PRINCIPAL BOND FUND INC /MD/, 485BPOS, 1999-06-30

PRINCIPAL BOND FUND INC /MD/
485BPOS, 1999-06-30

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Registration No. 33-14536

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

POST-EFFECTIVE AMENDMENT NO. 24 TO

FORM N-1A

REGISTRATION STATEMENT

under

THE SECURITIES ACT OF 1933

and

REGISTRATION STATEMENT

under

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

PRINCIPAL BOND 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
__X__ on 06/30/1999 pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485

If appropriate, check the following box:

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

PRINCIPAL MUTUAL FUNDS
Class C Shares

<TABLE>
<CAPTION>
DOMESTIC GROWTH-ORIENTED FUNDS INTERNATIONAL GROWTH-ORIENTED FUNDS

<S> <C>
Principal Balanced Fund, Inc. Principal International Emerging Markets Fund, Inc.
Principal Blue Chip Fund, Inc. Principal International Fund, Inc.
Principal Capital Value Fund, Inc. Principal International SmallCap Fund, Inc.
Principal Growth Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.
</TABLE>

INCOME-ORIENTED FUNDS MONEY MARKET FUND

Principal Bond Fund, Inc. Principal Cash Management 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.

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

The date of this Prospectus is
June 30, 1999.

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
MidCap Fund.........................................................14
Real Estate Fund....................................................16
SmallCap Fund.......................................................18
Utilities Fund......................................................20

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

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

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

The Costs of Investing.......................................................40

Certain Investment Strategies and Related Risks..............................45

Management, Organization and Capital Structure...............................49

Pricing of Fund Shares.......................................................50

Dividends and Distributions..................................................51

How To Buy Shares............................................................52

How To Sell Shares...........................................................54

How To Exchange Shares Among Principal Funds.................................57

General Information About a Fund Account.....................................59

Financial Highlights.........................................................62

FUND DESCRIPTIONS.

The Principal Mutual Funds have three categories of funds: domestic
growth-oriented funds, international growth-oriented funds and income-oriented
funds. Each Fund offers multiple share Classes. Only Class C shares are offered
in this prospectus. For a prospectus for Class A and Class B shares, call us at
1-800-247-4123 or visit our web site at www.principal.com/funds.

Class C shares are sold without an initial sales charge but are subject to a
contingent deferred sales charge ("CDSC") if they are sold within one year of
purchase. Your entire investment in Class C shares is available to work for you
from the time of investment. However, Class C shares generally have higher
annual operating expenses than Class A or Class B shares.

Class A shares are generally sold with a sales charge that is a variable
percentage based on the amount of the purchase. Class B shares are not subject
to a sales charge at the time of purchase but are subject to a CDSC of the
shares are sold within six years of purchase.

The Growth-Oriented Funds invest primarily in common stocks. Under normal market
conditions, the Growth-Oriented Funds (except Balanced and Utilities) are fully
invested in equity securities. Under unusual circumstances, each of the
Growth-Oriented Funds may invest without limit in cash for temporary or
defensive purposes (see Temporary or Defensive Measures). When doing so, the
Fund is not investing to achieve its investment objective. The Funds also
maintain a portion of their assets in cash while making long-term investment
decisions and to cover sell orders from shareholders.

The Income-Oriented Funds each have a rating limitation with regard to the
quality of the bonds that are held in its portfolio. The rating limitation
applies when the Fund purchases a bond. If the rating on a bond changes while
the Fund owns it, the Fund is not required to sell the bond. The Statement of
Additional Information ("SAI") contains additional information about bond
ratings by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P").

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

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

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

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

Principal Management Corporation (the "Manager") serves as the manager for the
Principal Mutual Funds. It has signed sub-advisory contracts with Invista
Capital Management, LLC ("Invista"). Under those contracts, Invista provides
portfolio management for the Growth-Oriented Funds (except the Real Estate
Fund), the Government Securities Income and Limited Term Bond Funds (see
Management, Organization and Capital Structure).

Fund Performance
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.

The bar chart shows changes in the Fund's Class A share 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. One of the tables compares
the Fund's average annual returns for 1, 5 and 10 years with a broad based
securities market index (a broad measure of market performance) and an average
of mutual funds with a similar investment objective and management style. The
averages used are prepared by Lipper, Inc. (an independent statistical service).
The other table for each Fund provides the highest and lowest quarterly rate of
return for that Fund's Class A shares during the last 10 years.

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: All investors should read the prospectus sections discussing the Funds,
the expenses and management (see Fund Descriptions; The Costs of
Investing, Management, Organization and Capital Structure; Dividends
and Distributions; Pricing of Fund Shares; and Financial Highlights).

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 the Funds other than those
contained in this Prospectus. Information or representations from
unauthorized parties must not be relied upon as having been made by the
Fund or the Manager.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

The Balanced Fund is generally a suitable investment for investors seeking
long-term growth but who are uncomfortable accepting the risks of investing
entirely in common stocks. 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.

The total returns are for Class A shares which are not offered in this
prospectus. The total returns for Class C shares would be substantially similar
to the returns shown as both classes invest in the same portfolio of securities.
The returns differ to the extent the classes do not have similar operating
expenses. 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
"1989" 10.65
"1990" -5.18
"1991" 31.72
"1992" 10.47
"1993" 9.01
"1994" -3.38
"1995" 23.39
"1996" 13
"1997" 17.29
"1998" 11.2

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is -1.02% and
for Class B shares is -1.20%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
3/31/91 11.34%
9/30/90 -11.70%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five Past Ten
Year Years Years
Class A 5.97% 10.86% 10.79%
Class B 6.31 14.96* --

S&P 500 Stock Index 28.58 24.06 19.21
Lehman Brothers Government/
Corporate Bond Index 9.47 7.30 9.33
Lipper Balanced Fund Average 13.48 13.93 13.04

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

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:

-----------------------------------------
Examples
-----------------------------------------

1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------
Class A $599 $862 $1,144 $1,947

Class B 619 967 1,330 2,082
Class C 299 606 1,042 2,254

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

Class A 599 862 1,144 1,947
Class B 207 640 1,098 2,082
Class C 196 606 1,042 2,254

-----------------------------------------
Fund Operating Expenses
-----------------------------------------

Class A Class B Class C
Management Fees................ 0.59% 0.59% 0.59%
12b-1 Fees..................... 0.25 0.91 1.00
Other Expenses................. 0.44 0.54 0.35

Total Fund Operating Expenses 1.28% 2.04% 1.94%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since October 1998 Co-Manager: Douglas D. Herold, CFA.
Portfolio Manager of Invista Capital
Management, LLC since 1996. Prior thereto,
Securities Analyst from 1993-1996.

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

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

DOMESTIC GROWTH-ORIENTED FUND

PRINCIPAL BLUE CHIP FUND, INC.
The Blue Chip 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 Blue Chip 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.

The Blue Chip Fund is generally a suitable investment for investors seeking
long-term growth who are willing to accept the risks of investing in common
stocks but who 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" 16.55

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 4.00% and
for Class B shares is 3.82%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
6/30/97 16.40%
9/30/98 -9.92%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five Past Ten
Year Years Years

Class A 11.07% 17.65% 14.17%*
Class B 11.69 21.98** --

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and
Income Fund Average 15.61 18.53 15.76

* Period from March 1, 1991, date Class A shares first offered to the public,
through December 31, 1998. **Period from December 9, 1994, date Class B
shares first offered to the public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------

1 Year 3 Years 5 Years 10 Years
Class A $602 $870 $1,159 $1,979
Class B 617 961 1,320 2,080
Class C 301 612 1,052 2,275
You would pay the following expenses if you did not redeem your
shares:

Class A 602 870 1,159 1,979
Class B 205 634 1,088 2,080
Class C 198 612 1,052 2,275

-----------------------------------------
Fund Operating Expenses
-----------------------------------------

Class A Class B Class C
Management Fees................ 0.48% 0.48% 0.48%
12b-1 Fees..................... 0.25 0.91 1.00
Other Expenses................. 0.58 0.63 0.49

Total Fund Operating Expenses 1.31% 2.02% 1.97%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since March 1991 Mark T. Williams, CFA. Portfolio Manager
(Fund's inception) of Invista Capital Management, LLC
since 1991.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

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

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

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

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

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

Main Risks
The Capital Value Fund is generally a suitable investment for investors seeking
long-term growth, who 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. 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.

Annual Total Returns
"1989" 14.76
"1990" -10.64
"1991" 37.21
"1992" 9.09
"1993" 7.56
"1994" 0.21
"1995" 31.9
"1996" 23.42
"1997" 28.69
"1998" 12.13

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is -0.16% and
for Class B shares is -0.36%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
3/31/91 17.94%
9/30/90 -17.62%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five Past Ten
Year Years Years

Class A 6.86% 17.54% 13.99%
Class B 7.29 22.85* --

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and Income
Fund Average 15.61 18.53 15.76

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $547 $700 $ 867 $1,350
Class B 569 813 1,066 1,503
Class C 262 493 850 1,856
You would pay the following expenses if you did not redeem your
shares:

Class A 547 700 867 1,350
Class B 155 480 829 1,503
Class C 159 493 850 1,856

-----------------------------------------
Fund Operating Expenses
-----------------------------------------

Class A Class B Class C
Management Fees................ 0.38% 0.38% 0.38%
12b-1 Fees..................... 0.14 0.79 1.00
Other Expenses................. 0.22 0.35 0.19

Total Fund Operating Expenses 0.74% 1.52% 1.57%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since November 1996 Catherine A. Zaharis, CFA. Portfolio
Manager of Invista Capital
Management, LLC since 1987.

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

Main Risks
These securities present greater opportunities for capital growth because of
high potential earnings growth, but may also involve greater risk than
securities which do not have the same potential. The companies may have limited
product lines, markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, these securities may change in value more than those of
larger, more established companies.

The Growth Fund is generally a suitable investment for investors who want
long-term growth. Additionally, the investor 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. As the value of the stocks
owned by the Fund changes, the Fund share price changes. In the short term, the
share price can fluctuate dramatically. 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.

Annual Total Returns
"1989" 18.07
"1990" -1.41
"1991" 56.61
"1992" 10.16
"1993" 7.51
"1994" 3.21
"1995" 33.47
"1996" 12.23
"1997" 28.41
"1998" 20.37

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 3.57% and
for Class B shares is 3.48%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
3/31/91 24.39%
9/30/90 -18.61%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past FivePast Ten
Year Years Years

Class A 14.71% 17.89% 17.27%
Class B 16.77 23.12* --

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth Fund Average 22.86 19.03 17.16

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $567 $763 $ 976 $1,586
Class B 563 795 1,035 1,543
Class C 270 517 892 1,944

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

Class A 567 763 976 1,586
Class B 149 462 797 1,543
Class C 167 517 892 1,944

-----------------------------------------
Fund Operating Expenses
-----------------------------------------

Class A Class B Class C
Management Fees................ 0.41% 0.41% 0.41%
12b-1 Fees..................... 0.21 0.65 1.00
Other Expenses................. 0.33 0.40 0.26

Total Fund Operating Expenses 0.95% 1.46% 1.67%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since August 1987 Michael R. Hamilton, Portfolio Manager
of Invista Capital Management, LLC
since 1987.
DOMESTIC GROWTH-ORIENTED FUND

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

Main Strategies
The MidCap 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. 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.

The MidCap Fund is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for short-term
fluctuations in the value of their investments. It is designed for long-term
investors for a portion of their investments and not designed for investors
seeking income or conservation of capital.

Annual Total Returns
"1989" 20.53
"1990" -6.33
"1991" 52.83
"1992" 14.81
"1993" 12.29
"1994" 3.03
"1995" 34.2
"1996" 19.13
"1997" 22.94
"1998" -0.23

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is -3.88% and
for Class B shares is -3.97%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
3/31/91 25.77%
9/30/98 -21.24%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five Past Ten
Year Years Years
Class A -4.92% 14.00% 15.66
Class B -4.65 18.55* --

S&P 500 Stock Index 28.58 24.06 19.21
Lipper Mid-Cap Fund Average 12.16 15.18 15.83

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $593 $844 $1,113 $1,882
Class B 589 875 1,173 1,843
Class C 303 618 1,062 2,296
You would pay the following expenses if you did not redeem your shares:

Class A 593 844 1,113 1,882
Class B 176 545 939 1,843
Class C 200 618 1,062 2,296

-----------------------------------------
Fund Operating Expenses
-----------------------------------------

Class A Class B Class C
Management Fees................ 0.56% 0.56% 0.56%
12b-1 Fees..................... 0.24 0.70 1.00
Other Expenses................. 0.42 0.47 0.41

Total Fund Operating Expenses 1.22% 1.73% 1.97%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since December 1987 Michael R. Hamilton, Portfolio Manager of
(Fund's inception) Invista Capital Management, LLC since 1987.

DOMESTIC GROWTH-ORIENTED FUND

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

Main Strategies
The Real Estate 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 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. 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.

The Real Estate Fund is generally a suitable investment for investors seeking
long-term growth, who want to invest in companies engaged in the real estate
industry and who are willing to accept fluctuations in the value of their
investment.

