PRINCIPAL HIGH YIELD FUND INC /MD/, 485APOS, 2000-12-29

PRINCIPAL HIGH YIELD FUND INC /MD/
485APOS, 2000-12-29

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Registration No. 33-14539

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

POST-EFFECTIVE AMENDMENT NO. 28 TO

FORM N-1A

REGISTRATION STATEMENT

under

THE SECURITIES ACT OF 1933

and

REGISTRATION STATEMENT

under

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

PRINCIPAL HIGH YIELD FUND, INC.
(Exact name of Registrant as specified in Charter)

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

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

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

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

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

_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
__X__ on March 1, 2001 pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

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

<PAGE>

PRINCIPAL MUTUAL FUNDS

DOMESTIC GROWTH-ORIENTED FUNDS

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal LargeCap Stock Index Fund, Inc.
Principal MidCap Fund, Inc.
Principal Partners Equity Growth Fund, Inc.
(formerly Principal Partners Aggressive Growth Fund, Inc.)
Principal Partners LargeCap Blend Fund, Inc.
Principal Partners LargeCap Growth Fund, Inc.
Principal Partners LargeCap Value Fund, Inc.
Principal Partners MidCap Growth Fund, Inc.
Principal Partners SmallCap Growth Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.

INTERNATIONAL GROWTH-ORIENTED FUNDS

Principal European Equity Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Pacific Basin Fund, Inc.

INCOME-ORIENTED FUNDS

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

MONEY MARKET FUND

Principal Cash Management Fund, Inc.

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

The date of this Prospectus is ______________

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

TABLE OF CONTENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FUND DESCRIPTIONS.

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

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

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

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

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

Partners LargeCap Blend Federated Management Corporation ("Federated")

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

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

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

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

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

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

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

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

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

Fund Performance

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

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

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

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

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

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

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

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

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

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

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL BALANCED FUND, INC.
The Fund seeks to generate a total return consisting of current income and
long-term growth of capital.

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

Invista serves as Sub-Advisor for the portion of the Fund's portfolio that is
invested in equity securities. In making its selection Invista looks for
companies that have predictable earnings and which, based on growth prospects,
it believes are undervalued in the marketplace. Invista buys stocks with the
objective of long-term capital appreciation. From time to time, Invista
purchases stocks with the expectation of price appreciation over the short-term.
In response to changes in economic conditions, Invista may change the make-up of
the portfolio and emphasize different market sectors by buying and selling the
portfolio's stocks. The Fund may invest up to 25% of its assets in securities of
foreign companies.

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

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

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

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

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

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

Annual Total Returns

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

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

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

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

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

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

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

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

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

Examples

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

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

Class A
Class B
Class C

Fund Operating Expenses*
Class A Class B Class C

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

Annual Total Returns

1992 6.09
1993 2.62
1994 3.36
1995 33.19
1996 16.78
1997 26.25
1998 16.65
1999 11.96

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

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

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

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

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

<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % %* S&P 500 Stock Index % % %
Class B ** Lipper Large-Cap Value Fund Average(1)
Class C ***

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*
Class A Class B Class C

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

Annual Total Returns
1991 37.21
1992 9.09
1993 7.56
1994 0.21
1995 31.90
1996 23.42
1997 28.69
1998 12.13
1999 -6.86
2000

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

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

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

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

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

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

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*
Class A Class B Class C

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

Annual Total Returns
1991 56.61
1992 10.16
1993 7.51
1994 3.21
1995 33.47
1996 12.23
1997 28.41
1998 20.37
1999 16.13
2000

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

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

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

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

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

<S> <C> <C> <C> <C> <C> <C> <C>
Class A % % % S&P 500 Stock Index % % %
Class B * Lipper Large-Cap Growth Fund Average(1)
Class C **

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*
Class A Class B Class C

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL LARGECAP STOCK INDEX FUND, INC.
The Fund seeks to achieve long-term growth of capital.

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

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

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

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

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

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

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*
Class A Class B Class C

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.
**The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31, 2001.
The effect of the waiver is to reduce the Fund's annual operating
expenses. The waiver will maintain a total level of operating expenses
(expressed as a percent of average net assets attributable to a Class on
an annualized basis) not to exceed:

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*
Class A Class B Class C

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns
2000

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

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

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

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

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*
Class A Class B Class C

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS LARGECAP BLEND FUND, INC.

The Fund seeks long-term growth of capital.

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

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

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

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

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

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

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

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

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

Examples The Examples assume that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Examples also assume that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your cost would be: 1
Year 3 Years 5 Years 10 Years
Class A $ $ N/A N/A
Class B N/A N/A
Class C N/A N/A
You would pay the following expenses if you did not redeem your shares:

Class A N/A N/A
Class B N/A N/A
Class C N/A N/A

Fund Operating Expenses*

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

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

**The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the waiver
and, if necessary, pay expenses normally payable by the Fund through the
period ending October 31, 2001. The effect of the waiver is to reduce the
Fund's annual operating expenses. The waiver will maintain a total level
of operating expenses (expressed as a percent of average net assets
attributable to a Class on an annualized basis) not to exceed:

% for Class A Shares
% for Class B Shares
% for Class C Shares

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

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

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL PARTNERS LARGECAP VALUE FUND, INC.

The Fund seeks long-term growth of capital.

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

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

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

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

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

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

Examples The Examples assume that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Examples also assume that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ N/A N/A
Class B N/A N/A
Class C N/A N/A
You would pay the following expenses if you did not redeem your shares:

Class A N/A N/A
Class B N/A N/A
Class C N/A N/A

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

% for Class A Shares
% for Class B Shares
% for Class C Shares

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Examples The Examples assume that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Examples also assume that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $
Class B
Class C
You would pay the following expenses if you did not redeem your shares:

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

The Fund's share price may fluctuate more than that of funds primarily invested
in stocks of mid-sized and large companies and may underperform as compared to
the securities of larger companies. This Fund is designed for long term
investors for a portion of their investments. It is not designed for investors
seeking income or conservation of capital.

Investor Profile
The Fund is generally a suitable investment if you are seeking long-term growth
and are willing to accept the potential for volatile fluctuations in the value
of your investment. As the inception date of the Fund is December, 2000,
historical performance data is not available. Estimated annual Fund operating
expenses are as follows:
Examples The Examples assume that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Examples also assume that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
Class A $ $ N/A N/A
Class B N/A N/A
Class C N/A N/A
You would pay the following expenses if you did not redeem your shares:

Class A N/A N/A
Class B N/A N/A
Class C N/A N/A

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

% for Class A Shares
% for Class B Shares
% for Class C Shares

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

Main Risks
Securities of real estate companies are subject to securities market risks as
well as risks similar to those of direct ownership of real estate. These
include:
o declines in the value of real estate
o risks related to general and local economic conditions
o dependency on management skills
o heavy cash flow dependency
o possible lack of available mortgage funds
o overbuilding
o extended vacancies in properties
o increases in property taxes and operating expenses
o changes in zoning laws
o expenses incurred in the cleanup of environmental problems
o casualty or condemnation losses
o changes in interest rates

In addition to the risks listed above, equity REITs are affected by the changes
in the value of the properties owned by the trust. Mortgage REITs are affected
by the quality of the credit extended. Both equity and mortgage REITs:
o are dependent upon management skills and may not be diversified;
o are subject to cash flow dependency and defaults by borrowers; and
o could fail to qualify for tax-free pass-through of income under the Code.

