SAR-SEPs or certain employee benefit plans or shares subject to a CDSC or
on shares for which a certificate has been issued.

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

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

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

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

Withdrawal payments are sent on or before the third business day after the date
of the sale. It may take an additional three business days for your financial
institution to post this payment to your account at that financial institution.
Sales made under your periodic withdrawal plan will reduce and may eventually
exhaust your account. The Funds do not normally accept purchase payments for
shares of any Fund except the Cash Management Fund while a periodic withdrawal
plan is in effect (unless the purchase represents a substantial addition to your
account).

The Fund from which the periodic withdrawal is made makes no recommendation as
to either the number of shares or the fixed amount that you withdraw.

HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS

Your Class R shares in the Funds may be exchanged for the Class R shares of any
other Principal Mutual Fund. The purchase date of the exchanged shares is used
to measure the length of time you have owned the acquired shares. The minimum
amount that may be exchanged into any Principal Mutual Fund must be at least
$300 on an annual basis.

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

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

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

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

General
o An exchange by any joint owner is binding on all joint owners.
o If you do not have an existing account in the Fund to which the exchange is
being made, a new account is established. The new account has the same
owner(s), dividend and capital gain options and dealer of record as the
account from which the shares are being exchanged.
o All exchanges are subject to the minimum investment and eligibility
requirement of the Fund being acquired.
o You may acquire shares of a Fund only if its shares are legally offered in
your state of residence.
o If a certificate has been issued, it must be returned to the Fund before
the exchange can take place.
o 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 3:00 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 the account. You would be notified of
any such action to the extent required by law.

Fund shares used to fund an employee benefit plan may be exchanged only for
shares of other Principal Mutual Funds available to employee benefit plans. Such
an exchange must be made by following the procedures provided in the employee
benefit plan and the written service agreement. The exchange is treated as a
sale of shares for federal (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. 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 purchases under an Automatic Investment Plan;
o sales under a periodic withdrawal plan; and
o purchases or sales under an automatic exchange election.
o used to fund certain individual retirement or individual pension plans.
o established under a payroll deduction plan.

Principal Mutual Fund 401(a) plan participants will receive semi-annual
statements which detail account activity. 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 a Fund exercises this
right, you will be notified that the redemption is going to be made. You will
have 30 days to make an additional investment and bring your account up to the
required minimum. The Funds reserve the right to increase the required minimum.

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

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

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

FINANCIAL HIGHLIGHTS
Domestic Growth-Oriented Funds

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

<TABLE>
<CAPTION>
PRINCIPAL BALANCED FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.28 $15.11 $14.61 $13.74 $12.43
Income from Investment Operations:
Net Investment Income............................... .40 .42 .35 .38 .41
Net Realized and Unrealized Gain (Loss)
on Investments.................................... .34 1.15 1.81 1.59 1.31

Total from Investment Operations .74 1.57 2.16 1.97 1.72

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.44) (.37) (.36) (.43) (.36)
Distributions from Capital Gains.................... (.45) (1.03) (1.30) (.67) (.05)

Total Dividends and Distributions (.89) (1.40) (1.66) (1.10) (.41)

Net Asset Value, End of Period......................... $15.13 $15.28 $15.11 $14.61 $13.74

Total Return(b) ....................................... 4.85% 11.00% 15.88% 15.10% 14.18%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $112,329 $104,414 $85,436 $70,820 $57,125
Ratio of Expenses to Average Net Assets............. 1.28% 1.28% 1.33% 1.28% 1.37%
Ratio of Net Investment Income to
Average Net Assets................................ 2.67% 2.86% 2.42% 2.82% 3.21%
Portfolio Turnover Rate............................. 24.2% 57.0% 27.6% 32.6% 35.8%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL BALANCED FUND, INC.(a)
Class R shares 1999 1998 1997 1996(e)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.15 $14.98 $14.52 $13.81
Income from Investment Operations:
Net Investment Income............................... .32 .33 .29 .24
Net Realized and Unrealized Gain (Loss)
on Investments.................................... .32 1.15 1.76 .73

Total from Investment Operations .64 1.48 2.05 .97

Less Dividends and Distributions:......................
Dividends from Net Investment Income................ (.35) (.28) (.30) (.26)
Distributions from Capital Gains.................... (.45) (1.03) (1.29) --

Total Dividends and Distributions (.80) (1.31) (1.59) (.26)

Net Asset Value, End of Period......................... $14.99 $15.15 $14.98 $14.52

Total Return(b) ....................................... 4.21% 10.43% 15.16% 7.52%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $23,972 $19,434 $9,745 $875
Ratio of Expenses to Average Net Assets............. 1.84% 1.88% 1.99% 1.49%(d)
Ratio of Net Investment Income to
Average Net Assets................................ 2.11% 2.22% 1.66% 2.26%(d)
Portfolio Turnover Rate............................. 24.2% 57.0% 27.6% 32.6%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $21.71 $20.22 $17.10 $15.03 $12.45
Income from Investment Operations:
Net Investment Income............................... .15 .12 .21 .23 .24
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 3.53 3.57 3.58 2.45 2.55

Total from Investment Operations 3.68 3.69 3.79 2.68 2.79

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.14) (.12) (.21) (.26) (.21)
Distributions from Capital Gains.................... -- (2.08) (.46) (.35) --

Total Dividends and Distributions (.14) (2.20) (.67) (.61) (.21)

Net Asset Value, End of Period......................... $25.25 $21.71 $20.22 $17.10 $15.03

Total Return(b) ....................................... 17.00% 19.48% 22.57% 18.20% 22.65%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $184,217 $126,740 $79,985 $44,389 $35,212
Ratio of Expenses to Average Net Assets............. 1.26% 1.31% 1.30% 1.33% 1.38%
Ratio of Net Investment Income to
Average Net Assets................................ .63% .57% 1.10% 1.41% 1.83%
Portfolio Turnover Rate............................. 16.4% .5% 55.4% 13.3% 26.1%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class R shares 1999 1998 1997 1996(e)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $21.63 $20.16 $17.08 $16.21
Income from Investment Operations:
Net Investment Income............................... .03 .02 .13 .12
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 3.49 3.57 3.53 .90

Total from Investment Operations 3.52 3.59 3.66 1.02

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.03) (.04) (.12) (.15)
Distributions from Capital Gains.................... -- (2.08) (.46) --

Total Dividends and Distributions (.03) (2.12) (.58) (.15)

Net Asset Value, End of Period......................... $25.12 $21.63 $20.16 $17.08

Total Return(b) ....................................... 16.31% 19.01% 21.82% 7.02%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $50,667 $32,871 $15,502 $1,575
Ratio of Expenses to Average Net Assets............. 1.81% 1.85% 1.89% 1.48%(d)
Ratio of Net Investment Income to
Average Net Assets................................ .08% .02% .45% .68%(d)
Portfolio Turnover Rate............................. 16.4% .5% 55.4% 13.3%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $31.07 $29.69 $27.72 $23.69 $20.83
Income from Investment Operations:
Net Investment Income............................... .52 .50 .50 .45 .45
Net Realized and Unrealized Gain (Loss)
on Investments.................................... .45 3.88 5.80 5.48 3.15

Total from Investment Operations .97 4.38 6.30 5.93 3.60

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.51) (.53) (.48) (.43 (.39)
Distributions from Capital Gains.................... (1.95) (2.47) (3.85) (1.47) (.35)

Total Dividends and Distributions (2.46) (3.00) (4.33) (1.90) (.74)

Net Asset Value, End of Period......................... $29.58 $31.07 $29.69 $27.72 $23.69

Total Return(b) ....................................... 3.00% 15.59% 25.36% 26.41% 17.94%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $573,485 $565,052 $494,444 $435,617 $339,656
Ratio of Expenses to Average Net Assets............. .75% .74% .70% .69% .75%
Ratio of Net Investment Income to
Average Net Assets................................ 1.73% 1.67% 1.85% 1.82% 2.08%
Portfolio Turnover Rate............................. 44.5% 23.2% 30.8% 50.2% 46.0%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class R shares 1999 1998 1997 1996(e)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $30.80 $29.44 $27.57 $24.73
Income from Investment Operations:
Net Investment Income............................... .32 .28 .30 .19
Net Realized and Unrealized Gain (Loss)
on Investments.................................... .44 3.84 5.74 2.81

Total from Investment Operations .76 4.12 6.04 3.00

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.28) (.29) (.32) (.16)

Distributions from Capital Gains.................... (1.95) (2.47) (3.85) --

Total Dividends and Distributions (2.23) (2.76) (4.17) (.16)

Net Asset Value, End of Period......................... $29.33 $30.80 $29.44 $27.57

Total Return(b) ....................................... 2.35% 14.77% 24.36% 12.74%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $43,862 $37,675 $18,326 $1,752
Ratio of Expenses to Average Net Assets............. 1.43% 1.50% 1.50% 1.16%(d)
Ratio of Net Investment Income to
Average Net Assets................................ 1.05% .88% .93% 1.18%(d)
Portfolio Turnover Rate............................. 44.5% 23.2% 30.8% 50.2%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL GROWTH FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $56.09 $50.43 $39.54 $37.22 $31.14
Income from Investment Operations:
Net Investment Income............................... .21 .35 .31 .35 .35
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 9.56 7.14 11.26 3.50 6.67

Total from Investment Operations 9.77 7.49 11.57 3.85 7.02

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.30) (.34) (.31) (.35) (.31)
Distributions from Capital Gains.................... -- (1.49) (.37) (1.18) (.63)

Total Dividends and Distributions (.30) (1.83) (.68) (1.53) (.94)

Net Asset Value, End of Period......................... $65.57 $56.09 $50.43 $39.54 $37.22

Total Return(b) ....................................... 17.46% 15.17% 29.55% 10.60% 23.29%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $493,117 $395,954 $317,386 $228,361 $174,328
Ratio of Expenses to Average Net Assets............. .89% .95% 1.03% 1.08% 1.16%
Ratio of Net Investment Income to
Average Net Assets................................ .33% .66% .68% .95% 1.12%
Portfolio Turnover Rate............................. 32.4% 21.9% 16.5% 1.8% 12.2%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL GROWTH FUND, INC.(a)

Class R shares 1999 1998 1997 1996(e)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $55.77 $50.16 $39.40 $39.27
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.13) .02 .06 .10
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 9.49 7.09 11.16 .13

Total from Investment Operations 9.36 7.11 11.22 .23

Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.01) (.09) (.10)

Distributions from Capital Gains.................... -- (1.49) (.37) --

Total Dividends and Distributions -- (1.50) (.46) (.10)

Net Asset Value, End of Period......................... $65.13 $55.77 $50.16 $39.40

Total Return(b) ....................................... 16.78% 14.46% 28.72% 1.12%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $47,193 $30,557 $16,265 $2,014
Ratio of Expenses to Average Net Assets............. 1.46% 1.59% 1.69% 1.42%(d)
Ratio of Net Investment Income (Operating
Loss) to Average Net Assets....................... (.24)% .01% .00% .14%(d)
Portfolio Turnover Rate............................. 32.4% 21.9% 16.5% 1.8%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL MIDCAP FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $39.90 $45.33 $35.75 $31.45 $25.08
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.06) (.07) .07 .14 .12
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 2.28 (4.26) 10.80 5.05 6.45

Total from Investment Operations 2.22 (4.33) 10.87 5.19 6.57

Less Dividends and Distributions:
Dividends from Net Investment Income -- -- (.11) (.14) (.06)
Distributions from Capital Gains.................... -- (1.10) (1.18) (.75) (.14)

Total Dividends and Distributions -- (1.10) (1.29) (.89) (.20)

Net Asset Value, End of Period......................... $42.12 $39.90 $45.33 $35.75 $31.45

Total Return(b) ....................................... 5.56% (9.78)% 31.26% 16.89% 26.89%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $313,984 $332,942 $346,666 $229,465 $150,611
Ratio of Expenses to Average Net Assets............. 1.22% 1.22% 1.26% 1.32% 1.47%
Ratio of Net Investment Income (Operating
Loss) to Average Net Assets....................... (.17)% (.14)% .20% .46% .47%
Portfolio Turnover Rate............................. 59.9% 25.1% 9.5% 12.3% 13.5%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL MIDCAP FUND, INC.(a)
Class R shares 1999 1998 1997 1996(e)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $39.43 $45.10 $35.67 $33.77
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.34) (.28) (.12) .04
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 2.27 (4.29) 10.74 1.88

Total from Investment Operations 1.93 (4.57) 10.62 1.92

Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- (.01) (.02)
Distributions from Capital Gains.................... -- (1.10) (1.18) --

Total Dividends and Distributions -- (1.10) (1.19) (.02)

Net Asset Value, End of Period......................... $41.36 $39.43 $45.10 $35.67

Total Return(b) ....................................... 4.89% (10.37)% 30.56% 6.20%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $24,877 $23,540 $17,448 $2,016
Ratio of Expenses to Average Net Assets............. 1.85% 1.89% 1.87% 1.53%(d)
Ratio of Net Investment Income (Operating
Loss) to Average Net Assets....................... (.80)% (.82)% (.45)% .29%(d)
Portfolio Turnover Rate............................. 59.9% 25.1% 9.5% 12.3%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL REAL ESTATE FUND, INC.
Class A shares 1999 1998(f)

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.39 $10.15
Income from Investment Operations:
Net Investment Income............................... .31 .20
Net Realized and Unrealized Gain (Loss)
on Investments.................................... (.67) (1.76)

Total from Investment Operations (.36) (1.56)
Less Dividends:
Dividends from Net Investment Income................ (.30) (.20)
- ---

Total Dividends (.30) (.20)

Net Asset Value, End of Period......................... $7.73 $8.39

Total Return(b) ....................................... (4.38)% (15.45)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,459 $5,490
Ratio of Expenses to Average Net Assets............. 2.19% 2.25%(d)
Ratio of Net Investment Income to
Average Net Assets................................ 3.77% 2.89%(d)
Portfolio Turnover Rate............................. 55.1% 60.4%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL REAL ESTATE FUND, INC.
Class R shares 1999 1998(f)

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.40 $10.15
Income from Investment Operations:
Net Investment Income............................... .28 .23
Net Realized and Unrealized Gain (Loss)
on Investments.................................... (.66) (1.78)

Total from Investment Operations (.38) (1.55)
Less Dividends:
Dividends from Net Investment Income................ (.30) (.20)

Total Dividends (.30) (.20)

Net Asset Value, End of Period......................... $7.72 $ 8.40

Total Return(b) ....................................... (4.70)% (15.37)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,100 $2,928
Ratio of Expenses to Average Net Assets............. 2.53% 1.99%(d)
Ratio of Net Investment Income to
Average Net Assets................................ 3.43% 3.07%(d)
Portfolio Turnover Rate............................. 55.1% 60.4%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL SMALLCAP FUND, INC.
Class A shares 1999 1998(f)

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.43 $9.92
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.11) (.08)
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 3.02 (1.41)

Total from Investment Operations 2.91 (1.49)

Net Asset Value, End of Period......................... $11.34 $8.43

Total Return(b) ....................................... 34.52% (15.95)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $41,598 $18,438
Ratio of Expenses to Average Net Assets............. 1.92% 2.58%(d)
Ratio of Net Investment Income (Operating
Loss) to Average Net Assets....................... (1.04)% (1.65)%(d)
Portfolio Turnover Rate............................. 100.7% 20.5%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL SMALLCAP FUND, INC.
Class R shares 1999 1998(f)

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.45 $9.91
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.10) (.07)
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 2.96 (1.39)

Total from Investment Operations 2.86 (1.46)

Net Asset Value, End of Period......................... $11.31 $ 8.45

Total Return(b) ....................................... 33.85% (15.75)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $10,177 $4,688
Ratio of Expenses to Average Net Assets............. 2.31% 2.07%(d)
Ratio of Net Investment Income (Operating
Loss) to Average Net Assets....................... (1.43)% (1.12)%(d)
Portfolio Turnover Rate............................. 100.7% 20.5%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL UTILITIES FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.11 $12.55 $11.40 $10.94 $9.25
Income from Investment Operations:
Net Investment Income............................... .33 .41(g) .48(g) .44(g) .48(g)
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 2.00 3.59 1.12 .45 1.70

Total from Investment Operations 2.33 4.00 1.60 .89 2.18

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.34) (.44) (.45) (.43) (.49)
Distributions from Capital Gains.................... (.24) -- -- -- --

Total Dividends and Distributions (.58) (.44) (.45) (.43) (.49)

Net Asset Value, End of Period......................... $17.86 $16.11 $12.55 $11.40 $10.94

Total Return(b) ....................................... 14.74% 32.10% 14.26% 8.13% 24.36%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $99,857 $83,533 $64,366 $66,322 $65,873
Ratio of Expenses to Average Net Assets(g).......... 1.20% 1.15% 1.15% 1.17% 1.04%
Ratio of Net Investment Income to
Average Net Assets................................ 1.94% 2.73% 3.90% 3.85% 4.95%
Portfolio Turnover Rate............................. 23.5% 11.9% 22.5% 34.2% 13.0%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL UTILITIES FUND, INC.(a)
Class R shares 1999 1998 1997 1996(e)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.07 $12.49 $11.33 $11.75
Income from Investment Operations:
Net Investment Income............................... .21 .33(g) .39(g) .28(g)
Net Realized and Unrealized Gain (Loss)
on Investments.................................... 2.00 3.58 1.14 (.41)

Total from Investment Operations 2.21 3.91 1.53 (.13)

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.22) (.33) (.37) (.29)
Distributions from Capital Gains.................... (.24) -- -- --

Total Dividends and Distributions (.46) (.33) (.37) (.29)

Net Asset Value, End of Period......................... $17.82 $16.07 $12.49 $11.33

Total Return(b) ....................................... 13.97% 31.47% 13.72% (.31)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $8,081 $4,005 $1,512 $311
Ratio of Expenses to Average Net Assets(g).......... 1.87% 1.65% 1.65% 1.47%(d)
Ratio of Net Investment Income to
Average Net Assets................................ 1.27% 2.21% 3.35% 3.77%(d)
Portfolio Turnover Rate............................. 23.5% 11.9% 22.5% 34.2%(d)
</TABLE>

Notes to Financial Highlights

(a)Effective January 1, 1998, the following changes were made to the names of
the Domestic Growth Funds:

<TABLE>
<CAPTION>
Former Fund Name New Fund Name

<S> <C> <C>
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
</TABLE>

(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.

(d) Computed on an annualized basis.

(e) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Certain of the Domestic
Growth Funds' Class R shares recognized net investment income for the
period from the initial purchase of Class R shares on February 27, 1996
through February 28, 1996 as follows, none of which was distributed to the
sole shareholder, Principal Management Corporation. Additionally, the
Domestic Growth Funds incurred unrealized gains (losses) on investments
during the initial interim period as follows. This represents Class R share
activities of each fund prior to the initial offering of Class R shares:

Per Share Per Share
Net Investment Unrealized
Income Gain (Loss)

Principal Balanced Fund, Inc. $-- $(.03)
Principal Blue Chip Fund, Inc. .01 (.02)
Principal Capital Value Fund, Inc. .01 (.11)
Principal Growth Fund, Inc. .01 .10
Principal MidCap Fund, Inc -- .19

(f) Period from December 31, 1997, date Class A shares first offered to the
public and Class R shares first offered to eligible purchasers, through
October 31, 1998. With respect to Principal Real Estate Fund, Inc. Class A
and Class R shares, net investment income aggregating $.03 per share for
the period from the initial purchase of shares on December 11, 1997 through
December 30, 1997 was recognized, of which $.01 per share was distributed
to its sole shareholder, Principal Life Insurance Company, during the
period. With respect to Principal SmallCap Fund, Inc. Class A and Class R
shares, net investment income aggregating $.02 per share from the initial
purchase of shares on December 11, 1997 through December 30, 1997 was
recognized. Principal SmallCap Fund, Inc. Class A and Class R did
distribute $.01 per share a taxable return of capital to the sole
shareholder Principal Life Insurance Company, during the period. Principal
Real Estate Fund, Inc. and Principal SmallCap Fund, Inc. Class A and Class
R shares incurred unrealized gains (losses) on investments during the
initial interim period as follows. This represents Class A and Class R
share activities of each fund prior to the initial public offering of each
class of shares.

Per Share Unrealized
Gain (Loss)

Class Class
A R

Principal Real Estate Fund, Inc. $ .13 $ .13
Principal SmallCap Fund, Inc. (.09) (.09)

(g) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods indicated, Principal Utilities Fund, Inc. would
have had per share net investment income and the ratios of expenses to
average net assets as shown:

<TABLE>
<CAPTION>
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived

<S> <C> <C> <C> <C> <C>
Class A 1998 $.39 1.23% $ 60,477
1997 .46 1.25% 65,940
1996 .43 1.25% 54,932
1995 .46 1.30% 151,145

Class R 1998 .28 2.10% 12,481
1997 .31 2.67% 9,355
1996(g) .28 1.47%(e) --
</TABLE>

The Manager ceased its waiver of expenses October 31, 1998.

International Growth-Oriented Funds

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

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class A shares 1999 1998 1997(a)

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $6.54 $8.29 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.03) (.02) (.01)
Net Realized and Unrealized
Gain (Loss) on Investments........................ 2.05 (1.73) (1.21)

Total from Investment Operations 2.02 (1.75) (1.22)

Net Asset Value, End of Period......................... $8.56 $6.54 $8.29

Total Return(b) ....................................... 30.89% (21.11)% (10.18)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $13,401 $7,312 $5,039
Ratio of Expenses to Average Net Assets............. 2.75% 3.31% 2.03%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.35)% (.36)% (.32)%(d)
Portfolio Turnover Rate............................. 95.8% 45.2% 21.4%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class R shares 1999 1998 1997(a)

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $6.53 $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. -- (.04) (.01)
Net Realized and Unrealized
Gain (Loss) on Investments........................ 2.02 (1.71) (1.22)

Total from Investment Operations 2.02 (1.75) (1.23)

Net Asset Value, End of Period......................... $8.55 $6.53 $8.28

Total Return(b) ....................................... 30.93% (21.14)% (10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,606 $2,202 $2,510
Ratio of Expenses to Average Net Assets............. 2.67% 3.47% 2.20%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.22)% (.60)% (.51)%(d)
Portfolio Turnover Rate............................. 95.8% 45.2% 21.4%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.20 $9.33 $8.14 $7.28 $7.44
Income from Investment Operations:
Net Investment Income............................... .13 .13 .09 .10 .08
Net Realized and Unrealized
Gain (Loss) on Investments........................ 1.28 .04 1.52 1.17 (.02)

Total from Investment Operations 1.41 .17 1.61 1.27 .06

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.11) (.10) (.11) (.08) (.03)

Distributions from Capital Gains.................... (.46) (.20) (.31) (.33) (.19)

Total Dividends and Distributions (.57) (.30) (.42) (.41) (.22)

Net Asset Value, End of Period......................... $10.04 $9.20 $9.33 $8.14 $7.28

Total Return(b) ....................................... 16.18% 1.93% 20.46% 18.36% 1.03%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $338,144 $302,757 $281,158 $172,276 $126,554
Ratio of Expenses to Average Net Assets............. 1.22% 1.25% 1.39% 1.45% 1.63%
Ratio of Net Investment Income
to Average Net Assets............................. 1.35% 1.45% 1.25% 1.43% 1.10%
Portfolio Turnover Rate............................. 58.7% 38.7% 26.6% 23.8% 35.4%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class R shares 1999 1998 1997 1996(f)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.13 $9.27 $8.12 $7.48
Income from Investment Operations:
Net Investment Income............................... .06 .06 .07 .01
Net Realized and Unrealized
Gain (Loss) on Investments........................ 1.27 .04 1.47 .63

Total from Investment Operations 1.33 .10 1.54 .64

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.04) (.08) --
Distributions from Capital Gains.................... (.46) (.20) (.31) --

Total Dividends and Distributions (.50) (.24) (.39) --

Net Asset Value, End of Period......................... $9.96 $9.13 $9.27 $8.12

Total Return(b) ....................................... 15.27% 1.13% 19.65% 9.29%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $22,229 $17,739 $11,773 $1,057
Ratio of Expenses to Average Net Assets............. 1.93% 2.01% 2.10% 1.59%(d)
Ratio of Net Investment Income
to Average Net Assets............................. .64% .67% .44% .78%(d)
Portfolio Turnover Rate............................. 58.7% 38.7% 26.6% 23.8%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class A shares 1999 1998 1997(a)

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.99 $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.12) (.07) (.01)
Net Realized and Unrealized
Gain (Loss) on Investments........................ 5.53 .10 (.07)

Total from Investment Operations 5.41 .03 (.08)

Less Distributions:
Distributions from Capital Gains.................... (.08) -- --

Total Distributions (.08) -- --

Net Asset Value, End of Period......................... $15.32 $9.99 $9.96

Total Return(b) ....................................... 54.52% .30% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $23.612 $11,765 $6,210
Ratio of Expenses to Average Net Assets............. 2.21% 2.66% 1.99%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.02)% (.81)% (.40)%(d)
Portfolio Turnover Rate............................. 191.5% 99.8% 10.4%(d)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class R shares 1999 1998 1997(a)

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $10.01 $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.10) (.07) (.01)
Net Realized and Unrealized
Gain (Loss) on Investments........................ 5.53 .12 (.07)

Total from Investment Operations 5.43 .05 (.08)

Less Distributions:
Distributions from Capital Gains.................... (.08) -- --

Total Distributions (.08) -- --

Net Asset Value, End of Period......................... $15.36 $10.01 $9.96

Total Return(b) ....................................... 54.61% .50% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,188 $3,317 $3,004
Ratio of Expenses to Average Net Assets............. 2.12% 2.51% 2.15%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.93)% (.68)% (.54)%(d)
Portfolio Turnover Rate............................. 191.5% 99.8% 10.4%(d)
</TABLE>

Notes to Financial Highlights

(a) Period from August 29, 1997, date Class A shares first offered to the
public and Class R shares first offered to eligible purchasers, through
October 31, 1997. Principal International Emerging Markets Fund, Inc. and
Principal International SmallCap Fund, Inc. classes of shares recognized
net investment income as follows for the period from the initial purchase
of shares on August 14, 1997, through August 28, 1997, none of which was
distributed to the sole shareholder, Principal Life Insurance Company.
Principal International Emerging Markets Fund, Inc. and Principal
International SmallCap Fund, Inc. incurred unrealized gains (losses) on
investments during the initial interim period as follows. This represents
Class A and ClassR share activities prior to the initial public offering of
all classes of shares of each fund.