Annual Total Returns
"1998" -13.62

Calendar Year Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is -6.44% and
for Class B shares is -6.52%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
12/31/98 0.26%
9/30/98 -7.81%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One
Year
Class A -17.68%
Class B -17.36

Morgan Stanley REIT Index -16.90
Lipper Real Estate
Fund Average -15.46

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $692 $1,145 $1,623 $2,937
Class B 660 1,093 1,542 2,727
Class C 375 838 1,430 3,032

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

Class A 692 1,145 1,623 2,937
Class B 250 770 1,316 2,727
Class C 273 838 1,430 3,032

-----------------------------------------
Fund Operating Expenses
-----------------------------------------

Class A Class B Class C
Management Fees................ 0.90% 0.90% 0.90%
12b-1 Fees..................... 0.31 0.60 1.00
Other Expenses................. 1.04 0.97 0.80

Total Fund Operating Expenses 2.25% 2.47% 2.70%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

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

DOMESTIC GROWTH-ORIENTED FUND

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

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

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

The net asset value of the Fund's shares is based on the values of the
securities it holds. The value of the stocks owned by the Fund changes on a
daily basis. The current share price reflects the activities of individual
companies as well as general market and economic conditions. In the short term,
stock prices can fluctuate dramatically in response to these factors. The Fund's
share price may fluctuate more than that of funds primarily invested in stocks
of mid-sized and large companies and may underperform as compared to the
securities of larger companies. Because of these fluctuations, principal values
and investment returns vary. 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.

The SmallCap Fund is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for volatile
fluctuations in the value of their investment. It is not designed for investors
seeking income or conservation of capital.

Annual Total Returns
"1998" -5.68

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is -3.81% and
for Class B shares is -4.04%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
12/31/98 22.22%
9/30/98 -23.52%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One
Year
Class A -10.12%
Class B -10.03

S&P 500 Stock Index 28.58
Lipper Small-Cap
Fund Average -0.33

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $724 $1,239 $1,780 $3,251
Class B 692 1,188 1,702 3,052
Class C 380 853 1,454 3,080
You would pay the following expenses if you did not redeem your shares:
Class A 724 1,239 1,780 3,251
Class B 283 868 1,479 3,052
Class C 278 853 1,454 3,080

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 0.85% 0.85% 0.85%
12b-1 Fees..................... 0.37 0.63 1.00
Other Expenses................. 1.36 1.32 0.90

Total Fund Operating Expenses 2.58% 2.80% 2.75%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

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

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

DOMESTIC GROWTH-ORIENTED FUND

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

Main Strategies

The Utilities 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 Utilities Fund is generally a suitable investment for investors seeking
quarterly dividends for income or to be reinvested for growth. Suitable
investors are those who want to invest in companies in the utilities industry
and are willing to accept fluctuations in the value of their investment. 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. 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.

Annual Total Returns
"1993" 8.42
"1994" -11.09
"1995" 33.87
"1996" 4.56
"1997" 29.58
"1998" 22.5

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is -6.33% and
for Class B shares is -6.46%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
12/31/97 19.24%
3/31/94 -9.00%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five Past Ten
Year Years Years
Class A 16.75% 13.49% 12.87%*
Class B 17.59 20.49** --

S&P 500 Stock Index 28.58 24.06 19.21
Dow Jones Utilities Index
with Income Fund Average 18.81 12.26 --

* Period from December 16, 1992, date Class A shares first offered to
the public, through December 31, 1998.

**Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $594 $847 $1,119 $1,893
Class B 615 955 1,310 2,036
Class C 299 606 1,042 2,254
You would pay the following expenses if you did not redeem your shares:
Class A 594 847 1,119 1,893
Class B 203 627 1,078 2,036
Class C 196 606 1,042 2,254

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 0.60% 0.60% 0.60%
12b-1 Fees..................... 0.25 0.90 1.00
Other Expenses................. 0.38 0.50 0.34

Total Fund Operating Expenses 1.23% 2.00% 1.94%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

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

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

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

Annual Total Returns
"1998" -17.42

Calendar Year Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 5.01% and
for Class B shares is 4.90%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
12/31/98 13.38%
9/30/98 -18.97%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five
Year Years
Class A -21.30% -23.37%*
Class B -21.09 -23.30*

Morgan Stanley Capital
International EMF
(Emerging Markets Free)
Index -27.52 -11.13
Lipper Emerging Markets
Fund Average -26.83 -10.01

* Period from August 29, 1997, date shares first offered to the public,
through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $793 $1,445 $2,119 $3,907
Class B 767 1,413 2,074 3,764
Class C 430 1,001 1,698 3,549
You would pay the following expenses if you did not redeem your shares:
Class A 793 1,445 2,119 3,907
Class B 362 1,100 1,859 3,764
Class C 328 1,001 1,698 3,549

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 1.25% 1.25% 1.25%
12b-1 Fees..................... 0.39 0.64 1.00
Other Expenses................. 1.67 1.70 1.00

Total Fund Operating Expenses 3.31% 3.59% 3.25%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

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

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

In choosing investments for the Fund, 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.

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

Annual Total Returns
"1989" 14.77
"1990" -9.51
"1991" 15.25
"1992" 0.81
"1993" 46.34
"1994" -5.26
"1995" 11.56
"1996" 23.76
"1997" 12.22
"1998" 8.48

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 1.74% and
for Class B shares is 1.53%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
12/31/98 15.54%
9/30/90 -18.37%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five Past Ten
Year Years Years
Class A 3.38% 8.70% 10.36%
Class B 3.78 12.64* --

Morgan Stanley Capital
International EAFE
(Europe, Australia and
Far East) Index 20.00 9.19 5.54
Lipper International Fund
Average 13.02 7.87 9.39

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $596 $853 $1,129 $1,915
Class B 606 929 1,264 1,981
Class C 314 652 1,119 2,410
You would pay the following expenses if you did not redeem your shares:
Class A 596 853 1,129 1,915
Class B 194 600 1,032 1,981
Class C 211 652 1,119 2,410

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 0.68% 0.68% 0.68%
12b-1 Fees..................... 0.19 0.74 1.00
Other Expenses................. 0.38 0.49 0.41

Total Fund Operating Expenses 1.25% 1.91% 2.09%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

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

INTERNATIONAL GROWTH-ORIENTED FUND

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

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

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

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

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

This Fund is not an appropriate investment for investors seeking either
preservation of capital or high current income. Investors must be able to assume
the increased risks of higher price volatility and currency fluctuations
associated with investments in international stocks which trade in non-U.S.
currencies.

The International SmallCap Fund is generally a suitable investment for investors
seeking long-term growth who want to invest a portion of their assets in
smaller, non-U.S. companies. 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.

Annual Total Returns
"1998" 14.4

Calendar Year Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 6.96% and
for Class B shares is 6.72%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
3/31/98 21.74%
9/30/98 -19.84%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five
Year Years
Class A 9.02% 5.37%*
Class B 10.00 5.95*

Morgan Stanley Capital
International EAFE
(Europe, Australia and
Far East) Index 20.00 9.19
Lipper International Small-Cap
Fund Average 13.02 6.10

* Period from August 29, 1997, date shares first offered to the public,
through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $731 $1,262 $1,818 $3,326
Class B 701 1,217 1,750 3,141
Class C 380 853 1,454 3,080
You would pay the following expenses if you did not redeem your shares:
Class A 731 1,262 1,818 3,326
Class B 293 898 1,528 3,141
Class C 278 853 1,454 3,080

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 1.20% 1.20% 1.20%
12b-1 Fees..................... 0.33 0.61 1.00
Other Expenses................. 1.13 1.09 0.55

Total Fund Operating Expenses 2.66% 2.90% 2.75%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

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

INCOME-ORIENTED FUND

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

Main Strategies
The Bond 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, 1998, the average ratings of this
Fund's assets based on market value at each month-end, were as follows (all
ratings are by Moody's):

Aaa 0.76%
Aa 2.06%
A 26.70%
Baa 64.42%
Ba 6.06%

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

Main Risks
The Bond Fund is generally a suitable investment for an investor 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. However, 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. 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
"1989" 13.43
"1990" 4.64
"1991" 17.45
"1992" 8.61
"1993" 12.77
"1994" -4.35
"1995" 22.28
"1996" 2.27
"1997" 10.96
"1998" 7.14

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is -0.69% and
for Class B shares is -0.88%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
6/30/95 8.54%
3/30/94 -4.06%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five Past Ten
Year Years Years
Class A 2.11% 6.27% 8.75%
Class B 2.35 8.92* --

Lehman Brothers BAA
Corporate Index 6.96 7.34 9.25
Lipper Corporate Debt BBB
Rated Fund Average 6.25 7.00 9.19

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $576 $790 $1,022 $1,686
Class B 597 899 1,214 1,829
Class C 278 542 933 2,030
You would pay the following expenses if you did not redeem your shares:
Class A 576 790 1,022 1,686
Class B 184 569 980 1,829
Class C 175 542 933 2,030

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees**.............. 0.48% 0.48% 0.48%
12b-1 Fees..................... 0.23 0.89 1.00
Other Expenses................. 0.33 0.44 0.24

Total Fund Operating Expenses 1.04% 1.81% 1.72%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

**The Manager voluntarily waived certain fees and expenses during the
fiscal year ended October 31, 1998. After waiver, the Class A share
management fee paid was 0.39% (total expenses 0.95%). After waiver, the
Class B share management fee paid was 0.34% (total expenses 1.67%).

Day-to-day Fund management:
Since November 1996 Scott A. Bennett, CFA. Assistant Director -
Securities Investment of Principal Capital
Management, LLC since 1996. Investment Manager
of Investment Securities from 1991-1996.

INCOME-ORIENTED FUND

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

Main Strategies
The Government Securities Income 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.

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,
when sold, shares of the Fund may be worth more or less than the amount paid for
them.

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.

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.

The Fund invests in modified pass-through GNMA Certificates. Owners of
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
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 period 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.

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

Annual Total Returns
"1989" 15.04
"1990" 9.52
"1991" 16.83
"1992" 6.13
"1993" 9.16
"1994" -4.89
"1995" 19.19
"1996" 3.85
"1997" 9.69
"1998" 7.19

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 0.40% and
for Class B shares is 0.18%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
6/30/89 8.75%
3/31/94 -4.38%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------
Past One Past FivePast Ten
Year Years Years
Class A 2.16% 5.70% 8.45%
Class B 2.44 8.56* --

Lehman Brothers GNMA
Index 6.93 7.34 9.25
Lipper GNMA Fund Average 6.47 6.52 8.31

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $559 $736 $ 929 $1,485
Class B 573 828 1,092 1,587
Class C 268 511 881 1,922
You would pay the following expenses if you did not redeem your shares:
Class A 559 736 929 1,485
Class B 160 496 855 1,587
Class C 165 511 881 1,922

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 0.45% 0.45% 0.45%
12b-1 Fees..................... 0.20 0.81 1.00
Other Expenses................. 0.21 0.31 0.17

Total Fund Operating Expenses 0.86% 1.57% 1.62%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

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

INCOME-ORIENTED FUND

PRINCIPAL HIGH YIELD FUND, INC.
The High Yield 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 High Yield Fund invests in high yield, lower or unrated fixed income
securities commonly known as "junk bonds" (see Risks of High Yield Securities).
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. These securities are considered to
be speculative with respect to the issuer's ability to pay interest and repay
principal. 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, 1998, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Moody's):
0.26% in securities rated Baa
38.36% in securities rated Ba
59.02% in securities rated B
2.36% in securities rated C

The above percentage for securities rated Ba includes 2.04% 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.

The High Yield Fund is generally a suitable investment for investors seeking
monthly dividends to provide income or to be reinvested in Fund shares for
growth. However, it is suitable only for that portion of the investor's
investments for which the investor is willing to accept potentially greater
risk. Investors should carefully consider their ability to assume the risks of
this Fund before making an investment. Investors should be prepared to maintain
their investment in the Fund during periods of adverse market conditions. This
Fund should not be relied on to meet short-term financial needs. 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.

Annual Total Returns
"1989" -1.51
"1990" -11.66
"1991" 28.74
"1992" 13.09
"1993" 12.1
"1994" -0.65
"1995" 15.61
"1996" 12.54
"1997" 9.68
"1998" -1.28

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 0.37% and
for Class B shares is 0.17%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
3/31/91 9.75%
9/30/98 -6.52%

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.

Lehman Brothers High Yield
Composite Bond Index 1.87 8.57 10.55
Lipper High Current Yield
Fund Average (0.44) 7.42 9.40

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

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
Example also assumes 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:

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $611 $ 897 $1,204 $2,075
Class B 648 1,055 1,478 2,331
Class C 316 658 1,129 2,431
You would pay the following expenses if you did not redeem your shares:
Class A 611 897 1,204 2,075
Class B 237 730 1,250 2,331
Class C 213 658 1,129 2,431

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 0.60% 0.60% 0.60%
12b-1 Fees..................... 0.25 1.03 1.00
Other Expenses................. 0.55 0.71 0.50

Total Fund Operating Expenses 1.40% 2.34% 2.10%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since April 1998 Mark P. Denkinger, CFA. Assistant Director - Securities
Investment of Principal Capital Management, LLC since
1998. Investment Manager from 1993-1998.

INCOME-ORIENTED FUND

PRINCIPAL LIMITED TERM BOND FUND, INC.

The Limited Term Bond Fund seeks a high level of current income consistent with
a relatively high level of principal stability by investing in a portfolio of
securities with a dollar weighted average maturity of five years or less.

Main Strategies and Risks
The Limited Term Bond 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.

The Fund may invest in corporate debt securities and mortgage-backed securities.
For a discussion of mortgage-backed securities, see the discussion of the U.S.
Government Securities Income 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.

The Limited Term Bond Fund is generally a suitable investment for investors who
want monthly dividends for income or to reinvest for modest growth. Suitable
investors are willing to accept some volatility in the value of their investment
but do not want dramatic volatility. 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.