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

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

Annual Total Returns

1998 -13.62
1999 -4.76
2000

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

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

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

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

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

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

Annual Total Returns

1998 -5.68
1999 43.22
2000

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

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

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

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

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

Past One Past Five
Year Years

Class A % *
Class B *
Class C **

Past One Past FivePast Ten
Year Years Years

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

1993 8.42
1994 -11.09
1995 33.87
1996 4.56
1997 29.58
1998 22.50
1999 2.25
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

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

Past One Past FivePast Ten
Year Years Years

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

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

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

Main Risks
Because it purchases equity securities, the Fund is subject to the risk that
stock prices will fall over short or extended periods of time. Individual
companies may report poor results or be negatively affected by industry and/or
economic trends and developments. The price of securities issued by such
companies may suffer a decline in response. These factors contribute to price
volatility. In addition, foreign stocks carry risks that are not generally found
in stocks of U.S. companies. These include the risk that a foreign security
could lose value as a result of political, financial and economic events in
foreign countries. Foreign securities may be subject to securities regulators
with less stringent accounting and disclosure standards than are required of
U.S. companies.

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

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

The Fund may invest in securities of companies with small to medium market
capitalizations. While small companies may offer greater opportunities for
capital growth than larger, more established companies, they also involve
greater risk and should be considered speculative. Small to mid-sized companies
may pose greater risk due to narrow product lines, limited financial resources,
less depth in management or a limited trading market for their securities.
Historically, these securities have fluctuated in price more than larger company
securities, especially over the short-term.

The net asset value of the Fund's shares is based on the values of the
securities it holds. The value of the stocks owned by the Fund changes on a
daily basis. In the short-term, stock prices can fluctuate dramatically in
response to these factors. If the investor sells Fund shares when their value is
less than the price the investor paid for them, the investor will lose money.

Investor Profile
The Fund is generally a suitable investment for investors seeking long-term
growth of capital in European markets who are able to assume the increased risks
of higher price volatility and currency fluctuations associated with investments
in international stocks which trade in non-U.S. currencies.

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2001. The effect of the waiver
is to reduce the Fund's annual operating expenses. The waiver will
maintain a total level of operating expenses (expressed as a percent
of average net assets attributable to a Class on an annualized basis)
not to exceed:
2.50% for Class A Shares
3.25% for Class B Shares
3.25% for Class C Shares

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

1998 -17.42
1999 67.20
2000

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

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

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

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

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

Past One Past Five
Year Years

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

Past One Past FivePast Ten
Year Years Years

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

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

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

** The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2001. The effect of the waiver is to reduce the Fund's annual
operating expenses. The waiver will maintain a total le!vel of
operating expenses (expressed as a percent of average net assets
attributable to a Class on an annualized basis) not to exceed:

2.50% for Class A Shares
3.25% for Class B Shares
3.25% for Class C Shares

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

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

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 Returns

1991 15.25
1992 0.81
1993 46.34
1994 -5.26
1995 11.56
1996 23.76
1997 12.22
1998 8.48
1999 25.82
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

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

Past One Past FivePast Ten
Year Years Years

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

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

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

1998 14.40
1999 84.72
2000

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

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

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

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

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

Past One Past Five
Year Years

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

Past One Past FivePast Ten
Year Years Years

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

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

Investor Profile
The Fund is generally a suitable investment for investors seeking long-term
growth of capital in Pacific Basin markets who are able to assume the increased
risks of higher price volatility and currency fluctuations associated with
investments in international stocks which trade in non-U.S. currencies.

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

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2001. The effect of the waiver is to reduce the Fund's annual
operating expenses. The waiver will maintain a total level of
operating expenses (expressed as a percent of average net assets
attributable to a Class on an annualized basis) not to exceed:

2.50% for Class A Shares
3.25% for Class B Shares
3.25% for Class C Shares

INCOME-ORIENTED FUND

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

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

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

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

During the fiscal year ended October 31, 2000, the average ratings of this
Fund's assets based on market value at each month-end, were as follows (all
ratings are by Moody's):
Aaa %
Aa %
A %
Baa %
Ba %

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

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

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

Annual Total Returns

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

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

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

Past One Past FivePast Ten
Year Years Years

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

INCOME-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

1991 16.83
1992 6.13
1993 9.16
1994 -4.89
1995 19.19
1996 3.85
1997 9.69
1998 7.19
1999 0.01
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

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

Past One Past FivePast Ten
Year Years Years

Lehman Brothers GNMA Index % % %
Lipper GNMA Fund Average

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

INCOME-ORIENTED FUND

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

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

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

During the fiscal year ended October 31, 2000, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Moody's):
% in securities rated A % in securities rated Ba % in securities rated C
% in securities rated Baa % in securities rated B % in securities rated D
The above percentage for securities rated Ba includes 2.89% of unrated
securities and securities rated B includes 2.52% of unrated securities which
have been determined by the Manager to be of comparable quality.

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

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

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

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

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

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

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

Annual Total Returns

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

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

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

Past One Past FivePast Ten
Year Years Years

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

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

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended
October 31, 2000.

INCOME-ORIENTED FUND

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

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

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

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

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

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

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

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

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

Annual Total Returns

1997 6.33
1998 6.70
1999 0.96
2000

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

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

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

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

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

Past One Past Five
Year Years

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

Past One Past FivePast Ten
Year Years Years

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

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

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

INCOME-ORIENTED FUND

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

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

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

Up to 20% of Fund assets may be invested in fixed-income securities rated lower
than BBB by S&P or Baa by Moody's. The Fund will not purchase municipal bonds
rated lower than B by Moody's or S&P. It also will not buy municipal notes or
commercial paper which are unrated or are not comparable in quality to rated
securities.

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

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

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

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

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

Investor Profile
The Fund is generally a suitable investment if you are seeking monthly,
federally tax-exempt dividends to produce income or to be reinvested for modest
growth and are willing to accept fluctuations in the value of your investment.

Annual Total Returns

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

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

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

Past One Past FivePast Ten
Year Years Years

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

Examples

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

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND, INC.

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

Main Strategies

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

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

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

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

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

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

Annual Total Returns

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

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

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

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

Past One Past FivePast Ten
Year Years Years
Class A % % %
Class B *
Class C **

Examples

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

Class A
Class B
Class C

Fund Operating Expenses*

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

Total Fund Operating Expenses % % %

* Total Fund Operating Expenses for the year ended October 31, 2000.