<TABLE>
<CAPTION>
Per Share Per Share
Net Investment Unrealized
Income Gain (Loss)

<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc.:
Class A $.01 $(.50)
Class R .01 (.50)

Principal International SmallCap Fund, Inc.:
Class A .01 .03
Class R .01 .03
</TABLE>

(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.

(d) Computed on an annualized basis.

(e) Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.

(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Principal International
Fund, Inc. Class R shares recognized no net investment income for the
period from the initial purchase by Principal Management Corporation of
ClassR shares on February27, 1996, through February 28, 1996. Additionally,
Class R shares incurred unrealized gains on investments of $.02 per share
during the initial interim period. This represents Class R share activities
of the fund prior to the intial offering of Class R shares.

Income-Oriented Funds

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

<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.59 $11.44 $11.17 $11.42 $10.27
Income from Investment Operations:
Net Investment Income................................. .70 .71(b) .75(b) .76(b) .78(b)
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.91) .16 .33 (.25) 1.16

Total from Investment Operations .21 .87 1.08 .51 1.94

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.69) (.72) (.81) (.76) (.78)
Distributions from Capital Gains...................... -- -- -- -- (.01)
Excess Distributions from Capital Gains............... (.03) -- -- -- --

Total Dividends and Distributions (.72) (.72) (.81) (.76) (.79)

Net Asset Value, End of Period........................... $10.66 $11.59 $11.44 $11.17 $11.42

Total Return(c) ......................................... (1.92)% 7.76% 10.15% 4.74% 19.73%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $145,975 $148,081 $126,427 $113,437 $106,962
Ratio of Expenses to Average Net Assets(b)............ 1.04% .95% .95% .95% .94%
Ratio of Net Investment Income to
Average Net Assets.................................. 6.25% 6.19% 6.70% 6.85% 7.26%
Portfolio Turnover Rate............................... 48.9% 15.2% 12.8% 3.4% 5.1%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class R shares 1999 1998 1997 1996(f)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.59 $11.43 $11.16 $11.27
Income from Investment Operations:
Net Investment Income................................. .63 .63(b) .71(b) .51(b)
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.90) .16 .30 (.13)

Total from Investment Operations (.27) .79 1.01 .38

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.62) (.63) (.74) (.49)
Excess Distributions from Capital Gains............... (.03) -- -- --

Total Dividends and Distributions (.65) (.63) (.74) (.49)

Net Asset Value, End of Period........................... $10.67 $11.59 $11.43 $11.16

Total Return(c) ......................................... (2.45)% 7.05% 9.49% 3.75%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $16,096 $12,196 $5,976 $525
Ratio of Expenses to Average Net Assets(b) ........ 1.61% 1.45% 1.45% 1.28%(e)
Ratio of Net Investment Income to
Average Net Assets.................................. 5.68% 5.66% 6.11% 6.51%(e)
Portfolio Turnover Rate............................... 48.9% 15.2% 12.8% 3.4%(e)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.63 $11.51 $11.26 $11.31 $10.28
Income from Investment Operations:
Net Investment Income................................. .69 .70 .70 .70 .71
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.52) .12 .29 (.05) 1.02

Total from Investment Operations .17 .82 .99 .65 1.73

Less Dividends:
Dividends from Net Investment Income.................. (.70) (.70) (.74) (.70) (.70)

Total Dividends (.70) (.70) (.74) (.70) (.70)

Net Asset Value, End of Period........................... $11.10 $11.63 $11.51 $11.26 $11.31

Total Return(c) ......................................... 1.47% 7.38% 9.23% 6.06% 17.46%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $237,811 $251,455 $249,832 $259,029 $261,128
Ratio of Expenses to Average Net Assets............... .89% .86% .84% .81% .87%
Ratio of Net Investment Income to
Average Net Assets.................................. 6.04% 6.07% 6.19% 6.31% 6.57%
Portfolio Turnover Rate............................... 19.4% 17.1% 10.8% 25.9% 10.1%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class R shares 1999 1998 1997 1996(f)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.55 $11.42 $11.21 $11.27
Income from Investment Operations:
Net Investment Income................................. .61 .61 .64 .47
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.52) .13 .24 (.08)

Total from Investment Operations .09 .74 .88 .39

Less Dividends:
Dividends from Net Investment Income:................. (.61) (.61) (.67) (.45)

Total Dividends (.61) (.61) (.67) (.45)

Net Asset Value, End of Period........................... $11.03 $11.55 $11.42 $11.21

Total Return(c) ......................................... .78% 6.66% 8.19% 3.76%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $11,539 $8,156 $4,152 $481
Ratio of Expenses to Average Net Assets............... 1.53% 1.64% 1.79% 1.18%(e)
Ratio of Net Investment Income to
Average Net Assets.................................. 5.40% 5.39% 5.21% 5.84%(e)
Portfolio Turnover Rate............................... 19.4% 17.1% 10.8% 25.9%(e)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $7.63 $8.52 $8.27 $8.06 $7.83
Income from Investment Operations:
Net Investment Income................................. .63 .64 .67 .68 .68
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.41) (.88) .31 .23 .20

Total from Investment Operations .22 (.24) .98 .91 .88

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.63) (.64) (.73) (.70) (.65)
Excess Distribution of Net Investment Income(g) ..... (.01) (.01) -- -- --

Total Dividends and Distributions (.64) (.65) (.73) (.70) (.65)

Net Asset Value, End of Period........................... $7.21 $7.63 $8.52 $8.27 $8.06

Total Return(c) ......................................... 2.81% (3.18)% 12.33% 11.88% 11.73%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $30,065 $33,474 $38,239 $28,432 $23,396
Ratio of Expenses to Average Net Assets............... 1.31% 1.40% 1.22% 1.26% 1.45%
Ratio of Net Investment Income to
Average Net Assets.................................. 8.23% 7.71% 7.99% 8.49% 8.71%
Portfolio Turnover Rate............................... 86.1% 65.9% 39.2% 18.8% 40.3%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class R shares 1999 1998 1997 1996(f)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $7.51 $8.40 $8.20 $8.21
Income from Investment Operations:
Net Investment Income................................. .56 .57 .62 .46
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.40) (.87) .26 (.03)

Total from Investment Operations .16 (.30) .88 .43

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.56) (.58) (.68) (.44)
Excess Distribution of Net Investment Income(g) ..... (.03) (.01) -- --

Total Dividends and Distributions (.59) (.59) (.68) (.44)

Net Asset Value, End of Period........................... $7.08 $7.51 $8.40 $8.20

Total Return(c) ......................................... 2.01% (3.97)% 11.14% 5.60%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,598 $2,734 $1,961 $124
Ratio of Expenses to Average Net Assets............... 2.09% 2.28% 2.42% 1.59%(e)
Ratio of Net Investment Income to
Average Net Assets.................................. 7.43% 6.84% 6.70% 7.84%(e)
Portfolio Turnover Rate............................... 86.1% 65.9% 39.2% 18.8%(e)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class A shares 1999 1998 1997 1996(h)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $9.93 $9.88 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b) ........................... .57 .57 .61 .38
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.39) .06 .03 (.04)

Total from Investment Operations .18 .63 .64 .34

Less Dividends:
Dividends from Net Investment Income.................. (.57) (.58) (.65) (.35)

Total Dividends (.57) (.58) (.65) (.35)

Net Asset Value, End of Period........................... $9.54 $9.93 $9.88 $9.89

Total Return(c) ......................................... 1.83% 6.57% 6.75% 3.62%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $27,096 $27,632 $20,567 $17,249
Ratio of Expenses to Average Net Assets(b) ........ 1.00% .82% .90% .89%(e)
Ratio of Net Investment Income to
Average Net Assets.................................. 5.76% 5.86% 6.20% 6.01%(e)
Portfolio Turnover Rate............................... 20.9% 23.8% 17.4% 16.5%(e)
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class R shares 1999 1998 1997 1996(f)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $9.93 $9.85 $9.88 $9.90
Income from Investment Operations:
Net Investment Income(b) ........................... .50 .52 .54 .36
Net Realized and Unrealized Gain (Loss)
on Investments...................................... (.39) .07 .03 (.06)

Total from Investment Operations .11 .59 .57 .30

Less Dividends:
Dividends from Net Investment Income.................. (.49) (.51) (.60) (.32)

Total Dividends (.49) (.51) (.60) (.32)

Net Asset Value, End of Period........................... $9.55 $9.93 $9.85 $9.88

Total Return(c) ......................................... 1.13% 6.12% 6.01% 3.24%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $3,276 $2,034 $606 $83
Ratio of Expenses to Average Net Assets(b)............ 1.41% 1.44% 1.48% 1.40%(e)
Ratio of Net Investment Income to
Average Net Assets.................................. 5.35% 5.21% 5.60% 5.64%(e)
Portfolio Turnover Rate............................... 20.9% 23.8% 17.4% 16.5%(e)
</TABLE>

Notes to Financial Highlights

(a) Effective January 1, 1998, the following changes were made to the names of
the Income Funds:

<TABLE>
<CAPTION>
Former Fund Name New Fund Name

<S> <C>
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
</TABLE>

(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods indicated, the following funds would have had per
share net investment income and the ratios of expenses to average net
assets as shown:

<TABLE>
<CAPTION>
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived

<S> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc.:*
Class A 1998 $.70 1.04% $121,092
1997 .74 .98 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018

Class R 1998 .61 1.72 25,144
1997 .69 1.78 10,427
1996(h) .51 1.28(f) 3

Principal Limited Term Bond Fund, Inc.:
Class A 1999 .55 1.14 40,285
1998 .55 1.13 76,952
1997 .59 1.15 46,271
1996(h) .37 1.16(f) 22,716

Class R 1999 .46 2.02 11,951
1998 .46 2.22 11,781
1997 .43 2.95 6,831
1996(f) .35 1.79(f) 60

<FN>
* The Manager ceased its waiver of expenses for Principal Bond Fund, Inc. on
October 31, 1998.
</FN>
</TABLE>

(d) Total return amounts have not been annualized.

(e) Computed on an annualized basis.

(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. The Income Funds' Class R
shares recognized no net investment income for the period from the initial
purchase by Principal Management Corporation of Class R shares on February
27, 1996 through February 28, 1996. Certain of the Income Funds' Class R
shares incurred unrealized losses on investments during the initial interim
period as follows. This represents Class R share activities of each fund
prior to the initial offering of Class R shares:

Per Share
Unrealized (Loss)

Principal Bond Fund, Inc. $(.03)
Principal Government Securities Income Fund, Inc. (.03)
Principal Limited Term Bond Fund, Inc. (.02)

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

(h) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole shareholder, Principal Life
Insurance Company during the period. Additionally, Class A shares incurred
unrealized losses on investments of $.12 per share during the initial
interim period. This represents Class A share activities of the fund prior
to the initial public offering of shares.

Money Market Fund

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

<TABLE>
<CAPTION>
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class A shares 1999 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b) ............................ .045 .051 .050 .049 .052

Total from Investment Operations .045 .051 .050 .049 .052

Less Dividends:
Dividends From Net Investment Income................. (.045) (.051) (.050) (.049) (.052)

Total Dividends (.045) (.051) (.050) (.049) (.052)

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

Total Return(c) ........................................ 4.56% 5.10% 4.96% 5.00% 5.36%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $352,675 $294,918 $836,072 $694,962 $623,864
Ratio of Expenses to Average Net Assets(b) .......... .69% .56%(d) .63% .66% .72%
Ratio of Net Investment Income to
Average Net Assets................................. 4.45% 5.12% 4.98% 4.88% 5.24%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class R shares 1999 1998 1997 1996(g)

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b) ............................ .040 .046 .044 .030

Total from Investment Operations .040 .046 .044 .030

Less Dividends:
Dividends from Net Investment Income................. (.040) (.046) (.044) (.030)

Total Dividends (.040) (.046) (.044) (.030)

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

Total Return(c) ........................................ 4.04% 4.56% 4.16% 2.97%(e)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $15,571 $10,414 $4,296 $1,639
Ratio of Expenses to Average Net Assets(b) .......... 1.15% 1.05%(d) 1.26% .99%(f)
Ratio of Net Investment Income to
Average Net Assets................................. 3.99% 4.62% 4.40% 4.41%(f)
</TABLE>

Notes to Financial Highlights

(a) Effective January 1, 1998, the following change was made to the name of the
Money Market Fund:

Former Fund Name New Fund Name

Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.

(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses for the periods indicated, the Fund would have had per share net
investment income and the ratios of expenses to average net assets as
shown:

<TABLE>
<CAPTION>
Year Ended Ratio of
October 31, Per Share Expenses
Except Net Investment to Average Amount
as Noted Income Net Assets Waived

<S> <C> <C> <C> <C> <C>
Class A 1998 $.051 .56% $ -- (d)
1997 .050 .63 --
1996 .049 .67 7,102
1995 .052 .78 296,255

Class R 1998 .046 1.05 -- (d)
1997 .043 1.34 2,441
1996(i) .030 .99 --
</TABLE>

The Manager ceased its waiver of expenses for Principal Cash Management
Fund, Inc. on March 1, 1998.

(d) Management fee waivers apply to November 1, 1997 through February 28, 1998.

(e) Total return amounts have not been annualized.

(f) Computed on an annualized basis.

(g) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996.

Additional information about the Funds is available in the Statement of
Additional Information dated March 1, 2000, as revised through May 1, 2000, and
which is part of this prospectus. Information about the Funds' investments is
also available in the Funds' annual and semiannual reports to shareholders. In
the Funds' annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Funds' performance
during its last fiscal year. The Statement of Additional Information and annual
and semiannual reports can be obtained free of charge by writing or telephoning
Princor Financial Services Corporation, P.O. Box 10423, Des Moines, IA 50306.
Telephone 1-800-247-4123.

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

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

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

SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS

811-05072 Principal Balanced Fund, Inc.
811-06263 Principal Blue Chip Fund, Inc.
811-01874 Principal Capital Value Fund, Inc.
811-01873 Principal Growth Fund, Inc.
811-09755 Principal LargeCap Stock Index Fund, Inc.
811-05171 Principal MidCap Fund, Inc.
811-09567 Principal Partners Aggressive Growth Fund, Inc.
811-09757 Principal Partners LargeCap Growth Fund, Inc.
811-09759 Principal Partners MidCap 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.

MONEY MARKET FUND

811-03585 Principal Cash Management Fund, Inc.

Principal Life Insurance Company Master Individual
Retirement Account Plan And Custody Agreement

This is the Principal Life Insurance Company's Master Individual Retirement
Account Plan and Custody Agreement for use by individuals who desire to
establish a Traditional Individual Retirement Account (Traditional IRA), as
described in Section 408(a) of the Internal Revenue Code (Code) or a Roth
Individual Retirement Account (Roth IRA) as described in Section 408A of the
Code. Traditional IRAs include Regular IRAs, Spousal IRAs, SEP IRAs and Rollover
IRAs Principal Life Insurance Company hereby agrees to act as Custodian of any
Traditional IRA or Roth IRA established under the Plan and this Agreement,
subject to the following terms and conditions:

ARTICLE I - Limitations on Contributions

In addition to the initial contribution made at the time the Account is
established, the Custodian may accept additional cash contributions from, or on
behalf of, the Participant for a taxable year of the Participant except as
limited below.

Only cash contributions will be accepted. Contributions to a Traditional IRA
shall not exceed the lesser of $2,000 or 100% of compensation, except in the
case of a rollover contribution as that term is described in Code Sections
402(c), 403(a)(4), 403(b)(8) or 408(d)(3), an employer contribution to a
Simplified Employee Pension as defined in Section 408(k), or any other
contribution as permitted by the Code. For Roth IRAs, cash contributions are
limited to the lesser of $2,000 or 100% of compensation, unless the contribution
is a rollover contribution described in Section 408(e) of the Code.
Contributions to a Traditional IRA (except SEP and Rollover IRAs) and Roth IRA
are coordinated; contributions to one reduces the amount that may be contributed
to the other so that contributions cannot exceed the 100% of compensation/$2,000
per Participant limitation.

Two applications are necessary if both spouses are establishing an IRA. The
maximum combined contribution in the event of a non-working spouse is the lesser
of 100% of compensation or $4,000. The maximum contribution must be split
between the Participant and the Participant's spouse so no more than $2000 is
contributed for either of them.

Excess Contributions

A retirement savings contribution will not be allowed for a Roth IRA or
Traditional IRA in excess of the 100%-$2,000/$4,000 limits, or in the case of a
Simplified Employee Pension, 15%-$30,000 limitation, nor can a contribution be
made to a Traditional IRA during the year in which or after the Participant
reaches 70 1/2 (except in the case of a Simplified Employee Pension or a Roth
IRA). (A spousal contribution can be made to the Traditional IRA of the
non-working spouse as long as the non-working spouse is under age 70 1/2 and the
working spouse has earned income.) Additionally, a non-deductible federal excise
tax penalty in the amount of 6% of excess contributions will be imposed on any
Participant who has excess contributions in a Traditional IRA or Roth IRA. This
penalty will be imposed each year until the excess contributions are removed.

An excess contribution may be removed from a Traditional IRA or Roth IRA by
withdrawing the amount of the excess or by applying the excess contribution
toward the contribution of the Participant in a subsequent year. If an excess
contribution is withdrawn from the Account, together with the net income of such
excess contribution, prior to the due date for filing the Participant's income
tax return for the year in which the excess contribution was made (including
extensions of time), the 6% non-deductible excise tax will not be imposed, the
contribution withdrawn will not be included in the Participant's gross income
for the year in which received, and the federal 10% tax on premature
distributions (see Distributions) will not be imposed on the excess withdrawn.
The net income on such excess contribution that is withdrawn will be deemed to
have been earned and is taxable in the taxable year in which such excess
contribution was made.

If an excess contribution is withdrawn after the due date for filing the
Participant's income tax return for the taxable year (including extensions of
time) and no deduction was taken for the excess portion of the contribution, the
excess withdrawn will not be included in the Participant's federal gross income
for the year in which received, and the 10% federal tax on premature
distributions will not be imposed on the excess withdrawn, provided that the
total contributions during the year, including the excess contribution, did not
exceed the applicable limitations. Any earnings of such excess contributions
withdrawn after the due date for filing the Participant's income tax return
(including extensions of time) will be subject to the taxes on premature
distributions and will be included in federal gross income.

If an excess contribution is withdrawn after the due date for filing the
Participant's income tax return for the taxable year (including extensions of
time) and the total contribution for the taxable year exceeded the $2,000/$4,000
limitation, the excess contribution that is withdrawn will be included in the
Participant's federal gross income for the year in which received, the 10%
federal tax on premature distributions will be imposed on the amount withdrawn,
and the 6% non-deductible excise tax will be imposed for each year until the
excess contribution is removed.

ARTICLE II - Nonforfeitability

The Participant's interest in the balance in the Account shall at all times be
nonforfeitable. The Account is established for the exclusive benefit of the
Participant and the Participant's beneficiaries.

ARTICLE III - Prohibited Investments

No part of the custodial funds shall be invested in life insurance contracts,
nor may the assets of any Participant's Account be commingled with other
property except in a common trust fund or common investment fund [within the
meaning of Code Section 408(a)(5)]. All funds shall be invested in shares of
such Mutual Funds as Participant shall designate.

ARTICLE IV - Distributions

Notwithstanding any other provision of this Plan, the Participant or a
Beneficiary may elect to receive distribution in any manner permitted by law
which is approved by the Custodian.

The duty to determine the amount of the distributions hereunder shall be the
Participant's or, when applicable, the designated Beneficiary. The Custodian
shall not be liable to the Participant or any other person for taxes or other
penalties incurred as a result of failure to distribute the minimum amount
required by law.

If the Participant dies before his or her entire interest has been distributed
and if the beneficiary is other than the surviving spouse, no additional cash
contributions or rollover contributions may be accepted in the account.

Pursuant to this Participation Agreement, certain distributions are at the
direction of the Participant as follows:

A. Traditional IRAs

(1) The Participant may begin to take money out of a Traditional IRA
without tax penalty after the age of 59 1/2, but must begin receiving a
distribution from the Account not later than the April 1 following the
calendar year in which the Participant attains age 70 1/2 (required
beginning date). At least 30 days prior to that date the Participant
must elect to have the balance in the Account distributed in: (a) a
single sum payment, (b) an Annuity Contract that provides equal or
substantially equal
monthly, quarterly or annual payments over the life the
Participant or over the joint and last survivor lives of the
Participant and the Participant's beneficiary.
(c) equal, or substantially equal, monthly, quarterly, semiannual or
annual payments (see "Minimum amounts to be distributed" below)
commencing not later than the above date and not extending beyond
the life expectancy of the Participant, or
(d) equal, or substantially equal, monthly, quarterly, semiannual or
annual payments (see "Minimum amounts to be distributed" below)
commencing not later than the above date and not extending beyond
the joint and last survivor expectancy of the lives of the
Participant and the designated Beneficiary.

Minimum amounts to be distributed. If the Participant's entire interest is to be
distributed in other than a lump sum, then the amount to be distributed each
year (commencing with the required beginning date and each year thereafter) must
be at least equal to the quotient obtained by dividing the Participant's benefit
by the lesser of (1) the applicable life expectancy or (2) if the Participant's
spouse is not the designated beneficiary, the applicable divisor determined from
the table set forth in Q&A-4 of section 1.401(a)(9)-2 of the Proposed Income Tax
Regulations. Distributions after the death of the Participant shall be
distributed using the applicable life expectancy as the relevant divisor without
regard to proposed regulations section 1.401(a)(9)-2. A 50% excise tax will be
imposed on the difference between the minimum payout required and the amount
actually paid, unless the underdistribution was due to reasonable cause.

Notwithstanding that required minimum distributions may have commenced as
described above, the Participant may receive a larger distribution from the
Account upon written request to the Custodian. If the Participant fails to elect
any of the methods described above on or before April 1 following the year in
which the Participant attains age 70 1/2, distribution will be made in a single
sum payment on or before that date.

(2) If the Participant dies before receiving full distribution from the
Account, the balance in the Account must be distributed in the
following manner: (a) If the owner dies after distribution of his or
her interest has begun, the remaining portion of such interest will
continue to be distributed at least as rapidly as under the method
of distribution being used prior to the owner's death. (b) If the owner
dies before distribution of his or her interest begins, the owner's
entire interest will be distributed in
accordance with one of the following four provisions:
(1) The owner's entire interest will be paid by December 31 of the
calendar year containing the fifth anniversary of the owner's
death.
(2) If the owner's interest is payable to a Beneficiary designated
by the owner and the owner has not elected (1) above, then the
entire interest will be distributed over the life or over a
period certain not greater than the life expectancy of the
designated Beneficiary commencing on or before December 31 of
the calendar year immediately following the calendar year in
which the owner died. The designated Beneficiary may elect at
any time to receive greater payments.
(3) If the designated Beneficiary of the owner is the owner's
surviving spouse, the spouse may elect to receive equal or
substantially equal payments over the life or life expectancy
of the surviving spouse commencing at any date prior to the
later of (1) December 31 of the calendar year immediately
following the calendar year in which the owner died and (2)
December 31 of the calendar year in which the owner would have
attained age 70 1/2. Such election must be made no later than
the earlier of December 31 of the calendar year containing the
fifth anniversary of the owner's death or the date
distributions are required to begin pursuant to the preceding
sentence. The surviving spouse may increase the frequency or
amount of such payments at any time.
(4) If the designated Beneficiary is the owner's surviving spouse,
the spouse may treat the account as his or her own individual
retirement arrangement (IRA). This election will be deemed to
have been made if such surviving spouse makes a regular IRA
contribution to the account, makes a rollover to or from such
account, or fails to elect any of the above three provisions.
(c) For purposes of this requirement, any amount paid to a child of
the owner will be treated as if it had been paid to the surviving
spouse if the remainder of the interest becomes payable to the
surviving spouse when the child reaches the age of majority.

(3) Life expectancy is computed by use of the expected return multiples in
Tables V and VI of section 1.72-9 of the Income Tax Regulations. Unless
otherwise elected by the Participant by the time distributions are
required to begin, life expectancies shall be recalculated annually.
Such election shall be irrevocable as to the Participant and shall
apply to all subsequent years. The life expectancy of a non-spouse
beneficiary may not be recalculated; instead, life expectancy will be
calculated using the attained age of such beneficiary during the
calendar year in which distributions are required to begin pursuant to
this section, and payments for subsequent years shall be calculated
based on such life expectancy reduced by one for each calendar year
which has elapsed since the calendar year life expectancy was first
calculated.

The owner of two or more individual retirement accounts may use the "alternative
method" described in Notice 88-38, 1988-1 C.B. 524, to satisfy the minimum
distribution requirements described above. This method permits an individual to
satisfy these requirements be taking from one individual retirement account the
amount required to satisfy the requirement for another.