Annual Total Returns
"1997" 6.63
"1998" 6.7

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 0.43% and
for Class B shares is 0.28%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
9/30/98 2.99%
3/31/97 0.20%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past Five
Year Years
Class A 5.10% 5.76%*
Class B 5.01 5.66*

Lehman Brothers Intermediate
Government/Corporate Index 8.42 6.60
Lipper Short-Intermediate
Investment Grade Debt
Fund Average 6.60 5.58

* Period from February 29, 1996, date shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $263 $504 $ 763 $1,504
Class B 367 818 1,317 2,243
Class C 221 526 907 1,976
You would pay the following expenses if you did not redeem your
shares:
Class A 263 504 763 1,504
Class B 239 736 1,260 2,243
Class C 170 526 907 1,976

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees**.............. 0.50% 0.50% 0.50%
12b-1 Fees..................... 0.15 0.50 0.50
Other Expenses................. 0.48 1.36 0.67

Total Fund Operating Expenses 1.13% 2.36% 1.67%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

**The Manager voluntarily waived certain fees and expenses during the
fiscal year ended October 31, 1998. After waiver, the Class A share
management fee paid was 0.19% (total expenses 0.82%). After waiver, the
Class B share management fee paid was 0% and other expenses were 0.72%
(total expenses 1.22%). For Class C shares, the Manager has agreed to
reimburse operating expenses so that total Fund operating expenses will
not be greater than 1.35%.

Day-to-day Fund management:
Since February 1996 Martin J. Schafer, Portfolio Manager of Invista
(Fund's inception) Capital Management, LLC since 1992.

INCOME-ORIENTED FUND

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

Main Strategies and Risks
The Tax-Exempt Bond 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:

o municipal bonds which are rated in the four highest grades by Moody's;
o municipal notes rated in the highest grade by Moody's;
o municipal commercial paper rated in the highest grade by Moody's or
S&P; or
o 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:

o securities that do not meet the criteria stated above;
o taxable securities; or
o municipal obligations the interest on which is treated as a tax
preference item for purposes of the federal alternative minimum tax.

Up to 20% of Fund assets may be invested in debt securities rated lower than BBB
by S&P or Baa by Moody's. These are sometimes referred to as "junk bonds" and
are considered speculative (see Risks of High Yield Securities). The Fund will
not purchase municipal bonds rated lower than B by Moody's or S&P. It also will
not buy municipal notes or commercial paper which are unrated or are not
comparable in quality to rated securities.

During the fiscal year ended October 31, 1998, the average ratings of the Fund's
assets, based on market value at each month-end, were as follows (all ratings
are by Standard & Poor's):

7.72% in securities rated AAA
29.10% in securities rated AA
42.73% in securities rated A
20.45% in securities rated BBB

The above percentages includes unrated securities which the Manager has
determined to be of comparable quality:

7.72% in securities rated AAA
0.41% in securities rated AAA
1.49% in securities rated AA
2.97% in securities rated A
1.44% in securities rated BBB

The Fund may not invest more than 5% of its assets in the securities of any one
issuer (except U.S. Government securities). It 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.

The Fund may also invest in taxable securities which mature one year or less
from the time of purchase. These taxable investments are generally made for
liquidity purposes or as a temporary investment of cash pending investment in
municipal obligations.

Under unusual market or economic conditions, for temporary defensive purposes
the Fund may invest more than 20% of its assets in taxable securities.

The Tax-Exempt Bond Fund is generally a suitable investment for investors
seeking monthly, federally tax-exempt dividends for income or to be reinvested
for modest growth and who are willing to accept fluctuations in the value of
their investment. 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.

Annual Total Returns
"1989" 11.24
"1990" 5.08
"1991" 12.07
"1992" 9.62
"1993" 12.44
"1994" -9.44
"1995" 20.72
"1996" 4.6
"1997" 9.19
"1998" 5.08

Calendar Years Ended December 31

The year-to-date return as of March 31, 1999 for Class A shares is 0.80% and
for Class B shares is 0.73%.

Highest & lowest
quarterly total returns
for the last 10 years

Quarter Ended Quarterly Return
3/31/95 9.13%
3/31/94 -7.08%

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.

-------------------------------------------------------
Average annua1 total returns
(for the period ending December 31, 1998)
-------------------------------------------------------

Past One Past FivePast Ten
Year Years Years
Class A 0.14% 4.57% 7.28%
Class B 0.34 8.58* --

Lehman Brothers Municipal
Bond Index 6.48 6.23 8.22
Lipper General Municipal Debt
Fund Average 5.32 5.44 7.70

* Period from December 9, 1994, date Class B shares first offered to the
public, through December 31, 1998.

-----------------------------------------
Examples
-----------------------------------------
1 Year 3 Years 5 Years 10 Years
Class A $556 $727 $ 914 $1,452
Class B 560 786 1,020 1,473
Class C 274 530 913 1,987
You would pay the following expenses if you did not redeem your shares:
Class A 556 727 914 1,452
Class B 146 452 782 1,473
Class C 171 530 913 1,987

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 0.47% 0.47% 0.47%
12b-1 Fees..................... 0.23 0.69 1.00
Other Expenses................. 0.13 0.27 0.21

Total Fund Operating Expenses 0.83% 1.43% 1.68%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since July 1991 Daniel J. Garrett, CFA. Assistant Director -
Securities Investment of Principal Capital
Management LLC since 1994.

MONEY MARKET FUND

PRINCIPAL CASH MANAGEMENT FUND, INC.
Principal Cash Management Fund seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing in a portfolio of money market
instruments.

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

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

The Fund maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Fund may
sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Fund shares by its shareholders; or
o upon revised credit opinions of the security's issuer.

The sale of a security by the Fund before maturity may not be in the best
interest of the Fund. The Fund does have an ability to borrow money to cover the
sale of Fund shares. The sale of portfolio securities is usually a taxable
event.

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

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

Main Risks
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. 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.

The Cash Management Fund is generally a suitable investment for investors
seeking monthly dividends to produce income without incurring much principal
risk or for investor's short-term needs. 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.

Annual Total Returns
"1989" 8.42
"1990" 7.63
"1991" 5.8
"1992" 3.38
"1993" 2.63
"1994" 3.77
"1995" 5.44
"1996" 4.96
"1997" 4.88
"1998" 5.15

Calendar Years Ended December 31

The 7-day yield ending on March 31, 1999 for Class A shares is 4.31% and for
Class B shares is 3.80%. To obtain the Fund's current yield information, please
call 1-800-247-4123.

-----------------------------------------
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 $ 57 $179 $ 313 $ 701
Class B 566 804 1,051 1,408
Class C 264 499 860 1,878
You would pay the following expenses if you did not redeem your shares:
Class A 57 179 313 701
Class B 152 471 813 1,408
Class C 161 499 860 1,878

-----------------------------------------
Fund Operating Expenses
-----------------------------------------
Class A Class B Class C
Management Fees................ 0.42% 0.42% 0.42%
12b-1 Fees..................... None 0.32% 1.00
Other Expenses................. 0.14% 0.75% 0.15

Total Fund Operating Expenses 0.56% 1.49% 1.57%

* Total Fund Operating Expenses for Class A and Class B shares are as of
October 31, 1998. Expenses for Class C shares are estimated.

Day-to-day Fund management:
Since March 1983 Michael R. Johnson. Assistant Director - Securities
Trading of Principal Capital Management, LLC since
1994.
THE COSTS OF INVESTING

The Funds continuously offer four classes of shares designated as Class A, Class
B, Class C and Class R shares. Information with regard to Class A, B and R
shares of the Funds is available in separate prospectuses.

Fees and Expenses of the Funds
This table describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.
<TABLE>
<CAPTION>

Shareholder Fees
(fees paid directly from your investment)

Class A Shares Class B Shares Class C Shares

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

Redemptions During Redemptions During
Year Year 1

1 2 3 4 5 6 7
-------------------------------------------------------
All Funds except Limited Term Bond Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
and Money Market Funds 4.75% 4% 4% 3% 3% 2% 1% 0% 1.00%
Limited Term Bond Fund 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 Class A 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 shares have no front-end sales charge.
o 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 sale (Class B and C shares).

o Class A shares may be purchased at a price equal to the share price
plus an initial sales charge.
o Purchases 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 shares have no initial sales charge but may be subject to a
contingent deferred sales charge (CDSC). If you sell (redeem) shares
and the CDSC is imposed, it will reduce the amount of sales proceeds
(see Contingent deferred sales charge: Class B shares).
o Class C shares have no initial sales charge but may be subject to a
contingent deferred sales charge (CDSC). If you sell (redeem) shares
and the CDSC is imposed, it will reduce the amount of sales proceeds
(see Contingent deferred sales charge: Class C shares).

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 will depend on a number of factors such as the
amount you wish to invest, the amount of time you wish to hold on to your
investment and whether you intend to make additional investments in the Fund.

Class A Shares. If you invest in Class A shares, you generally pay an
initial sales charge. However, if you invest $50,000 or more the sales
charge is reduced. Additionally, you are not assessed an initial sales
charge for purchases of Class A shares of $1 million or more. A deferred
sales charge is imposed if you sell those shares within 18 months after you
buy them. Class A shares generally have lower annual operating expenses
than Class B and Class C shares of the same Fund.

Class B Shares. If you invest in Class B shares, you do not pay an initial
sales charge. However, if you sell your shares within 6 years from the date
of your purchase, you pay a deferred sales charge. If you maintain your
Class B shares for 7 years, your Class B shares automatically convert to
Class A shares without a charge. Class B shares generally have higher
annual operating expenses than Class A shares of the same Fund.

Class C Shares. If you invest in Class C shares, you do not pay an initial
sales charge. If you sell your Class C shares within 12 months of buying
those shares, you pay a sales charge. Class C shares generally have higher
annual operating expenses than Class A or Class B shares of the same Fund.

The decision as to which class to purchase depends on the amount you invest, how
long you intend to hold the shares and your personal situation. If you are
making an investment that qualifies for reduced sales charges, you might
consider Class A shares. If you prefer not to pay an initial sales charge and
you plan to hold the investment for at least six years, you might consider Class
B shares. If you prefer not to pay an initial sales charge and you plan to hold
your investment for only a few years, you may prefer Class C shares.

The difference between Class A shares and Class C shares 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 in a Fund, but are unsure which class
to select, this table may assist you. Class A shares of a Fund may be
advantageous over Class C shares when:

The amount invest 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

When investing $1 million or more, Class A shares are more advantageous then
Class C shares.

Front-end sales charge: Class A shares
There is no sales charge on purchases of Class A shares of the Cash Management
Fund or on shares of any of the Funds purchased with reinvested dividends or
other distributions. Class A shares of the other Funds are sold with a sales
charge that is a variable percentage based on the amount of the purchase. This
table shows the sales charge for those Funds which is based on the amount of
your purchase.

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

Offering Net Amount Offering Net Amount All Funds Except 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% (0.25% for the
Limited Term Bond Fund) of the lesser of the current market value or the initial
purchase price of the shares sold. The CDSC is waived on shares sold to fund a
Principal Mutual Fund 401(a) or Principal Mutual Fund 401(k) retirement plan,
except redemptions which are the result of termination of the plan or transfer
of all plan assets. The CDSC is also waived:

o on shares sold to satisfy IRS minimum distribution rules
o on shares sold using a periodic withdrawal plan. (You may sell up to
10% of the value of the shares subject to a CDSC without paying the
CDSC.)

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

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

Contingent deferred sales charge: Class B shares
A CDSC is imposed on sales of Class B shares within six years of purchase (five
years for certain sponsored plans). Princor receives the proceeds of any CDSC.
The CDSC does not apply to shares purchased with reinvested dividends or other
distributions. The amount of the CDSC is a percentage based on the number of
years you own the shares multiplied by the lesser of the current market value or
the initial purchase price of the shares sold.

o In the case of selling some but not all of the shares in an account,
the shares not subject to a sales charge are redeemed first. Other
shares are redeemed in the order purchased (first in, first out).

o Using a periodic withdrawal plan, you may sell up to 10% of the value
of the shares subject to a CDSC without paying the CDSC.

o Shares subject to the CDSC which are exchanged into another Principal
Mutual Fund continue to be subject to the CDSC until the CDSC expires.

<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge

For Certain Sponsored Plans
Commenced After 2/1/98

All Funds All Funds
Years Since Purchase Except Limited Term Limited Term Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund Bond Fund Bond Fund
<S> <C> <C> <C> <C>
1 year or less 4.0% 1.25% 3.00% 0.75%
more than 2 years, up to 4 years 3.0 0.75 2.00 0.50
more than 4 years, up to 5 years 2.0 0.50 1.00 0.25
more than 5 years, up to 6 years 1.0 0.25 None None
more than 6 years None None None None
</TABLE>

Class B shares of the Cash Management Fund may be purchased only by exchange
from other Class B share accounts. 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.

Contingent deferred sales charge: Class C shares
You may buy Class C shares at the net asset value per share next computed after
the Fund receives your purchase order without the imposition of an initial sales
charge; however, Class C shares redeemed (sold) within one year of purchase are
subject to a CDSC of 1% (.5% for Limited Term Bond Fund). The charge is assessed
on the amount equal to the lesser of the current market value or the original
purchase cost of the shares being redeemed. No CDSC is imposed on increases in
account value above the initial purchase price, including shares derived from
the reinvestment of dividends or capital gains distributions. Class C shares do
not convert to any other class of Fund shares.

For the purpose of determining the time of any purchase, all payments during a
month are aggregated and considered to have be made on the first day of that
month. In processing redemptions of Class C shares, the Fund first redeems
shares not subject to any CDSC, and then shares held for the shortest period of
time during the one-year period. As a result, you pay the lowest possible CDSC.