THE COSTS OF INVESTING

Fees and Expenses of the Funds

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

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

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

Redemptions During Redemptions During
Year Year 1

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

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

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

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

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

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

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

The amount invested is The holding period of the investment is

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

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

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

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

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

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

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

The front-end sales charge is waived on an investment of $1 million or more in
Class A shares. There may be a CDSC on shares sold within 18 months of the
purchase date. The CDSC does not apply to shares purchased with reinvested
dividends or other distributions. The CDSC is calculated as 0.75% of the lesser
of the market value at the time of the redemption or the initial purchase price
of the shares sold. The CDSC is waived on shares sold to fund a Principal Mutual
Fund 401(a) or Principal Mutual Fund 401(k) retirement plan, except redemptions
which are the result of termination of the plan or transfer of all plan assets.
The CDSC is also waived on shares sold:
o to satisfy IRS minimum distribution rules; and
o using a periodic withdrawal plan. (You may sell up to 10% of the value of
the shares (as of December 31 of the prior year) subject to a CDSC without
paying the CDSC.)

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

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

SALES CHARGE WAIVER OR REDUCTION (Class A shares)

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

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

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

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

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

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

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

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

<TABLE>
<CAPTION>
Sales Charge as a % of:
Dealer Allowance
Offering Net Amount as % of
Amount of Purchase Price Invested Offering Price

<S> <C> <C> <C> <C>
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than $1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more no sales charge
</TABLE>

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

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

Class B shares
A CDSC may be imposed on Class B shares sold within six years of purchase (five
years for certain sponsored plans). Class B shares automatically convert into
Class A shares (based on share prices, not numbers of shares) seven years after
purchase. Class B shares provide you the benefit of putting all your dollars to
work from the time of investment, but (until conversion) have higher ongoing
fees and lower dividends than Class A shares.

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

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

For Certain Sponsored Plans
Commenced After 2/1/98

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

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

Class C shares
A CDSC of 1% may be imposed on Class C shares sold within one year of purchase.
No CDSC is imposed on increases in account value above the initial purchase
price (including shares acquiring from the reinvestment of dividends or capital
gains distributions). Class C shares do not convert to any other class of Fund
shares.

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

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

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

The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
<TABLE>
<CAPTION>
<S> <C>
o Class A shares (except Cash Management, LargeCap Stock Index and Limited Term Bond) 0.25%
o Class A shares of LargeCap Stock Index and Limited Term Bond 0.15%
o Class B shares (except LargeCap Stock Index and Limited Term Bond) 1.00%
o Class B shares of LargeCap Stock Index and Limited Term Bond 0.50%
o Class C shares (except LargeCap Stock Index and Limited Term Bond) 1.00%
o Class C shares of LargeCap Stock Index and Limited Term Bond 0.50%
</TABLE>

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Each Fund may invest its assets in foreign securities to the indicated
percentage of its assets:
o European Equity, International, International Emerging Markets,
International SmallCap and Pacific Basin Funds - 100%;
o Partners Equity Growth, Partners LargeCap Blend, Partners LargeCap Growth,
Partners LargeCap Value, Partners SmallCap Growth and Real Estate Funds -
25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%; and
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

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

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

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

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

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

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

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

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

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

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

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

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

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

Funds with high turnover rates (more than 100%) often have higher transaction
costs (which are paid by the Fund) and may generate short-term capital gains (on
which you pay taxes even if you don't sell any of your shares during the year).
No turnover rate can be calculated for the Cash Management Fund because of the
short maturities of the securities in which it invests. No turnover rates are
calculated for the Funds which have been in existence for less than six months
(Partners LargeCap Blend, Partners LargeCap Value and Partners SmallCap Growth
Funds). However, the Partners LargeCap Blend and Partners LargeCap Value Funds
each expect that it may have an annual turnover rate ranging from 200% to 300%.
Turnover rates for each of the other Funds may be found in the Fund's Financial
Highlights table.

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

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

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

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

The Sub-Advisors

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

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

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

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

Fund: Partners Equity Growth
Sub-Advisor: Morgan Stanley, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of portfolio
management services to customers in the U.S. and abroad. As of
December 31, ____, Morgan Stanley, together with its affiliated
institutional asset management companies, managed investments
totaling approximately $_____ billion as named fiduciary or
fiduciary adviser. On December 1, 1998, Morgan Stanley Assets
Management Inc. changed its name to Morgan Stanley Dean Witter
Investment Management Inc. but continues to do business in
certain instances using the name Morgan Stanley Asset Management.

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

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

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

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

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

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

The Manager is paid a fee by the Fund for its services, which includes any fee
paid to the Sub-Advisor. The fee paid by each Fund (as a percentage of the
average daily net assets) for the fiscal year ended October 31, 2000 was:

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

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

THE PORTFOLIO MANAGERS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PRICING OF FUND SHARES

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

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

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

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

DIVIDENDS AND DISTRIBUTIONS

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

<TABLE>
<CAPTION>
Funds Record Date Payable Date
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced, the business day before March 19, June 19,
Real Estate and each payable date September 19 and December 19
Utilities (or previous business day)

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

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

Bond, Government Securities the business day before monthly on the 19th
Income, High Yield, Limited each payable date (or previous business day)
Term Bond and Tax-Exempt Bond
</TABLE>

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

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

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

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

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

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

HOW TO BUY SHARES

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

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

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

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

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

Note: The minimum investment applies on a fund level, not on the total
investment being made. Minimums may be waived on accounts set up for:
certain employee benefit plans; retirement plans qualified under
Internal Revenue Code Section 401(a); payroll deduction plans
submitting contributions in an electronic format devised and approved
by Princor; Principal Mutual Fund asset allocation programs; Automatic
Investment Plans; and Cash Management Accounts.

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

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

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

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

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

Order by telephone
o Call us between 7:00 A.M.. and 7:00 P.M. Central Time on any day that the
New York Stock Exchange is open.
o We must receive your payment for the order within three business days (or
the order will be canceled and you may be liable for any loss).
o For new accounts, you also need to send a completed application.

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

Wire money from your bank
o Have your Registered Representative call Principal Mutual Funds for an
account number and wiring instructions.
o For both initial and subsequent purchases, federal funds should be wired
to:
Wells Fargo Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA No.: 073000228
For credit to: Principal Mutual Funds
Account No.: 3000499968
For credit: Principal ________ Fund, Class ____
Shareholder Account No. __________________
Shareholder Registration __________________
o Give the number and instructions to your bank (which may charge a wire
fee).
o No wires are accepted on days when the New York Stock Exchange is closed or
when the Federal Reserve is closed (because the bank that would receive
your wire is closed).

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

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

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

HOW TO REDEEM (SELL) SHARES

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

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

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

For other payment arrangements, please call Principal Mutual Funds.