B. Roth IRAs
No minimum distribution rules apply to Roth IRAs during the Participant's
lifetime. Unless IRS rules or regulations require or permit otherwise, if
the Participant dies before his or her entire interest in a Roth IRA is
distributed to him or her, the entire remaining interest will be
distributed as follows:

(1) If the Participant dies on or after distribution of his or her interest
has begun, distribution must continue to be made at least as rapidly as
under the method of distribution in effect at the Participant's death.

(2) If the Participant dies before distribution of his or her interest has
begun, the entire remaining interest will, at the election of the
Participant or, if the Participant has not so elected, at the election
of the Beneficiary or Beneficiaries, either (a) Be distributed by the
December 31 of the year containing the fifth anniversary of the
Participant's death, or (b) Be distributed in equal or substantially
equal payments over the life or life expectancy ( computed by use of
the
expected return multiples in Tables V and VI of section 1.72-9 of
the Income Tax Regulations) of the designated Beneficiary or
Beneficiaries starting by December 31 of the year following the
year of the Participant's death. If, however, the Beneficiary is
the Participant's surviving spouse, then this distribution is not
required to begin before the later of (A) the December 31 of the
year following the year of the Participant's death, or (B) the
December 31 of the year in which the Participant would have turned
age 70 1/2.

If the Participant dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse,
no additional cash contributions or rollover contributions may be
accepted in the account.

ARTICLE V - Declaration of Intention

Except in the case of the Participant's death, Disability [as defined in Section
72(m) of the Code] or attainment of age 59 1/2, the Custodian shall receive from
the Participant a declaration of the Participant's intention as to the
disposition of the amount distributed before distributing an amount from the
Participant's Account.

ARTICLE VI - Notices And Reports

The Participant agrees to provide information to the Custodian at such time and
in such manner and containing such information as may be necessary for the
Custodian to prepare any reports required pursuant to Section 408(i) and
408A(d)(3)E of the Code and the regulations thereunder, and any other applicable
guidance issued by the Internal Revenue Service.

The Custodian agrees to submit reports to the Internal Revenue Service and the
Participant as prescribed by the Internal Revenue Service. Currently, calendar
year reports concerning the status of the account are required to be furnished
annually.

ARTICLE VII - Controlling Article

Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence shall be controlling.
Furthermore, any such additional article shall be wholly invalid if it is
inconsistent, in whole or in part, with Section 408(a) or 408A of the Code,
whichever is applicable, and the regulations thereunder.

ARTICLE VIII - Amendments

The Custodian shall have the authority to amend this Agreement from time to time
in order to comply with the provisions of the Code and regulations thereunder.
The Custodian shall have the right to amend its fee structure and amounts. Such
an amendment shall apply to current and/or future years only. The Custodian
shall also have the right to amend this agreement by adding additional
investment alternatives. Furthermore, other amendments may be made upon written
consent of the Custodian and the Participant.

ARTICLE IX - Definitions

Account shall mean the Principal Life Insurance Company Individual Retirement
Account which has been established in accordance with Section 408 of the Code
and consists of the terms and conditions herein set forth together with the
provisions of the Application.

Annuity Contract shall mean an annuity contract issued by Principal Life
Insurance Company.

Beneficiary shall mean the person(s) or entity(ies) designated to receive the
balance in the Account upon the death of the Participant or upon the death of a
prior Beneficiary.

ERISA means the Employee Retirement Income Security Act of 1974, as it may be
amended from time to time.

Compensation means wages, salaries, professional fees, and other amounts derived
from or received for personal services actually rendered (including, but not
limited to, commissions-paid salespersons, remuneration for services on the
basis of a percentage of profits, commissions on insurance premiums, tips and
bonuses) and includes earned income, as defined in Section 401(c)(2) of the Code
(reduced by the deduction the self-employed individual takes for contributions
made to a self-employed retirement plan). For purposes of this definition,
Section 401(c)(2) shall be applied as if the term trade or business for purposes
of Section 1402 included service described in subsection (c)(6). Compensation
does not include amounts derived from or received as earnings or profits from
property (including, but not limited to, interest and dividends) or amounts not
includible in gross income. Compensation also does not include any amount
received as a pension or annuity or as deferred compensation. The term
compensation shall include any amount includible in the individual's gross
income under Section 71 with respect to a divorce or separation instrument
described in subparagraph (A) of Section 71(b)(2).

Custodian means Principal Life Insurance Company or any successor thereto.

Investment Manager refers to Principal Management Corporation. This term shall
have the same meaning as that in Section 3(38) of ERISA. The Investment Managers
with respect to the Mutual Funds hereby acknowledge that they are fiduciaries
with respect to the Plan. The Investment Managers with respect to the individual
Participant's Account hereby acknowledge that they are fiduciaries with respect
to the funds of the Participant.

Principal Group of Funds, Mutual Fund, Fund, or The Principal Family of Mutual
Funds means the fund or funds managed by Principal Management Corporation which
have been made available for the investment of traditional IRA or Roth IRA
contributions.

Participant means any individual of legal age who shall execute the
Participation Agreement and make contributions to this Plan.

Participation Agreement means the written agreement executed by the Participant
and, where applicable, the Broker, whereby the Participant agrees to participate
in the Plan.

Plan means the terms and conditions of this Principal Life Insurance Company IRA
Plan and Custody Agreement including any amendments made pursuant to Article IX
of the Plan.

Spousal IRA means two contributory traditional or Roth IRAs established by a
working individual for himself or herself and for the benefit of his or her
non-employed spouse.

All other capitalized words, terms and phrases not specifically defined shall
have and carry the meaning given them under the Code.

ARTICLE X - Investments

All contributions received by the Custodian shall be invested in such Mutual
Funds as the Participant may designate, or shall be used to purchase an Annuity
Contract as directed by the Participant.

At the time the Participant executes the Participation Agreement, the
Participant shall specify the particular Mutual Fund or Funds in which
contributions shall be invested. After the initial contribution, the Participant
may, at any time, direct the Custodian to transfer contributions then invested
in any such Fund into any other such Funds or to an Annuity Contract. Transfers
made pursuant to such direction shall not be considered a distribution of any
Account to the Participant.

No party identified herein shall be required to comply with any direction of the
Participant which in the judgment of such party may subject it to liability or
expense unless such party shall be indemnified in manner and amount satisfactory
to it.

The Participant is 100% vested at all times in all funds attributed to his
Account.

The Participant may not borrow funds from his Account, nor may he use the funds
as security for any loan or extension of credit. Except as provided in this
Plan, no right, interest or claim in or to any funds held in the Mutual Fund or
Annuity Contract shall be transferable, assignable or subject to pledge by the
Participant or Beneficiary, and any attempt to transfer, assign or pledge the
same shall not be recognized except as required by law. The right, interest or
claim in or to any funds held in the Mutual Fund or Annuity Contract shall not
be subject to garnishment, attachment, execution or levy except as permitted by
law.

Any Participant under the Plan may transfer his or her interest, in whole or in
part, to his or her spouse under a decree of divorce or dissolution of marriage
or a written instrument incident to such divorce or dissolution. At the time of
transfer, such interest shall be deemed an IRA of such spouse. The Participant
shall promptly notify Custodian of any such transfer by delivery to Custodian of
a certified copy of such decree or a true copy of such written instrument. Upon
receipt of the certified copy of such decree or a true copy of such written
instrument from any source, Custodian shall promptly adjust its books and
records to reflect that such Account is for the benefit of such former spouse.
Custodian shall not be required to accept contributions to or make distributions
from an Account established for a former spouse by reason of a transfer of
interest by a Participant to such former spouse hereunder until such former
spouse shall execute a Participation Agreement.

The Plan and the Accounts established hereunder shall be governed by all
applicable laws, rules and regulations of the United States of America and the
State of Iowa.

ARTICLE XI - Contributions

All initial contributions shall be paid to the Custodian at the time the
Participation Agreement is executed. Additional contributions may be paid to the
Custodian in such manner and in such amounts as the Custodian shall specify.

Contributions made by or on behalf of the Participant may be paid at any time
during the calendar year, but in no event later than the last day for the filing
of the Federal Income Tax Return for the calendar year to which they relate, not
to include any extensions thereof (except for contributions to a SEP IRA, which
may be made until the federal income tax filing deadline of the Participant's
employer, including extensions).

Except in the case of a Rollover IRA, Simplified Employee Pension or Roth IRA,
contributions made by or on behalf of the Participant shall not be made during
or after the calendar year in which the Participant attains age70 1/2.

All IRA contributions must be in cash. Participant must clearly identify on the
application for the IRA account whether the IRA being established is a
Traditional IRA or a Roth IRA. Traditional IRAs and Roth IRAs must be maintained
in separate Custodial Accounts.

If an Excess Contribution is made by or on behalf of the Participant for any
calendar year, upon written request for distribution from the Participant
stating the amount of the Excess Contribution to be distributed, Custodian will
distribute such amount of the Excess Contribution to the Participant, together
with the income attributable thereto. The Custodian shall not have any duty to
determine whether an Excess Contribution has been made by or on behalf of the
Participant, and the Custodian shall not be held liable by the Participant or
any other person for failing to determine whether an Excess Contribution was
made or for failing to make distribution of such Excess Contribution without
request of the Participant. The Custodian shall not be liable to the Participant
or any other person for taxes or other penalties incurred as a result of an
Excess Contribution and any income attributable thereto or as a result of a
distribution of an Excess Contribution and any income attributable thereto.
Before the Custodian shall accept a contribution by or on behalf of the
Participant as a Rollover Contribution or Roth Conversion Contribution, the
Participant shall deliver to the Custodian a written declaration, in a form
acceptable to the Custodian, that such contribution is eligible for treatment as
a Rollover Contribution or Roth Conversion Contribution. Notwithstanding
anything to the contrary in the Plan, once the Custodian has received a
declaration from the Participant that a contribution is a Rollover Contribution
or Roth Conversion Contribution, the Custodian may conclusively rely on the
Participant's declaration and may accept and treat the contribution as a
Rollover Contribution or Roth Conversion Contribution. All Rollover
Contributions from a qualified employer plan shall be maintained in a separate
Rollover IRA, unless the Participant makes a written request to combine new
contributions and rollover contributions in one IRA. The Custodian shall have no
duty to determine whether combining new contributions and rollover contributions
in the same IRA is in the best interests of the Participant.

ARTICLE XII - Designation of Beneficiary

The Participant may designate the Beneficiary of his or her Account by a written
form acceptable to and filed with Custodian. Community property states and
marital property states require spousal consent if someone other than the spouse
is to be named as Beneficiary.

If the Participant designates more than one Beneficiary, he or she shall
designate the percentage interest that each such Beneficiary shall receive from
his or her Account upon distribution. In the event no such percentage interest
is designated, the interest of each Beneficiary shall be equal.

If the Participant predeceases his or her spouse before his or her entire
Account is distributed in accordance with Article IV(A)(1) of the Plan and the
Participant has designated no Beneficiary for the remaining interest or all such
Beneficiaries predecease the Participant's spouse, then the interest of the
Participant's spouse in the Account shall be fully vested and subject to the
terms and conditions of this Article and the Participant's spouse shall be
entitled to designate the Beneficiary of the Account in accordance with this
Article.

The Participant may, at any time, change or revoke any designation made under
this Article in a written form acceptable to and filed with the Custodian. Upon
the death of the Participant, the designation or designations made hereunder
shall be irrevocable. The designation shall be effective only if received by the
Custodian prior to the death of the Participant.

If the Participant fails to designate any Beneficiary or if the Participant
revokes the designation of Beneficiary or if all Beneficiaries designated
predecease the Participant, then the entire interest of the Participant in his
Account shall pass to the Participant's estate.

ARTICLE XIII - Administrative Duties

This Article shall delineate the responsibilities of the Custodian. The
Custodian shall maintain the Account in the name of the Participant and shall be
responsible only for the contributions of which it receives notice from the
Participant. The Custodian shall make distributions and transfers only in
accordance with the directions of the Participant. The Custodian shall keep
records of all receipts, investments and disbursements relating to the Account.
The Custodian shall furnish the Participant or the Beneficiary, where
applicable, with a written statement of transactions relating to the Account.
Unless the Participant shall have filed with the Custodian Agent written
exceptions or objections to such statement within thirty (30) days after it is
furnished, the custodian shall be forever released and discharged from liability
or accountability to the Participant or the Beneficiary, with respect to the
acts and transactions shown in the statement. No Beneficiary shall be entitled
to statements hereunder until the Participant is deceased and distribution shall
have commenced to such Beneficiary.

The duties and responsibilities of all parties to this Agreement are limited to
those specifically stated herein and no other or further duties or
responsibilities shall be implied.

ARTICLE XIV - Revocation Of Participation in Plan

The Participant may terminate participation in the Plan at any time by notifying
the Custodian in writing of the intention to terminate and instructing the
Custodian in writing to whom and by what means the funds on deposit in his
Account shall be transferred. Withdrawal of all funds invested in the Mutual
Fund shall terminate participation in the Plan. Although termination of this
Account could have an adverse effect on a Simplified Employee Pension in which
the Participant is participating, the Custodian has no liability to the
Participant, the employer, or to any other employees of that employer with
respect to such termination.

The Participant may revoke participation in the Plan within seven (7) business
days from the date the Participant executes the Participation Agreement by
notice to the Custodian in writing.

The Custodian may be required to withhold 10% from any taxable distribution from
an IRA unless the Participant elects no withholding at the time distributions
begin. Whether or not the Participant allows the Custodian to withhold, he or
she may be required to make quarterly estimated tax payments. In addition,
unless the Participant indicates at the time he or she closes an IRA account
that it is being transferred to another tax qualified plan, the Custodian will
be required to withhold at least 10% of the distribution.

ARTICLE XV - Miscellaneous

All instructions to the Custodian shall be in writing. The Participant may
authorize an agent to give instructions hereunder. Any such agent, including any
Broker authorized to direct the investment of a Participant's Account, must be
authorized in writing by the Participant in such form which is approved by and
filed with the Custodian. Any instruction by an agent so authorized shall be
binding on the Participant. Any authorization hereunder shall remain in effect
until revoked by the Participant in writing filed with the Custodian.

Principal Life Insurance Company shall substitute another Trustee or Custodian
upon notification by the Internal Revenue Service that such substitution is
required because it has failed to comply with the requirements of Section
1.401-12(n) of the Treasury Regulations, or is not keeping such records, or
mailing such returns or sending such statements as are required by forms or
regulations.

In no event shall the Custodian be liable or responsible for the payment of any
tax or any penalty attributable to Excess Contributions, retention of Excess
Contributions, failure to make the minimum distribution from the Account, or
withdrawals or distributions made from the Account. Custodian shall not be
required to make any distribution which, in the judgment of Custodian, will
render Custodian directly liable for any such tax or penalty.

In the event Custodian shall receive any claim to the funds held under the Plan
which claim is adverse to the interest of the Participant or the Beneficiary and
which claim Custodian, in its absolute discretion, deems meritorious, Custodian
may withhold distribution under the Plan until the claim is resolved or until
instructed by a court of competent jurisdiction or Custodian may pay all or any
portion of the funds then invested in the Mutual Fund into such court. Payment
to a court under the Plan shall relieve Custodian of any further obligation to
anyone for the amount so paid.

In the event any question arises or ambiguity exists as to the meaning,
interpretation or construction of any provisions of the Plan, the Custodian is
authorized to construe or interpret any such provision and such construction and
interpretation shall be binding upon the Participant and the Beneficiary.

As compensation for its service hereunder, the Custodian shall be paid an annual
maintenance fee of $15 per IRA Plan Participant Account on the first business
day of December each year. Such fees shall be deducted from the Accounts as
applicable and paid to the Custodian unless the participant elects, in a writing
filed with the Custodian, to pay such fee directly. Any fee not paid directly
when due may be deducted from the Account and paid to the Custodian.

Any notices required or permitted to be given to Custodian under the Plan shall
be given to Custodian at the office of Custodian or any of its offices, and any
notices required or permitted to be given to the Participant under the Plan
shall be given to the Participant at the address for notice the Participant may
file with Custodian from time to time. Notices hereunder may be personally
served or sent by United States mail, first class, with postage prepaid and
properly addressed.

Any provision of the Plan which disqualifies it as a Traditional IRA or Roth IRA
shall be disregarded to the extent necessary to continue to qualify it as such
under the code.

Titles to Articles in this Plan are for convenience only and, in the event of
any conflict, the text of the Plan rather than the titles shall control.

Individual Retirement Custody
Account Disclosure Statement

Right To Revoke
AN INDIVIDUAL MAY REVOKE HIS OR HER TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT
(TRADITIONAL IRA) OR ROTH IRA AND HIS OR HER PARTICIPATION IN THE PLAN AT ANY
TIME WITHIN SEVEN (7) BUSINESS DAYS AFTER HIS OR HER ADOPTION OF THE PLAN. In
the event of such a revocation, the entire amount contributed by the individual
will be returned.

Individuals wishing to revoke their Traditional IRA or Roth IRA are required to
mail or deliver a written notice of revocation to the custodian not later than
the seventh business day after the establishment of the Account. The notice
shall be deemed delivered on the date of the postmark.

Custodian: Principal Life Insurance Company
Princor Financial Services Corporation
Attn: IRA Section
PO Box 10423
Des Moines, Iowa 50306
Telephone Number: 1-800-247-4123
Sponsor: Principal Group of Funds

General Description Of The Plan

A Traditional IRA may be established under the Plan by any working individual
who will not reach the age of 70 1/2 before the end of the year. The age
limitation does not apply to rollover contributions, Simplified Employee Pension
contributions and Roth IRA contributions. See the Plan for a more detailed
description of the restrictions on participation.

Contributions may be invested in any of the Mutual Funds named in the
application and instructions. All dividends and capital gains distributions will
be reinvested in the Funds selected and will accumulate in the account on a
tax-deferred basis. The individual (or the named beneficiary who survives the
individual) may request the Custodian to exchange shares of one fund for any
other eligible fund. Investments may be split among any of the funds named in
the application.

Traditional IRA(s) must be maintained in separate Custodial Account(s) from Roth
IRA(s).

The Participant may begin receiving distributions from a Traditional IRA without
incurring a 10% penalty tax on premature distributions at any time after a
Participant reaches age 59 1/2 The 10% penalty tax does not apply to
distributions made

o Due to the Participant's death
o Due to the Participant's disability as defined in the Plan
o In substantially equal periodic payments (at least annually) for the life
expectancy of the Participant or joint life expectancies of the Participant
and the Participant's beneficiary
o For medical expenses which are deductible on the Participant's income tax
return
o To pay health insurance premiums for a Participant who has been unemployed
for at least 12 weeks in the current or preceding tax year
o For qualified education expenses
o For a first-time home purchase for distributions of up to $10,000

The Participant must begin receiving distributions from a Traditional IRA before
April 1 following the year in which he or she attains age 70 1/2 He or she may
elect to receive their distribution in a lump sum or in installments over any
number of years selected by the Participant, but not exceeding their life
expectancy or the joint and survivor expectancy of the Participant and his or
her designated Beneficiary. Each payment is calculated by dividing the net asset
value of the shares in the account, and any dividends held, by the number of
payments remaining until the end of the period selected.

Income Tax Considerations

2000 Tax Year

Single persons who are not covered by an employer retirement plan can deduct
amounts contributed to a Regular IRA up to the lesser of $2,000 or 100% of
compensation. Persons who are covered by an employer retirement plan will be
able to make tax-deductible contributions to Regular IRAs only if their incomes
are below certain levels. For married persons filing separate tax returns, the
fact that the spouse is covered by an employer retirement plan does not affect
the non-covered spouse's ability to make deductible contributions. For married
persons filing jointly where either spouse has an employer retirement plan, the
full Traditional IRA deduction may be taken if adjusted gross income (AGI) is
$52,000 or less ($32,000 or less for single taxpayers.) However, as the joint
AGI exceeds $52,000 ($32,000 for singles), the deduction is phased down at 20
cents (22.5 cents for spousal IRAs) per dollar of AGI and is eventually
phased-out when joint AGI reaches $62,000 ($42,000 for singles). The phaseout is
based on AGI before it is reduced for deductible IRA contributions. The
deduction is rounded down to the next lowest multiple of $10 when not already a
multiple of $10. There is a $200 minimum deduction for anyone without phaseout
limits. The amount of a contribution that is deductible is determined by the
Participant. To the extent allowable contributions are not eligible for
deduction due to the AGI limits, non-deductible contributions are permitted.

A married person who is not covered by an employer retirement plan, but whose
spouse is covered may deduct IRA contributions if AGI on a joint return is less
than $150,000. The deduction is phased out as previously discussed between
$150,000 and $160,000. The foregoing does not apply to Rollover IRAs.

Employer retirement plans include pension and profit sharing plans, 401(k)
plans, 403(b) plans, SEP and SIMPLE IRAs, government plans and just about every
other type of employer-maintained retirement plan. One exception: unfunded
deferred compensation plans including plans of state and local government and
tax-exempt organizations. A person will be considered a participant in an
employer retirement plan even if not vested. However, a person who works for an
employer that has a plan, but who has not yet met the plan's eligibility
requirements, can make deductible IRA contributions. A person's Form W-2 for the
year should indicate whether that person is covered by an employer retirement
plan.
Future Tax Years

Regular IRAs. Any single person or any married person where neither spouse is
covered by an employer retirement plan (as defined in the preceding paragraph)
can deduct contributions of up to the lesser of $2,000 or 100% of compensation
to a Regular IRA. Persons covered by an employer retirement plan may make
deductible contributions to a Regular IRA, but deductions are phased out based
upon the person's AGI as described in the following table:

Tax Year Joint Returns (AGI) Individual Returns (AGI)
- -----------------------------------------------------------------
2001 $53,000-$63,000 $33,000-$43,000
2002 $54,000-$64,000 $34,000-$44,000
2003 $60,000-$70,000 $40,000-$50,000
2004 $65,000-$75,000 $45,000-$55,000
2005 $70,000-$80,000 $50,000-$60,000
2006 $75,000-$85,000 $50,000-$60,000
2007+ $80,000-$100,000 $50,000-$60,000

The amount of the contribution that is deductible is determined by the
Participant. To the extent allowable contributions are not eligible for
deductions due to the AGI limits, non-deductible contributions are permitted.

Roth IRAs. For tax year 2000, any person whose AGI is less than $95,000
($150,000 if filing a joint return) can contribute the lesser of 100% of
compensation or $2,000 to a Roth IRA. Contributions to a Roth IRA are not
deductible. Eligibility to contribute to a Roth IRA is phased out for AGI
between $95,000 - $110,000 for individuals and $150,000 - $160,000 for married
persons filing joint returns. Contributions to a Roth IRA are coordinated with
contributions to a Regular IRA; contribution to one reduces the amount that may
be contributed to the other so that total contributions cannot exceed the 100%
of compensation/$2,000 per Participant limitation. Participation in an employer
retirement plan does not affect eligibility for Roth IRA contributions.

Set-up charges and annual fees are considered miscellaneous deductions and,
therefore, are not deductible unless miscellaneous deductions are in excess of
2% of the Participant's adjusted gross income.

Rollover Contributions

Rollovers to Traditional IRAs from other retirement plans. Certain distributions
from qualified employee benefit plans and 403(b) plans (tax-sheltered annuities)
are eligible to be paid to a Traditional IRA. Such a payment is referred to as a
rollover of an eligible rollover distribution. The administrator or custodian
for the employee benefit plan or 403(b) plan from which the distribution is made
can indicate which portion of a distribution is an eligible rollover
distribution. Non-taxable distributions, distributions that are part of a series
of substantially equal payments made at least once a year over long periods of
time and distributions that are required after a participant attains age 70 1/2
are not eligible rollover distributions.

A rollover can be completed as a direct rollover to a Traditional IRA (which
avoids the application of a 20% income tax withholding requirement) or by
reinvesting distribution proceeds paid to the plan participant in a Traditional
IRA within 60 days of the date the participant receives the distribution. If the
distribution is not reinvested within 60 days of its receipt, the payment is
taxed in the year in which the participant received it. Distributions from a
qualified employee benefit plan may be eligible for special tax treatment such
as 10-year averaging and capital gain tax treatment. This special tax treatment
is not available if an individual previously rolled over a payment from the
employee benefit plan or certain other similar plans of the employer. The
special tax treatment is also not available for distributions rolled over to an
IRA when distributions are subsequently made from that IRA. Also, if only part
of a distribution from an employee benefit plan is rolled over to an IRA, this
special tax treatment is not available for the part of the distribution that was
not so rolled over. Additional restrictions are described in IRS Form 4972,
which has more information on lump sum distributions and how an individual may
elect the special tax treatment. The Plan provides that Rollover contributions
from a qualified employer plan shall be held in a separate IRA (called a Conduit
IRA) at all times, unless the Participant instructs the Custodian, in writing,
to the contrary. The Custodian shall be entitled to rely upon all written
instructions it reasonably believes to be genuine.

Rollovers to Traditional IRAs from other Traditional IRAs. Amounts distributed
from another Traditional IRA may be rolled over to the Princor Traditional IRA.
Rollovers between Traditional IRAs may occur no more than once a year; however,
direct transfers of Traditional IRA assets to another Traditional IRA may occur
at any time.

Under the Plan, Rollover Contributions may only be made in cash. If an
individual receives a distribution from a qualified employee benefit plan of
property other than cash, the individual may sell such property and invest the
proceeds of the sale in a Traditional Rollover IRA under the Plan within 60 days
after distribution.

Rollover from a Traditional IRA to a Roth IRA. An individual whose AGI is less
than $100,000 (regardless of whether filing an individual or joint return) may
rollover amounts from a Traditional IRA to a Roth IRA. Any income resulting from
the rollover is not taken into account when determining whether the AGI cap has
been exceeded. The 10% penalty tax does not apply to amounts rolled over to the
Roth IRA. The income resulting from a rollover from a Traditional IRA to a Roth
IRA is taxable. Amounts rolled over to a Roth IRA must remain in the Roth IRA
for a period of five years from the year of the rollover in order to receive
favorable tax treatment. The Participant shall provide the Custodian with
information necessary to ensure compliance with holding period and IRS reporting
requirements.