<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge

All Funds
Years Since Purchase Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund
<S> <C> <C>
1 year or less 1.0% 0.50%
more than 1 year None None
</TABLE>

Proceeds from the CDSC are paid to Princor Financial Services Corporation. The
fees are used to help offset Princor's expenses related to providing
distribution-related services to the Fund in connection with the sale of Class C
shares, including the payment of compensation to broker-dealers.

Class C shares of the Cash Management Fund may be purchased only by exchange
from other Class C share accounts. Class C shares do not convert into any other
Class shares. Class C shares provide you the benefit of putting all your dollars
to work from the time of investment, but have higher ongoing fees and lower
dividends than Class A or Class B shares.

WAIVER OF THE SALES CHARGE

The CDSC on Class C shares, and on Class B shares subject to a CDSC, may be
waived or reduced as follows:
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;
o from a retirement plan to assure the plan complies with Sections
401(k), 401(m) 408(k) and 415 of the Code;
o if the distribution is part of a series of substantially equal
payments made over the life expectancy of the participant or the joint
life expectancy of the participant and his or her beneficiary; or
o from retirement plans qualified under Section 401(a) of the Code due
to the plan participant's death, disability, retirement or separation
from service after attaining age 55.

Ongoing fees
Each Fund pays ongoing operating fees to its Manager, Underwriter and others who
provide services to the Fund. They reduce the value of each share you own (see
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE and Distribution (12b-1) Fees).

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

The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
o Class A shares (except Cash Management and Limited Term Bond Funds) 0.25%
o Class A shares of the Limited Term Bond Fund 0.15%
o Class B shares (except the Limited Term Bond Fund) 1.00%
o Class B shares of the Limited Term Bond Fund 0.50%
o Class C shares (except the Limited Term Bond Fund) 1.00%
o Class C shares of the Limited Term Bond Fund 0.50%

CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS

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

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

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

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

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

Each of the Principal Mutual Funds, except the Capital Value, Growth and Cash
Management Funds, may lend its portfolio securities to unaffiliated
broker-dealers and other unaffiliated qualified financial institutions.

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

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

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

Warrants
Each of the Funds (except Cash Management, Government Securities Income and
Tax-Exempt Bond) 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. For the International, International Emerging
Markets and International SmallCap Funds, the 2% limitation also applies to
warrants not listed on the Toronto Stock and Chicago Board Options Exchanges.

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

Investment in high yield bonds involves special risks in addition to the risks
associated with investment in high rated debt securities. High yield bonds may
be regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Moreover, such securities may,
under certain circumstances, be less liquid than higher rated debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities. The ability of a
Fund to achieve its investment objective may, to the extent of its investment in
high yield bonds, be more dependent on such creditworthiness analysis than would
be the case if the Fund were investing in higher quality bonds.

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

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

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

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

Foreign Securities
Each of the following Funds may invest in foreign securities (securities of
non-U.S. companies) to the indicated percentage of its assets: (Debt securities
issued in the United States pursuant to a registration statement filed with the
Securities and Exchange Commission are not treated as foreign securities for
purposes of these limitations.)
o International, International Emerging Markets and International
SmallCap Funds - 100%;
o Real Estate Fund - 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited
Term Bond, MidCap, SmallCap and Utilities Funds - 20%.
o The Cash Management Fund does not invest in foreign securities other
than those that are United States dollar denominated. All principal
and interest payments for the security are payable in U.S. dollars.
The interest rate, the principal amount to be repaid and the timing of
payments related to the security do not vary or float with the value
of a foreign currency, the rate of interest on foreign currency
borrowings or with any other interest rate or index expressed in a
currency other than U.S. dollars.

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

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

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

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

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

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

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

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

MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE

The Manager
Principal Management Corporation (the "Manager") 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 Invista for portfolio management functions
for the Growth-Oriented Funds (except the Real Estate Fund), the Government
Securities Income Fund and the Limited Term Bond Fund. The Manager compensates
Invista for its subadvisory services as provided in the Subadvisory Agreement
between Invista and the Manager. The Manager may periodically reallocate
management fees between itself and Invista.

The Manager is a subsidiary of Princor Financial Services Corporation. It has
managed mutual funds since 1969. As of May 31, 1999, the Funds it managed had
assets of approximately $6.1 billion. The Manager's address is Principal
Financial Group, Des Moines, Iowa 50392-0200.

Invista is also a subsidiary of Principal Life Insurance Company and is an
affiliate of the Manager. Invista has managed investments for institutional
investors, including Principal Life, since 1985. As of December 31, 1998, it
managed assets of approximately $31 billion. Invista's address is 1800 Hub
Tower, 699 Walnut, Des Moines, Iowa 50309.

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

The Manager is paid a fee by each Fund for its services, which includes any fee
paid to Invista. The fee paid by each Fund (as a percentage of the average daily
net assets) for the fiscal year ended October 31, 1998 was:

Balanced 0.59% International Emerging Markets 1.25%
Blue Chip 0.48% International SmallCap 1.20%
Bond 0.48% Limited Term Bond 0.50%
Capital Value 0.38% MidCap 0.56%
Cash Management 0.38% Real Estate 0.89%
Government Securities Income 0.46% SmallCap 0.75%
Growth 0.41% Tax-Exempt Bond 0.47%
High Yield 0.60% Utilities 0.60%
International 0.68%

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 Princor receives your
order to buy or sell shares, 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 SAI. The Cash Management Fund reserves
the right to determine a share price more than once a day.

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

DIVIDENDS AND DISTRIBUTIONS

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

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

Capital Value and Growth three business days before June 24 and December 24
each payable date (or previous business day)

International, International three business days before December 24
Emerging Markets, each payable date (or previous business day)
International SmallCap,
MidCap and SmallCap

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

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

You can authorize income dividend and capital gain distributions to be:

o invested in additional shares of the Fund you own without a sales
charge;
o invested in shares of another Principal Mutual Fund (Dividend Relay)
without a sales charge (distributions of a Fund may be directed only
to one receiving Fund); or
o paid in cash.

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

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

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

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

HOW TO BUY SHARES

To open an account and buy fund shares, rely on your Registered Representative.
Principal Mutual Funds are "load" funds which means you pay 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 the Principal Mutual Fund(s) you want to invest in;
o the amount of the investment;
o your Social Security number or Taxpayer I.D. number;
o investor information (used to help your Registered Representative
confirm that your investment selection is consistent with your
goals and circumstances) ;
o employer information; and
o other required information (may include corporate resolutions,
trust agreements, etc.).

* An application for Class C shares is included with this prospectus. A
different application is needed for an IRA, 403(b), SEP, SIMPLE, SAR-SEP or
certain employee benefit plans. Call Principal Mutual Funds
(1-800-247-4123) 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 per Fund. However, if your subsequent
investment are made using an Automatic Investment Plan, the investment minimum
is $50 per Fund (see Establish an Automatic Investment Plan).

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

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

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

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

Wire money from your bank:
o Have your Registered Representative call Principal Mutual Funds
(1-800-247-4123) for an account number and wiring instructions.
o For both initial and subsequent purchases, federal funds should be
wired to:
Norwest Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA No.: 073000228
For credit to: Principal Mutual Funds
Account No.: 3000499968
For credit: Principal ________ Fund, Class ____
Shareholder Account No. __________________
Shareholder Registration __________________
o Give the number and instructions to your bank (which may charge a wire
fee).
o To buy shares the same day, the wire must be received before 3:00 p.m.
Central Time.
o No wires are accepted on days when the New York Stock Exchange is
closed or when the Federal Reserve is closed (because the bank that
would receive your wire is closed).

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

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

HOW TO SELL SHARES

After you place a sell order in proper form, shares are sold using the next
share price calculated. 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). The
Fund can only sell shares after your check making the Fund investment has
cleared your bank. To avoid the inconvenience of a delay in obtaining sale
proceeds, shares may be purchased with a cashier's check, money order or
certified check.

A sell order from one owner is binding on all joint owners.

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

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

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

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

Within 60 days after the sale of shares, the amount of the sale proceeds can be
reinvested in 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 C shares on which a CDSC was paid.

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

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

Sell shares in amounts of $100,000 or less by telephone* (1-800-247-4123)
o Address on account must not have been changed within the last month
and telephone privileges must apply to the account from which the
shares are being sold.
o If our phone lines are busy, you may need to send in a written sell
order.
o To sell shares the same day, the order must be received before 3:00
p.m. Central Time.
o Telephone redemption privileges are not available for Principal Mutual
Funds IRAs, 403(b)s, certain employee benefit plans, or on shares for
which certificates have been issued.
o If previously authorized, checks can be sent to a shareholder's U.S.
bank account.

* 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.

Periodic withdrawal plans

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

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

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

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

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

Withdrawal payments are sent on or before the third business day after the date
of the sale. 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. 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 gains rates (see DIVIDENDS AND DISTRIBUTIONS).

HOW TO EXCHANGE SHARES AMONG PRINCIPAL FUNDS

Your Class C shares in the Funds may be exchanged without a sales charge for
Class C shares of any other Principal Mutual Fund.

Class A and Class B shares may not be exchanged into Class C shares except Class
A shares of the Cash Management Fund may be exchanged into Class C shares of
other Principal Mutual Funds - subject to the CDSC.

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

You may exchange shares by:
o calling us (1-800-247-4123), if you have telephone privileges on the
account and if
o the amount of the exchange is $500,000 or less, and
o no share certificate has been issued.
o sending a written request to:
Principal Mutual Funds
P. O. Box 10423
Des Moines, Iowa 50306-9780
o completing an Exchange Authorization Form (call us at 1-800-247-4123
to obtain the form).

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

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

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

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

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

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

GENERAL INFORMATION ABOUT A FUND ACCOUNT

No salesperson, dealer or other person is authorized to give any information or
to make any representations in connection with the offer of the Funds, other
than those contained in this Prospectus. If such information or representations
are made, they must not be relied on as having been authorized by the Fund or
the Manager.

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

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

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

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

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

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

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

Year 2000 Readiness Disclosure
The business operations of the Funds depend on computer systems that contain
date fields. These systems include securities transfer agent operations and
securities pricing systems. Many of these systems were constructed using a two
digit date field to represent the date. Unless these systems are changed or
modified, they may not be able to distinguish the Year 1900 from the Year 2000
(commonly referred to as the Year 2000 Problem).

When the Year 2000 arrives, the Funds' operations could be adversely affected if
the computer systems used by the Manager, the service providers and other third
parties it does business with are not Year 2000 compliant. For example, the
Funds' portfolios and operational areas could be impacted, included securities
pricing, dividend and interest payments, shareholder account servicing and
reporting functions. In addition, a Fund could experience difficulties in
transactions if foreign broker-dealers or foreign markets are not Year 2000
compliant.

The Manager relies on public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside of the U.S.,
particularly in emerging countries, may not be required to make the same
disclosures about their readiness as are required in the U.S. It is likely that
if a company a Fund invests in is adversely affected by Year 2000 problems, the
price of its securities will also be negatively impacted. A decrease in value of
one or more of a Fund's securities will decrease that Fund's share price.

In addition, the Manager and affiliated service providers are working to
identify their Year 2000 problems and taking steps they reasonably believe will
address these issues. This process began in 1996 with the identification of
product vendors and service providers as well as the internal systems that might
be impacted.

At this time, testing of internal systems has been completed. The Manager is now
participating in a corporate-wide initiative lead by senior management
representatives of Principal Life. Currently they are engaged in regression
testing of internal programs. They are also participating in development of
contingency plans in the event that Year 2000 problems develop and/or persist on
or after January 1, 2000. The contingency plan calls for:
o identification of business risks;
o consideration of alternative approaches to critical business risks;
and
o development of action plans to address problems.

Other important Year 2000 initiatives include:

o the service provider for our transfer agent system has renovated its
code. Client testing occurred;
o the securities pricing system we use has renovated its code and
conducted client testing in June 1998;
o Facilities Management of Principal Life has identified non-systems
issues (heat, lights, water, phone, etc.) and is working with these
service providers to ensure continuity of service; and
o the Manager and other areas of Principal Life have contacted all
vendors with which we do business to receive assurances that they are
able to deal with any Year 2000 problems. We continue to work with the
vendors to identify any areas of risk.

In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.

Financial Statements
You will receive an annual financial statement for the Funds, examined by the
Funds' independent auditors, Ernst & Young LLP. That report is a part of this
prospectus. You will also receive a semiannual financial statement which is
unaudited. The following financial highlights for each of the 5 years in the
period ended October 31, 1998 are based on financial statements which were
audited by Ernst & Young LLP. The financial highlights for the 6 month period
ended April 30, 1999 are unaudited.

FINANCIAL HIGHLIGHTS
Domestic Growth-Oriented Funds
(unaudited)
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

<TABLE>
<CAPTION>
PRINCIPAL BALANCED FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.28 $15.11 $14.61 $13.74 $12.43 $13.26
Income from Investment Operations:
Net Investment Income............................... .21 .42 .35 .38 .41 .32
Net Realized and Unrealized Gain (Loss) on Investments 1.00 1.15 1.81 1.59 1.31
(.20).................................................