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

Within 60 days after the sale of shares, you may reinvest the amount of the sale
proceeds into any Principal Mutual Funds' Class A shares without a sales charge
if the shares that were sold were:
o Class A shares on which a sales charge was paid;
o Class A shares acquired by conversion of Class B shares; or
o Class B or Class C shares on which a CDSC was paid.
The transaction is considered a sale for federal (and state) income tax purposes
even if the proceeds are reinvested. If a loss is realized on the sale, the
reinvestment may be subject to the "wash sale" rules resulting in the
postponement of the recognition of the loss for tax purposes.

Sell shares by mail
o Send a letter (signed by the owner of the account) to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Specify the Fund and account number.
o Specify the number of shares or the dollar amount to be sold.
o A signature guarantee* will be required if the:
o sell order is for more than $100,000;
o account address has been changed within one month of the sell order; or
o check is payable to a party other than the account shareholder(s) or
Principal Life Insurance Company.
* If required, the signature(s) must be guaranteed by a commercial
bank, trust company, credit union, savings and loan, national
securities exchange member or brokerage firm. A signature
guaranteed by a notary public or savings bank is not acceptable.

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

Sell shares by checkwriting (Class A shares of Cash Management Fund only)
o Checkwriting must be elected on initial application or by written request
to Principal Mutual Funds.
o The Fund can only sell shares after your check making the Fund investment
has cleared your bank.
o Checks must be written for at least $500.
o Checks are drawn on Wells Fargo Bank Iowa, N.A. and its rules concerning
checking accounts apply.
o If the account does not have sufficient funds to cover the check, it is
marked "Insufficient Funds" and returned (the Fund may revoke checkwriting
on accounts on which "Insufficient Funds" checks are drawn).
o Accounts may not be closed by withdrawal check (accounts continue to earn
dividends until checks clear and the exact value of the account is not
known until the check is received by Wells Fargo).
o Only available for non-qualified accounts.

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

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

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

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

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

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

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

HOW TO EXCHANGE SHARES AMONG PRINCIPAL MUTUAL FUNDS

Your shares in the Funds (except Class A shares of Cash Management, LargeCap
Stock Index and Limited Term Bond Funds) may be exchanged without a sales charge
for the same class of any other Principal Mutual Fund. The minimun amount that
may be exchanged into any Principal Mutual Fund must be at least $300 on an
annual basis. After 90 days of their purchase, Class A shares of LargeCap Stock
Index and Limited Term Bond Funds may be exchanged into Class A shares of the
other Principal Mutual Funds. The 90 day holding period requirement is waived if
your purchase of Limited Term Bond Fund shares is made through our Principal
Path for Income program.

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

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

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

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

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

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

General
o An exchange by any joint owner is binding on all joint owners.
o If you do not have an existing account in the Fund to which the exchange is
being made, a new account is established. The new account has the same
owner(s), dividend and capital gain options and dealer of record as the
account from which the shares are being exchanged.
o All exchanges are subject to the minimum investment and eligibility
requirements of the Fund being acquired.
o You may acquire shares of a Fund only if its shares are legally offered in
your state of residence.
o If a certificate has been issued, it must be returned to the Fund before
the exchange can take place.
o For an exchange to be effective the day we receive your instruction, we
must receive the instruction before the close of normal trading on the New
York Stock Exchange (generally 3 p.m. Central Time).

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

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

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

GENERAL INFORMATION ABOUT A FUND ACCOUNT

Statements
You will receive quarterly statements (monthly statements for the Cash
Management Fund) for the Funds you own. Principal Mutual Fund 401(a) plan
participants will receive semi-annual statements which detail account activity.
The statements provide the number and value of shares you own, transactions
during the quarter, dividends declared or paid and other information. The year
end statement includes information for all transactions that took place during
the year. Please review your statement as soon as you receive it. Keep your
statements as you may need them for tax reporting purposes.

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

Certain purchases and sales are only included on your quarterly statement. These
include accounts

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

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

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

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

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

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

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

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

Information about the Fund can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 1-800-SEC-0330. Reports and other information about the Fund are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.

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

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

SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS

811-05072 Principal Balanced Fund, Inc.
811-06263 Principal Blue Chip Fund, Inc.
811-01874 Principal Capital Value Fund, Inc.
811-01873 Principal Growth Fund, Inc.
811-09755 Principal LargeCap Stock Index Fund, Inc.
811-05171 Principal MidCap Fund, Inc.
811-09567 Principal Partners Aggressive Growth Fund, Inc.
811-10187 Principal Partners LargeCap Blend Fund, Inc.
811-09757 Principal Partners LargeCap Growth Fund, Inc.
811-10189 Principal Partners LargeCap Value Fund, Inc.
811-09759 Principal Partners MidCap Growth Fund, Inc.
811-10193 Principal Partners SmallCap Growth Fund, Inc.
811-08379 Principal Real Estate Fund, Inc.
811-08381 Principal SmallCap Fund, Inc.
811-07266 Principal Utilities Fund, Inc.

INTERNATIONAL GROWTH-ORIENTED FUNDS

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

INCOME-ORIENTED FUNDS

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

MONEY MARKET FUND

811-03585 Principal Cash Management Fund, Inc.
APPENDIX A

RELATED PERFORMANCE OF THE SUB-ADVISORS

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

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

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

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

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

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

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

PERFORMANCE RESULTS - DOMESTIC GROWTH FUNDS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

IMPORTANT NOTES TO THE APPENDIX

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

PRINCIPAL MUTUAL FUNDS

DOMESTIC GROWTH-ORIENTED FUNDS

INTERNATIONAL GROWTH-ORIENTED FUNDS

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.

The date of this Prospectus is

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 Equity 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

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

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

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

Partners Equity 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, PCII 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:

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.

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 employee 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; or
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.

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL BALANCED FUND, INC.
The Fund seeks to generate a total return consisting of current income and
long-term growth of capital.

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

Annual Total Returns

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

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

Past One Past FivePast Ten
Year Years Years

S&P 500 Stock Index % % %
Lehman Brothers Government/Corporate Bond Index
Lipper Balanced Fund Average

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

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

Class A
Class R

Fund Operating Expenses

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

Total Fund Operating Expenses % %

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) s
o easy access to credit
o superior management structure
o established history of earnings and dividend
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.

Annual Total Returns

1992 6.09
1993 2.62
1994 3.36
1995 33.19
1996 16.78
1997 26.25
1998 16.65
1999 11.96
2000

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

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 returns for the period ending December 31, 2000

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

Past One Past FivePast Ten
Year Years Years

Class A % % %*
Class R **

Past One Past FivePast Ten
Year Years Years
S&P 500 Stock Index % % %
Lipper Large-Cap Value Fund Average

* Period from March 1, 1991, date Class A shares first offered to the
public, through December 31, 2000.
** Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

DOMESTIC GROWTH-ORIENTED FUND

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

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

1991 37.21
1992 9.09
1993 7.56
1994 0.21
1995 31.90
1996 23.42
1997 28.69
1998 12.13
1999 -6.86
2000

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

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

Highest 17.94% (3-31-1991)
Lowest -17.62% ( 9-30-1990)

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

Past One Past FivePast Ten
Year Years Years

S&P 500 Stock Index % % %
S&P 500 Barra Value Index
Lipper Large-Cap Value Fund Average

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

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.