Simplified Employee Pension Contribution

If an Individual Retirement Account is being used as a receptacle for employer
contributions made under a Simplified Employee Pension (SEP) Plan, the limit on
employer contributions in a taxable year is the lesser of $30,000 or 15% of a
Participant's compensation.

Contributions must bear a uniform relationship to the total compensation [not in
excess of the first $170,000 beginning in 2000, as indexed in future years under
Code Section 401(a)(17)] of each employee maintaining a SEP. The employer's
contribution is excluded from the Participant's current taxable income.

Please see your Registered Representative for additional information about
Simplified Employee Pension plans.

Excess Contributions

Contributions for an individual during a taxable year are considered excess
contributions if they exceed 100% of compensation or $2,000, or such other limit
as may be prescribed by law. Contributions to Traditional IRAs and Roth IRAs are
coordinated; contributions to one reduces the amount that may be contributed to
the other so that total contributions cannot exceed the 100% of
compensation/$2,000 limitation. Contributions to individual accounts for a
person and that person's spouse are considered excess contributions if
contributions exceed the lesser of: (1) $4,000; (b) 100% of the compensation
includable in gross income for the taxable year; or (c) more than $2,000 paid to
a single individual retirement account for the individual or the individual's
spouse. If excess contributions are made, the individual must pay a cumulative,
non-deductible 6% excise tax on the portion of the contribution that exceeds the
amounts permitted by law. An individual can avoid this excise tax by withdrawing
the excess contribution prior to filing the tax return. Any income earned by the
excess contribution must also be withdrawn at the time the excess contribution
is withdrawn. Since the excess contribution was not deductible when made, it is
not included in the individual's income when returned, nor is it subject to the
10% tax on premature distributions. Income earned by the excess contribution,
however, must be included in the individual's income tax return for the tax year
in which it was earned. If the 6% excise tax is imposed for the taxable year,
its cumulative effect can be avoided by making reduced contributions in a future
year. Excess rollover contributions can also be corrected (with regard to dollar
limitations) if the excess contribution was due to reasonable cause.

Form 5329

Form 5329 (Return for Individual Retirement Savings Arrangement) must accompany
an individual's tax return (Form 1040) only if the individual owes excess
contribution taxes, premature distribution taxes, or taxes on certain
accumulations.

Distributions/Transfers

Traditional IRAs. Distributions from Traditional IRAs are taxed as ordinary
income when received. Ten-year averaging is not permissible.

If non-deductible contributions are made, the portion of the Traditional IRA
contribution consisting of non-deductible contributions will not be taxed again
when distributed. A distribution of a non-deductible contribution will generally
consist of a non-taxable portion (the return of non-deductible contributions)
and a taxable portion (the return of deductible contributions, if any, and
account earnings).

Thus, an individual may not take a distribution from a Traditional IRA which is
entirely tax free. The following formula is used to determine the non-taxable
portion of distributions for a taxable year:
[Remaining Non-Deductible Contributions Year-End / Total Traditional IRA
Account Balances] X Total Distributions (for the year) = Non-Taxable
Distributions (for the year)
All of an individual's Traditional IRAs are treated as a single IRA to figure
the year-end total IRA account balance. This includes all regular IRAs, as well
as Simplified Employer Pension (SEP) IRAs, SIMPLE IRAs and Rollover IRAs.
Distributions taken during the year must also be added back in. Calculation of
the taxable portion of any IRA distribution as well as recordkeeping of the
non-deductible contributions made to an IRA are the Participant's
responsibility.

Roth IRAs. Distributions from Roth IRAs are not subject to federal income tax
if:

(1) made after the Participant attains age 59 1/2, or due to the
Participant's death or disability, or for a first-time home purchase (up
to $10,000), and
(2) made more than five tax years after the tax year of the initial
contribution to any Roth IRA.

Distributions from a Roth IRA that do not qualify for tax-exempt treatment (e.g.
because taken before the Participant attains age 59 1/2 or before five years
have passed since the initial contribution was made) are treated first as a
return of the Participant's contribution and after that amount is distributed,
additional distributions would be taxed as ordinary income and would be subject
to the 10% penalty tax if none of the previously described exceptions to the
penalty tax apply. Calculation of the taxable portion of any distribution as
well as recordkeeping of the undistributed balance of Roth IRA contributions are
the Participant's responsibility.

The IRS has not issued regulations governing distributions from Roth IRAs, so
there are some unanswered questions regarding distributions subsequent to the
Participant's death. Distributions will be subject to such regulations when and
as adopted.

Financial Disclosure

Information about the Funds and the method by which the annual earnings are
computed and allocated to each shareholder's account is described in the
prospectus accompanying this disclosure statement.

An annual administration fee of $15.00 is also required. This fee will be
deducted from the account as a separate item on the first business day of
December each year. You may pay this fee by separate check before November 15.
There is also a sales charge deducted on the purchase of Class A shares of most
of the Funds amounting to 4.75% (3.75% for SEP IRAs and certain "listbill"
plans) or less of the amount of the transaction at offering price. These sales
charges are reduced under various circumstances described in detail in the
Fund's prospectus. A contingent deferred sales charge of up to 4% (3% for SEP
IRAs and certain "listbill" plans) applies to Class B shares of each of the
Funds. Class C shares are available with no front end sales charge and no
contingent deferred sales charge if shares are held for greater than 1 year. A
complete description of Class A shares, Class B shares, and Class C shares is
provided in the prospectus. You must have received a prospectus prior to
submitting your application to create a Traditional or Roth IRA. The annual
earnings on your Account will depend upon the investment income received by the
Fund or Funds which you select. Growth in value of this Account is neither
guaranteed nor projected. All certificates shall be held by the Custodian. The
Custodian has the right to change its fees in the current and/or future years.

Princor Financial Services Corporation is the principal underwriter of each of
the Principal Mutual Funds and offers shares of such Funds, as well as other
unaffiliated mutual funds for the purpose of funding IRAs. Only shares of
Principal Mutual Funds are offered to fund an IRA for which Principal Life
Insurance Company acts as Custodian.

Prohibited Transactions

If the Participant borrows money by use of the Traditional or Roth IRA or uses
any portion of it as security for a loan (which the plan prohibits), the portion
so used will be treated for tax purposes as having been distributed to the
Participant. In addition, if a Participant or a Beneficiary engages in a
prohibited transaction (as defined in Section 4975 of the Internal Revenue Code)
with respect to the Traditional or Roth IRA, the Account will be disqualified
and the entire amount in the Account will be treated as having been distributed
to the Participant. Examples of prohibited transactions for both Traditional and
Roth IRAs are: the borrowing of the income or principal from the IRA, selling
property to or buying property from the IRA, or receiving more than reasonable
compensation for services performed for the IRA. When all or a portion of an IRA
is treated as having been distributed, such amounts will be taxed as previously
described as a distribution for that taxable year and will generally be subject
to the 10% federal tax on premature distributions (unless an exemption applies).

Estate And Gift Tax Considerations

Transfers of Traditional and Roth IRAs are generally subject to taxation under
federal estate and gift tax laws. To the extent that benefits are distributed to
the spouse of the Participant, the amount of the benefits may be eligible for
the estate tax marital deduction.

In community property states, if a person other than a spouse is designated as
the plan beneficiary, the spouse might be considered to have made a gift on
one-half of the value of the benefit conveyed when the conveyance is complete.

IRS Approval Letter

An IRS approval letter has not been obtained for the IRA Plan and Custodial
Agreement contained in this booklet but the Custodian is of the opinion that the
form of the Plan and Custodial Agreement complies with applicable federal income
tax rules and regulations.

Further Information

Further information regarding Individual Retirement Accounts and the retirement
savings deduction may be obtained from any district office of the Internal
Revenue Service.

Because legal and tax consequences of the use of the plan may vary in particular
cases, independent advice should be sought from your attorney or tax advisor.

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 Aggressive Growth Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.

Statement of Additional Information

dated March 1, 2000
as revised through
May 1, 2000

This Statement of Additional Information is not a prospectus but is a part of
the prospectuses for the Funds listed above. The most recent prospectuses dated
March 1, 2000 and shareholder report are available without charge. Please call
1-800-247-4123 to request a copy. The prospectus for Class A, Class B and Class
C shares of all funds may also be viewed on our web site at
www.principal.com/funds.
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
Statement of Net Assets for Principal Partners
Aggressive Growth Fund, Inc. .................................. 81
Statements of Net Assets for Principal LargeCap Stock Index
Fund, Inc., Principal Partners LargeCap Growth Fund, Inc. and
Principal Partners MidCap Growth Fund, Inc..................... 85
Statements of Net Assets for Principal European Equity Fund, Inc.
and Principal Pacific Basin Fund, Inc.......................... 89

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 Aggressive Growth Fund, Partners LargeCap Growth Fund,
Partners MidCap Growth Fund and SmallCap Fund);
o one Fund which seeks a total investment return including both capital
appreciation and income through investments in equity and debt securities
(Balanced Fund);
o one Fund which seeks growth of capital and growth of income primarily
through investments in common stocks of well-capitalized, established
companies (Blue Chip Fund);
o one Fund which seeks to generate total return by investing primarily in
equity securities of companies principally engaged in the real estate
industry (Real Estate Fund);
o one Fund which seeks to approximate the performance of the Standard &
Poor's 500 Composite Stock Price Index (LargeCap Stock Index Fund); and
o one Fund which seeks current income and long-term growth of income and
capital by investing primarily in equity and fixed-income securities of
companies in the public utilities industry (Utilities Fund).

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).

In seeking to achieve its investment objective, each Fund has adopted as matters
of fundamental policy certain investment restrictions which cannot be changed
without approval by the holders of the lesser of: (i) 67% of the Fund's shares
present or represented at a shareholders' meeting at which the holders of more
than 50% of such shares are present or represented by proxy; or (ii) more than
50% of the outstanding shares of the Fund. Similar shareholder approval is
required to change the investment objective of each of the Funds. The following
discussion provides for each Fund a statement of its investment objective, a
description of its investment restrictions that are matters of fundamental
policy and a description of any investment restrictions it may have adopted that
are not matters of fundamental policy and may be changed without shareholder
approval. For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security, and any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service will not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectuses or the Statement of
Additional Information is not fundamental and may be changed by the respective
Fund's Board of Directors.

The Table on the next page graphically illustrates each Fund's emphasis on
producing current income or capital growth and the stability of the market value
of the Fund's portfolio. These illustrations represent comparative relationships
only with regard to the investment objectives sought by the Funds. Relative
income, stability and growth may vary among the Funds with certain market
conditions. The illustrations are not intended and should not be construed as
projected relative performances of the Principal Mutual Funds.

INCOME-ORIENTED FUNDS

PRINCIPAL LIMITED TERM BOND FUND . . . for investors seeking a high level of
current income combined with a relative high level of stability of principal by
investing in fixed-income securities with maturities of 5 years or less.

PRINCIPAL GOVERNMENT SECURITIES INCOME FUND . . . for investors seeking a high
level of current income, liquidity, and relative safety from a portfolio
emphasizing GNMA securities.

PRINCIPAL BOND FUND . . . for investors seeking high current income from a
portfolio of higher quality bonds.

PRINCIPAL TAX-EXEMPT BOND FUND . . . for investors seeking a high level of
current income exempt from federal income tax, consistent with preservation of
capital.

PRINCIPAL HIGH YIELD FUND . . . for investors seeking higher current income from
a portfolio of lower or non-rated fixed-income securities.

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND . . . for investors seeking income, liquidity and
the stability of money market securities.

GROWTH ORIENTED
INTERNATIONAL FUNDS

PRINCIPAL INTERNATIONAL FUND . . . for investors seeking growth from common
stocks of companies domiciled in any of the major nations of the world.

PRINCIPAL EUROPEAN EQUITY FUND . . . for investors seeking growth of capital by
investing primarily in equity securities (or other securities with equity
characteristics) of issuers located in Europe.

PRINCIPAL PACIFIC BASIN FUND . . . for investors seeking growth of capital by
investing primarily in equity securities (or other securities with equity
characteristics) of issuers located in the Pacific Basin.

PRINCIPAL INTERNATIONAL SMALLCAP FUND . . . for investors seeking long-term
growth from equities from non-United States companies with relatively small
market capitalization.

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND . . . for investors seeking
long-term growth by investing in stocks of companies in emerging market
countries.

GROWTH-ORIENTED DOMESTIC FUNDS

PRINCIPAL UTILITIES FUND . . . for investors seeking current income and
long-term growth of income and capital from securities issued by public
utilities companies.

PRINCIPAL REAL ESTATE FUND . . . for investors seeking long-term capital growth
and current income from securities of companies primarily engaged in the real
estate industry.

PRINCIPAL BALANCED FUND . . . for investors seeking total return from a flexible
portfolio of common stocks, corporate bonds and money market securities.

PRINCIPAL BLUE CHIP FUND . . . for investors seeking growth of capital and
growth of income from stocks of well capitalized, established companies.

PRINCIPAL CAPITAL VALUE FUND . . . for investors seeking long-term capital
appreciation, with growth of income as a secondary objective.

PRINCIPAL LARGECAP STOCK INDEX FUND . . . for investors seeking long-term growth
of capital by investing in widely held common stocks representing industrial,
financial, utilities and transportation companies.

PRINCIPAL GROWTH FUND . . . for investors seeking long-term growth opportunities
from a common stock portfolio.

PRINCIPAL MIDCAP FUND . . . for investors seeking long-term capital growth from
securities of emerging and other growth-oriented companies.

PRINCIPAL PARTNERS AGGRESSIVE GROWTH FUND . . . for investors seeking long-term
capital appreciation from a portfolio of primarily equity securities.

PRINICIPAL PARTNERS LARGECAP GROWTH FUND . . . for investors seeking long-term
growth of capital by investing primarily in common stocks of larger
capitalization domestic companies.

PRINCIPAL PARTNERS MIDCAP GROWTH FUND . . . for investors seeking long-term
growth of capital by investing primarily in medium capitalization U.S.
companies.

PRINCIPAL SMALLCAP FUND . . . for investors seeking long-term growth of capital
from a portfolio of investment securities issued by companies domiciled in the
United States with comparatively smaller market capitalization.

* These illustrations represent comparative relationships only with regard to
the investment objectives sought by the funds. Relative income, stability and
growth may vary among the funds with certain market conditions. In no way
should the illustrations be construed as projected relative performances of
the Principal funds.

GROWTH-ORIENTED FUNDS

Investment Objectives

Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective.

Principal Blue Chip Fund, Inc. ("Blue Chip Fund") seeks to achieve growth of
capital and growth of income by investing primarily in common stocks of well
capitalized, established companies.

Principal Capital Value Fund, Inc. ("Capital Value Fund") seeks to achieve
primarily long-term capital appreciation and secondarily growth of investment
income through the purchase primarily of common stocks, but the Fund may invest
in other securities.

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

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 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 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, Partners Aggressive Growth
Fund, Pacific Basin Fund, Partners LargeCap Growth Fund and Partners MidCap
Growth Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The European Equity Fund,
LargeCap Stock Index Fund, Pacific Basin Fund, Partners Aggressive Growth Fund,
Partners LargeCap Growth Fund and Partners MidCap Growth Fund each may not:

(1) Issue any senior securities as defined in the Investment Company Act of
1940, as amended. Purchasing and selling securities and futures contracts
and options thereon and borrowing money in accordance with restrictions
described below do not involve the issuance of a senior security.

(2) Invest in physical commodities or commodity contracts (other than foreign
currencies), but it may purchase and sell financial futures contracts,
options on such contracts, swaps and securities backed by physical
commodities.

(3) Invest in real estate, although it may invest in securities that are
secured by real estate and securities of issuers that invest or deal in
real estate.

(4) Borrow money, except that it may (a) borrow from banks (as defined in the
Investment Company Act of 1940, as amended) or other financial institutions
or through reverse repurchase agreements in amounts up to 33 1/3% of its
total assets (including the amount borrowed); (b) to the extent permitted
by applicable law, borrow up to an additional 5% of its total assets for
temporary purposes; (c) obtain short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities; and (d)
purchase securities on margin to the extent permitted by applicable law
(the deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered purchase of
securities on margin).

(5) Make loans, except that the Fund may (a) purchase and hold debt obligations
in accordance with its investment objective and policies; (b) enter into
repurchase agreements; and (c) lend its portfolio securities without
limitation against collateral (consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities) equal at all times to not less than 100% of the value of
the securities loaned. This limit does not apply to purchases of debt
securities or commercial paper.

(6) Invest more than 5% of its total assets in the securities of any one issuer
(other than obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities) or purchase more than 10%
of the outstanding voting securities of any one issuer, except that this
limitation shall apply only with respect to 75% of the total assets of the
Fund. This restriction does not apply to the Partners LargeCap Growth Fund
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 non-rated fixed income
securities which are believed to not involve undue risk to income or principal.
Capital growth is a secondary objective when consistent with the objective of
high current income.

Principal Limited Term Bond Fund, Inc. ("Limited Term Bond Fund") seeks a high
level of current income consistent with a relatively high level of principal
stability by investing in a portfolio of securities with a dollar weighted
average maturity of five years or less.

Principal Tax-Exempt Bond Fund, Inc. ("Tax-Exempt Bond Fund") seeks as high a
level of current income exempt from federal income tax as is consistent with
preservation of capital. The Fund seeks to achieve its objective primarily
through the purchase of investment grade quality, tax-exempt fixed income
obligations.

Investment Restrictions

Bond Fund, High Yield Fund and Limited Term Bond Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Bond Fund, High Yield
Fund and Limited Term Bond Fund each may not:

(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.

(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.

(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:

(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.

(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:

(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.

(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning more than one-half
of 1% (0.5%) of the securities of the issuer together own beneficially more
than 5% of such securities.

(6) Invest in companies for the purpose of exercising control or management.

(7) Invest more than:
(a) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that these limitations shall apply only with respect to 75% of
the Fund's total assets.
(b) 15% of its total assets in securities that are not readily marketable
and in repurchase agreements maturing in more than seven days.

(8) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.

(9) Invest in commodities or commodity futures contracts.

(10) Write, purchase or sell puts, calls or combinations thereof.

(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in securities of issuers which invest in
or sponsor such programs.

(12) Make short sales of securities.

(13) Purchase any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions.

(14) Make loans, except that the Fund may purchase and hold debt obligations in
accordance with its investment objective and policies, enter into
repurchase agreements, and may lend its portfolio securities without
limitation against collateral, consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities, which is equal at all times to 100% of the value of the
securities loaned.

(15) Borrow money, except for temporary or emergency purposes from banks in an
amount not to exceed 5% of the value of the Fund's total assets at the time
the loan is made.

(16) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.

The Fund has also adopted the following restriction which is not fundamental and
may be changed without shareholder approval. It is contrary to the Fund's
current policy to invest in real estate limited partnership interests.

The identification of the issuer of a Municipal Obligation depends on the terms
and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, the subdivision is deemed the
sole issuer. Similarly, in the case of an industrial development bond, if that
bond is backed only by the assets and revenues of the non-governmental user,
then such non-governmental user is deemed the sole issuer. If, in either case,
the creating government or some other entity guarantees a security, the
guarantee is considered a separate security and is treated as an issue of such
government or other entity. However, that guarantee is not deemed a security
issued by the guarantor if the value of all securities issued or guaranteed by
the guarantor and owned by the Fund does not exceed 10% of the value of the
Fund's total assets.

The Fund may invest without limit in debt obligations of issuers located in the
same state and in debt obligations which are repayable out of revenue sources
generated from economically related projects or facilities. Sizable investments
in such obligations could increase the risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, but it will not invest more than 20% of its total assets in any Municipal
Obligation the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax.

MONEY MARKET FUND

Investment Objectives

Principal Cash Management Fund, Inc. ("Cash Management Fund") seeks as high a
level of income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing in a
portfolio of money market instruments.

Investment Restrictions

Cash Management Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Cash Management Fund
may not:

(1) Concentrate its investments in any one industry. No more than 25% of the
value of its total assets will be invested in securities of issuers having
their principal activities in any one industry, other than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or obligations of domestic branches of U.S. banks and
savings institutions. (See "Bank Obligations").

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

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

(4) Act as an underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under the federal securities laws.

(5) Purchase securities of any company with a record of less than 3 years
continuous operation (including that of predecessors) if the purchase would
cause the value of the Fund's aggregate investments in all such companies
to exceed 5% of the value of the Fund's total assets.

(6) Engage in the purchase and sale of illiquid interests in real estate,
including interests in real estate investment trusts (although it may
invest in securities secured by real estate or interests therein) or invest
in commodities or commodity contracts, oil and gas interests, or mineral
exploration or development programs.

(7) Purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization.

(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

(9) Purchase securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The Fund will not
effect a short sale of any security. The Fund will not issue or acquire put
and call options, straddles or spreads or any combination thereof.

(10) Invest in companies for the purpose of exercising control or management.

(12) Borrow money except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require
the untimely disposition of securities, in an amount not to exceed the
lesser of (i) 5% of the value of the Fund's assets, or (ii) 10% of the
value of the Fund's net assets taken at cost at the time such borrowing is
made. The Fund will not issue senior securities except in connection with
such borrowings. The Fund may not pledge, mortgage, or hypothecate its
assets (at value) to an extent greater than 10% of the net assets.

(13) Invest in time deposits maturing in more than seven days; time deposits
maturing from two business days through seven calendar days may not exceed
10% of the value of the Fund's total assets.

(14) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.

The Fund has also adopted the following restriction which is not fundamental and
may be changed without shareholder approval. It is contrary to the Fund's
current policy to:

(1) Invest in real estate limited partnership interests.

FUNDS' INVESTMENTS

The following information supplements the discussion of the Funds' investment
objectives and policies in the Prospectuses under the caption "CERTAIN
INVESTMENT STRATEGIES AND RELATED RISKS."

Selections of equity securities for the Funds (except the European Equity Fund,
LargeCap Stock Index, Pacific Basin Fund, Partners Aggressive Growth, Partners
LargeCap Growth and Partners MidCap Growth Funds) 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 Aggressive Growth Fund and the Partners
LargeCap Growth Fund, the Sub-Advisors, Morgan Stanley Asset Management ("Morgan
Stanley") and Duncan-Hurst Capital Management Inc. ("Duncan-Hurst"),
respectively, follow a flexible investment program in looking for companies with
above average capital appreciation potential. The Sub-Advisor focuses on
companies with consistent or rising earnings growth records and compelling
business strategies. The Sub-Advisor continually and rigorously studies company
developments, including business strategy, management focus and financial
results, to identify companies with earnings growth and business momentum. In
addition, the Sub-Advisor closely monitors analysts' expectations to identify
issuers that have the potential for positive earnings surprises versus consensus
expectations. In its selection of securities for the Partners Aggressive 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.

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 Aggressive Growth, Partners LargeCap Growth and Real Estate Funds
- 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%;
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

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.

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

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
Aggressive Growth Fund may also purchase and sell futures contracts and
related options to maintain cash reserves while simulating full investment
in equity securities and to keep substantially all of its assets exposed to
the market.

Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund is obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it is obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date. The Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction
costs are less or more than the price of the initial sale or on whether the
price of an offsetting sale is more or less than the price of the initial
purchase plus transaction costs. Although the Funds usually liquidate
futures contracts on financial instruments in this manner, they may make or
take delivery of the underlying securities when it appears economically
advantageous to do so.

A futures contract based on a securities index provides for the purchase or
sale of a group of securities at a specified future time for a specified
price. These contracts do not require actual delivery of securities but
result in a cash settlement. The amount of the settlement is based on the
difference in value of the index between the time the contract was entered
into and the time it is liquidated (at its expiration or earlier if it is
closed out by entering into an offsetting transaction).

When a futures contract is purchased or sold a brokerage commission is
paid. Unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or 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 Aggressive
Growth) are not permitted to engage in speculative futures trading. Each
Fund determines that the price fluctuations in the futures contracts and
options on futures used for hedging or risk management purposes are
substantially related to price fluctuations in securities held by the Fund
or which it expects to purchase. In pursuing traditional hedging
activities, each Fund may sell futures contracts or acquire puts to protect
against a decline in the price of securities that the Fund owns. Each Fund
may purchase futures contracts or calls on futures contracts to protect the
Fund against an increase in the price of securities the Fund intends to
purchase before it is in a position to do so.

When a Fund purchases a futures contract, or purchases a call option on a
futures contract, it places any asset, including equity securities and
non-investment grade debt in a segregated account, so long as the asset is
liquid and marked to the market daily. The amount so segregated plus the
amount of initial margin held for the account of its broker equals the
market value of the futures contract.

The Funds do not maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions
(marked to market) exceeds the current market value of that portion of its
securities portfolio being hedged by those futures and options plus or
minus the unrealized gain or loss on those open positions, adjusted for the
historical volatility relationship between that portion of the portfolio
and the contracts (i.e., the Beta volatility factor). To the extent a Fund
writes call options on specific securities in that portion of its
portfolio, the value of those securities is deducted from the current
market value of that portion of the securities portfolio. If this
limitation is exceeded at any time, the Fund takes prompt action to close
out the appropriate number of open short positions to bring its open
futures and options positions within this limitation.

Forward Foreign Currency Exchange Contracts

The International Growth Oriented, Partners Aggressive Growth, Partners LargeCap
Growth and Partners MidCap 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
Co-operatives, Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
o U.S. instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home
Administration.

Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality. Still others, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality.