Total from Investment Operations 1.21 1.57 2.16 1.97 1.72 .12
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.23) (.37) (.36) (.43) (.36) (.40)

Distributions from Capital Gains.................... (.45) (1.03) (1.30) (.67) (.05) (.55)

Total Dividends and Distributions (.68) (1.40) (1.66) (1.10) (.41) (.95)

Net Asset Value, End of Period......................... $15.81 $15.28 $15.11 $14.61 $13.74 $12.43

Total Return(b)........................................ 8.12%(c) 11.00% 15.88% 15.10% 14.18% .94%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $116,402 $104,414 $85,436 $70,820 $57,125 $53,366
Ratio of Expenses to Average Net Assets............. 1.22%(d) 1.28% 1.33% 1.28% 1.37% 1.51%
Ratio of Net Investment Income to Average Net Assets 2.74%(d) 2.86% 2.42% 2.82% 3.21% 2.70%
Portfolio Turnover Rate............................. 27.9%(d) 57.0% 27.6% 32.6% 35.8% 14.4%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.22 $15.05 $14.56 $13.71 $11.80
Income from Investment Operations:
Net Investment Income............................... .15 .31 .25 .29 .31
Net Realized and Unrealized Gain (Loss) on Investments .99 1.14 1.79 1.55 1.90

Total from Investment Operations 1.14 1.45 2.04 1.84 2.21

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.17) (.25) (.25) (.32) (.30)

Distributions from Capital Gains.................... (.45) (1.03) (1.30) (.67) --

Total Dividends and Distributions (.62) (1.28) (1.55) (.99) (.30)

Net Asset Value, End of Period......................... $15.74 $15.22 $15.05 $14.56 $13.71

Total Return(b)........................................ 7.68%(c) 10.18% 14.96% 14.10% 18.72%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $22,844 $18,930 $11,88 $5,964 $1,263
Ratio of Expenses to Average Net Assets............. 1.93%(d) 2.04% 2.14% 2.13% 1.91%(d)
Ratio of Net Investment Income to Average Net Assets 2.03%(d) 2.08% 1.58% 1.93% 2.53%(d)
Portfolio Turnover Rate............................. 27.9%(d) 57.0% 27.6% 32.6% 35.8%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $21.71 $20.22 $17.10 $15.03 $12.45 $11.94
Income from Investment Operations:
Net Investment Income............................... .08 .12 .21 .23 .24 .20
Net Realized and Unrealized Gain (Loss) on Investments 3.21 3.57 3.58 2.45 2.55
.57

Total from Investment Operations 3.29 3.69 3.79 2.68 2.79 .77

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.08) (.12) (.21) (.26) (.21) (.26)

Distributions from Capital Gains.................... (.01) (2.08) (.46) (.35) -- --

Total Dividends and Distributions (.09) (2.20) (.67) (.61) (.21) (.26)

Net Asset Value, End of Period......................... $24.91 $21.71 $20.22 $17.10 $15.03 $12.45

Total Return(b)........................................ 15.20%(c) 19.48% 22.57% 18.20% 22.65% 6.58%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $166,447 $126,740 $79,985 $44,389 $35,212 $27,246
Ratio of Expenses to Average Net Assets............. 1.21%(d) 1.31% 1.30% 1.33% 1.38% 1.46%
Ratio of Net Investment Income to Average Net Assets .71%(d) .57% 1.10% 1.41% 1.83% 1.72%
Portfolio Turnover Rate............................. 13.2%(d) .5% 55.4% 13.3% 26.1% 5.5%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(e)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $21.55 $20.14 $17.03 $14.99 $11.89
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .01 (.02) .07 .11 .15
Net Realized and Unrealized Gain (Loss) on Investments 3.18 3.53 3.54 2.41 3.10

Total from Investment Operations 3.19 3.51 3.61 2.52 3.25

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.01) (.02) (.04) (.13) (.15)

Distributions from Capital Gains.................... (.01) (2.08) (.46) (.35) --

Total Dividends and Distributions (.02) (2.10) (.50) (.48) (.15)

Net Asset Value, End of Period......................... $24.72 $21.55 $20.14 $17.03 $14.99

Total Return(b)........................................ 14.79%(c) 18.59% 21.59% 17.18% 26.20%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $47,864 $34,223 $18,265 $6,527 $1,732
Ratio of Expenses to Average Net Assets............. 1.96%(d) 2.02% 2.06% 2.19% 1.90%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.04)%(d) (.14)% .32% .49% .97%(d)
Portfolio Turnover Rate............................. 13.2%(d) .5% 55.4% 13.3% 26.1%(d)

* Six Months Ended April 30, 1999.
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $31.07 $29.69 $27.72 $23.69 $20.83 $21.41
Income from Investment Operations:
Net Investment Income............................... .25 .50 .50 .45 .45 .39
Net Realized and Unrealized Gain (Loss) on Investments 3.16 3.88 5.80 5.48 3.15
.93

Total from Investment Operations 3.41 4.38 6.30 5.93 3.60 1.32

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.26) (.53) (.48) (.43) (.39) (.41)

Distributions from Capital Gains.................... (1.95) (2.47) (3.85) (1.47) (.35) (1.49)

Total Dividends and Distributions (2.21) (3.00) (4.33) (1.90) (.74) (1.90)

Net Asset Value, End of Period......................... $32.27 $31.07 $29.69 $27.72 $23.69 $20.83

Total Return(b)........................................ 11.48%(c) 15.59% 25.36% 26.41% 17.94% 6.67%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $630,443 $565,052 $494,444 $435,617 $339,656 $285,965
Ratio of Expenses to Average Net Assets............. .72%(d) .74% .70% .69% .75% .83%
Ratio of Net Investment Income to Average Net Assets 1.69%(d) 1.67% 1.85% 1.82% 2.08% 2.02%
Portfolio Turnover Rate............................. 21.2%(d) 23.2% 30.8% 50.2% 46.0% 31.7%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $30.90 $29.51 $27.58 $23.61 $19.12
Income from Investment Operations:
Net Investment Income............................... .15 .26 .23 .21 .33
Net Realized and Unrealized Gain (Loss) on Investments 3.14 3.86 5.77 5.45 4.46

Total from Investment Operations 3.29 4.12 6.00 5.66 4.79

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.14) (.26) (.22) (.22) (.30)

Distributions from Capital Gains.................... (1.95) (2.47) (3.85) (1.47) --

Total Dividends and Distributions (2.09) (2.73) (4.07) (1.69) (.30)

Net Asset Value, End of Period......................... $32.10 $30.90 $29.51 $27.58 $23.61

Total Return(b)........................................ 11.11%(c) 14.71% 24.13% 25.19% 25.06%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $56,323 $44,765 $27,240 $9,832 $2,248
Ratio of Expenses to Average Net Assets............. 1.42%(d) 1.52% 1.65% 1.70% 1.50%(d)
Ratio of Net Investment Income to Average Net Assets .99%(d) .88% .84% .80% 1.07%(d)
Portfolio Turnover Rate............................. 21.2%(d) 23.2% 30.8% 50.2% 46.0%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL GROWTH FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $56.09 $50.43 $39.54 $37.22 $31.14 $30.41
Income from Investment Operations:
Net Investment Income............................... .13 .35 .31 .35 .35 .26
Net Realized and Unrealized Gain (Loss) on Investments 10.47 7.14 11.26 3.50 6.67 2.56

Total from Investment Operations 10.60 7.49 11.57 3.85 7.02 2.82

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.18) (.34) (.31) (.35) (.31) (.28)

Distributions from Capital Gains.................... -- (1.49) (.37) (1.18) (.63) (1.81)

Total Dividends and Distributions (.18) (1.83) (.68) (1.53) (.94) (2.09)

Net Asset Value, End of Period......................... $66.51 $56.09 $50.43 $39.54 $37.22 $31.14

Total Return(b)........................................ 18.92%(c) 15.17% 29.55% 10.60% 23.29% 9.82%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $494,746 $395,954 $317,386 $228,361 $174,328 $116,363
Ratio of Expenses to Average Net Assets............. .86%(d) .95% 1.03% 1.08% 1.16% 1.30%
Ratio of Net Investment Income to Average Net Assets .43%(d) .66% .68% .95% 1.12% .95%
Portfolio Turnover Rate............................. 18.7%(d) 21.9% 16.5% 1.8% 12.2% 13.6%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $55.98 $50.36 $39.43 $37.10 $28.33
Income from Investment Operations:
Net Investment Income............................... (.02) .06 .09 .08 .21
Net Realized and Unrealized Gain (Loss) on Investments 10.46 7.14 11.23 3.48 8.76

Total from Investment Operations 10.44 7.20 11.32 3.56 8.97

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.03) (.09) (.02) (.05) (.20)

Distributions from Capital Gains.................... -- (1.49) (.37) (1.18) --

Total Dividends and Distributions (.03) (1.58) (.39) (1.23) (.20)

Net Asset Value, End of Period......................... $66.39 $55.98 $50.36 $39.43 $37.10

Total Return(b)........................................ 18.65%(c) 14.58% 28.92% 9.80% 31.48%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $89,661 $64,809 $42,241 $24,019 $8,279
Ratio of Expenses to Average Net Assets............. 1.33%(d) 1.46% 1.48% 1.79% 1.80%(d)
Ratio of Net Investment Income to Average Net Assets (.04)%(d) .15% .23% .22% .31%(d)
Portfolio Turnover Rate............................. 18.7%(d) 21.9% 16.5% 1.8% 12.2%(d)

* Six Months Ended April 30, 1999.
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL MIDCAP FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $39.90 $45.33 $35.75 $31.45 $25.08 $23.56
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .02 (.07) .07 .14 .12 --
Net Realized and Unrealized Gain (Loss) on Investmen 4.96 (4.26) 10.80 5.05 6.45 1.61

Total from Investment Operations 4.98 (4.33) 10.87 5.19 6.57 1.61

Less Dividends and Distributions:
Dividends from Net Investment Income -- -- (.11) (.14) (.06) --

Distributions from Capital Gains.................... -- (1.10) (1.18) (.75) (.14) (.09)

Total Dividends and Distributions -- (1.10) (1.29) (.89) (.20) (.09)

Net Asset Value, End of Period......................... $44.88 $39.90 $45.33 $35.75 $31.45 $25.08

Total Return(b)........................................ 12.48%(c) (9.78)% 31.26% 16.89% 26.89% 6.86%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $353,387 $332,942 $346,666 $229,465 $150,611 $92,965
Ratio of Expenses to Average Net Assets............. 1.24%(d) 1.22% 1.26% 1.32% 1.47% 1.74%
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.07)%(d) (.14)% .20% .46% .47% .02%
Portfolio Turnover Rate............................. 25.0%(d) 25.1% 9.5% 12.3% 13.5% 8.1%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $39.29 $44.88 $35.48 $31.31 $23.15
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .26 (.23) (.05) (.04) --
Net Realized and Unrealized Gain (Loss) on Investments 4.67 (4.26) 10.64 4.97 8.18

Total from Investment Operations 4.93 (4.49) 10.59 4.93 8.18

Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- (.01) (.01) (.02)

Distributions from Capital Gains.................... -- (1.10) (1.18) (.75) --

Total Dividends and Distributions -- (1.10) (1.19) (.76) (.02)

Net Asset Value, End of Period......................... $44.22 $39.29 $44.88 $35.48 $31.31

Total Return(b)........................................ 12.29%(c) (10.24)% 30.64% 16.07% 35.65%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $75,248 $68,358 $59,554 $28,480 $8,997
Ratio of Expenses to Average Net Assets............. 1.59%(d) 1.73% 1.69% 2.01% 2.04%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.42)%(d) (.66)% (.24)% (.24)% (.17)%(d)
Portfolio Turnover Rate............................. 25.0%(d) 25.1% 9.5% 12.3% 13.5%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.
</TABLE>

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

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.39 $10.15
Income from Investment Operations:
Net Investment Income............................... .16 .20
Net Realized and Unrealized Gain (Loss) on Investments .24 (1.76)

Total from Investment Operations .40 (1.56)
Less Dividends:
Dividends from Net Investment Income (.16) (.20)

Total Dividends (.16) (.20)

Net Asset Value, End of Period......................... $8.63 $8.39

Total Return(b)........................................ 4.95%(c) (15.45)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,697 $5,490
Ratio of Expenses to Average Net Assets............. 2.00%(d) 2.25%(d)
Ratio of Net Investment Income to Average Net Assets 3.89%(d) 2.89%(d)
Portfolio Turnover Rate............................. 59.6%(d) 60.4%(d)
</TABLE>

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

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.38 $10.15
Net Investment Income............................... .12 .20
Net Realized and Unrealized Gain (Loss) on Investments .25 (1.78)

Total from Investment Operations .37 (1.58)
Less Dividends:
Dividends from Net Investment Income................ (.14) (.19)

Total Dividends (.14) (.19)

Net Asset Value, End of Period......................... $8.61 $ 8.38

Total Return(b)........................................ 4.54%(c) (15.67)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,418 $3,120
Ratio of Expenses to Average Net Assets............. 2.89%(d) 2.47% (d)
Ratio of Net Investment Income to Average Net Assets 3.00%(d) 2.67%(d)
Portfolio Turnover Rate............................. 59.6%(d) 60.4%(d)

* Six Months Ended April 30, 1999.
</TABLE>

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

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.43 $9.92
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) (.08)
Net Realized and Unrealized Gain (Loss) on Investments 1.64 (1.41)

Total from Investment Operations 1.62 (1.49)

Net Asset Value, End of Period......................... $10.05 $8.43

Total Return(b)........................................ 19.22%(c) (15.95)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $29,845 $18,438
Ratio of Expenses to Average Net Assets............. 1.79%(d) 2.58%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.91)%(d) (1.65)%(d)
Portfolio Turnover Rate............................. 78.2%(d) 20.5%(d)
</TABLE>

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

<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.41 $9.91
Net Investment Income (Operating Loss).............. (.05) (.11)
Net Realized and Unrealized Gain (Loss) on Investments 1.61 (1.39)

Total from Investment Operations 1.56 (1.50)

Net Asset Value, End of Period......................... $9.97 $8.41

Total Return(b)........................................ 18.55%(c) (16.15)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $10,528 $6,550
Ratio of Expenses to Average Net Assets............. 2.66%(d) 2.80% (d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.78)%(d) (1.85)%(d)
Portfolio Turnover Rate............................. 78.2% (d) 20.5% (d)

* Six Months Ended April 30, 1999.