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

Annual Total Returns

1991 56.61
1992 10.16
1993 7.51
1994 3.21
1995 33.47
1996 12.23
1997 28.41
1998 20.37
1999 16.13
2000

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

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

Highest 24.39% (3-31-1991)
Lowest -18.61% (9-30-1990)

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

Past One Past FivePast Ten
Year Years Years

S&P 500 Stock Index % % %
Lipper Large-Cap Growth Fund Average

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL LARGECAP STOCK INDEX FUND, INC.
The Fund seeks to achieve long-term growth of capital.

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

Examples

Fund Operating Expenses *

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2001. The effect of the waiver
is to reduce the Fund's annual operating expenses. The waiver will
maintain a total level of operating expenses (expressed as a percent
of average net assets attributable to a Class on an annualized basis)
not to exceed:

0.90% for Class A Shares
1.40% for Class R Shares

DOMESTIC GROWTH-ORIENTED FUND

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

Annual Total Returns

1991 52.83
1992 14.81
1993 12.29
1994 3.03
1995 34.l20
1996 19.13
1997 22.94
1998 -0.23
1999 11.62
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

Past One Past FivePast Ten
Year Years Years

S&P 400 MidCap Index % % -- %
S&P 500 Stock Index
Lipper Mid-Cap Core Fund Average

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

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

Fund Operating Expenses

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

Total Fund Operating Expenses % %

DOMESTIC GROWTH-ORIENTED FUND

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

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.

Annual Total Returns

2000

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

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

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

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

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

Past One Past Five
Year Years

Class A %*
Class R **

Past One Past FivePast Ten
Year Years Years

S&P 500 Stock Index % % %
Lipper Large-Cap Growth Fund Average

* Period from November 1, 1999, date A shares first offered to the public,
through December 31, 2000.
** Period from November 1, 1999, date R shares first offered to eligible
purchasers, through December 31, 2000.

Examples

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

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.

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.

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.

Examples

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2001. The effect of the waiver
is to reduce the Fund's annual operating expenses. The waiver will
maintain a total level of operating expenses (expressed as a percent
of average net assets attributable to a Class on an annualized basis)
not to exceed:

1.95% for Class A Shares
2.45% for Class R Shares

DOMESTIC GROWTH-ORIENTED FUND

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

Main Strategies
The 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.

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.

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.

Examples

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund from
the date operations commenced. The Manager intends to continue the
waiver and, if necessary, pay expenses normally payable by the Fund
through the period ending October 31, 2001. The effect of the waiver
is to reduce the Fund's annual operating expenses. The waiver will
maintain a total level of operating expenses (expressed as a percent
of average net assets attributable to a Class on an annualized basis)
not to exceed:

1.95% for Class A Shares
2.45% for Class R Shares

DOMESTIC GROWTH-ORIENTED FUND

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

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

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.

Annual Total Returns

1998 -13.62
1999 -4.76
2000

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

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

Highest 11.00% (6-30-1999)
Lowest -8.25% (9-30-1999)

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

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

Past One Past Five
Year Years

Class A % 6%*
Class R % %**

Past One Past FivePast Ten
Year Years Years

Morgan Stanley REIT Index % % -- %
Lipper Real Estate Fund Average

* Period from December 31, 1997, date A shares first offered to the public,
through December 31, 2000.
** Period from December 31, 1997, date R shares first offered to eligible
purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

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.

Annual Total Returns

1998 -5.68
1999 43.22
2000

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

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

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

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

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

Past One Past Five
Year Years

Class A % %*
Class R % %**

Past One Past FivePast Ten
Year Years Years

S&P 600 Stock Index % % %
Lipper Small-Cap Core Fund Average

* Period from December 31, 1997, date Class A shares first offered to the
public, through December 31, 2000.
** Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

DOMESTIC GROWTH-ORIENTED FUND

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

Annual Total Returns

1993 8.42
1994 -11.09
1995 33.87
1996 4.56
1997 29.58
1998 22.50
1999 2.25
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %*
Class R **

Past One Past FivePast Ten
Year Years Years

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

* Period from December 16, 1992, date Class A shares first offered to the
public, through December 31, 2000.
** Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

INTERNATIONAL GROWTH-ORIENTED FUND

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

Examples

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

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.

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.

Annual Total Returns

1998 -17.42
1999 67.20
2000

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

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

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

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

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

Past One Past Five
Year Years

Class A % %*
Class R **

Past One Past FivePast Ten
Year Years Years

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

* Period from August 29, 1997, date A shares first offered to the public,
through December 31, 2000.
** Period from August 29, 1997, date R shares first offered to eligible
purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

* The Manager has agreed to waive a portion of its fee for the Fund. The
Manager intends to continue the waiver and, if necessary, pay expenses
normally payable by the Fund through the period ending October 31,
2001. The effect of the waiver is to reduce the Fund's annual
operating expenses. The waiver will maintain a total level of
operating expenses (expressed as a percent of average net assets
attributable to a Class on an annualized basis) not to exceed:

2.50% for Class A Shares
3.00% for Class R Shares

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.

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 Returns

1991 15.25
1992 0.81
1993 46.34
1994 -5.26
1995 11.56
1996 23.76
1997 12.22
1998 8.48
1999 25.82
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

Past One Past FivePast Ten
Year Years Years

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

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

INTERNATIONAL GROWTH-ORIENTED FUND

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.

Annual Total Returns

1998 14.40
1999 84.72
2000

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

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

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

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

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

Past One Past Five
Year Years

Class A % %*
Class R **

Past One Past FivePast Ten
Year Years Years

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

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

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.

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.

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.

Examples

Fund Operating Expenses*

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

Total Fund Operating Expenses % %

* Total Fund Operating Expenses are estimated.

** The Manager has agreed to waive a portion of its fee for the Fund. 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

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.

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

Annual Total Returns

1991 17.45
1992 8.61
1993 12.77
1994 -4.35
1995 22.28
1996 2.27
1997 10.96
1998 7.14
1999 -3.04
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *
Past One Past FivePast Ten
Year Years Years

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

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

INCOME-ORIENTED FUND

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.

Annual Total Returns

1991 16.83
1992 6.13
1993 9.16
1994 -4.89
1995 19.19
1996 3.85
1997 9.69
1998 7.19
1999 0.01
2000

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

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, 2000

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

Past One Past FivePast Ten
Year Years Years

Lehman Brothers GNMA Index % % %
Lipper GNMA Fund Average

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

INCOME-ORIENTED FUND

During the fiscal year ended October 31, 2000, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Moody's):
% in securities rated A % in securities rated Ba % in securities rated C
% in securities rated Baa % in securities rated B % in securities rated D
The above percentage for securities rated Ba includes 2.89% of unrated
securities and securities rated B includes ____% of unrated securities which
have been determined by the Manager to be of comparable quality.