(3) Bank Obligations -- Certificates of deposit, time deposits and bankers'
acceptances of U.S. commercial banks having total assets of at least one
billion dollars and overseas branches of U.S. commercial banks and foreign
banks, which in the Manager's opinion, are of comparable quality. However,
each such bank with its branches has total assets of at least five billion
dollars, and certificates, including time deposits of domestic savings and
loan associations having at least one billion dollars in assets which are
insured by the Federal Savings and Loan Insurance Corporation. The Fund may
acquire obligations of U.S. banks which are not members of the Federal
Reserve System or of the Federal Deposit Insurance Corporation.

Any obligations of foreign banks must be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of U.S.
banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. For example, an issuing bank may be able to maintain
that the liability for an investment is solely that of the overseas branch
which could expose the Fund to a greater risk of loss. In addition,
obligations of foreign banks or of overseas branches of U.S. banks may be
affected by governmental action in the country of domicile of the branch or
parent bank. Examples of adverse foreign governmental actions include the
imposition of currency controls, the imposition of withholding taxes on
interest income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium. Deposits
in foreign banks or foreign branches of U.S. banks are not covered by the
Federal Deposit Insurance Corporation. The Fund only buys short-term
instruments where the risks of adverse governmental action are believed by
the Manager to be minimal. The Fund considers these factors along with
other appropriate factors in making an investment decision to acquire such
obligations. It only acquires those which, in the opinion of management,
are of an investment quality comparable to other debt securities bought by
the Fund. The Fund invests in certificates of deposit of selected banks
having less than one billion dollars of assets providing the certificates
do not exceed the level of insurance (currently $100,000) provided by the
applicable government agency.

A certificate of deposit is issued against funds deposited in a bank or
savings and loan association for a definite period of time, at a specified
rate of return. Normally they are negotiable. However, the Fund
occasionally invests in certificates of deposit which are not negotiable.
Such certificates may provide for interest penalties in the event of
withdrawal prior to their maturity. A bankers' acceptance is a short-term
credit instrument issued by corporations to finance the import, export,
transfer or storage of goods. They are termed "accepted" when a bank
guarantees their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at maturity.

(4) Commercial Paper -- Short-term promissory notes issued by U.S. or foreign
corporations.

(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures which at
the time of purchase have 397 days or less remaining to maturity.

(6) Repurchase Agreements -- Instruments under which securities are purchased
from a bank or securities dealer with an agreement by the seller to
repurchase the securities at the same price plus interest at a specified
rate. (See "FUND INVESTMENTS - Repurchase Agreements.")

(7) Taxable Municipal Obligations -- Short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.

The ratings of nationally recognized statistical rating organization (NRSRO),
such as Moody's Investor Services, Inc. ("Moody's") and Standard and Poor's
("S&P"), which are described in Appendix 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 European Equity, LargeCap Stock Index,
Pacific Basin, Partners Aggressive Growth, Partners LargeCap Growth and Partners
MidCap 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 24.2% and 57.0%
Blue Chip Fund 16.4% and 0.5%
Bond Fund 48.9% and15.2%
Capital Value Fund 44.5% and 23.2%
Government Securities Income Fund 19.4% and 17.1%
Growth Fund 32.4% and 21.9%
High Yield Fund 86.1% and 65.9%
International Emerging Markets Fund 95.8% and 45.2%
International Fund 58.7% and 38.7%
International SmallCap Fund 191.5% and 99.8%
Limited Term Bond Fund 20.9% and 23.8%
MidCap Fund 59.9% and 25.1%
Real Estate Fund 55.1% and 60.4%
SmallCap Fund 100.7% and 20.5%
Tax-Exempt Bond Fund 15.6% and 6.6%
Utilities Fund 23.5% and 11.9%

MANAGEMENT OF THE 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, 50, Director. Executive Vice President, Principal
Life Insurance Company since 2000; Senior Vice President, 1996-2000; Vice
President - Individual Markets 1990-1996. Director, Principal Management
Corporation and Princor Financial Services Corporation.

@ James D. Davis, 66, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.

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

@ Pamela A. Ferguson, 56, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto,
President, Grinnell College.

Richard W. Gilbert, 59, Director. 5040 Arbor Lane, #302, Northfield,
Illinois. President, Gilbert Communications, Inc. since 1993. Prior
thereto, President and Publisher, Pioneer Press.

*& J. Barry Griswell, 51, Director and Chairman of the Board. President and
CEO, Principal Life Insurance Company since 2000; President, 1998-2000;
Executive Vice President, 1996-1998; Senior Vice President, 1991-1996.
Director and Chairman of the Board, Principal Management Corporation and
Princor Financial Services Corporation.

@ William C. Kimball, 52, 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, 59, Director. 13731 Bay Hill Court, Clive, Iowa.
President and CEO, Barbican Enterprises, Inc. since 1997. President and
CEO, Lu San ELITE USA, L.C. 1985-1998.

* Craig L. Bassett, 48, Treasurer. Second Vice President and Treasurer,
Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
Prior thereto, Associate Treasurer.

* Michael J. Beer, 39, Financial Officer. Executive Vice President, Princor
Financial Services Corporation and Principal Management Corporation since
1999. Senior Vice President and Chief Operating Officer, 1997-1999. Vice
President and Chief Operating Officer, 1995-1997. Prior thereto, Financial
Officer.

* Arthur S. Filean, 61, 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, 44, 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, 41, Controller. Controller - Mutual Funds, Princor
Financial Services Corporation since 1995.

* Michael D. Roughton, 48, 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, 48, Assistant Vice President and Assistant Secretary.
Assistant Vice President - Registered Products, Princor Financial Services
Corporation since 2000. Prior thereto, Compliance Officer - Registered
Products.

* Traci L. Weldon, 34, Assistant Counsel. Counsel, Principal Life Insurance
Company since 1999. Assistant Counsel 1998-1999. Assistant State Attorney
General, Iowa Attorney General's Office, 1994-1998. Prior thereto,
Investment Banker, Kirkpatrick Pettis.

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

@ Member of Audit and Nominating Committee

& Member of Executive Committee (which is selected by the Board and which may
exercise all the powers of the Board, with certain exceptions, when the
Board is not in session. The Committee must report its actions to the
Board.)
COMPENSATION TABLE*
fiscal year ended October 31, 1999

Compensation from Compensation from
Director Each Principal Mutual Fund Fund Complex

James D. Davis $1,350 $53,250
Pamela A. Ferguson 1,200 47,700
Richard W. Gilbert 1,350 50,850
Barbara A. Lukavsky 1,200 47,700

* None of the Funds provide retirement benefits for any of the directors.

As of April 7, 2000, 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 0.17%
Blue Chip Fund 0.33
Bond Fund 0.70
Capital Value Fund 25.85
Cash Management Fund 7.26
Government Securities Income Fund 0.04
Growth Fund 0.37
High Yield Fund 8.19
International Emerging Markets Fund 31.08
International Fund 24.78
International SmallCap Fund 26.07
LargeCap Stock Index Fund 88.12
Limited Term Bond Fund 18.30
MidCap Fund 0.36
Partners Aggressive Growth Fund 8.36
Partners LargeCap Growth Fund 86.73
Partners MidCap Growth Fund 78.97
Real Estate Fund 60.87
SmallCap Fund 8.09
Tax-Exempt Bond Fund 0.05
Utilities Fund 0.30

As of April 26, 2000, Principal Life Insurance Company owned 100% of the
outstanding voting shares of the Principal European Equity and Principal Pacific
Basin Funds which represented start-up capital.

As of April 11, 2000, 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 April 7, 2000, the following shareholders of the Funds owned 5% or more of
the outstanding shares of any Class of the Funds:

<TABLE>
<CAPTION>
Percentage
Name Address of Ownership
<S> <C> <C>
Principal Balanced Fund, Inc.
Class C
Louis Barbieri 23 Highland Cross 16.3%
Rutherford, NJ 07070-2110

Wanda J. Mayer 301 6th Avenue 12.2
Hiawatha, IA 52233-1704
Principal Blue Chip Fund, Inc.
Class C
Edward Chester 920 SW 6th Street, Apt. 112 17.5
Gainesville, FL 32601-6692

Principal Life Insurance Company Custodian 8912 Brierfield Road 6.6
IRA of Richard A. Jackson Granbury, TX 76049-4215

Principal Bond Fund, Inc.
Class C
Principal Life Insurance Company Custodian 8912 Brierfield Road 24.5
IRA of Richard A. Jackson Granbury, TX 76049-4215

Donaldson Lufkin Jenrette P.O. Box 2052 9.1
Securities Corporation, Inc. Jersey City, NJ 07303-9998

Ellen M. Bryan TOD 2608 W. Castle Court 6.4
Peoria, IL 60614-3727

Principal Capital Accumulation Fund, Inc.
Class C
Principal Life Insurance Company Custodian P.O. Box 1523 8.8
IRA of Theodore J. Gomes Kahului, HI 96733-1523

Principal Life Insurance Company Custodian 291 Dairy Road 7.7
IRA of David Masanda Kahului, HI 96732-2914

Principal Life Insurance Company Custodian 9107 W. Monks Lane 6.8
IRA of Donald D. Davis Mapleton, IL 61547-9783

Woodland Heights Presbyterian Church 722 W. Atlantic Street 5.0
Attn: Gregory W. Esselman Springfield, MO 65803-1516

Principal Cash Management Fund, Inc.
Class A
Delaware Charter Guarantee & Trust Co. P.O. Box 8704 7.5
Attn: Thomas R. Kline, CFO Wilmington, DE 19899-8704

Class C
Principal Life Insurance Company Custodian 9107 W. Monks Lane 21.3
IRA of Donald D. Davis Mapleton, IL 61547-9783

Janice Mae Firth & Brian Andrew Firth 3212 Stony Pointe Drive 8.9
Greensboro, NC 27406-5420

Principal Life Insurance Company Custodian 3434 Thyme Drive 6.1
IRA of Thomas L. Parr Rockford, IL 61114-5385

Principal Government Securities Income Fund, Inc.
Class C
Principal Life Insurance Company Custodian 8912 Brierfield Road 19.0%
IRA of Richard A. Jackson Granbury, TX 76049-4215

Dominica M. Bradley 26751 Via Zaragosa 6.8
Mission Viejo, CA 92691-5024

George F. Kenney & Merlyn J. Kenney 3690 S. Willow Water Lane 6.5
Springfield, MO 65809-4238

Principal Growth Fund, Inc.
Class C
Tarbell Financial Corp. 1403 N. Tustin Avenue, Suite 380 14.0
Non-Qualified Plan Reserve Santa Ana, CA 92705-8620

Edward Chester 920 SW 6th Street, Apt. 112 11.2
Gainesville, FL 32601-6692

Principal Life Insurance Company Custodian 8912 Brierfield Road 7.5
IRA of Richard A. Jackson Granbury, TX 76049-4215

Principal High Yield Fund, Inc.
Class C
Principal Life Insurance Company Custodian 8912 Brierfield Road 27.0
IRA of Richard A. Jackson Granbury, TX 76049-4215

Ellen M. Bryan TOD 2608 W. Castle Court 21.1
Peoria, IL 61614-3727

Marguerite M. Dunn & Patricia A. Kunz 125 N. Main Street 7.3
Carroll, IA 51401-2852

Class R
Principal Life Insurance Company Custodian 1313 Little Blue Heron Court 6.5
IRA of William Flatley Naples, FL 34108-3311

Principal International Emerging Markets Fund, Inc.
Class C
Betty Jo Fagerholt Revocable Living Trust 7575 139th Avenue NE 17.7
Hoople, ND 58243-9523
Principal International Fund, Inc.
Class C
Edward Chester 920 SW 6th Street., Apt. 112 13.8
Gainesville, FL 32601-6692

Principal Life Insurance Company Custodian 8912 Brierfield Road 9.1
IRA of Richard A. Jackson Granbury, TX 76049-4215

Principal Life Insurnace Company Custodian 9107 W. Monks Lane 7.3
IRA of Donald D. Davis Mapleton, IL 61547-9783

Principal International SmallCap Fund, Inc.
Class C
Edward Chester 920 SW 6th Street, Apt. 112 13.8
Gainesville, FL 32601-6692

Principal Life Insurance Company Custodian 8912 Brierfield Rd. 12.8
IRA of Richard A. Jackson Granbury, TX 76049-4215

Betty Jo Fagerholt Revocable Living Trust 7575 139th Avenue NE 7.3
Hoople, ND 58243-9523

Principal Life Insurance Company Trust 47 Roxiticus Road 5.9
Roth IRA of Robin E. Behm Mendham, NJ 07945-2501

Principal LargeCap Stock Index Fund, Inc.
Class A
Donaldson Lufkin Jenrette P.O. Box 2052 8.1%
Securities Corporation, Inc. Jersey City, NJ 07303-2052

Rhythums Net Connections, Inc. 6933 S. Revere Pkwy 6.5
Englewood, CO 80112-3981

Principal Limited Term Bond Fund, Inc.
Class C
Principal Life Insurance Company Custodian 2101 Sumac Drive 13.7
IRA of William P. Klein Champaign, IL 61821-6323

Principal Life Insurance Company Custodian 2101 Sumac Drive 9.6
Conduit IRA of Mary F. McClain Champaign, IL 61821-6323

Donaldson Lufkin Jenrette P.O. Box 2052 7.1
Securities Corporation Inc. Jersey City, NJ 07303-9998

Principal Life Insurance Company Custodian 3748 Maple Hill Road 6.0
Conduit IRA of Frederic Angelo Hibbing, MN 55746-8339

Principal MidCap Fund, Inc.
Class C
Betty Jo Fagerholt Revocable Living Trust 7575 139th Avenue NE 9.7
Hoople, ND 58243-9523

Woodland Heights Presbyterian Church 722 W. Atlantic Street 8.1
Attn: Gregory W. Esselman Springfield, MO 65803-1516

Donaldson Lufkin Jenrette P.O. Box 2052 5.4
Securities Corporation, Inc. Jersey City, NJ 07303-9998

Principal Partners Aggressive Growth Fund, Inc.
Class C
Betty Jo Fagerholt Revocable Living Trust 7575 139th Avenue NE 6.8
Hoople, ND 58243-9523
Principal Partners LargeCap Growth Fund, Inc.
Class C
Donaldson Lufkin Jenrette P.O. Box 2052 5.3
Securities Corporation, Inc. Jersey City, NJ 07303-9998

Principal Real Estate Fund, Inc.
Class C
Principal Life Insurance Company Custodian 3344 Kalamazoo Avenue SE 9.0
Inherited IRA of Nicola L. Kern Grand Rapid, MI 49508-2558
Beneficiary of Richard Kern

Principal SmallCap Fund, Inc.
Class C
Edward Chester 920 SW 6th Street, Apt. 112 15.7
Gainesville, FL 32601-6692

Betty Jo Fagerholt Revocable Living Trust 7575 139th Avenue NE 6.1
Hoople, ND 58243-9523
Principal Tax-Exempt Bond Fund, Inc.
Class B
Allan S. Noddle The Grand Oudezijds Voorburgawal 197 9.5
Amsterdam Netherlands 1012 EX
Netherlands
Class C
Shirley M. Parish 4234 Cedar Bend Drive 11.3
Missouri City, TX 77459-4586

JME, Inc. 3020 E. Oakland Avenue 54.1
Bloomington, IL 61704-6214

Principal Utilities Fund, Inc.
Class C
James W. Smith RR 1 Box 183 15.2%
Eastman, WI 54626-9798

Donaldson Lufkin Jenrette P.O. Box 2052 5.6
Securities Corporation, Inc. Jersey City, NJ 07303-9998

Delaware Charter Guarantee and Trust Co. 11452 Clarkson Road 5.2
Biomedical Research Laboratories Inc. PSP Los Angeles, CA 90064-3831
FBO Hun-Chi Lin
</TABLE>

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, Blue Chip, Capital Value, Government Securities Income,
Growth, International, International Emerging Growth,
International SmallCap, LargeCap Stock Index, Limited Term Bond,
MidCap, SmallCap and Utilities Funds.
Sub-Advisor: Invista, an indirectly wholly-owned subsidiary of Principal Life
Insurance Company and an affiliate of the Manager, was founded in
1985 and manages investments for institutional investors,
including Principal Life Insurance Company. Assets under
management at December 31, 1999 were approximately $35.3 billion.
Invista's address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.

Fund: 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 for more than 410,000 institutional and
individual clients, as at January 2000. Offering institutional
investment product since the early 1970s, BT's team of over 100
investment specialists manages all asset classes from its
headquarters in Sydney, Australia. It has specialized expertise
in European and Asian regional equity portfolios as well as
global equities, global and Australian fixed interest, currency
management, asset allocation and Australian real estate. Its
address is The Chifley Tower, 2 Chifley Square, Sydney 2000
Australia.

Fund: Partners Aggressive 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, 1999, Morgan Stanley, together with its affiliated
institutional asset management companies, managed investments of
approximately $184.9 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, 1999,
Duncan-Hurst managed assets of approximately $5.9 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, 1999, Turner had
discretionary management authority with respect to approximately
$5.7 billion in assets.

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)
Michael J. Beer Financial Officer Executive Vice President and 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 Vice President - Registered Products (Manager)
Assistant Secretary
</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 Aggressive Growth Fund .75 .70 .65 .60 .55
International Fund .85 .80 .75 .70 .65
</TABLE>

<TABLE>
<CAPTION>
Net Asset Value of Fund

First Next Next Next Over
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, 1999 and the rate of the fee for each Fund for
investment management services as provided in the Management Agreement for the
fiscal year then ended were as follows:
Management Fee
Net Assets as of For Fiscal Year Ended
Fund October 31, 1999 October 31, 1999

Balanced Fund $160,113,402 0.58%
Blue Chip Fund 291,707,955 0.46
Bond Fund 187,792,641 0.48
Capital Value Fund 670,726,648 0.37
Cash Management Fund 374,707,858 0.44
Government Securities Income Fund 279,432,929 0.45
Growth Fund 636,878,130 0.38
High Yield Fund 40,312,045 0.60
International Emerging Markets Fund 22,166,474 0.68
International Fund 408,882,643 1.25
International SmallCap Fund 40,867,074 1.20
Limited Term Bond Fund 33,418,483 0.50*
MidCap Fund 407,721,977 0.56
Real Estate Fund 13,009,308 0.90
SmallCap Fund 66,121,454 0.85
Tax-Exempt Bond Fund 198,589,990 0.46
Utilities Fund 126,445,559 0.59

* Before waiver.

The Manager pays for office space, facilities and simple business equipment and
the costs of keeping the books of the Fund. The Manager also compensates all
personnel who are officers and directors, if such officers and directors are
also affiliated with the Manager.

Each Fund pays all its other corporate expenses incurred in the operation of the
Fund and the continuous public offering of its shares, but not selling expenses.
Among other expenses, the Fund pays its taxes (if any), brokerage commissions on
portfolio transactions, interest, the cost of stock issue and transfer and
dividend disbursement, administration of shareholder accounts, custodial fees,
expenses of registering and qualifying shares for sale after the initial
registration, auditing and legal expenses, fees and expenses of unaffiliated
directors, and costs of shareholder meetings. The Manager pays most of these
expenses in the first instance, and is reimbursed for them by the Fund as
provided in the Management Agreement. The Manager also is responsible for the
performance of certain of the functions described above, such as transfer and
dividend disbursement and administration of shareholder accounts, the cost of
which the Manager is reimbursed by the Fund.

Under a Sub-Advisory Agreement between BT and the Manager, BT performs all the
investment advisory responsibilities of the Manager under the Management
Agreement for the European Equity Fund. The Manager pays BT a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Fund as follows: first $250 million of net assets - the fee is 0.50%; next
$250 million - 0.475%; next $250 million - 0.450%; next $250 million - 0.425%;
and net assets over $1 billion - 0.40%.

Under a Sub-Advisory Agreement between BT and the Manager, BT performs all the
investment advisory responsibilities of the Manager under the Management
Agreement for the Pacific Basin Fund. The Manager pays BT a fee that is accrued
daily and payable monthly. The fee is based on the net asset value of the Fund
as follows: first $250 million of net assets - the fee is 0.60%; next $250
million - 0.575%; next $250 million - 0.550%; next $250 million - 0.525%; and
net assets over $1 billion - 0.50%.

Under a Sub-Advisory Agreement between Duncan-Hurst and the Manager,
Duncan-Hurst Stanley performs all the investment advisory responsibilities of
the Manager under the Management Agreement for the Partners LargeCap Growth
Fund. The Manager pays Duncan-Hurst a fee that is accrued daily and payable
monthly. The fee of 0.50% is based on the net asset value of the Fund.

Under a Sub-Advisory Agreement between Morgan Stanley and the Manager, Morgan
Stanley performs all the investment advisory responsibilities of the Manager
under the Management Agreement for the Partners Aggressive Growth Fund. The
Manager pays Morgan Stanley a fee that is accrued daily and payable monthly. The
fee is based on the net asset value of the Fund as follows: first $200 million
of net assets - the fee is 0.30%; next $100 million - 0.25%; and net assets over
$300 million - 0.20%.

Under a Sub-Advisory Agreement between Turner and the Manager, Turner performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the Partners MidCap Growth Fund. The Manager pays Turner a fee
that is accrued daily and payable monthly. The fee of 0.50% is based on the net
asset value of the Fund.

Fees paid for investment management services during the periods indicated were
as follows:

<TABLE>
<CAPTION>
Management Fees For Fiscal Years Ended October 31,

Fund 1999 1998 1997

<S> <C> <C> <C>
Balanced Fund $ 914,378 $ 750,616 $ 556,009
Blue Chip Fund 1,142,839 764,784 417,958
Bond Fund 909,902 782,241(1) 636,217(1)
Capital Value Fund 2,570,792 2,349,118 2,031,143
Cash Management Fund 1,526,404 2,127,595(1) 2,864,916(1)
Government Securities Income Fund 1,283,959 1,239,644 1,227,604
Growth Fund 2,283,089 1,863,070 1,443,120
High Yield Fund 259,764 287,858 230,667
International Emerging Markets Fund 216,500 157,324 28,487(2)
International Fund 2,673,903 2,492,037 1,882,664
International SmallCap Fund 358,891 242,403 30,283(2)
Limited Term Bond Fund 160,694(1) 133,825(1) 97,039(1)
MidCap Fund 2,461,880 2,548,924 2,004,305
Real Estate Fund 114,693 87,653(3) N/A
SmallCap Fund 412,361 147,083(3) N/A
Tax-Exempt Bond Fund 972,660 974,740 941,387
Utilities Fund 685,175 531,644(1) 436,296(1)
<FN>
(1)Before waiver.
(2)Period from August 14, 1997 (Date Operations Commenced) through October 31, 1997.
(3)Period from December 11, 1997 (Date Operations Commenced) through October 31, 1998.
</FN>
</TABLE>

The Manager waived $66,728, $100,270 and $59,630 of its fee for the Limited Term
Bond Fund for the years ended October 31, 1999, 1998 and 1997, respectively. The
Manager waived $172,366 and $60,665 of its fee for the Bond Fund for the years
ended October 31, 1998 and 1997, respectively. The Manager also waived $1,343
and $7,933 of its fee for the Cash Management Fund for the years ended October
31, 1998 and 1997, respectively. The Manager also waived $82,515 and $79,048 of
its fee for the Utilities Fund for the years ended October 31, 1998 and 1997,
respectively.

Costs reimbursed to the Manager during the periods indicated for providing other
services pursuant to the Management Agreement were as follows:
<TABLE>
<CAPTION>
Reimbursement by Fund
of Certain Costs For
Fiscal Years Ended October 31,

Fund 1999 1998 1997

<S> <C> <C> <C>
Balanced Fund $ 664,179 $ 521,852 $ 364,442
Blue Chip Fund 1,336,983 832,394 402,003
Bond Fund 534,104 482,817 278,385
Capital Value Fund 1,415,788 1,247,865 837,825
Cash Management Fund 788,303 854,575 1,833,423
Government Securities Income Fund 544,396 499,207 407,146
Growth Fund 1,613,707 1,421,948 1,121,832
High Yield Fund 170,349 217,020 98,481
International Emerging Markets Fund 148,065 119,948 4,116(1)
International Fund 1,111,335 1,168,106 906,359
International SmallCap Fund 168,397 153,320 4,283(1)
Limited Term Bond Fund 123,038 90,187 44,634
MidCap Fund 1,733,436 1,840,474 1,308,608
Real Estate Fund 93,688 76,546(2) N/A
SmallCap Fund 348,721 199,807 (2) N/A
Tax-Exempt Bond Fund 165,845 199,780 135,553
Utilities Fund 390,699 304,813 230,151

<FN>
(1)Period from August 14, 1997 (Date Operations Commenced) through October 31, 1997.
(2)Period from December 11, 1997 (Date Operations Commenced) through October 31, 1998.
</FN>
</TABLE>

NOTE: The Manager has agreed to waive a portion of its fee for the Blue Chip
Fund from November 1, 1999. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the Blue Chip Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average net
assets attributable to a Class on an annualized basis) not to exceed
1.20% for Class A Shares, 1.95% for Class B Shares, 1.95% for Class C
Shares and 1.70% for Class R Shares. The effect of the waiver is to
reduce the Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the European
Equity Fund from May 1, 2000. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the Partners MidCap
Growth Fund through the period ending October 31, 2000. The waiver will
maintain a total level of operating expenses (expressed as a percent of
average net assets attributable to a Class on an annualized basis) not
to exceed 2.50% for Class A Shares, 3.25% for Class B Shares, 3.25% for
Class C Shares and 3.00% for Class R Shares. The effect of the waiver is
to reduce the Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the
International Emerging Markets Fund from November 1, 1999. The Manager
intends to continue the waiver and, if necessary, pay expenses normally
payable by the International Emerging Markets Fund through the period
ending October 31, 2000. The waiver will maintain a total level of
operating expenses (expressed as a percent of average net assets
attributable to a Class on an annualized basis) not to exceed 2.50% for
Class A Shares, 3.25% for Class B Shares, 3.25% for Class C Shares and
3.00% for Class R Shares. The effect of the waiver is to reduce the
Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the LargeCap
Stock Index Fund from March 1, 2000. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the LargeCap
Stock Index Fund through the period ending October 31, 2000. The waiver
will maintain a total level of operating expenses (expressed as a
percent of average net assets attributable to a Class on an annualized
basis) not to exceed 0.80% for Class A Shares, 1.15% for Class B Shares,
1.15% for Class C Shares and 1.30% for Class R Shares. The effect of the
waiver is to reduce the Fund's annual operating expenses.