See accompanying notes.
</TABLE>

<TABLE>
PRINCIPAL UTILITIES FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.11 $12.55 $11.40 $10.94 $9.25 $11.45
Income from Investment Operations:
Net Investment Income(g)............................ .18 .41 .48 .44 .48 .46
Net Realized and Unrealized Gain (Loss) on Investments 1.39 3.59 1.12 .45 1.70 (2.19)

Total from Investment Operations 1.57 4.00 1.60 .89 2.18 (1.73)

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.18) (.44) (.45) (.43) (.49) (.45)

Distributions from Capital Gains.................... (.24) -- -- -- -- (.02)

Total Dividends and Distributions (.42) (.44) (.45) (.43) (.49) (.47)

Net Asset Value, End of Period......................... $17.26 $16.11 $12.55 $11.40 $10.94 $9.25

Total Return(b)........................................ 9.85%(c) 32.10% 14.26% 8.13% 24.36% (15.20)%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $95,189 $83,533 $64,366 $66,322 $65,873 $56,747
Ratio of Expenses to Average Net Assets(g).......... 1.17%(d) 1.15% 1.15% 1.17% 1.04% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.16%(d) 2.73% 3.90% 3.85% 4.95% 4.89%
Portfolio Turnover Rate............................. 26.2%(d) 11.9% 22.5% 34.2% 13.0% 13.8%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.09 $12.53 $11.38 $10.93 $9.20
Income from Investment Operations:
Net Investment Income(g)............................ .12 .30 .38 .36 .40
Net Realized and Unrealized Gain (Loss) on Investments 1.38 3.59 1.13 .43 1.77

Total from Investment Operations 1.50 3.89 1.51 .79 2.17

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.11) (.33) (.36) (.34) (.44)

Distributions from Capital Gains.................... (.24) -- -- -- --

Total Dividends and Distributions (.35) (.33) (.36) (.34) (.44)

Net Asset Value, End of Period......................... $17.24 $16.09 $12.53 $11.38 $10.93

Total Return(b)........................................ 9.45%(c) 31.23% 13.41% 7.23% 24.18%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $15,220 $11,391 $6,937 $5,579 $3,952
Ratio of Expenses to Average Net Assets(g).......... 1.93%(d) 1.90% 1.90% 1.93% 1.72%(d)
Ratio of Net Investment Income to Average Net Assets 1.40%(d) 2.04% 3.14% 3.07% 3.84%(d)
Portfolio Turnover Rate............................. 26.2%(d) 11.9% 22.5% 34.2% 13.0%(d)

* Six Months Ended April 30, 1999.
</TABLE>

Notes to Financial Highlights

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

Former Fund Name New Fund Name
- ------------------------------------------------ --------------------------
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.

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

(d) Computed on an annualized basis.

(e) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Domestic Growth Funds' Class B shares
recognized net investment income as follows for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994,
none of which was distributed to the sole shareholder, Principal Management
Corporation. The Domestic Growth Funds' Class B shares incurred unrealized
losses on investments during the initial interim period as follows. This
represents Class B share activities of each fund prior to the initial
public offering of Class B shares:

Net Investment
Income

Principal Balanced Fund, Inc. $-- $(.19)
Principal Blue Chip Fund, Inc. -- (.15)
Principal Capital Value Fund, Inc. -- (.46)
Principal Growth Fund, Inc. -- (.86)
Principal MidCap Fund, Inc. -- (.77)
Principal Utilities Fund, Inc. .01 (.01)

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

Per Share Unrealized
Gain (Loss)

Class Class
A B

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

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

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

Class A 1998 $.39 1.23% $ 60,477
1997 .46 1.25% 65,940
1996 .43 1.25% 54,932
1995 .46 1.30% 151,145
1994 .41 1.50% 284,836

Class B 1998 .29 2.00% 9,557
1997 .37 1.95% 3,753
1996 .34 2.06% 6,690
1995(e) .40 1.81%(d) 1,338

International Growth-Oriented Funds
(unaudited)
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

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

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $6.54 $8.29 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. -- (.02) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.44 (1.73) (1.21)

Total from Investment Operations 1.44 (1.75) (1.22)

Net Asset Value, End of Period......................... $7.98 $6.54 $8.29

Total Return(b)........................................ 22.02%(c) (21.11)% (10.18)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $9,800 $7,312 $5,039
Ratio of Expenses to Average Net Assets............. 2.73%(d) 3.31% 2.03%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ .23%(d) (.36)% (.32)%(d)
Portfolio Turnover Rate............................. 91.2%(d) 45.2% 21.4%(d)
</TABLE>

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

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $6.52 $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.03) (.05) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.42 (1.71) (1.22)

Total from Investment Operations 1.39 (1.76) (1.23)

Net Asset Value, End of Period......................... $7.91 $6.52 $8.28

Total Return(b)........................................ 21.32%(c) (21.26)% (10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $4,290 $3,275 $3,116
Ratio of Expenses to Average Net Assets............. 3.83%(d) 3.59% 2.16%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.87)%(d) (.69)% (.46)%(d)
Portfolio Turnover Rate............................. 91.2%(d) 45.2% 21.4%(d)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.20 $9.33 $8.14 $7.28 $7.44 $6.85
Income from Investment Operations:
Net Investment Income............................... .05 .13 .09 .10 .08 .01
Net Realized and Unrealized Gain (Loss) on Investments 1.16 .04 1.52 1.17 (.02) .64

Total from Investment Operations 1.21 .17 1.61 1.27 .06 .65

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.11) (.10) (.11) (.08) (.03) (.02)

Distributions from Capital Gains.................... (.46) (.20) (.31) (.33) (.19) (.04)

Total Dividends and Distributions (.57) (.30) (.42) (.41) (.22) (.06)

Net Asset Value, End of Period......................... $9.84 $9.20 $9.33 $8.14 $7.28 $7.44

Total Return(b)........................................ 13.87%(c) 1.93% 20.46% 18.36% 1.03% 9.60%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $339,889 $302,757 $281,158 $172,276 $126,554 $115,812
Ratio of Expenses to Average Net Assets............. 1.23%(d) 1.25% 1.39% 1.45% 1.63% 1.74%
Ratio of Net Investment Income to Average Net Assets 1.26%(d) 1.45% 1.25% 1.43% 1.10% .10%
Portfolio Turnover Rate............................. 56.4%(d) 38.7% 26.6% 23.8% 35.4% 13.2%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.14 $9.26 $8.07 $7.24 $6.71
Income from Investment Operations:
Net Investment Income............................... .03 .07 .03 .03 .05
Net Realized and Unrealized Gain (Loss) on Investments 1.14 .04 1.51 1.15 .51

Total from Investment Operations 1.17 .11 1.54 1.18 .56

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.05) (.03) (.04) (.02) (.03)

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

Total Dividends and Distributions (.51) (.23) (.35) (.35) (.03)

Net Asset Value, End of Period......................... $9.80 $9.14 $9.26 $8.07 $7.24

Total Return(b)........................................ 13.42%(c) 1.27% 19.62% 17.16% 9.77%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $47,801 $41,676 $33,842 $15,745 $3,908
Ratio of Expenses to Average Net Assets............. 1.88%(d) 1.91% 2.17% 2.28% 2.19%(d)
Ratio of Net Investment Income to Average Net Assets .61%(d) .77% .42% .64% .58%(d)
Portfolio Turnover Rate............................. 56.4%(d) 38.7% 26.6% 23.8% 35.4%(d)

* Six months ended April 30, 1999
</TABLE>

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

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.99 $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .03 (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 2.50 .10 (.07)

Total from Investment Operations 2.53 .03 (.08)

Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- --

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

Total Dividends and Distributions (.08) -- --

Net Asset Value, End of Period......................... $12.44 $9.99 $9.96

Total Return(b)........................................ 25.47%(c) .30% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $16,805 $11,765 $6,210
Ratio of Expenses to Average Net Assets............. 2.19%(d) 2.66% 1.99%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.79)%(d) (.81)% (.40)%(d)
Portfolio Turnover Rate............................. 163.7%(d) 99.8% 10.4%(d)
</TABLE>

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

<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.97 $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.19) (.10) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 2.65 .11 (.07)

Total from Investment Operations 2.46 .01 (.08)

Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- --

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

Total Dividends and Distributions (.08) -- --

Net Asset Value, End of Period......................... $12.35 $9.97 $9.96

Total Return(b)........................................ 24.82%(c) .10% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $8,376 $6,585 $4,774
Ratio of Expenses to Average Net Assets............. 3.09%(d) 2.90% 2.07%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (1.69)%(d) (1.05)% (.47)%(d)
Portfolio Turnover Rate............................. 163.7%(d) 99.8% 10.4%(d)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

Notes to Financial Highlights

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

Per Share
Net Investment
Income

Principal International Emerging Markets Fund, Inc.:
Class A $.01 $(.50)
Class B .01 (.50)
Principal International SmallCap Fund, Inc.:
Class A .01 .03
Class B .01 .03

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

(d) Computed on an annualized basis.

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

(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal International Fund, Inc. Class
B shares recognized no net investment income for the period from the
initial purchase by Principal Management Corporation of Class B shares on
December 5, 1994, through December 8, 1994. Additionally, Class B shares
incurred unrealized losses on investments of $.07 per share during the
initial interim period. This represents Class B share activities of the
fund prior to the initial public offering of Class B shares.

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

<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.59 $11.44 $11.17 $11.42 $10.27 $11.75
Income from Investment Operations:
Net Investment Income(b).............................. .35 .71 .75 .76 .78 .78
Net Realized and Unrealized Gain (Loss) on Investments (.29) .16 .33 (.25) 1.16 (1.47)

Total from Investment Operations .06 .87 1.08 .51 1.94 (.69)

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.35) (.72) (.81) (.76) (.78) (.78)

Distributions from Capital Gains...................... (.03) -- -- -- (.01) (.01)

Total Dividends and Distributions (.38) (.72) (.81) (.76) (.79) (.79)

Net Asset Value, End of Period........................... $11.27 $11.59 $11.44 $11.17 $11.42 $10.27

Total Return(c).......................................... .47%(d) 7.76% 10.15% 4.74% 19.73% (6.01)%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $155,111 $148,081 $126,427 $113,437 $106,962 $88,801
Ratio of Expenses to Average Net Assets(b)............ 1.02%(e) .95% .95% .95% .94% .95%
Ratio of Net Investment Income to Average Net Assets.. 6.06%(e) 6.19% 6.70% 6.85% 7.26% 7.27%
Portfolio Turnover Rate............................... 49.9%(e) 15.2% 12.8% 3.4% 5.1% 8.9%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.58 $11.42 $11.15 $11.41 $10.19
Income from Investment Operations:
Net Investment Income(b).............................. .30 .63 .67 .67 .63
Net Realized and Unrealized Gain (Loss) on Investments (.29) .16 .31 (.25) 1.19

Total from Investment Operations .01 .79 .98 .42 1.82

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.30) (.63) (.71) (.68) (.60)

Distributions from Capital Gains...................... (.03) -- -- -- --

Total Dividends and Distributions (.33) (.63) (.71) (.68) (.60)

Net Asset Value, End of Period........................... $11.26 $11.58 $11.42 $11.15 $11.41

Total Return(c).......................................... .09%(d) 7.04% 9.20% 3.91% 17.98%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $26,210 $22,466 $13,403 $7,976 $2,708
Ratio of Expenses to Average Net Assets(b)............ 1.77%(e) 1.67% 1.70% 1.69% 1.59%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.31%(e) 5.45% 5.92% 6.14% 6.30%(e)
Portfolio Turnover Rate............................... 49.9%(e) 15.2% 12.8% 3.4% 5.1%(e)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.63 $11.51 $11.26 $11.31 $10.28 $11.79
Income from Investment Operations:
Net Investment Income................................. .35 .70 .70 .70 .71 .69
Net Realized and Unrealized Gain (Loss) on Investments (.15) .12 .29 (.05) 1.02 (1.40)

Total from Investment Operations .20 .82 .99 .65 1.73 (.71)

Less Dividends and Distributions:
Dividends from Net Investment Income:................. (.35) (.70) (.74) (.70) (.70) (.68)

Distributions from Capital Gains...................... -- -- -- -- -- (.12)

Total Dividends and Distributions (.35) (.70) (.74) (.70) (.70) (.80)

Net Asset Value, End of Period........................... $11.48 $11.63 $11.51 $11.26 $11.31 $10.28

Total Return(c).......................................... 1.77%(d) 7.38% 9.23% 6.06% 17.46% (6.26)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $250,496 $251,455 $249,832 $259,029 $261,128 $249,438
Ratio of Expenses to Average Net Assets............... .85%(e) .86% .84% .81% .87% .95%
Ratio of Net Investment Income to Average Net Assets.. 5.98%(e) 6.07% 6.19% 6.31% 6.57% 6.35%
Portfolio Turnover Rate............................... 22.7%(e) 17.1% 10.8% 25.9% 10.1% 24.8%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.60 $11.50 $11.23 $11.29 $10.20
Income from Investment Operations:
Net Investment Income................................. .31 .62 .64 .61 .56
Net Realized and Unrealized Gain (Loss) on Investments (.15) .12 .29 (.05) 1.07