Annual Total Returns

1991 28.74
1992 13.09
1993 12.10
1994 -0.65
1995 15.61
1996 12.54
1997 9.68
1998 -1.28
1999 0.97
2000

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

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

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

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

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

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

Past One Past FivePast Ten
Year Years Years

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

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

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

Total Fund Operating Expenses % %

INCOME-ORIENTED FUND

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

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

Annual Total Returns

1997 6.33
1998 6.70
1999 0.96
2000

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

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, 2000

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

Past One Past Five
Year Years

Class A % %*
Class R **

Past One Past FivePast Ten
Year Years Years

Lehman Brothers Intermediate
Government/Corporate Index % % %
Lipper Short-Intermediate Investment Grade Debt
Fund Average

* Period from February 29, 1996, date A shares first offered to the public,
through December 31, 2000.
** Period from February 29, 1996, date R shares first offered to eligible
purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

Class A Class R
Management Fees................ % %
12b-1 Fees.....................
Other Expenses.................

Total Fund Operating Expenses % %

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND, INC.
The Fund seeks as high a level of income available from short-term securities as
is considered consistent with preservation of principal and maintenance of
liquidity by investing in a portfolio of money market instruments.

Main Strategies
The Fund invests its assets in a portfolio of money market instruments. The
investments are U.S. dollar denominated securities which the Manager believes
present minimal credit risks. At the time the Fund purchases each security, it
is an "eligible security" as defined in the regulations issued under the
Investment Company Act of 1940.

The Fund maintains a dollar weighted average portfolio maturity of 90
days or less. It intends to hold its investments until maturity. However, the
Fund may sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Fund shares by its shareholders; or
o upon revised credit opinions of the security's issuer.
The sale of a security by the Fund before maturity may not be in the best
interest of the Fund. The Fund does have an ability to borrow money to cover the
sale of Fund shares. The sale of portfolio securities is usually a taxable
event.

It is the policy of the Fund to be as fully invested as possible to maximize
current income. Securities in which the Fund invests include:
o Government securities which are issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
o U.S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U.S. Government. These are backed
either by the full faith and credit of the U.S. Government or by the credit
of the particular agency or instrumentality.
o bank obligations consisting of:
o certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank; or
o bankers acceptances which are time drafts drawn on a commercial bank,
usually in connection with international commercial transactions.
o commercial paper which is short-term promissory notes issued by U.S. or
foreign corporations primarily to finance short-term credit needs.
o short-term corporate debt consisting of notes, bonds or debentures which at
the time of purchase by the Fund has 397 days or less remaining to
maturity.
o repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price plus
interest at a specified rate. Generally these have a short maturity (less
than a week) but may also have a longer maturity.
o taxable municipal obligations which are short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.

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

1991 5.80
1992 3.38
1993 2.63
1994 3.77
1995 5.44
1996 4.96
1997 4.88
1998 5.15
1999 4.63
2000

The 7-day yield for the period ended December 31, 2000 for Class A shares is
____% and for Class R shares is ____%. To obtain the Fund's current yield
information, please call 1-800-247-4123.

Average annual total returns for the period ending December 31, 2000

This table shows the Fund's average annual returns over the periods indicated.

Past One Past FivePast Ten
Year Years Years

Class A % % %
Class R *

* Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through December 31, 2000.

Examples

Fund Operating Expenses

Class A Class R
Management Fees................ % %
12b-1 Fees..................... None
Other Expenses.................

Total Fund Operating Expenses % %
THE COSTS OF INVESTING

Fees and Expenses of the Funds

This table describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.

<TABLE>
Shareholder Fees
(fees paid directly from your investment)

<CAPTION>
Maximum Sales Load Imposed Contingent
on Purchases of Class R shares 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
</TABLE>

* A wire charge of $6.00 will be deducted for all wire transfers.

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
charge on shares of any of the Funds purchased with reinvested dividends or
other distributions.

Class R shares automatically convert into Class A shares (based on share prices,
not numbers of shares) 49 months after purchase. Class R shares provide you the
benefit of putting all your dollars to work from the time of investment, but
(until conversion) have higher ongoing fees and lower dividends than Class A
shares.

Only Class R shares are offered in this prospectus. Class A shares are only
described because Class R shares convert to Class A shares. Orders for Class R
shares of $500,000 or more are treated as orders for Class A shares (unless you
include a written instruction that the order should be treated as an order for
Class R shares.)

Class A shares of the Cash Management Fund are sold without a sales charge.
Class A shares of the other Funds are sold with a sales charge that is a
variable percentage based on the amount of the purchase. This table shows the
sales charge for those funds which is based on the amount of your purchase.

<TABLE>
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

<CAPTION>
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.)

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

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, Principal Capital
Management LLC and Principal Capital Income Investors LLC;
o by any employee or Registered Representative (and their employees) of an
authorized broker-dealer;
o through a "wrap account" offered by Princor or through broker-dealers,
investment advisors and other financial institutions that have entered into
an agreement with Princor which includes a requirement that such shares be
sold for the benefit of clients participating in a "wrap account" or
similar program under which clients pay a fee to the broker-dealer,
investment advisor or financial institution;
o by unit investment trusts sponsored by Principal Life Insurance Company
and/or its subsidiaries or affiliates;
o by certain employee welfare benefit plan customers of Principal Life with
Plan Deposit Accounts;
o by participants who receive distributions from certain annuity contracts
offered by Principal Life (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 (a) such purchase is made through a
representative of Princor Financial Services Corporation which is a home
office employee of Principal Life Insurance Company and the purchase
proceeds represent a distribution from a terminating 401 (a) plan
administered by Principal Life Insurance Company or any of its affiliates,
or (b) the employer or plan trustee has entered into a written agreement
with Princor permitting the group solicitation of active employees/ plan
participants. Such purchases are subject to the CDSC which applies to
purchases of $1 million or more as described above; and
o to fund non-qualified plans administered by Principal Life pursuant to a
written service agreement.

Class A shares may also be purchased without a sales charge if your Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met:
o your purchase of Class A shares must take place within the first 180 days
of your Registered Representative's affiliation with the authorized
broker-dealer;
o your 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.

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, depository receipts,
convertible securities and warrants. Common stocks, the most familiar type,
represent an equity (ownership) interest in a corporation. Although equity
securities have a history of long-term growth in value, their prices fluctuate
based on changes in a company's financial condition and 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.

Each of the Funds may lend its portfolio securities to unaffiliated
broker-dealers and other unaffiliated qualified financial institutions.