The Manager voluntarily waived a portion of its fee for the Limited Term
Bond Fund from the date operations commenced and intends to continue
such waiver and, if necessary, pay expenses normally payable by the
Limited Term Bond Fund through the period ending October 31, 2000 in an
amount that will maintain a total level of operating expenses, which as
a percent of average net assets attributable to a class on an annualized
basis will not exceed 1.00% for the Class A shares, 1.35% for the Class
B shares, 1.35% for the Class C shares and 1.60% for the Class R shares.
The effect of the waiver was and will be to reduce the Fund's annual
operating expenses and increase the Fund's yield and effective yield.

The Manager has agreed to waive a portion of its fee for the Pacific
Basin Fund from May 1, 2000. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the Partners MidCap
Growth Fund through the period ending October 31, 2000. The waiver will
maintain a total level of operating expenses (expressed as a percent of
average net assets attributable to a Class on an annualized basis) not
to exceed 2.50% for Class A Shares, 3.25% for Class B Shares, 3.25% for
Class C Shares and 3.00% for Class R Shares. The effect of the waiver is
to reduce the Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the Partners
Aggressive Growth Fund from November 1, 1999. The Manager intends to
continue the waiver and, if necessary, pay expenses normally payable by
the Partners Aggressive Growth Fund through the period ending October
31, 2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class on
an annualized basis) not to exceed 1.60% for Class A Shares, 2.35% for
Class B Shares, 2.35% for Class C Shares and 2.10% for Class R Shares.
The effect of the waiver is to reduce the Fund's annual operating
expenses.

The Manager has agreed to waive a portion of its fee for the Partners
LargeCap Growth Fund from March 1, 2000. The Manager intends to continue
the waiver and, if necessary, pay expenses normally payable by the
Partners LargeCap Growth Fund through the period ending October 31,
2000. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class on
an annualized basis) not to exceed 1.80% for Class A Shares, 2.55% for
Class B Shares, 2.55% for Class C Shares and 2.30% for Class R Shares.
The effect of the waiver is to reduce the Fund's annual operating
expenses.

The Manager has agreed to waive a portion of its fee for the Partners
MidCap Growth Fund from March 1, 2000. The Manager intends to continue
the waiver and, if necessary, pay expenses normally payable by the
Partners MidCap Growth Fund through the period ending October 31, 2000.
The waiver will maintain a total level of operating expenses (expressed
as a percent of average net assets attributable to a Class on an
annualized basis) not to exceed 1.80% for Class A Shares, 2.55% for
Class B Shares, 2.55% for Class C Shares and 2.30% for Class R Shares.
The effect of the waiver is to reduce the Fund's annual operating
expenses.

The Manager has agreed to waive a portion of its fee for the Real Estate
Fund from November 1, 1999. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the Real Estate Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average net
assets attributable to a Class on an annualized basis) not to exceed
1.90% for Class A Shares, 2.65% for Class B Shares, 2.65% for Class C
Shares and 2.40% for Class R Shares. The effect of the waiver is to
reduce the Fund's annual operating expenses.

The Manager has agreed to waive a portion of its fee for the SmallCap
Fund from November 1, 1999. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the SmallCap Fund
through the period ending October 31, 2000. The waiver will maintain a
total level of operating expenses (expressed as a percent of average net
assets attributable to a Class on an annualized basis) not to exceed
1.80% for Class A Shares, 2.55% for Class B Shares, 2.55% for Class C
Shares and 2.30% for Class R Shares. The effect of the waiver is to
reduce the Fund's annual operating expenses

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.

The Management Agreement for each Fund (except Growth, LargeCap Stock Index,
MidCap, Partners Aggressive Growth, Partners LargeCap Growth and Partners MidCap
Growth) was last approved by shareholders of the applicable Fund on November 2,
1999. Shareholders approved the Management Agreement for the other Funds as
follows: 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 Aggressive Growth - November 1, 1999; Partners LargeCap
Growth - February 25, 2000; and Partners MidCap Growth - February 25, 2000.

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 9/13/99 9/13/99 9/13/99
Blue Chip 9/13/99 9/13/99 9/13/99
Bond 9/13/99 9/13/99 9/13/99
Capital Value 9/13/99 9/13/99 9/13/99
Cash Management 9/13/99 9/13/99 9/13/99
European Equity 3/13/00 3/13/00 3/13/00
Government Securities Income 9/13/99 9/13/99 9/13/99
Growth 9/13/99 9/13/99 9/13/99
High Yield 9/13/99 9/13/99 9/13/99
International 9/13/99 9/13/99 9/13/99
International Emerging Markets 9/13/99 9/13/99 9/13/99
International SmallCap 9/13/99 9/13/99 9/13/99
LargeCap Stock Index 12/13/99 12/13/99 12/13/99
Limited Term Bond 9/13/99 9/13/99 9/13/99
MidCap 9/13/99 9/13/99 9/13/99
Pacific Basin 3/13/00 3/13/00 3/13/00
Partners Aggressive Growth N/A 9/13/99 9/13/99
Partners LargeCap Growth N/A 12/13/99 12/13/99
Partners MidCap Growth N/A 12/13/99 12/13/99
Real Estate 9/13/99 9/13/99 9/13/99
SmallCap 9/13/99 9/13/99 9/13/99
Tax-Exempt Bond 9/13/99 9/13/99 9/13/99
Utilities 9/13/99 9/13/99 9/13/99
</TABLE>

BROKERAGE ON PURCHASES AND SALES OF SECURITIES

In distributing brokerage business arising out of the placement of orders for
the purchase and sale of securities for any Fund, the objective of the Fund's
Manager or Sub-Advisor is to obtain the best overall terms. In pursuing this
objective, the Manager or Sub-Advisor considers all matters it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and executing capability of the broker or dealer and the
reasonableness of the commission, if any (for the specific transaction and on a
continuing basis). This may mean in some instances that the Manager or
Sub-Advisor will pay a broker commissions that are in excess of the amount of
commissions another broker might have charged for executing the same transaction
when the Manager or Sub-Advisor believes that such commissions are reasonable in
light of (a) the size and difficulty of the transaction (b) the quality of the
execution provided and (c) the level of commissions paid relative to commissions
paid by other institutional investors. (Such factors are viewed both in terms of
that particular transaction and in terms of all transactions that broker
executes for accounts over which the Manager or Sub-Advisor exercises investment
discretion. The Manager or Sub-Advisor may purchase securities in the
over-the-counter market, utilizing the services of principal market makers
unless better terms can be obtained by purchases through brokers or dealers, and
may purchase securities listed on the New York Stock Exchange from non-Exchange
members in transactions off the Exchange.)

The Manager or Sub-Advisor 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 fiscal year
ended October 31, 1999 due to research services provided by such brokers. The
table also indicates the commissions paid to such brokers as a result of these
portfolio transactions.

Fund Commissions Paid

Balanced $12,785
Capital Value 41,550
Growth 88,339
International Emerging Markets 215
International 65,764
International SmallCap 241
MidCap 66,150
SmallCap 3,055

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 thses
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 marketmaker for the securities. Such
transactions are usually conducted on a net basis with the Fund paying no
brokerage commissions. Purchases from underwriters include a commission or
concession paid by the issuer to the underwriter, and the purchases from dealers
serving as marketmakers include the spread between the bid and asked prices.

The following table shows the brokerage commissions paid during the periods
indicated. In each year, 100% of the commissions paid by each Fund went to
broker-dealers which provided research, statistical or other factual
information.

<TABLE>
<CAPTION>
Total Brokerage Commissions Paid

Fund 1999 1998 1997

<S> <C> <C> <C>
Balanced Fund $ 50,867 $ 70,261 $ 47,096
Blue Chip Fund 149,945 41,024 113,923
Capital Value Fund 695,270 331,316 339,994
Growth Fund 438,476 276,004 43,018
International Emerging Markets Fund 125,801 51,821 45,140*
International Fund 1,201,021 758,808 708,333
International SmallCap Fund 306,636 101,485 46,970*
MidCap Fund 517,173 242,311 98,217
Real Estate Fund 36,634 40,791** N/A
SmallCap Fund 154,031 46,957** N/A
Utilities Fund 95,017 39,470 58,450

<FN>
* Period from August 14, 1997 (date operations commenced) through October
31, 1997.
** Period from December 11, 1997 (date operations commenced) through
October 31, 1998.
</FN>
</TABLE>

Brokerage commissions paid to affiliates during the fiscal year ending October
31 were as follows:

<TABLE>
<CAPTION>
Commissions Paid to Goldman Sachs Co.
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 1,725 3.39% 1.94%
1998 2,950 4.20% 1.87%
Blue Chip Fund
1999 7,735 5.16% 5.25%
Capital Value Fund
1999 87,440 12.58% 10.41%
Growth Fund
1999 10,650 2.43% 3.63%
1998 5,000 1.81% 1.87%
International Emerging Markets Fund
1999 6,756 5.37% 5.97%
1998 662 1.28% 1.54%
International Fund
1999 90,123 7.50% 5.97%
1998 41,600 5.48% 5.79%
International SmallCap Fund
1999 26,377 8.60% 9.72%
1998 2,326 2.29% 2.96%
MidCap Fund
1999 21,673 4.19% 3.49%
Real Estate Fund
1999 135 0.37% 0.47%
SmallCap Fund
1999 2,370 1.54% 2.95%
1998 210 0.45% 0.61%
Utilities Fund
1999 3,160 3.33% 3.83%
1998 1,500 3.80% 3.71%
</TABLE>

<TABLE>
<CAPTION>
Commissions Paid to J.P. Morgan Securities
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 6,841 13.45% 15.18%
1998 500 0.71% 1.03%
Blue Chip Fund
1999 8,485 5.66% 5.82%
1998 1,950 4.75% 5.35%
Capital Value Fund
1999 9,470 1.36% 1.83%
1998 18,935 5.72% 6.27%
Growth Fund
1999 23,170 5.28% 5.47%
1998 1,250 0.45% 0.39%
International Emerging Markets Fund
1999 4,492 3.57% 4.82%
1998 2,570 4.96% 6.77%
International Fund
1999 13,911 1.16% 1.22%
1998 17,961 2.37% 1.80%
MidCap Fund
1999 10,715 2.07% 1.87%
Real Estate Fund
1999 8,845 24.14% 23.03%
1998 3,205 7.86% 7.67%
SmallCap Fund
1999 3,065 1.99% 2.68%
Utilities Fund
1999 3,935 4.14% 4.98%
</TABLE>

<TABLE>
<CAPTION>
Commissions Paid to Morgan Stanley& Co. Incorporated
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C>
Balanced Fund
1999 $ 2,300 4.52% 4.33%
1998 2,630 3.74% 2.27%
1997 45 - 0.1%
Blue Chip Fund
1999 13,950 9.30% 11.72%
1998 365 0.89% 0.99%
1997 4,602 4.0% 2.4%
Capital Value Fund
1999 12,575 1.81% 2.48%
1998 13,740 4.15% 3.78%
1997 9,900 2.9% 2.4%
Growth Fund
1999 12,338 2.81% 3.90%
1998 12,500 4.53% 4.92%
1997 3,250 7.6% 8.5%
International Emerging Markets Fund
1999 2,570 2.04% 2.76%
1998 1,499 2.89% 3.64%
1997 1,586 3.5% 9.3%
International Fund
1999 128,900 10.73% 11.76%
1998 78,938 10.40% 10.03%
1997 20,595 2.9% 2.7%
International SmallCap Fund
1999 18,755 6.12% 8.26%
1998 4,284 4.22% 7.42%
1997 1,502 3.2% 4.2%
MidCap Fund
1999 21,551 4.17% 5.00%
1998 7,716 3.18% 4.19%
1997 3,750 3.8% 2.8%
Real Estate Fund
1999 1,600 4.37% 4.10%
1998 11,540 28.29% 28.36%
SmallCap Fund
1999 795 0.52% 0.81%
1998 840 1.79% 1.65%
Utilities Fund
1999 340 0.36% 0.49%
1998 1,735 4.40% 5.95%
</TABLE>

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 Aggressive 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 Aggressive 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 executed together as a
single "block" in order to facilitate orderly and efficient execution. Whenever
Duncan-Hurst does so, each account on whose behalf an order was placed will
receive the average price and will bear a proportionate share of all transaction
costs, based on the size of that account's order. Clients receiving such
concurrent treatment may include investment limited partnerships of which
Duncan-Hurst is a general partner and accounts as to which Duncan-Hurst may
receive performance-based fees. In some cases, they may also include affiliates
of Duncan-Hurst.

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.

HOW TO PURCHASE SHARES

Each Fund, except the Tax-Exempt Bond Fund, offers investors four classes of
shares which bear sales charges in different forms and amounts: Class A, Class
B, Class C and Class R shares. The Tax-Exempt Bond Fund offers only Class A,
Class B and Class C shares.

Purchases are generally made by completing an Account Application or a Principal
Mutual Fund IRA Application and mailing it to Princor. Shares are issued at the
offering price next computed after the application is received at Princor's main
office and Princor receives the amount to be invested. 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
All Funds Except Sales Charge for
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

Rights of Accumulation. The applicable sales charge is determined by adding the
current net asset value of any Class A shares, Class B shares and Class C shares
already owned by the investor to the amount of the new purchase. The
corresponding percentage factor in the schedule is then applied to the entire
amount of the new purchase. For example, if an investor currently owns Class A,
Class B or Class C shares with a value of $5,000 and makes an additional
investment of $45,000 in Class A shares of a Growth-Oriented Fund (the total of
which equals $50,000), the charge applicable to the $45,000 investment would be
4.25% of the offering price. If the investor purchases shares of more than one
Principal Mutual Fund at the same time, those purchases are aggregated and added
to the net asset value of the shares of Principal Mutual Funds already owned by
the investor to determine the sales charge for the new purchase. Class A shares
of the Cash Management Fund are not counted in determining either the amount of
a new purchase or the current net asset value of shares already owned, unless
the shares of the Cash Management Fund were acquired in exchange for shares of
other Principal Mutual Funds. If the investor purchases shares from a
broker/dealer other than Princor, the dealer should be advised of any shares
already owned.

Investments made by an individual, or by an individual's spouse and dependent
children purchasing shares for their own account or by a trust primarily for the
benefit of such persons, or by a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a pension,
profit-sharing, or other employee-benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) will be treated as
investments made by a single investor in calculating the sales charge. In
addition, investments made through an employer by or on behalf of an employee
(including independent contractors) by means of payroll deductions or otherwise,
are also considered investments by a single investor in calculating the sales
charge. Other groups (as allowed by rules of the Securities and Exchange
Commission) may be considered for a reduced sales charge. An investor whose new
account qualifies for a reduced charge on the basis of other accounts owned by
the individual, spouse or children, should be certain to identify those accounts
at the time of the new application.

Statement of Intention (SOI). Another method is available by which a purchaser
may qualify for a reduced sales charge on the purchase of Class A shares of the
Funds. A purchaser may execute an SOI indicating the total amount (excluding
reinvested dividends and capital gains distributions) intended to be invested
(including all investments for the account of the spouse and dependent children
or trusts for the benefit of such persons) in Class A shares (except Class A
shares of the Cash Management Fund), Class B shares and Class C shares of the
Funds within a thirteen-month period (two-year period if the intended investment
is made by a trustee of a Section 401(a) plan or is equal to or greater than $1
million). The SOI may be submitted by a shareholder other than a trustee of a
Principal Mutual Fund 401(a) plan, within 90 days after the date of the first
purchase to be included within the SOI period. A trustee of a Principal Mutual
Fund 401(a) plan must submit the SOI at the time the first plan purchase is
made; the SOI may not be submitted after the initial plan purchase and the 90
day backdating is not available. The SOI period begins on the date of the first
purchase included for purposes of satisfying the statement. When an existing
shareholder submits an SOI, the net asset value of all Class A shares (except
Class A shares of the Cash Management Fund), Class B shares and Class C shares
in that shareholder's account or accounts combined for rights of accumulation
purposes, is added to the amount that has been indicated will be invested during
the applicable period, and the sales charge applicable to all purchases of Class
A shares made under the SOI is the sales charge which applies to a single
purchase of this total amount.

An SOI may be entered into for any amount provided such amount, when added to
the net asset value of any shares already held, equals or is in excess of the
amount needed to qualify for a reduced sales charge. In the event a shareholder
invests an amount in excess of the indicated amount, such excess is allowed any
further reduced sales charge for which it qualifies.

The SOI provides for a price adjustment if the amount actually invested is less
than the amount specified therein. Sufficient Class A shares belonging to the
shareholder, other than a shareholder that is 401(a) qualified plan trustee, are
held in escrow in the shareholder's account by Princor to make up any difference
in sales charges based on the amount actually purchased. If the intended
investment is completed within the thirteen-month period (or two-year period),
such shares are released to the shareholder. If the total intended investment is
not completed within that period shares are, to the extent necessary, redeemed
and the proceeds used to pay the additional sales charge due. A shareholder that
is 401(a) qualified plan trustee is billed by Princor Financial Services
Corporation for any additional sales charge due at the end of the two-year
period. In any event, the sales charge applicable to these purchases is no more
than the applicable sales charge had the shareholder made all of such purchases
at one time. The SOI does not constitute an obligation on the shareholder to
purchase, nor the Funds to sell, the amount indicated.

Purchases at Net Asset Value.
A Fund's Class A shares may be purchased without a sales charge:
o by its Directors, Principal Life and its subsidiaries and 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 and Principal Capital Management 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 December 1, 2000 and ending January 31, 2001,
investors may purchase Class A shares of the Funds at net asset value to the
extent that this investment represents the proceeds of a redemption, within the
preceding 60 days, of shares (the purchase price of which shares included a
front-end sales charge on the redemption of which was subject to a contingent
deferred sales charge) of another investment company. This provision does not
apply to purchase of Class A shares used to fund a defined contribution plan.
When making a purchase at net asset value pursuant to this provision, the
investor must indicate on the account application that the purchase qualifies
for a net asset value purchase and must forward to Princor either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor Financial Services Corporation, or (ii) a copy of the
confirmation from the other investment company showing the redemption
transactions. In the case of a wire purchase pursuant to this provision, a copy
of the confirmation from the other investment company showing the redemption
must be forwarded to and received by Princor within 21 days following the date
of purchase. If the confirmation is not provided within the 21-day period, a
sufficient number of shares will be redeemed from the shareholder's account to
pay the otherwise applicable sales charge.

Purchases at a Reduced Sales Charge. A reduced sales charge is also available
for purchases of Class A shares of the Funds, except the LargeCap Stock Index
and Limited Term Bond Funds, to the extent that the investment represents the
death benefit proceeds of one or more life insurance policies or annuity
contracts (other than an annuity contract issued to fund an employer-sponsored
retirement plan that is not an SEP, salary deferral 403(b) plan or HR-10 plan)
of which the shareholder is a beneficiary if one or more of such policies or
contracts is issued by Principal Life Insurance Company, or any directly or
indirectly owned subsidiary of Principal Life Insurance Company, and such
investment is made in any Principal Mutual Fund within one year after the date
of death of the insured. (Shareholders should seek advice from their tax
advisors regarding the tax consequences of distributions from annuity
contracts.) Such shares may be purchased at net asset value plus a sales charge
which ranges from a high of 2.50% to a low of 0% of the offering price
(equivalent to a range of 2.56% to 0% of the net amount invested) according to
the schedule below:

<TABLE>
<CAPTION>
Sales Charge as a % of:

Net Dealer Allowance as %
Offering Amount of Offering
Amount of Purchase Price Invested Price

<S> <C> <C> <C> <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

Schedule 2
The first $50,000 3.00%
The next $50,000 2.00
The next $400,000 1.00
The next $2,500,000 0.50
Excess over $3,000,000 0.25

<FN>
* Plan contributions directed to an annuity contract issued by Principal
Life Insurance Company to fund the plan are combined with contributions
directed to the Funds to determine the applicable commission charge.
</FN>
</TABLE>

Generally, the commission level described in Schedule 2 apply for salary
deferral Plans and the commission level described in Schedule 1 apply to other
plans. No commission will be payable by the employer if shares of the Funds used
to fund an Administered Employee Benefit Plan are purchased through a registered
representative of Princor Financial Services Corporation who is also a Group
Insurance Representative employee of Principal Life Insurance Company.

Plans Other Than Administered Employee Benefit Plans. Shares of the Funds are
offered to fund certain sponsored Princor plans. These plans can be divided into
three categories: Retirement plans meeting the requirements of Section 401 of
the Internal Revenue Code (e.g. 401(k) Plans, Profit Sharing Plans and Money
Purchase Pension Plans); Group Solicited Plan Terminations; and other
employer-sponsored retirement plans (SIMPLE IRA Plans, Simplified Employee
Pension Plans, Salary Reduction Simplified Employee Pension Plans, Non-Qualified
Deferred Compensation Plans, Payroll Deduction Plans ("PDP") and certain
Association Plan.

Princor 401 Plans
When establishing a Princor Section 401 Plan, the employer chooses whether
to fund the plan with either Class A shares, Class B shares or Class C
shares. If Class A shares are used to fund the plan, all plan investments
are treated as made by a single investor to determine whether a reduced
sales charge is available. The regular sales charge table for Class A
shares applies to purchases $250,000 or more. If Class B shares are used to
fund the plan, contributions into the plan after the plan assets amount to
$250,000 or more, are used to purchase Class A shares unless the plan
trustee directs otherwise. Plan assets are not combined with investments
made outside of the plan to determine the sales charge applicable to such
investments. Investments made by plan participants outside of the plan are
not included with plan assets to determine the sales charge applicable to
the plan.

Group Solicited Plan Terminations
Occasionally, an employer terminates a Section 401 Plan. If the employer or
plan trustee enters into a written agreement with Princor permitting the
group solicitation of the employees/plan participants, the proceeds of
distributions from such plans are eligible to purchase shares of the funds
at net asset value. A redemption of such shares within 18 months after
purchase are subject to a contingent deferred sales charge ("CDSC") at the
rate of .75% (.25% for the LargeCap Stock Index and Limited Term Bond
Funds) of the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gain distributions) or the total cost of
such shares. The CDSC is waived in connection with (1) redemption of shares
to satisfy IRS minimum distribution rules or (2) shares redeemed through a
systematic withdrawal plan that permits up to 10% of the value of the
shareholder's Class A shares of a Fund on the last business day of December
each year to be withdrawn automatically in equal monthly installments
throughout the year.

Other Employer Sponsored Princor Plans
When establishing an employer-sponsored Princor plan, the employer chooses
whether to fund the plan with either Class A shares, Class B shares or
Class C shares. If Class A shares are used to fund the plan, all plan
investments are treated as made by a single investor to determine whether a
reduced sales charge is available. The regular sales charge table for Class
A shares applies to purchases of $250,000 or more. If Class B shares are
used to fund the plan and a plan participant has $250,000 or more invested
in Class B shares, Class A shares are purchased with plan contributions
attributable to the plan participant, unless the plan participant elects
otherwise. Plan assets are not combined with investments made outside of
the plan to determine the sales charge applicable to such investments.
Investments made by plan participants outside of the plan are not included
with plan assets to determine the sales charge applicable to the plan.

Shares of the funds are also available to participants of Princor 403(b) plans
at the same sales charge levels available to other employer-sponsored Princor
plans described above. However, contributions by plan participants are not
combined to determine sales charges.

The Funds reserve the right to discontinue offering shares at net asset value
and/or at a reduced sales charge at any time for new accounts and upon 60-days
notice to shareholders of existing accounts. Other types of sponsored plans may
be added in the future.