Total from Investment Operations .16 .74 .93 .56 1.63

Less Dividends from Net Investment Income:............... (.32) (.64) (.66) (.62) (.54)

Net Asset Value, End of Period........................... $11.44 $11.60 $11.50 $11.23 $11.29

Total Return(c).......................................... 1.40%(d) 6.60% 8.65% 5.17% 16.07%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $29,190 $24,370 $15,431 $11,586 $4,699
Ratio of Expenses to Average Net Assets............... 1.55%(e) 1.57% 1.39% 1.60% 1.53%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.28%(e) 5.43% 5.63% 5.53% 5.68%(e)
Portfolio Turnover Rate............................... 22.7%(e) 17.1% 10.8% 25.9% 10.1%(e)

* Six months ended April 30, 1999
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $7.63 $8.52 $8.27 $8.06 $7.83 $8.36
Income from Investment Operations:
Net Investment Income................................. .34 .64 .67 .68 .68 .63
Net Realized and Unrealized Gain (Loss) on Investments .03 (.88) .31 .23 .20 (.51)

Total from Investment Operations .37 (.24) .98 .91 .88 .12

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.32) (.64) (.73) (.70) (.65) (.65)

Excess Distribution of Net Investment Income(h)....... -- (.01) -- -- -- --

Total Dividends and Distributions (.32) (.65) (.73) (.70) (.65) (.65)

Net Asset Value, End of Period........................... $7.68 $7.63 $8.52 $8.27 $8.06 $7.83

Total Return(c).......................................... 4.85%(d) (3.18)% 12.33% 11.88% 11.73% 1.45%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $32,934 $33,474 $38,239 $28,432 $23,396 $19,802
Ratio of Expenses to Average Net Assets............... 1.39%(e) 1.40% 1.22% 1.26% 1.45% 1.46%
Ratio of Net Investment Income to Average Net Assets.. 8.76%(e) 7.71% 7.99% 8.49% 8.71% 7.82%
Portfolio Turnover Rate............................... 78.3%(e) 65.9% 39.2% 18.8% 40.3% 27.2%
</TABLE>

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $7.59 $8.47 $8.22 $8.05 $7.64
Income from Investment Operations:
Net Investment Income................................. .32 .57 .62 .60 .53
Net Realized and Unrealized Gain (Loss) on Investments .02 (.87) .28 .20 .38

Total from Investment Operations .34 (.30) .90 .80 .91

Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.29) (.57) (.65) (.63) (.50)

Excess Distribution of Net Investment Income(h)....... -- (.01) -- -- --

Total Dividends and Distributions (.29) (.58) (.65) (.63) (.50)

Net Asset Value, End of Period........................... $7.64 $7.59 $8.47 $8.22 $8.05

Total Return(c).......................................... 4.46%(d) (3.93)% 11.31% 10.46% 12.20%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $8,442 $8,527 $6,558 $2,113 $ 633
Ratio of Expenses to Average Net Assets............... 1.97%(e) 2.34% 2.13% 2.38% 2.10%(e)
Ratio of Net Investment Income to Average Net Assets.. 8.18%(e) 6.78% 7.03% 7.39% 7.78%(e)
Portfolio Turnover Rate............................... 78.3%(e) 65.9% 39.2% 18.8% 40.3%(e)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

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

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $9.93 $9.88 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .28 .57 .61 .38
Net Realized and Unrealized Gain (Loss) on Investments (.13) .06 .03 (.04)

Total from Investment Operations .15 .63 .64 .34

Less Dividends from Net Investment Income................ (.28) (.58) (.65) (.35)

Net Asset Value, End of Period........................... $9.80 $9.93 $9.88 $9.89

Total Return(c).......................................... 1.55%(d) 6.57% 6.75% 3.62%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $26,188 $27,632 $20,567 $17,249
Ratio of Expenses to Average Net Assets(b)............ 1.00%(e) .82% .90% .89%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.69%(e) 5.86% 6.20% 6.01%(e)
Portfolio Turnover Rate............................... 23.5%(e) 23.8% 17.4% 16.5%(e)
</TABLE>

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

<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $9.98 $9.90 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .26 .54 .56 .36
Net Realized and Unrealized Gain (Loss) on Investments .14 .06 .04 (.05)

Total from Investment Operations .40 .60 .60 .31

Less Dividends from Net Investment Income................ (.52) (.54) (.59) (.32)

Net Asset Value, End of Period........................... $9.86 $9.98 $9.90 $9.89

Total Return(c).......................................... 1.34%(d) 6.24% 6.31% 3.32%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,534 $1,705 $ 625 $ 112
Ratio of Expenses to Average Net Assets(b)............ 1.35%(e) 1.22% 1.24% 1.15%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.34%(e) 5.44% 5.84% 5.75%(e)
Portfolio Turnover Rate............................... 23.5%(e) 23.8% 17.4% 16.5%(e)

* Six months ended April 30, 1999
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.59 $12.38 $12.04 $11.98 $10.93 $12.62
Income from Investment Operations:
Net Investment Income................................. .31 .60 .63 .64 .65 .64
Net Realized and Unrealized Gain (Loss) on Investments (.12) .22 .39 .07 1.05 (1.54)

Total from Investment Operations .19 .82 1.02 .71 1.70 (.90)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.30) (.61) (.68) (.65) (.65) (.63)

Distributions from Capital Gains...................... (.01) -- -- -- -- (.16)

Total Dividends and Distributions (.31) (.61) (.68) (.65) (.65) (.79)

Net Asset Value, End of Period........................... $12.47 $12.59 $12.38 $12.04 $11.98 $10.93

Total Return(c)......................................... 1.49%(d) 6.76% 8.71% 6.08% 16.03% (7.41)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $199,617 $204,865 $193,007 $187,180 $179,715 $171,425
Ratio of Expenses to Average Net Assets............... .80%(e) .83% .79% .78% .83% .91%
Ratio of Net Investment Income to Average Net Assets.. 4.80%(e) 4.83% 5.14% 5.34% 5.67% 5.49%
Portfolio Turnover Rate............................... 21.7%(e) 6.6% 8.9% 9.8% 17.6% 20.6%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(f)

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $12.59 $12.39 $12.02 $11.96 $10.56
Income from Investment Operations:
Net Investment Income................................. .27 .53 .55 .55 .50
Net Realized and Unrealized Gain (Loss) on Investments (.12) .20 .40 .06 1.38

Total from Investment Operations .15 .73 .95 .61 1.88

Less Dividends and Distributions:
Dividends from Net Investment Income................. (.26) (.53) (.58) (.55) (.48)

Distributions from Capital Gains..................... (.01) -- -- -- --

Total Dividends and Distributions (.27) (.53) (.58) (.55) (.48)

Net Asset Value, End of Period........................... $12.47 $12.59 $12.39 $12.02 $11.96

Total Return(c).......................................... 1.18%(d) 6.01% 8.08% 5.23% 17.97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $12,135 $11,419 $7,783 $5,794 $3,486
Ratio of Expenses to Average Net Assets............... 1.38%(e) 1.43% 1.45% 1.52% 1.51%(e)
Ratio of Net Investment Income to Average Net Assets.. 4.22%(e) 4.22% 4.46% 4.59% 4.78%(e)
Portfolio Turnover Rate............................... 21.7%(e) 6.6% 8.9% 9.8% 17.6%(e)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

Notes to Financial Highlights

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

<TABLE>
<CAPTION>
Former Fund Name New Fund Name
- --------------------------- -------------
<S> <C>
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
</TABLE>

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

<TABLE>
<CAPTION>
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
Principal Bond Fund, Inc.:
<S> <C> <C> <C> <C>
Class A 1998 $.70 1.04% $121,092
1997 .74 .98 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999

Class B 1998 .62 1.81 26,130
1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(f) .62 1.62(e) 300

Principal Limited Term Bond Fund, Inc.:
Class A 1998 .55 1.13 76,952
1997 .59 1.15 46,271
1996(g) .37 1.16(e) 22,716

Class B 1998 .47 2.36 11,537
1997 .46 3.82 6,528
1996(g) .34 1.94(e) 259
</TABLE>

(d) Total return amounts have not been annualized.

(e) Computed on an annualized basis.

(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds' Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Principal
Management Corporation. Additionally, the Income Funds' Class B shares
incurred unrealized losses on investments during the initial interim period
as follows. This represents Class B share activities of each fund prior to
the initial public offering of Class B shares:

Per Share Per Share
Net Investment Unrealized
Income (Loss)

Principal Bond Fund, Inc. $.01 $ --
Principal Government Securities Income Fund, Inc. .01 (.02)
Principal High Yield Fund, Inc. .01 (.03)
Principal Tax-Exempt Bond Fund, Inc. -- (.05)

(g) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole shareholder, Principal Life
Insurance Company during the period. Additionally, Class A shares incurred
unrealized losses on investments of $.12 per share during the initial
interim period. With respect to Class B shares, no net investment income
was recognized for the period from initial purchase of shares on February
27, 1996 through February 28, 1996. Additionally, Class B shares incurred
unrealized losses on investments of $.02 per share during the initial
interim period. This represents Class A share and Class B share activities
of the fund prior to the initial public offering of both classes of shares.

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

<TABLE>
<CAPTION>
Money Market Fund
(unaudited)
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995 1994

<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................ .023 .051 .050 .049 .052 .033

Total from Investment Operations .023 .051 .050 .049 .052 .033

Less Dividends From Net Investment Income............... (.023) (.051) (.050) (.049) (.052) (.033)

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

Total Return(c)......................................... 2.26%(d) 5.10% 4.96% 5.00% 5.36% 2.67%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $339,509 $294,918 $836,072 $694,962 $623,864 $332,346
Ratio of Expenses to Average Net Assets(b)........... .65%(f) .56%(e) .63% .66% .72% .70%
Ratio of Net Investment Income to Average Net Assets. 4.47%(f) 5.12% 4.98% 4.88% 5.24% 3.27%
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(g)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .020 .042 .041 .041 .041

Total from Investment Operations .020 .042 .041 .041 .041

Less Dividends from Net Investment Income............... (.020) (.042) (.041) (.041) (.041)

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

Total Return(c)......................................... 1.96%(d) 4.25% 4.05% 4.13% 4.19%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $4,391 $3,602 $992 $520 $208
Ratio of Expenses to Average Net Assets(b)........... 1.20%(f) 1.41%(e) 1.47% 1.50% 1.42%(f)
Ratio of Net Investment Income to Average Net Assets. 3.92%(f) 4.23% 4.08% 4.08% 4.50%(f)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

Notes to Financial Highlights

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

Former Fund Name New Fund Name
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.

(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the Money Market Fund would have had per share net investment
income and the ratios of expenses to average net assets as shown:

<TABLE>
<CAPTION>
Year Ended Ratio of
October 31, Per Share Expenses
Except Net Investment to Average Amount
as Noted Income Net Assets Waived
Principal Cash Management Fund, Inc.:
<S> <C> <C> <C> <C>
Class A 1998(e) $ .051 .56% $ --
1997 .050 .63 --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343

Class B 1998(e) .041 1.49 1,343
1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(g) .041(f) 1.63(f) 104
</TABLE>

(d) Total return amounts have not been annualized.

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

(f) Computed on an annualized basis.

(g) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995.

A Shares B Shares C Shares

12B-1 o o o

CDSC o o

Initial Sales Charge o

Convert to A o

Check writing (MM) o

Exchange (same class) o o o

Reinvestment (Div/Cap Gain) o o o

Dividend Relay o o o

DCA (Dollar Cost Averaging) o o o

ADR (Path/Trailblazer) o o o

Additional information about the Funds is available in the Statement of
Additional Information dated March 1, 1999, and which is part of this
prospectus. Information about the Funds' investments is also available in the
Funds' annual and semi-annual 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, annual and semi-annual
reports, shareholder inquires and other information can be obtained free of
charge by writing or telephoning Princor Financial Services Corporation, P.O.
Box 10423, DesMoines, 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 1-800-SEC-0330. Reports and other information about the Funds are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.

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

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

SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS

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

INTERNATIONAL GROWTH-ORIENTED FUNDS

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

INCOME-ORIENTED FUNDS

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

MONEY MARKET FUND

811-03585 Principal Cash Management Fund, Inc.

Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Limited Term Bond Fund Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Utilities Fund, Inc.

Statement of Additional Information

dated June 30, 1999

This Statement of Additional Information is not a prospectus but is a part of
the prospectuses for the Funds listed above. The most recent prospectuses for
Class A, Class B and Class R shares dated March 1, 1999 and for Class C shares
dated June 30, 1999 and shareholder report are available without charge. Please
call 1-800-247-4123 to request a copy. The prospectus for Class A and Class B
shares may also be viewed on our web site at www.principal.com/funds.

<PAGE>

TABLE OF CONTENTS

Investment Policies and Restrictions of the Funds................. 3
Growth-Oriented Funds............................................. 5
Income-Oriented Funds ............................................ 8
Money Market Fund.................................................12
Funds' Investments................................................13
Management of the Fund............................................24
Manager and Sub-Advisor...........................................27
Cost of Manager's Services........................................28
Brokerage on Purchases and Sales of Securities....................30
How to Purchase Shares............................................33
Offering Price of Funds' Shares...................................35
Distribution Plan.................................................42
Determination of Net Asset Value of Funds' Shares ................45
Performance Calculation...........................................46
Tax Treatment of Funds, Dividends and Distributions .............52
General Information and History...................................53
Financial Statements .............................................54
Appendix A........................................................54

<PAGE>

INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS

The following information about the Principal Funds, a family of separately
incorporated, diversified, open-end management investment companies, commonly
called mutual funds, supplements the information provided in the Prospectuses
under the caption "CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS".