Currency Contracts
The International Growth-Oriented, Partners Equity Growth, Partners LargeCap
Blend, Partners LargeCap Growth, Partners LargeCap Value, Partners MidCap
Growth, and Partners SmallCap Growth Funds may each enter into forward currency
contracts, currency futures contracts and options, and options on currencies for
hedging and other non-speculative purposes. In addition, the European Equity and
Pacific Basin Funds each may invest a limited percentage of its assets in such
contracts for speculative purposes. A forward currency contract involves a
privately negotiated obligation to purchase or sell a specific currency at a
future date at a price set in the contract. A Fund will not hedge currency
exposure to an extent greater than the aggregate market value of the securities
held or to be purchased by the Fund (denominated or generally quoted or
currently convertible into the currency).

Hedging is a technique used in an attempt to reduce risk. If a Fund's
Sub-Advisor hedges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investment, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or to increase
return. These techniques may increase the volatility of a Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these techniques could result in a loss if the other party to the
transaction does not perform as promised. Additionally, there is the risk of
government action through exchange controls that would restrict the ability of
the Fund to deliver or receive currency.

Forward Commitments
Each of the Income-Oriented Funds and the Balanced, European Equity, Pacific
Basin, Partners Equity Growth, Partners LargeCap Blend, Partners LargeCap Value,
and Partners SmallCap Growth Funds may enter into forward commitment agreements.
These agreements call for the Fund to purchase or sell a security on a future
date at a fixed price. Each of these Funds may also enter into contracts to sell
its investments either on demand or at a specific interval.

Warrants
Each of the Funds (except Cash 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.

There are many different types of derivatives and many different ways to use
them. Futures and options are commonly used for traditional hedging purposes to
attempt to protect a Fund from exposure to changing interest rates, security
prices, or currency exchange rated and for cash management purposes as a
low-cost method of gaining exposure to a particular securities market without
investing directly in those securities.

The return on a derivative security may increase or decrease, depending upon
changes in the reference index or instrument to which it relates. The risks
associated with derivative investment include:
o the risk that the underlying security, interest rate, market index or other
financial asset will not move in the direction the Sub-Advisor anticipated;
o the possibility that there may be no liquid secondary market which may make
it difficult or impossible to close out a position when desired;
o the risk that adverse price movements in an instrument an result in a loss
substantially greater than a Fund's initial investment; and
o the counterparty may fail to perform its obligations.

Each Fund may invest its assets in foreign securities to the indicated
percentage of its assets:
o European Equity, International, International Emerging Markets,
International SmallCap and Pacific Basin Funds - 100%;
o Partners Equity Growth, Partners LargeCap Blend, Partners LargeCap Growth,
Partners LargeCap Value, Partners SmallCap Growth, and Real Estate Funds -
25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%; and
o LargeCap Stock Index and Partners MidCap Growth Funds - 10%.

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.

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
(Partners LargeCap Blend, Partners LargeCap Value, and Partners SmallCap
Growth). However, the Partners LargeCap Blend and Partners LargeCap Value Funds
each expect that it may have an annual turnover rate ranging from 200% to 300%.
Turnover rates for each of the other Funds may be found in the Fund's Financial
Highlights table.

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, record keeping and bookkeeping services, and keeps the
financial and accounting records required for the Funds. The Manager has signed
sub-advisory agreements with various Sub-Advisors for portfolio management
functions for certain Funds. The Manager compensates the Sub-Advisor for its
services as provided in the sub-advisory agreement.

The Sub-Advisors

Funds: Balanced (equity securities portion), Blue Chip, Capital Value,
Growth, International, International Emerging Markets,
International SmallCap, LargeCap Stock Index, MidCap, SmallCap,
and Utilities.
Sub-Advisor: Invista, an indirectly wholly-owned subsidiary of Principal Life
Insurance Company and an affiliate of the Manager, was founded in
1985. It manages investments for institutional investors,
including Principal Life. Assets under management as of were
approximately $35.3 billion. Invista's address is 1800 Hub Tower,
699 Walnut, Des Moines, Iowa 50309.

Funds: Balanced (fixed-income portion), Government Securities Income,
and Limited Term Bond.

Sub-Advisor: Principal Capital Income Investors, LLC ("PCII"), an indirect
wholly-owned subsidiary of Principal Life Insurance Company and
an affiliate of the Manager, was founded in 2000. It manages
investments for institutional investors, including Principal Life
Insurance Company. Assets under management as of September 30,
2000, were approximately $31.1 billion. PCII'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.

Fund: Partners Equity Growth
Sub-Advisor: Morgan Stanley, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of portfolio
management services to customers in the U.S. and abroad. As of ,
Morgan Stanley, together with its affiliated institutional asset
management companies, managed investments totaling approximately
$ billion as named fiduciary or fiduciary adviser. On December 1,
1998, Morgan Stanley Assets Management Inc. changed its name to
Morgan Stanley Dean Witter Investment Management Inc. but
continues to do business in certain instances using the name
Morgan Stanley Asset Management.

Fund: Partners LargeCap Growth
Sub-Advisor: Duncan-Hurst was founded in 1990. Its address is 4365 Executive
Drive, Suite 1520, San Diego, CA 92121. As of , Duncan-Hurst
managed assets of approximately $ 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 , Turner had discretionary
management authority with respect to approximately $ billion in
assets.

Balanced % International SmallCap %
Blue Chip % LargeCap Stock Index %
Bond % Limited Term Bond %
Capital Value % MidCap %
Cash Management % Pacific Basin %
European Equity % Partners Equity Growth %
Government Securities Income % Partners LargeCap Growth %
Growth % Partners MidCap Growth %
High Yield % Real Estate %
International % SmallCap %
International Emerging Markets % Utilities %

Each Fund and the Manager, under an order received from the SEC, may enter into
and materially amend agreements with Sub-Advisors without obtaining shareholder
approval. For any Fund that is relying on the order, the Manager may:
o hire one or more Sub-Advisors;
o change Sub-Advisors; and
o reallocate management fees between itself and Sub-Advisors.
The Manager will continue to have the ultimate responsibility for the investment
performance of these Funds due to its responsibility to oversee Sub-Advisors and
recommend their hiring, termination and replacement. No Fund will rely on the
order until it receives approval from:
o its shareholder(s); or
o in the case of a new Fund, the Fund's sole initial shareholder before the
Fund is available to the public, and the Fund states in its prospectus that
it intends to rely on the order. The Manager will not enter into an
agreement with an affiliated Sub-Advisor without that agreement, including
the compensation to be paid under it, being similarly approved. The
Partners Equity Growth, Partners LargeCap Blend, Partners LargeCap Growth,
Partners LargeCap Value, Partners MidCap Growth, and Partners SmallCap
Growth Funds have received the necessary shareholder approval and intend to
rely on the order.

THE PORTFOLIO MANAGERS
The investment professionals who manage the assets of each Fund are shown below.
Backed by their staffs of experienced securities analysts, they provide the
Funds with professional investment management.

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.