Class B shares
Class B shares are sold without an initial sales charge, although a CDSC is
imposed if you redeem shares within six years of purchase. Class B shares
purchased under certain sponsored Princor plans established after February 1,
1998, are subject to a CDSC of up to 3% if redeemed within five years of
purchase. (See "Plans Other than Administered Employee Benefit Plans" above for
discussion of sponsored Princor plans.) The following types of shares may be
redeemed without charge at any time: (i) shares acquired by reinvestment of
distributions and (ii) shares otherwise exempt from the CDSC, as described
below. Subject to the foregoing exclusions, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. Therefore, when a share is redeemed, any increase
in its value above the initial purchase price is not subject to any CDSC. The
amount of the CDSC will depend on the number of years since you invested and the
dollar amount being redeemed, according to the following table:

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

<TABLE>
<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>
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

<S> <C> <C>
All purchases other than through Payroll Deduction Plans (PDP)
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>
<CAPTION>
Contingent Deferred Sales Charge as a
Percentage of Dollar Amount Subject to Charge

For Certain Sponsored Plans
Commenced After 2/1/98

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

<S> <C> <C>
All purchases other than through Payroll Deduction Plans (PDP)
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>
<CAPTION>
Underwriting Fees for
Fiscal Years Ended October 31,

Fund 1999 1998 1997

<S> <C> <C> <C>
Balanced Fund $ 689,518 $ 716,315 $ 518,345
Blue Chip Fund 1,419,225 1,230, 098 816,203
Bond Fund 800,916 887,870 582,903
Capital Value Fund 1,647,688 1,769,043 1,383,995
Cash Management Fund 76,773 19,171 14,123
Government Securities Income Fund 940,825 846,821 737,229
Growth Fund 2,515,833 2,079,726 1,548,696
High Yield Fund 200,747 335,156 321,051
International Emerging Markets Fund 111,950 114,325 33,588(1)
International Fund 1,032,623 1,369,016 1,524,740
International SmallCap Fund 156,120 197,039 38,421(1)
Limited Term Bond Fund 89,515 77,191 50,773
MidCap Fund 1,677,041 2,447,638 2,152,664
Real Estate Fund 50,841 53,280(2) N/A
SmallCap Fund 453,831 398,391(2) N/A
Tax-Exempt Bond Fund 576,841 667,756 558,697
Utilities Fund 513,501 339,353 169,904
<FN>
(1) Period from August 14, 1997 (Date Operations Commenced) through
October 31, 1997.
(2) Period from December 11, 1997 (Date Operations Commenced) through
October 31, 1998.
</FN>
</TABLE>

DISTRIBUTION PLAN

Rule 12b-1 of the Investment Company Act of 1940 (the "Act"), as amended,
permits a mutual fund to finance distribution activities and bear expenses
associated with the distribution of its shares provided that any payments made
by the Fund are made pursuant to a written plan adopted in accordance with the
Rule. A majority of the Board of Directors of each Fund, including a majority of
the Directors who have no direct or indirect financial interest in the operation
of the Plan or any agreements related to the Plan and who are not "interested
persons" as defined in the Act, adopted the Distribution Plans as described
below. No such Plan was adopted for Class A shares of the Cash Management Fund.
Shareholders of each class of shares of each Fund approved the adoption of the
Plan for their respective class of shares.

Class A Distribution Plan. Each of the Funds, except the Cash Management Fund,
has adopted a distribution plan for the Class A shares. The Class A Plan
provides that the Fund makes payments from its assets to Princor pursuant to
this Plan to compensate Princor and other selling Dealers for providing
shareholder services to existing Fund shareholders and rendering assistance in
the distribution and promotion of the Fund Class A shares to the public. The
Fund pays Princor a fee after the end of each month at an annual rate no greater
than 0.25% (.15% for the LargeCap Stock Index and Limited Term Bond Funds) of
the daily net asset value of the Fund. Princor retains such amounts as are
appropriate to compensate for actual expenses incurred in distributing and
promoting the sale of the Fund shares to the public but may remit on a
continuous basis up to .25% (.15% for the LargeCap Stock Index and Limited Term
Bond Funds) to Registered Representatives and other selected Dealers (including
for this purpose, certain financial institutions) as a trail fee in recognition
of their services and assistance.

Class B Distribution Plan. Each Class B Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the LargeCap Stock Index
and Limited Term Bond Funds) of the Fund's average net asset attributable to
Class B shares. Princor also receives the proceeds of any CDSC imposed on
redemptions of such shares.

Although Class B shares are sold without an initial sales charge, Princor pays a
sales commission equal to 4.00% (3.00% for certain sponsored plans or 1.25% for
the LargeCap Stock Index and Limited Term Bond Funds) of the amount invested to
dealers who sell such shares. These commissions are not paid on exchanges from
other Principal Mutual Funds. In addition, Princor may remit on a continuous
basis up to .25% (.15% for the LargeCap Stock Index and Limited Term Bond Funds)
to the Registered Representatives and other selected Dealers (including for this
purpose, certain financial institutions) as a trail fee in recognition of their
services and assistance.

Class C Distribution Plan. Each Class C Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the LargeCap Stock Index
and Limited Term Bond Funds) of the Fund's average net asset attributable to
Class C shares. Princor also receives the proceeds of any CDSC imposed on
redemptions of such shares.

Class C shares are sold without an initial sales charge. Princor may remit on a
continuous basis up to 1.00% (.50% for the LargeCap Stock Index and Limited Term
Bond Funds) to the Registered Representatives and other selected Dealers
(including for this purpose, certain financial institutions) as a trail fee in
recognition of their services and assistance.

Class R Distribution Plan. Each of the Funds, except the Tax-Exempt Bond Fund,
has adopted a distribution plan for the Class R shares. Each Class R Plan
(except the LargeCap Stock Index Fund) provides for payments by the Fund to
Princor at the annual rate of up to .75% of the Fund's average net assets
attributable to Class R shares. The Class R Plan for the LargeCap Stock Index
Fund provides for payments from the Fund to Princor at the annual rate of up to
.65% of the Fund's average net assets attributable to Class R shares

Although Class R shares are sold without an initial sales charge, Princor incurs
certain distribution expenses. In addition, Princor may remit on a continuous
basis up to .25% to Registered Representatives and other selected Dealers
(including, for this purpose, certain financial institutions) as a trail fee in
recognition of their ongoing services and assistance.

General Information Regarding Distribution Plans. A representative of Princor
provides to each Fund's Board of Directors, and the Board reviews, at least
quarterly, a written report of the amounts expended pursuant to the Plans and
the purposes for which such expenditures were made.

If expenses under a Class A, Class B or Class R Plan exceed the compensation
limit for Princor described in the Plan in any one fiscal year, the Fund does
not carry over such expenses to the next fiscal year. The Funds have no legal
obligation to pay any amount pursuant to these Plans that exceeds the
compensation limit. The Funds do not pay, directly or indirectly, interest,
carrying charges, or other financing costs in connection with these Plans. If
the aggregate payments received by Princor under these Plans in any fiscal year
exceed the expenditures made by Princor in that year pursuant to the Plan,
Princor promptly reimburses the Fund for the amount of the excess.

The Funds pay Princor the compensation described in the Class C Plan. The amount
of the payment and the distribution expenses are reviewed annually by the Board
of Directors of each Fund.

The amount received from each Fund and retained by Princor during the year ended
October 31, 1999 and the manner in which such amounts were spent pursuant to the
Class A Distribution Plan for the last fiscal period of each of the Funds were
as follows:
<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Expenditures

<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $ 281,544 $ 11,194 $12,931 $ 124,364 $14,319 $118,736 $ 281,544
Blue Chip 398,224 15,688 16,313 186,708 20,675 158,840 398,224
Bond 377,708 13,024 13,263 138,124 16,779 196,518 377,708
Capital Value 1,009,068 26,762 25,938 248,032 34,818 673,518 1,009,068
Government Securities Income 588,420 14,355 15,455 160,619 18,754 379,237 588,420
Growth 1,142,540 36,918 33,145 307,895 47,162 717,419 1,142,540
High Yield 81,018 3,988 4,787 49,543 5,266 17,433 81,018
International Emerging Markets 25,107 1,392 2,236 17,745 2,465 1,269 25,107
International 672,611 21,377 26,347 210,368 32,949 381,569 672,611
International SmallCap 42,474 2,490 3,692 28,608 4,190 3,494 42,474
Limited Term Bond 40,320 2,304 2,911 25,896 2,971 6,238 40,320
MidCap 845,826 27,815 26,807 249,771 37,042 504,390 845,826
Real Estate 15,770 912 1,276 12,034 1,158 389 15,770
SmallCap 75,376 4,656 5,144 48,854 6,132 10,590 75,376
Tax-Exempt Bond 496,651 12,614 14,795 151,653 16,572 301,017 496,651
Utilities 235,289 9,153 11,126 102,293 11,858 100,859 235,289
</TABLE>

The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 and the manner in which such amounts were spent pursuant
to the Class B Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Commissions Expenditures

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced $198,343 $5,586 $ 3,744 $64,090 $ 7,209 $28,814 $ 88,901 $198,343
Blue Chip 418,361 10,834 7,262 91,904 14,143 64,340 229,878 418,361
Bond 229,930 6,180 4,157 68,540 8,077 35,695 107,282 229,930
Capital Value 439,339 10,779 7,245 101,434 14,024 84,401 221,456 439,339
Cash Management 15,843 879 573 8,668 1,103 4,620 0 15,843
Government Securities Income 258,662 5,564 3,720 64,241 7,235 39,721 138,182 258,662
Growth 751,729 17,277 11,289 141,284 21,888 142,742 417,249 751,729
High Yield 75,683 3,148 2,217 41,591 4,261 9,282 15,185 75,683
International Emerging Markets 33,938 1,681 1,144 21,563 2,197 1,360 5,993 33,938
International 342,736 10,269 6,885 95,233 13,145 81,155 136,049 342,736
International SmallCap 69,817 3,427 2,358 40,517 4,534 5,900 13,081 69,817
Limited Term Bond 11,986 505 334 9,324 648 479 697 11,986
MidCap 480,422 12,406 8,747 114,879 16,753 123,863 203,775 480,422
Real Estate 25,863 1,345 923 19,225 1,789 369 2,212 25,863
SmallCap 85,272 3,167 2,129 33,866 4,116 5,674 36,320 85,272
Tax-Exempt Bond 78,975 2,140 1,412 26,272 2,774 18,452 27,925 78,975
Utilities 129,593 4,113 2,750 47,240 5,329 16,749 53,410 129,593
</TABLE>

The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 and the manner in which such amounts were spent pursuant
to the Class C Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Commissions Expenditures

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced $553 $205 $ 82 $19 $ 93 $0 $154 $553
Blue Chip 626 267 107 14 121 0 116 626
Bond 589 188 75 19 85 0 223 589
Capital Value 454 184 74 11 83 0 103 454
Cash Management 371 65 26 4 30 0 245 371
Government Securities Income 680 224 90 27 101 0 238 680
Growth 871 373 149 16 169 0 164 871
High Yield 450 76 30 34 34 0 276 450
International Emerging Markets 333 77 31 19 35 0 172 333
International 459 141 56 11 64 0 187 459
International SmallCap 408 142 57 29 64 0 117 408
Limited Term Bond 679 174 69 59 78 0 298 679
MidCap 515 196 78 12 88 0 141 515
Real Estate 325 48 19 25 22 0 210 325
SmallCap 468 186 75 16 84 0 107 468
Tax-Exempt Bond 390 85 34 64 39 0 168 390
Utilities 575 202 81 20 91 0 181 575
</TABLE>

The amount received from each Fund and retained by Princor during the period
ended October 31, 1999 and the manner in which such amounts were spent pursuant
to the Class R Distribution Plan for the last fiscal period of each of the Funds
were as follows:

<TABLE>
<CAPTION>
Expenditures

Prospectus and Registered
Shareholder Representative Underwriter's
Amount Report Sales Sales Service Salaries and Total
Fund Retained Printing Brochures Materials Fees Overhead Expenditures

<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $165,857 $5,852 $4,044 $ 8,019 $ 57,285 $ 90,657 $165,857
Blue Chip 320,689 8,641 5,912 11,685 107,005 187,446 320,689
Bond 99,448 3,709 2,550 5,021 37,080 51,087 99,448
Capital Value 270,170 7,949 5,508 10,814 108,796 137,103 270,170
Cash Management 61,325 1,596 1,071 2,104 30,279 26,276 61,325
Government Securities Income 71,106 2,747 1,842 3,692 25,910 36,915 71,106
Growth 301,974 7,315 4,958 9,891 96,761 183,048 301,974
High Yield 17,181 1,566 1,056 2,111 6,831 5,618 17,181
International Emerging Markets 8,084 767 484 943 857 5,033 8,084
International 142,372 5,161 3,588 7,077 51,402 75,143 142,372
International SmallCap 10,270 730 477 949 1,241 6,873 10,270
Limited Term Bond 20,129 1,684 1,193 2,386 5,961 8,905 20,129
MidCap 175,791 6,275 4,354 8,534 64,347 92,281 175,791
Real Estate 15,022 2,344 1,493 2,910 1,315 6,959 15,022
SmallCap 50,365 2,393 1,549 3,032 6,951 36,439 50,365
Utilities 46,756 1,941 1,287 2,578 10,898 30,051 46,756
</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 European Equity, Pacific Basin and Tax-Exempt Bond), including a
majority of the non-interested directors, on December 13, 1999. The Board of
Directors of the Tax-Exempt Bond Fund, including a majority of the
non-interested directors, approved Plans for Class A, B and C shares on December
13, 1999. The Plans for Class A, B, C and R shares were approved by the Boards
of Directors of the European Equity and Pacific Basin Funds, including a
majority of the non-interested directors, on March 13, 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
o Lehman Brothers BAA Corporate Index
o Lehman Brothers GNMA Index
o Lehman Brothers High Yield Index
o Lehman Brothers Municipal Bond Index
o Lehman Brothers Revenue Bond Index
o Brothers Mutual Fund Short Government/Corporate Index
o Lehman Brothers Intermediate Government/Corporate Index
o Lehman Brothers Government/Corporate Bond Index
o Merrill Lynch Corporate Government Bond Index
o Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index
o Morgan Stanley Capital International EMF (Emerging Markets) Index
o Morgan Stanley 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, 1999 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.
<TABLE>
<CAPTION>
Fund 1-Year 5-Year 10-Year

<S> <C> <C> <C> <C>
Balanced Fund (0.07)% 11.06% 9.80%
Blue Chip Fund 11.50 18.81 14.01(1)
Bond Fund (9.53) 6.83 7.22
Capital Value Fund (1.84) 16.22 12.42
Government Securities Income Fund (3.30) 7.16 7.13
Growth Fund 11.94 17.89 16.38
High Yield Fund (2.02) 5.90 6.36
International Emerging Markets Fund 24.74 (5.53)(3) N/A
International Fund 10.72 10.21 11.04
International SmallCap Fund 47.25 19.94(3) N/A
Limited Term Bond Fund 0.31 4.67(4) N/A
MidCap Fund 0.60 11.98 13.15
Real Estate Fund (8.87) (13.27)(5) N/A
SmallCap Fund 28.20 4.16(5) N/A
Tax-Exempt Bond Fund (7.09) 5.82 6.07
Utilities Fund 9.35 17.29 12.02(2)

<FN>
(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.
</FN>
</TABLE>

The following table shows as of October 31, 1999 average annual returns for
Class B shares for each of the Funds for the period indicated:
<TABLE>
<CAPTION>
Fund 1-Year 5-Year

<S> <C> <C> <C>
Balanced Fund 0.06% 12.31(1)
Blue Chip Fund 12.09 20.30(1)
Bond Fund (6.36) 6.72(1)
Capital Value Fund (1.57) 18.12(1)
Government Securities Income Fund (3.17) 7.17(1)
Growth Fund 12.75 20.29(1)
High Yield Fund (1.76) 6.05(1)
International Emerging Markets Fund 25.91 (5.67)(2)
International Fund 11.27 12.45(1)
International SmallCap Fund 49.42 20.65(2)
Limited Term Bond Fund 0.08 4.49(3)
MidCap Fund 1.09 14.26(1)
Real Estate Fund (8.79) (13.20)(4)
SmallCap Fund 29.29 4.16(4)
Tax-Exempt Bond Fund (6.73) 6.48(1)
Utilities Fund 9.85 17.88(1)

<FN>
(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.
</FN>
</TABLE>

The following table shows as of October 31, 1999 average annual returns for
Class C shares for each of the Funds for the period indicated:
<TABLE>
<CAPTION>
Fund 1-Year(1)

<S> <C> <C>
Balanced Fund (5.67)%
Blue Chip Fund (2.29)
Bond Fund (1.40)
Capital Value Fund (8.42)
Government Securities Income Fund 0.11
Growth Fund (4.75)
High Yield Fund (1.99)
International Emerging Markets Fund (5.47)
International Fund 2.95
International SmallCap Fund 16.81
Limited Term Bond Fund 0.34
MidCap Fund (9.36)
Real Estate Fund (11.21)
SmallCap Fund 0.53
Tax-Exempt Bond Fund (3.59)
Utilities Fund (1.47)

<FN>
(1) Period beginning June 30, 1999 and ending October 31, 1999.
</FN>
</TABLE>

The following table shows as of October 31, 1999 average annual returns for
Class R shares for each of the Funds for the period indicated:
<TABLE>
<CAPTION>
Fund 1-Year 5-Year

<S> <C> <C> <C>
Balanced Fund 4.21% 10.14%(1)
Blue Chip Fund 16.31 17.46(1)
Bond Fund (2.45) (4.76)(1)
Capital Value Fund 2.35 14.57(1)
Government Securities Income Fund 0.78 5.25(1)
Growth Fund 16.78 16.29(1)
High Yield Fund 2.01 3.88(1)
International Emerging Markets Fund 30.93 (3.46)(2)
International Fund 15.27 12.18(1)
International SmallCap Fund 54.61 22.77(2)
Limited Term Bond Fund 1.13 4.48(1)
MidCap Fund 4.89 7.49(1)
Real Estate Fund (4.70) (11.07)(3)
SmallCap Fund 33.85 6.77(3)
Utilities Fund 13.97 15.54(1)

<FN>
(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.
</FN>
</TABLE>

Yield

Income-Oriented Funds
Each Income-Oriented Fund computes a yield by
1. calculating net investment income per share for a 30 day (or one month)
period
2. annualizing net investment income per share, assuming semi-annual
compounding
3. dividing the annualized net investment income by the maximum public
offering price for Class A shares or the net asset value for Class B, Class
C and Class R shares for the last day of the same period.

The following table shows as of October 31, 1999 the yield for each class of
shares for each of the Income-Oriented Funds:

Yield as of October 31, 1999

Fund Class A Class B Class C Class R

Bond Fund 7.40% 6.63% 6.56% 6.79%
Government Securities Income Fund 6.34 5.48 5.50 5.76
High Yield Fund 9.69 8.74 8.87 8.56
Limited Term Bond Fund 6.23 5.83 5.83 5.58
Tax-Exempt Bond Fund 4.94 4.54 3.96 N/A

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

[(Tax-exemptportion of the yield) divided by (1 minus your tax rate)] plus
[any portion of the yield which is not tax-exempt]

As of October 31, 1999 the Fund's tax-equivalent yields for Class A , Class B
and Class C shares were as follows:

Tax-Equivalent Yield Assumed

Class A Class B Class C Tax Rate

6.53% 6.31% 5.50% 28.0%
7.34 7.09 6.19 36.0
7.78 7.52 6.56 39.6

Money Market Fund

The Cash Management Fund advertises its yield and its effective yield.

Yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return
o multiplying the base period return by (365/7) with the resulting yield
figure carried to at least the nearest hundredth of one percent.

The following table shows as of October 31, 1999 the yield for each class of
shares for the Cash Management Fund:

Yield as of October 31, 1999

Fund Class A Class B Class C Class R

Cash Management Fund 5.17% 4.75% 4.65% 3.63%

There may be a difference in the net investment income per share used to
calculate yield and the net investment income per share used for dividend
purposes. This is because the calculation for yield purposes does not include
net short-term realized gains or losses on the Fund's investment, which are
included in the calculation for dividend purposes.

Effective yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return compounding the base period
return by adding 1, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result.
The resulting effective yield figure is carried to at least the nearest
hundredth of one percent.

The following table shows as of October 31, 1999 the effective yield for each
class of shares for the Cash Management Fund:

Effective Yield as of October 31, 1999

Fund Class A Class B Class C Class R

Cash Management Fund 5.30% 4.85% 3.69% 4.75%

The yield quoted at any time for the Cash Management Fund represents the amount
that has earned during a specific, recent seven-day period and is a function of:
o the quality of investments in the Fund's portfolio
o types of investments in the Fund's portfolio
o length of maturity of investments in the Fund's portfolio
o Fund's operating expenses.

The length of maturity for the portfolio is calculated using the average dollar
weighted maturity of all investments. This means that the portfolio has an
average maturity of a stated number of days for its investments. The calculation
is weighted by the relative value of each investment.

The yield for the Cash Management Fund will fluctuate daily as the income earned
on the investments of the Fund fluctuates. There is no assurance the yield
quoted on any given occasion will remain in effect for any period of time. It
should also be emphasized that the Funds are open-end investment companies.
There is no guarantee that the net asset value or any stated rate of return will
remain constant. A shareholder's investment in the Fund is not insured.
Investors comparing results of the Cash Management Fund with investment results
and yields from other sources such as banks or savings and loan associations
should understand these distinctions. Historical and comparative yield
information may be presented by the Funds.

A Fund may include in its advertisements the compounding effect of reinvested
dividends over an extended period of time as shown in the following
illustrations.

The Power of Compounding

Fund shareholders who reinvest their distributions get the advantage of
compounding. Here's what happens to a $10,000 investment with monthly income
reinvested at 6 percent, 8 percent and 10 percent over 20 years.

These figures assume no change in the value of principal. This chart is for
illustration purposes only and is not an indication of the results a shareholder
may receive as a shareholder of a specific Fund. The return and capital value of
an investment in a Fund vary so that the value, when redeemed, may be worth more
or less than the original cost.

(chart)
Year 6% 8% 10%
0 $10,000 $10,000 $10,000
20 $32,071 $46,610 $67,275

A Fund may also include in its advertisements an illustration of the impact of
income taxes and inflation on earnings from bank certificates of deposit
("CD's"). The interest rate on the hypothetical CD will be based upon average CD
rates for a stated period as reported in the Federal Reserve Bulletin. The
illustrated annual rate of inflation will be the core inflation rate as measured
by the Consumer Price Index for the 12-month period ended as of the most recent
month prior to the advertisement's publication. The illustrated income tax rate
may include any federal income tax rate that may apply to individuals at the
time the advertisement is published. Any such advertisement will indicate that,
unlike bank CD's, an investment in the Fund is not insured nor is there any
guarantee that the Fund's net asset value or any stated rate of return will
remain constant.

An example of a typical calculation included in such advertisements is as
follows: the after-tax and inflation-adjusted earnings on a bank CD, assuming a
$10,000 investment in a six-month bank CD with an annual interest rate of 6.04%
(monthly average six-month CD rate for the month of October, 1999, as reported
in the Federal Reserve Bulletin) and an inflation rate of 2.6% (rate of
inflation for the 12-month period ended October 31, 1999 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(87).

($10,000 x 6.04%) / 2 = $302 Interest for six-month period
- 85 Federal income taxes (28%)
-130 Inflation's impact on invested principal
$(10,000 x 2.6%) / 2
($87) 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 Aggressive Growth Fund August 10, 1999
Partners LargeCap Growth Fund November 24, 1999
Partners MidCap Growth Fund November 24, 1999
Real Estate Fund May 27, 1997
SmallCap Fund August 13, 1997
Tax-Exempt Bond Fund June 7, 1985
Utilities Fund September 3, 1992

Effective January 1, 1998, the following changes were made to the names of
certain of the Funds:

<TABLE>
<CAPTION>
Old Fund Name New Fund Name

<S> <C> <C>
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Government Securities Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
Princor World Fund, Inc. Principal International Fund, Inc.
</TABLE>

FINANCIAL STATEMENTS

The financial statements for each of the Principal Mutual Funds (except the
European Equity, LargeCap Stock Index, Pacific Basin, Partners Aggressive
Growth, Partners LargeCap Growth and Partners MidCap Growth Funds) for the year
ended October 31, 1999 are a part of this Statement of Additional Information.
The financial statements appear in the Annual Reports to Shareholders. Reports
on those statements from Ernst & Young LLP, independent auditors, are included
in the Annual Report and are also a part of this Statement of Additional
Information. The Annual Reports are furnished, without charge, to investors who
request copies of the Statement of Additional Information.

The statements of net assets of the Principal Partners Aggressive Growth Fund as
of October 28, 1999, the LargeCap Stock Index, Partners LargeCap Growth and
Partners MidCap Growth Funds as of February 24, 2000, the European Equity and
Pacific Basin Funds as of April 26, 2000 and the report of Ernst & Young LLP
thereon 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 March 1, 2000:

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 Aggressive Growth Fund, Inc. Class A
PBAGX Principal Partners Aggressive 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 March 31,
2000) except the European Equity and Pacific Basin Funds (as their inception
date is May 1, 2000, information is not available for those Funds) and 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 8.9%
Mortgage Pass Thru Securities 5.3%
Commercial Banks 5.3%
Drugs 5.3%
Computer & Data Processing 5.1%
Other 70.1%

Top Holdings
CISCO Systems 3.1%
Intel Corp. 2.4%
General Electric Co. 2.2%
Citigroup Inc. 2.1%
NationsBank Corp. 1.6%
DLJ Comm. Mort. Corp. 1.4%
Microsoft Corp. 1.4%
Nortel Networks Corp. 1.4%
MCI Worldcom Inc. 1.3%
GMAC Commercial Mort. 1.3%
---
Percent of Total Holdings 18.2%

Principal Blue Chip Fund, Inc.

Top Industry
Computer & Office Equipment 17.8%
Drugs 8.6%
Telephone Communication 8.2%
Computer & Data Processing 6.6%
Petroleum Refining 5.7%
Other 53.1%

Top Holdings
Cisco Systems 4.3%
General Electric Co. 4.1%
Hewlett-Packard Co. 3.9%
Motorola, Inc. 3.7%
Dell Computer Corp. 3.7%
Williams Cos Inc. 3.6%
Oracle Systems Corp. 3.5%
Intel Corp. 3.4%
American International 3.4%
Citigroup Inc. 3.3%
---
Percent of Total Holdings 36.9%

Principal Bond Fund, Inc.

Portfolio Composition
Corporate Bonds: 96.0%
Asset-backed Securities: 3.3%
Commercial Paper: 0.7%

Maturity Profile
Average Bond Quality: Baa1
Average Bond Maturity: 10 years
Average Duration: 5.7 years

Principal Capital Value Fund, Inc.