NOTES:
o If current market values are not readily available for a security, its fair
value is determined using a policy adopted by the Fund's Board of
Directors.
o A Fund's securities may be traded on foreign securities markets which
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities used
in computing share price are determined at the time the foreign market
closes. Occasionally, events affecting the value of foreign securities
occur when the foreign market is closed and the New York Stock Exchange is
open. The NAV of a Fund investing in foreign securities may change on days
when shareholders are unable to purchase or redeem shares. If the Manager
believes the market value is materially affected, the share price will be
calculated using the policy adopted by the Fund.
o Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any point in time. These may be
referred to as a local price and a premium price. The premium price is
often a negotiated price that may not consistently represent a price at
which a specific transaction can be effected. The international
growth-oriented funds each have a policy to value such securities at a
price at which the Manager or Sub-Advisor expects the shares may be sold.

DIVIDENDS AND DISTRIBUTIONS

The Growth-Oriented and Income-Oriented Funds pay most of their net dividend
income to you every year. The payment schedule is:

<TABLE>
<CAPTION>
Funds Record Date Payable Date
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced, Real Estate the business day before March 19, June 19,
and Utilities each payable date September 19 and December 19
(or previous business day)

Blue Chip the business day before June 19 or December 19
each payable date (or previous business day)

Capital Value, European Equity, the business day before December 19
Growth, International, International each payable date (or previous business day)
Emerging Markets, International
SmallCap, LargeCap Stock Index
MidCap, Pacific Basin, Partners
Equity Growth, Partners
LargeCap Growth, Partners
MidCap Growth and SmallCap

Bond, Government Securities the business day before monthly on the 19th
Income, High Yield and each payable date (or previous business day)
Limited Term Bond
</TABLE>

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.

HOW TO BUY SHARES

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 ______________between 7:00 A.M.. and 7:00 P.M.. Central Time on
any day that the New York Stock Exchange is open.
o We must receive your payment for the order within three business days (or
the order will be canceled and you may be liable for any loss).
o For new accounts, you also need to send a completed application.

Note:Phone orders are not available for qualified accounts or the Cash
Management Fund.

Wire money from your bank
o Have your Registered Representative call Principal Mutual Funds
(1-800-247-4123) for an account number and wiring instructions.
o For both initial and subsequent purchases, federal funds should be wired
to:
Wells Fargo Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA No.: 073000228
For credit to: Principal Mutual Funds
Account No.: 3000499968
For credit: Principal ________ Fund, Class ____
Shareholder Account No. __________________
Shareholder Registration __________________
o Give the number and instructions to your bank (which may charge a wire
fee).
o No wires are accepted on days when the New York Stock Exchange is closed or
when the Federal Reserve is closed (because the bank that would receive
your wire is closed).

Establish a Direct Deposit Plan
Direct Deposit allows you to deposit automatically all or part of your paycheck
(or government allotment) to your Principal Mutual Fund account(s).
o Availability of this service must be approved by your payroll department.
o Have your Registered Representative call Principal Mutual Funds ( ) for an
account number, Automated Clearing House (ACH) instructions and the form
needed to establish Direct Deposit.
o Give the Direct Deposit Authorization Form to your employer or the
governmental agency (either of which may charge a fee for this service).
o Shares will be purchased on the day the ACH notification is received by
Wells Fargo Bank Iowa, N.A.
o On days when the NYSE is closed, but the bank receiving the ACH
notification is open, your purchase will be priced at the next calculated
share price.

Set up a Dividend Relay
o Invest your dividends and capital gains from one Principal Mutual Fund in
shares of another Principal Mutual Fund.
o Distributions from a Fund may be directed to only one receiving Fund.
o The Fund share class receiving the investment must be the same class as the
originating Fund.
o There is no sales charge or administrative charge for the Dividend Relay.
o You can set up Dividend Relay:
o on the application for a new account; or
o by calling Principal Mutual Funds (_______________) if telephone
services apply to the originating account; or
o in writing (a signature guarantee may be required).
o You may discontinue your Dividend Relay election with a written notice to
Principal Mutual Funds.
o There may be a delay of up to 10 days before the Dividend Relay plan is
discontinued.
o The receiving Fund must meet fund minimums. If it does not, the Fund
reserves the right to close the account if it is not brought up to the
minimum investment amount within 90 days of sending you a deficiency
notice.

HOW TO 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 ( ).
--------------------------------------

You should also call Principal Mutual Funds ( ) for special instructions that
may apply to sales from accounts:
o when an owner has died;
o for certain employee benefit plans; or
o owned by corporations, partnerships, agents or fiduciaries.

Within 60 days after the sale of shares, 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* (__________________)
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 Wells Fargo Bank Iowa, N.A. and its rules concerning
checking accounts apply.
o If the account does not have sufficient funds to cover the check, it is
marked "Insufficient Funds" and returned (the Fund may revoke checkwriting
on accounts on which "Insufficient Funds" checks are drawn).
o Accounts may not be closed by withdrawal check (accounts continue to earn
dividends until checks clear and the exact value of the account is not
known until the check is received by Wells Fargo).
o Only available for non-qualified accounts.

Periodic withdrawal 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 _________________ 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).

Your periodic withdrawal plan continues until:
o you instruct us to stop; or
o your Fund account balance is zero.

Withdrawal payments are sent on or before the third business day after the date
of the sale. It may take additional business days for your financial institution
to post this payment to your account at that financial institution. Sales made
under your periodic withdrawal plan will reduce and may eventually exhaust your
account. The Funds do not normally accept purchase payments 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 minimum amount that may be exchanged into any
Principal Mutual Fund must be at least $300 on an annual basis. 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 (_______________), if you have telephone privileges on the
account.
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 __________ to obtain
the form).
o via the internet at www.principal.com.

Automatic exchange election
This election authorizes an exchange from one Principal Mutual Fund to another
on a monthly, quarterly, semiannual or annual basis. You can set up an automatic
exchange by:
o completing the Automatic Exchange Election section of the application;
o calling us (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.

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 To eliminate the need for safekeeping, the Funds do not issue certificates
for Class R shares.
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).

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.

GENERAL INFORMATION ABOUT A FUND ACCOUNT

Statements
You will receive quarterly statements (monthly statements for the Cash
Management Fund) for the Funds you own. Principal Mutual Fund 401(a) plan
participants will receive semiannual statements which detail account activity.
The statements provide the number and value of shares you own, transactions
during the quarter, dividends declared or paid and other information. The year
end statement includes information for all transactions that took place during
the year. Please review your statement as soon as you receive it. Keep your
statements as you may need them for tax reporting purposes.

Generally, each time you buy, sell or exchange shares between Principal Mutual
Funds, you will receive a confirmation in the mail shortly thereafter. It
summarizes all the key information; what you bought or sold, the amount of the
transaction, and other vital data. The Cash Management Fund mails confirmations
only once a month detailing dividend and account activity.

Certain purchases and sales are only included on your quarterly statement. These
include accounts

o when the only activity during the quarter:
o is purchase of shares from reinvested dividends and/or capital gains;
o is a result of Dividend Relay;
o 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.

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.

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.

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,
address, 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.

Additional information about the Funds is available in the Statement of
Additional Information dated ________________, 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.

SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS

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

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.

APPENDIX A