Top Industry
Commercial Banks 12.3%
Petroleum Refining 10.1%
Telephone Communication 8.2%
Drugs 7.3%
Electric Services 5.6%
Other 56.5%

Top Holdings
Chevron Corp. 3.7%
Exxon Mobil Corp. 3.6%
Texaco 3.5%
Atlantic Richfield Co. 3.3%
AT&T Corp. 3.0%
Merck & Co. 3.0%
Enron Corp. 3.0%
Weyerhauser Co. 2.9%
Kimberly Clark Corp. 2.8%
Chase Manhattan 2.8%
---
Percent of Total Holdings 31.6%

Principal Government Securities Income Fund, Inc.

Portfolio Composition
U.S. Government Bonds: 98.2%
Commercial Paper: 1.8%

Maturity Profile
Average Bond Quality: AAA+
Average Bond Maturity: 8.1 years
Average Duration: 4.4 years

Principal Growth Fund, Inc.

Top Industry
Computer & Office Equipment 15.2%
Electronic Components & Access. 10.2%
Computer & Data Processing 8.8%
Communications Equipment 7.9%
Telephone Communication 7.3%
Other 50.6%

Top Holdings
CISCO Systems 9.4%
Intel Corp. 6.0%
Citigroup INc. 4.8%
Nortel Networks Corp. 4.7%
Pfizer, Inc. 4.4%
General Electric Co. 4.4%
Sun Microsystems, Inc. 4.0%
Guidant Corp. 3.8%
Home Depot Inc 3.7%
Microsoft Corp. 3.4%
---
Percent of Total Holdings 48.6%

Principal High Yield Fund, Inc.

Portfolio Composition
Corporate Bonds: 99.3%
Commercial Paper: 0.5%
Preferred Stock: 0.2%

Maturity Profile
Average Bond Quality: Ba3
Average Bond Maturity: 7.4 years
Average Duration: 4.8 years

Principal International Emerging Markets Fund, Inc.

Investments
Top Industry by Country
Telephone Communication 20.6% Korea 13.6%
Commercial Banks 10.9% Taiwan 13.4%
Electronic Components & Access. 10.3% Mexico 11.8%
Computer & Office Equipment 6.1% Brazil 11.1%
Computer & Data Processing 5.0% India 8.6%
Other 47.1% Other 41.5%

Top Holdings
Samsung Electronics 3.1%
Tele Mex (ADR's) 2.5%
Compal Electronics, Inc. 2.5%
Taiwan Semiconductor 2.2%
Asustek Computer, Inc. 2.0%
United Microelectronics 2.0%
The India Fund Inc. 1.9%
Acer Peripherals, Inc. 1.6%
Matav RT ADR 1.5%
China Telecom 1.5%
---
Percent of Total Holdings 20.8%

Principal International Fund, Inc.

Investments
Top Industry by Country
Telephone Communication 14.1% United Kingdom 18.8%
Commercial Banks 7.9% Japan 16.0%
Electronic Components & Access. 7.7% France 15.5%
Computer & Office Equipment 5.9% Netherlands 14.3%
Computer & Data Processing 4.5% Sweden 8.9%
Other 59.9% Other 26.5%

Top Holdings
Philips Electronics 3.4%
Ericsson LM B Shares 3.3%
Vodafone Group 3.0%
Koninklijke KPN NV 2.9%
Nokia Corp. A ADR 2.4%
NEC Corp. 2.3%
Cap Gemini SA 2.3%
Alcatel Alsthom 2.3%
News Corp. Ltd. ADS 2.3%
Getronics NV 2.3%
---
Percent of Total Holdings 26.5%

Principal International SmallCap Fund, Inc.

Investments
Top Industry by Country
Computer & Data Processing 15.8% Japan 10.3%
Federal & Federally Sponsored 6.4% Canada 9.7%
Telephone Communication 6.1% Germany 8.4%
Electronic Components & Access. 5.7% Netherlands 7.2%
Advertising 3.8% Australia 7.0%
Other 62.2% Other 57.4%

Top Holdings
Creo Products, Inc. 2.0%
Davnet Ltd. 1.8%
Mosaic Group, Inc. 1.7%
C-Mac Industries, Inc. 1.7%
Urban Corp. 1.6%
Mikron Holding Ag 1.6%
Prodisc Internatio, Inc. 1.6%
H.I.S. Co. Ltd. 1.6%
Esat Telecom Group ADR 1.4%
Swisslog Holding AG 1.4%
---
Percent of Total Holdings 16.4%

Principal LargeCap Stock Index Fund, Inc.

Top Holdings
Microsoft Corp. 0.6%
CISCO Systems 0.6%
General Electric Co. 0.6%
Intel Corp. 0.5%
Exxon Mobil Corp. 0.3%
Wal-Mart Stores, Inc. 0.3%
Oracle Systems Corp. 0.3%
IBM Corp. 0.3%
Citigroup Inc. 0.2%
Lucent Technologies 0.2%
---
Percent of Total Holdings 3.9%

Principal Limted Term Bond Fund, Inc.

Portfolio Composition
Corporate Bonds: 51.6%
U.S. Government Bonds: 26.2%
Asset-backed Securities: 21.1%
Commercial Paper: 1.1%

Maturity Profile
Average Bond Quality: AA3
Average Bond Maturity: 4 years
Average Duration: 2.8 years

Principal MidCap Fund, Inc.

Top Industry
Computer & Data Processing 24.0%
Electronic Components & Access. 13.2%
Telephone Communication 10.9%
Drugs 5.4%
Commercial Banks 5.2%
Other 41.3%

Top Holdings
Veritas Software 7.3%
Comverse Technology, Inc. 3.1%
Intermedia Communications 2.8%
Altera Corp. 2.5%
Jabil Circuit Inc. 2.5%
Brocade Communications 2.5%
American Power Conversion 2.2%
Family Dollar Stores 2.2%
State Street Corp. 2.1%
Maxim Integrated Products 2.1%
---
Percent of Total Holdings 29.3%

Principal Partners Aggressive Growth Fund, Inc.

Top Industry
Drugs 12.0%
Electronic Components & Access. 8.9%
Computer & Data Processing 8.5%
Computer & Office Equipment 6.3%
General Industrial Machines 6.2%
Other 58.1%

Top Holdings
Tyco International Ltd. 11.7%
CISCO Systems 10.9%
General Electric 8.3%
Microsoft Corp. 8.1%
Intel Corp. 8.0%
United Technologies 7.3%
Home Depot Inc. 5.8%
Warner-Lambert Co. 5.5%
Time Warner, Inc. 5.1%
Clear Channel Comm. 4.6%
---
Percent of Total Holdings 75.3%

Principal Partners LargeCap Growth Fund, Inc.

Top Holdings
Juniper Networks, Inc. 0.10%
CISCO Systems 0.10%
Echostar Comm. Corp. 0.09%
JDS Uniphase Corp. 0.09%
Veritas Software 0.09%
AT&T Corp. Liberty Media 0.09%
Broadcom Corp. Class A 0.08%
Nokia Corp. A ADR 0.07%
Intel Corp. 0.06%
Nextel Communications Inc. 0.06%
----
Percent of Total Holdings 0.83%

Principal Partners MidCap Growth Fund, Inc.

Top Holdings
JDS Uniphase Corp. 0.03%
Veritas Software 0.03%
Exodus Communications Inc. 0.02%
SDL Inc. 0.01%
PMC Sierra, Inc. 0.01%
Broadcom Corp, Class A 0.01%
Nextel Communications 0.01%
Medimmune Inc. 0.01%
KLA-Tencor Corp. 0.01%
PE Corp.-PE Biosystems 0.01%
----
Percent of Total Holdings 0.15%

Principal Real Estate Fund, Inc.

Top Industry
Apartment 4.7%
Hotels & Motels 3.8%
Real Estate Operators 3.3%
Personal Credit Institutions 1.8%
Other 86.4%

Top Holdings
Spieker Properties, Inc. 5.7%
Equity Residential Prop 5.0%
Cornerstone Properties 5.0%
Prologis Trust 4.8%
AMB Property Corp. 3.9%
Simon Property Group 3.9%
Apartment Investment 3.3%
Mirage Resorts, Inc. 3.1%
Equity Office Properties 3.0%
Duke-Weeks Realty Corp. 3.0%
---
Percent of Total Holdings 40.70%

Principal SmallCap Fund, Inc.

Top Industry
Computer & Data Processing 11.1%
Personal Credit Institutions 6.3%
Electronic Components & Access. 5.2%
Communications Equipment 4.4%
Drugs 4.0%
Other 69.0%

Top Holdings
Hot Topic Inc. 2.3%
Digene Corp. 2.1%
Matritech Inc. 1.9%
Hadco Corp. 1.8%
ICG Communications Inc. 1.5%
Bindview Dev. Corp. 1.5%
American Eagle Outfitters 1.5%
Intervoice-Brite, Inc. 1.5%
Internet Pictures Corp. 1.5%
Quintus Corp. 1.5%
---
Percent of Total Holdings 17.1%

Principal Tax-Exempt Bond Fund, Inc.

Portfolio Composition
Long-term Municipal Bonds: 100.5%
Borrowed funds: -0.5%

Maturity Profile
Average Bond Quality: A
Average Bond Maturity: 16 years
Average Duration: 7.4 years

Principal Utilities Fund, Inc.

Top Industry
Electric Services 46.3%
Telephone Communication 23.6%
Combination Utility Services 10.5%
Gas Production & Distribution 6.0%
Radio & Television Broadcasting 3.9%
Other 9.7%

Top Holdings
Enron Corp. 3.7%
FPL Group, Inc. 3.5%
Duke Energy Corp. 3.4%
Niagara Mohawk Holdings 3.2%
AES Corp. 3.2%
Peco Energy Co. 3.0%
Calpine Corp. 2.9%
DQE Inc. 2.9%
Dynegy, Inc. 2.8%
Pinnacle West Capital Cor 2.6%
---
Percent of Total Holdings 31.2%

Principal Partners Aggressive
Growth Fund, Inc.

Statement of Net Assets

October 28, 1999

Assets - cash in bank $4,000,000
==============

Net Assets Applicable to Outstanding Shares $4,000,000
==============

Net Assets Consist of:
Capital stock $ 4,000
Additional paid-in capital 3,996,000
--------------
Total net assets $4,000,000
==============

Capital Stock (par value $.01 a share):
Shares authorized 100,000,000

Net Asset Value Per Share:
Class A:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share (b) $10.00
Maximum offering price per share (a) $10.50
Class B:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share (b) $10.00
Class C:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share (b) $10.00
Class R:
Net assets $1,000,000
Shares issued and outstanding 100,000
Net asset value per share $10.00

(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.

(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

See accompanying notes.

<PAGE>

Principal Partners Aggressive
Growth Fund, Inc.

Notes to Statement of Net Assets

October 28, 1999

1. Organization

Principal Partners Aggressive Growth Fund, Inc. ("the Fund") is registered under
the Investment Company Act of 1940, as amended, as open-end diversified
management investment company. On October 28, 1999, the initial purchase of
100,000 shares each of Class A, Class B, Class C and Class R Capital Stock was
made by Principal Life Insurance Company, which is the indirect parent of
Princor Financial Services Corporation and Principal Management Corporation.

All organizational expenses have been paid by Principal Management Corporation.
Certain officers and directors of the Fund are also officers of Principal Life
Insurance Company, Princor Financial Services Corporation and Principal
Management Corporation.

2. Operations

The Fund has agreed to pay investment advisory and management fees to Principal
Management Corporation (the "Manager") computed at an annual percentage rate of
the Fund's average daily net assets. The annual rate to be used in this
calculation for the Funds is as follows:

Net Asset Value of Fund
(in millions)
------------------------------------------------------------
First $250 Next $250 Next $250 Next $250 Over $1,000
----------- ---------- ----------- ----------- -----------

.75% .70% .65% .60% .55%

The Manager has subcontracted the investment advisory services of the Fund to
Morgan Stanley Dean Witter Investment Management, Inc. for a monthly fee
approximating the actual cost of providing the services by Morgan Stanley Dean
Witter Investment Management, Inc.

The Funds have also agreed to pay distribution and shareholder servicing fees to
Princor Financial Services Corporation (the "Underwriter") as follows: Class A,
.25% of the daily net assets of the Fund's Class A shares; Class B, 1.00% of the
daily net assets of the Fund's Class B shares; Class C, 1.00% of the daily net
assets of the Fund's Class C shares; and Class R, .75% of the daily net assets
of the Fund's Class R shares.

The Funds reimburse the Manager for transfer and administrative services,
including the cost of accounting, data processing, supplies and other services
rendered.

<PAGE>

Principal Partners Aggressive
Growth Fund, Inc.

Notes to Statement of Net Assets (continued)

2. Operations (continued)

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

The Funds intend to qualify as "regulated investment companies" under the
Internal Revenue Code and intend to distribute each year substantially all of
their net investment income and realized capital gains to their shareholders.

3. Capital Stock

The Fund has authorized 100,000,000 shares and has allocated 25,000,000 shares
each for issuance of Class A, Class B, Class C, and Class R shares.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class C shares are sold without an initial sales charge, but
are subject to a CDSC for redemptions within one year of purchase. Class R
shares are sold without an initial sales charge and are not subject to a CDSC.
Class B shares, Class C shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) on the first business day of
the 49th month. All classes of shares for each fund represent interests in the
same portfolio of investments, and will vote together as a single class except
where otherwise required by law or as determined by each of the Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
will declare separate dividends on each class of shares.

4. Line of Credit

The Fund participates with other funds and portfolios managed by Principal
Management Corporation in an unsecured joint line of credit with a bank, which
allows the funds to borrow up to $75,000,000, collectively. Borrowings are made
solely to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each fund, based on its borrowings, at
a rate equal to the Fed Funds Rate plus .50%. Additionally, a commitment fee is
charged at the annual rate of .09% on the average unused portion of the line of
credit. The commitment fee is allocated among the participating funds and
portfolios in proportion to their average net assets during each quarter. At
October 28, 1999, the Fund had no outstanding borrowings under the line of
credit.

<PAGE>

Report of Independent Auditors

The Board of Directors and Shareholder
Principal Partners Aggressive Growth Fund, Inc.

We have audited the accompanying statement of net assets of Principal Partners
Aggressive Growth Fund, Inc. as of October 28, 1999. This statement of net
assets is the responsibility of the Fund's management. Our responsibility is to
express an opinion on this statement of net assets based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of net assets is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of net assets. Our procedures
included confirmation of cash held as of October 28, 1999, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall statement of net assets presentation. We believe that our audit of the
statement of net assets provides a reasonable basis for our opinion.

In our opinion, the statement of net assets referred to above presents fairly,
in all material respects, the financial position of Principal Partners
Aggressive Growth Fund, Inc. at October 28, 1999, in conformity with generally
accepted accounting principles.

/S/ ERNST & YOUNG LLP

Des Moines, Iowa
October 28, 1999

<PAGE>

Principal LargeCap Stock Index Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
<TABLE>
Statements of Net Assets

February 24, 2000
<CAPTION>
Principal Principal
Principal Partners Partners
LargeCap LargeCap MidCap
Stock Index Growth Fund, Growth Fund,
Fund, Inc. Inc. Inc.
------------- ------------- ------------

<S> <C> <C> <C>
Assets - cash in bank $4,000,000 $4,000,000 $4,000,000
============= ========== ==========

Net Assets Applicable to Outstanding Shares $4,000,000 $4,000,000 $4,000,000
============= ========== ==========

Net Assets Consist of:
Capital stock $ 4,000 $ 4,000 $ 4,000
Additional paid-in capital 3,996,000 3,996,000 3,996,000
------------- ------------- ------------
Total net assets $4,000,000 $4,000,000 $4,000,000
============= ========== ==========

Capital Stock (par value $.01 a share):
Shares authorized 100,000,000 100,000,000 100,000,000

Net Asset Value Per Share:
Class A:
Net assets $1,000,000 $1,000,000 $1,000,000
Shares issued and outstanding 100,000 100,000 100,000
Net asset value per share $10.00 $10.00 $10.00
Maximum offering price per share (a) $10.15 $10.50 $10.50
Class B:
Net assets $1,000,000 $1,000,000 $1,000,000
Shares issued and outstanding 100,000 100,000 100,000
Net asset value per share (b) $10.00 $10.00 $10.00
Class C:
Net assets $1,000,000 $1,000,000 $1,000,000
Shares issued and outstanding 100,000 100,000 100,000
Net asset value per share (b) $10.00 $10.00 $10.00
Class R:
Net assets $1,000,000 $1,000,000 $1,000,000
Shares issued and outstanding 100,000 100,000 100,000
Net asset value per share $10.00 $10.00 $10.00
<FN>

(a) Maximum offering price is equal to net asset value plus a front-end sales
charge. For the Principal LargeCap Stock Index Fund, Inc., this charge is
1.5% of the offering price or 1.52% of the net asset value. For the
Principal Partners LargeCap Growth Fund, Inc. and the Principal Partners
MidCap Growth Fund, Inc., this charge is 4.75% of the offering price or
4.99% of the net asset value.

(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>

See accompanying notes.
</TABLE>

<PAGE>

Principal LargeCap Stock Index Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.

Notes to Statements of Net Assets

February 24, 2000

1. Organization

Principal LargeCap Stock Index Fund, Inc., Principal Partners LargeCap Growth
Fund, Inc. and Principal Partners MidCap Growth Fund, Inc. (the "Funds") are
registered under the Investment Company Act of 1940, as amended (the "Act").
Principal LargeCap Stock Index Fund, Inc. and Principal Partners MidCap Fund,
Inc. are registered under the Act as open-end diversified management investment
companies. Principal Partners LargeCap Growth Fund, Inc. is registered under the
Act as an open-end non-diversified management investment company. On February
24, 2000, the initial purchase of 100,000 shares each of Class A, Class B, Class
C and Class R Capital Stock of each of the Funds was made by Principal Life
Insurance Company, which is an affiliate of Princor Financial Services
Corporation and Principal Management Corporation.

All organizational expenses have been paid by Principal Management Corporation.
Certain officers and directors of the Funds are also officers of Principal Life
Insurance Company, Princor Financial Services Corporation and Principal
Management Corporation.

2. Operations

The Funds have agreed to pay investment advisory and management fees to
Principal Management Corporation (the "Manager") computed at an annual
percentage rate of the Fund's average daily net assets. The annual rate used in
this calculation for the Funds is as follows:

Overall Fee
---------------

Principal LargeCap Stock Index Fund, Inc. .35%
Principal Partners LargeCap Growth Fund, Inc. .90%
Principal Partners MidCap Growth Fund, Inc. .90%

The Manager has subcontracted the investment advisory services of the Principal
LargeCap Stock Index Fund, Inc. to Invista Capital Management (an affiliate),
the Principal Partners LargeCap Growth Fund, Inc. to Duncan-Hurst Capital
Management Inc. and the Principal Partners MidCap Growth Fund, Inc. to Turner
Investment Partners, Inc. for a monthly fee approximating the actual cost of
providing the services.

<PAGE>

Principal LargeCap Stock Index Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.

Notes to Statements of Net Assets (continued)

2. Operations (continued)

The Funds bear distribution and shareholder servicing fees with respect to each
class computed at an annual rate of the average daily net assets attributable to
each class of each fund. The annual rate will not exceed the following limits:
<TABLE>
<CAPTION>
Class A Class B Class C Class R
-------- -------- ------- -------

<S> <C> <C> <C> <C>
Principal LargeCap Stock Index Fund, Inc. .15% .50% .50% .65%
Principal Partners LargeCap Growth Fund, Inc.
.25 1.00 1.00 .75
Principal Partners MidCap Growth Fund, Inc.
.25 1.00 1.00 .75
</TABLE>

The Funds reimburse the Manager for transfer and administrative services,
including the cost of accounting, data processing, supplies and other services
rendered.

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

3. Capital Stock

Each of the Funds has authorized 100,000,000 shares and has allocated 25,000,000
shares each for issuance of Class A, Class B, Class C, and Class R shares.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class C shares are sold without an initial sales charge, but
are subject to a CDSC for redemptions within one year of purchase. Class R
shares are sold without an initial sales charge and are not subject to a CDSC.
Class B shares, Class C shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) 49 months after purchase. All
classes of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the Funds' respective Board of
Directors. In addition, the Board of Directors of each fund will declare
separate dividends on each class of shares.

<PAGE>

Report of Independent Auditors

The Board of Directors and Shareholder
Principal LargeCap Stock Index Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.

We have audited the accompanying statements of net assets of Principal LargeCap
Stock Index Fund, Inc., Principal Partners LargeCap Growth Fund, Inc. and
Principal Partners MidCap Growth Fund, Inc. as of February 24, 2000. These
statements of net assets are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these statements of net assets based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statements of net assets are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of net assets.
Our procedures included confirmation of cash held as of February 24, 2000, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of net assets presentation. We believe that
our audits of the statements of net assets provide a reasonable basis for our
opinion.

In our opinion, the statements of net assets referred to above presents fairly,
in all material respects, the financial position of Principal LargeCap Stock
Index Fund, Inc., Principal Partners LargeCap Growth Fund, Inc. and Principal
Partners MidCap Growth Fund, Inc. at February 24, 2000, in conformity with
accounting principles generally accepted in the United States.

/S/ ERNST & YOUNG LLP

Des Moines, Iowa
February 24, 2000

Principal European Equity Fund, Inc.
Principal Pacific Basin Fund, Inc.

Statements of Net Assets

April 26, 2000

<TABLE>
<CAPTION>
Principal Principal
European Equity Pacific
Fund, Inc. Basin
Fund, Inc.
---------------------------------------

<S> <C> <C>
Assets - cash in bank $5,000,000 $5,000,000
=======================================

Net Assets Applicable to Outstanding Shares $5,000,000 $5,000,000
=======================================

Net Assets Consist of:
Capital stock $ 5,000 $ 5,000
Additional paid-in capital 4,995,000 4,995,000
=======================================
Total net assets $5,000,000 $5,000,000
=======================================

Capital Stock (par value $.01 a share):
Shares authorized 100,000,000 100,000,000

Net Asset Value Per Share:
Class A:
Net assets $1,250,000 $1,250,000
Shares issued and outstanding 125,000 125,000
Net asset value per share $10.00 $10.00
Maximum offering price per share (a) $10.50 $10.50
Class B:
Net assets $1,250,000 $1,250,000
Shares issued and outstanding 125,000 125,000
Net asset value per share (b) $10.00 $10.00
Class C:
Net assets $1,250,000 $1,250,000
Shares issued and outstanding 125,000 125,000
Net asset value per share (b) $10.00 $10.00
Class R:
Net assets $1,250,000 $1,250,000
Shares issued and outstanding 125,000 125,000
Net asset value per share $10.00 $10.00

<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge. For the Principal European Equity Fund, Inc. and the Principal
Pacific Basin Fund, Inc., this charge is 4.75% of the offering price or
4.99% of the net asset value.

(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
</TABLE>

See accompanying notes.

Principal European Equity Fund, Inc.
Principal Pacific Basin Fund, Inc.

Notes to Statements of Net Assets

April 26, 2000

1. Organization

Principal European Equity Fund, Inc. and Principal Pacific Basin Fund, Inc. (the
"Funds") are registered under the Investment Company Act of 1940, as amended, as
open-end diversified management investment companies. On April 26, 2000, the
initial purchase of 125,000 shares each of Class A, Class B, Class C and Class R
Capital Stock of each of the Funds was made by Principal Life Insurance Company,
which is an affiliate of Princor Financial Services Corporation and Principal
Management Corporation.

2. Operations

<TABLE>
<CAPTION>
Net Asset Value of Fund
(in millions)
---------------------------------------------------------
First Next $250 Next $250 Next $250 Over
$250 $1,000
---------- ---------- ----------- ----------- -----------

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

The Manager has subcontracted the investment advisory services of the Funds to
BT Funds Management (International) Limited, an affiliate, for a monthly fee
approximating the actual cost of providing the services.

Principal European Equity Fund, Inc.
Principal Pacific Basin Fund, Inc.

Notes to Statements of Net Assets (continued)

2. Operations (continued)

<TABLE>
<CAPTION>
Class A Class B Class C Class R
------------ ----------- ------------ ------------

<S> <C> <C> <C> <C>
Principal European Equity Fund, Inc. .25% 1.00% 1.00% .75%
Principal Pacific Basin Fund, Inc. .25 1.00 1.00 .75
</TABLE>

The Funds reimburse the Manager for transfer and administrative services,
including the cost of accounting, data processing, supplies and other services
rendered.

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

3. Capital Stock

Each of the Funds has authorized 100,000,000 shares and has allocated 25,000,000
shares each for issuance of Class A, Class B, Class C, and Class R shares.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions redeemed within six
years of purchase. Class C shares are sold without an initial sales charge, but
are subject to a CDSC for redemptions within one year of purchase. Class R
shares are sold without an initial sales charge and are not subject to a CDSC.
Class B shares, Class C shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) 49 months after purchase. All
classes of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the Funds' respective Board of
Directors. In addition, the Board of Directors of each fund will declare
separate dividends on each class of shares.

Report of Independent Auditors

The Board of Directors and Shareholder
Principal European Equity Fund, Inc.
Principal Pacific Basin Fund, Inc.

We have audited the accompanying statements of net assets of Principal European
Equity Fund, Inc. and Principal Pacific Basin Fund, Inc. as of April 26, 2000.
These statements of net assets are the responsibility of the Funds' management.
Our responsibility is to express an opinion on these statements of net assets
based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statements of net assets are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statements of net assets.
Our procedures included confirmation of cash held as of April 26, 2000, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall statement of net assets presentation. We believe that
our audits of the statements of net assets provide a reasonable basis for our
opinion.

In our opinion, the statements of net assets referred to above presents fairly,
in all material respects, the financial position of Principal European Equity
Fund, Inc. and Principal Pacific Basin Fund, Inc. at April 26, 2000, in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Des Moines, Iowa
April 26, 2000