There are three categories of Principal Funds:

Growth-Oriented Funds which include:
o seven Funds which seek primarily capital appreciation through investments
in equity securities (Capital Value Fund, Growth Fund, International
Emerging Markets Fund, International Fund, International SmallCap Fund,
MidCap Fund and SmallCap Fund);
o one Fund which seeks a total investment return including both capital
appreciation and income through investments in equity and debt securities
(Balanced Fund);
o one Fund which seeks growth of capital and growth of income primarily
through investments in common stocks of well-capitalized, established
companies (Blue Chip Fund);
o one Fund which seeks to generate total return by investing primarily in
equity securities of companies principally engaged in the real estate
industry (Real Estate Fund); and
o one Fund which seeks current income and long-term growth of income and
capital by investing primarily in equity and fixed-income securities of
companies in the public utilities industry (Utilities Fund).

Income-Oriented Funds which include five funds which seek primarily a high level
of income through investments in debt securities (Bond Fund, Government
Securities Income Fund, High Yield Fund, Limited Term Bond Fund and Tax-Exempt
Bond Fund).

Money Market Fund which seeks primarily a high level of income through
investments in short-term debt securities (Cash Management Fund).

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

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

- ----------------------------------- ------------------------------------
INCOME-ORIENTED FUNDS GROWTH-ORIENTED
PRINCIPAL LIMITED DOMESTIC FUNDS
TERM BOND FUND PRINCIPAL UTILITIES FUND
... for investors seeking a high ... for investors seeking current
level of current income combined income and long-term growth of
with a relative high level of stability income and capital from securities
of principal by investing in issued by public utilities
fixed-income securities with companies.
maturities of 5 years or less.
- ----------------------------------- ------------------------------------
PRINCIPAL GOVERNMENT PRINCIPAL REAL ESTATE FUND
SECURITIES INCOME FUND ... for investors seeking long-term
... for investors seeking a high capital growth and current income
level of current income, liquidity, from securities of companies
and relative safety from a portfolio primarily engaged in the real estate
emphasizing GNMA securities. industry.
- ----------------------------------- ------------------------------------
PRINCIPAL PRINCIPAL
BOND FUND BALANCED FUND
... for investors seeking high ... for investors seeking total
current income from a portfolio of return from a flexible portfolio of
higher quality bonds. common stocks, corporate bonds
and money market securities.
- ----------------------------------- ------------------------------------
PRINCIPAL TAX-EXEMPT PRINCIPAL
BOND FUND BLUE CHIP FUND
... for investors seeking a high ... for investors seeking growth
level of current income exempt of capital and growth of income
from federal income tax, consis- from stocks of well capitalized,
tent with preservation of capital. established companies.

(Income may be subject to Alternative
Minimum Tax for some investors.)
- ----------------------------------- ------------------------------------
PRINCIPAL HIGH PRINCIPAL CAPITAL
YIELD FUND ACCUMULATION FUND
... for investors seeking higher ... for investors seeking long-
current income from a portfolio of term capital appreciation, with
lower or non-rated fixed-income growth of income as a secondary
securities. objective.

- ----------------------------------- ------------------------------------
MONEY MARKET FUNDS PRINCOR
PRINCIPAL CASH GROWTH FUND
MANAGEMENT FUND ... for investors seeking long-
... for investors seeking income, term growth opportunities from a
liquidity, and the stability of common stock portfolio.
money market securities.
- ----------------------------------- -------------------------------------
GROWTH-ORIENTED INTERNATIONAL FUNDS PRINCIPAL MIDCAP FUND
PRINCIPAL INTERNATIONAL FUND ... for investors seeking long-term
... for investors seeking growth capital growth from securities
from common stocks of companies of emerging and other growth-oriented
domiciled in any of the major companies.
nations of the world.
- ----------------------------------- -------------------------------------
PRINCIPAL INTERNATIONAL PRINCIPAL SMALLCAP FUND
SMALLCAP FUND ...for investors seeking long-term
...for investors seeking long-term growth of capital from a portfolio
growth from equities from of investment securities issued by
non-United States companies with companies domiciled in the United
small market capitalization. States with comparatively smaller
market capitalization.
- ----------------------------------- -------------------------------------
PRINCIPAL INTERNATIONAL EMERGING *These illustrations represent
MARKETS FUND comparative relationships only with
... for investors seeking long-term regard to the investment objectives
growth of capital from securities sought by the funds. Relative
issued in emerging market income, stability and growth may
countries. vary among the funds with certain
- ----------------------------------- market conditions. In "no way should
the illustrations be construed as
projected relative performance of
the Principal funds.

GROWTH-ORIENTED FUNDS

Investment Objectives

Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective.

Principal Blue Chip Fund, Inc. ("Blue Chip Fund") seeks to achieve growth of
capital and growth of income by investing primarily in common stocks of well
capitalized, established companies.

Principal Capital Value Fund, Inc. ("Capital Value Fund") seeks to achieve
primarily long-term capital appreciation and secondarily growth of investment
income through the purchase primarily of common stocks, but the Fund may invest
in other securities.

Principal Growth Fund, Inc. ("Growth Fund") seeks growth of capital through the
purchase primarily of common stocks, but the Fund may invest in other
securities.

Principal International Emerging Markets Fund, Inc. ("International Emerging
Markets Fund") seeks to achieve long-term growth of capital by investing
primarily in equity securities of issuers in emerging market countries.

Principal International Fund, Inc. ("International Fund") seeks long-term growth
of capital by investing in a portfolio of equity securities of companies
domiciled in any of the nations of the world.

Principal International SmallCap Fund, Inc. ("International SmallCap Fund")
seeks to achieve long-term growth of capital by investing primarily in equity
securities of non-United States companies with comparatively smaller market
capitalizations.

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

Principal Real Estate Fund, Inc. ("Real Estate Fund") seeks to generate total
return by investing primarily in equity securities of companies principally
engaged in the real estate industry.

Principal SmallCap Fund, Inc. ("SmallCap Fund") seeks to achieve long-term
growth of capital by investing primarily in equity securities of companies with
comparatively smaller market capitalizations.

Principal Utilities Fund, Inc. ("Utilities Fund") seeks to provide high current
income and long-term growth of income and capital. The Fund seeks to achieve its
objective by investing primarily in equity and fixed income securities of
companies in the public utilities industry.

Investment Restrictions

Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, Real Estate Fund,
SmallCap Fund and Utilities Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Balanced Fund, Blue
Chip Fund, International Fund, International Emerging Markets Fund,
International SmallCap Fund, MidCap Fund, Real Estate Fund, SmallCap Fund and
Utilities Fund each may not:

(1) Issue any senior securities as defined in the Investment Company Act of
1940. Purchasing and selling securities and futures contracts and options
thereon and borrowing money in accordance with restrictions described below
do not involve the issuance of a senior security.

(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the Fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

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

(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.

(5) Borrow money, except for temporary or emergency purposes, in an amount not
to exceed 5% of the value of the Fund's total assets at the time of the
borrowing.

(6) Make loans, except that the Fund may (i) purchase and hold debt obligations
in accordance with its investment objective and policies, (ii) enter into
repurchase agreements, and (iii) lend its portfolio securities without
limitation against collateral (consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities) equal at all times to not less than 100% of the value of
the securities loaned.

(7) Invest more than 5% of its total assets in the securities of any one issuer
(other than obligations issued or guaranteed by the United States
Government or its agencies or instrumentalities) except that this
limitation shall apply only with respect to 75% of the total assets of the
International Emerging Markets Fund and the International SmallCap Fund; or
purchase more than 10% of the outstanding voting securities of any one
issuer.

(8) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

(9) Concentrate its investments in any particular industry or industries,
except that:
(a) the Utilities Fund may not invest less than 25% of its total assets in
securities of companies in the public utilities industry,
(b) the Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund and
SmallCap Fund each may invest not more than 25% of the value of its
total assets in a single industry, and
(c) the Real Estate Fund may not invest less than 25% of its total assets
in securities of companies in the real estate industry.

(10) Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that equals
or exceeds the securities sold short) or purchase any securities on
margin, except it may obtain such short-term credits as are necessary for
the clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures contracts is
not considered the purchase of securities on margin.

(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.

Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:

(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.
The value of any options purchased in the Over-the-Counter market are
included as part of this 15% limitation.

(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange. The 2% limitation for the International Fund also includes
warrants not listed on the Toronto Stock Exchange. The 2% limitation for
the International Emerging Markets Fund and International SmallCap Fund
also includes warrants not listed on the Toronto Stock Exchange and the
Chicago Board Options Exchange.

(3) Purchase securities of any issuer having less than three years' continuous
operation (including operations of any predecessors) if such purchase would
cause the value of the Fund's investments in all such issuers to exceed 5%
of the value of its total assets.

(4) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.

(5) Invest in companies for the purpose of exercising control or management.

(6) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts. Options on financial futures
contracts and options on securities indices will be used solely for hedging
purposes; not for speculation.

(7) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.

(8) Invest in arbitrage transactions.

(9) Invest in real estate limited partnership interests except that this
restriction shall not apply to the Real Estate Fund.

(10) Invest in mineral leases.

The Balanced Fund, Blue Chip Fund, MidCap Fund, SmallCap Fund and Utilities Fund
have also adopted a restriction, which is not a fundamental policy and may be
changed without shareholder approval, that each such Fund may not invest more
than 20% of its total assets in securities of foreign issuers.

The Real Estate Fund has adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that the Fund may not
invest more than 25% of its total assets in securities of foreign issuers.

The Balanced Fund, Blue Chip Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund, SmallCap Fund and
Utilities Fund have also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that each Fund may not
invest more than 10% of its assets in securities of other investment companies,
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the outstanding voting securities of any one
investment company except in connection with a merger, consolidation or plan of
reorganization and the Funds may purchase securities of closed-end companies in
the open market where no underwriter or dealer's commission or profit, other
than a customary broker's commission, is involved.

The Utilities Fund has also adopted a restriction, which is not a fundamental
policy and may be changed without shareholder approval, that the Fund may not
own more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.

Capital Value Fund and Growth Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Capital Value Fund and
Growth Fund each may not:

(1) Concentrate its investments in any one industry. No more than 25% of the
value of its total assets will be invested in any one industry.

(2) Purchase the securities of any issuer if the purchase will cause more than
5% of the value of its total assets to be invested in the securities of any
one issuer (except U.S. Government securities).

(3) Purchase the securities of any issuer if the purchase will cause more than
10% of the voting securities, or any other class of securities of the
issuer, to be held by the Fund.

(4) Underwrite securities of other issuers, except that the Fund may acquire
portfolio securities under circumstances where if sold the Fund might be
deemed an underwriter for purposes of the Securities Act of 1933.

(5) Purchase securities of any company with a record of less than three years'
continuous operation (including that of predecessors) if the purchase would
cause the value of the Fund's aggregate investments in all such companies
to exceed 5% of the Fund's total assets.

(6) Engage in the purchase and sale of illiquid interests in real estate. For
this purpose, readily marketable interests in real estate investment trusts
are not interests in real estate.

(7) Engage in the purchase and sale of commodities or commodity contracts.

(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of one percent (0.5%) of the securities of the issuer
together own beneficially more than 5% of such securities.

(9) Purchase securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The Fund will not
effect a short sale of a security. The Fund will not issue or acquire put
and call options.

(10) Invest more than 5% of its assets at the time of purchase in rights and
warrants (other than those that have been acquired in units or attached to
other securities).

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

In addition:

(12) The Fund may not make loans except that the Fund may (i) purchase and hold
debt obligations in accordance with its investment objective and policies,
and (ii) enter into repurchase agreements.

(13) The Fund does not propose to borrow money except for temporary or
emergency purposes from banks in an amount not to exceed the lesser of (i)
5% of the value of the Fund's assets, less liabilities other than such
borrowings, or (ii) 10% of the Fund's assets taken at cost at the time
such borrowing is made. The Fund may not pledge, mortgage, or hypothecate
its assets (at value) to an extent greater than 15% of the gross assets
taken at cost.

Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval, each Fund
may not:

(1) Invest in companies for the purpose of exercising control or management.

(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange.

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

(4) Invest in real estate limited partnership interests.

(5) Invest in interests in oil, gas, or other mineral exploration or
development programs, but the Fund may purchase and sell securities of
companies which invest or deal in such interests.

(6) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any
one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connect with a merger,
consolidation or plan of reorganization.

INCOME-ORIENTED FUNDS

Investment Objectives

Principal Bond Fund, Inc. ("Bond Fund") seeks to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.

Principal Government Securities Income Fund, Inc. ("Government Securities Income
Fund") seeks a high level of current income, liquidity and safety of principal
by purchasing obligations issued or guaranteed by the United States Government
or its agencies, with emphasis on Government National Mortgage Association
Certificates ("GNMA Certificates"). The guarantee by the United States
Government extends only to principal and interest. There are certain risks
unique to GNMA Certificates.

Principal High Yield Fund, Inc. ("High Yield Fund") seeks high current income
primarily by purchasing high yielding, lower or non-rated fixed income
securities which are believed to not involve undue risk to income or principal.
Capital growth is a secondary objective when consistent with the objective of
high current income.

Principal Limited Term Bond Fund, Inc. ("Limited Term Bond Fund") seeks a high
level of current income consistent with a relatively high level of principal
stability by investing in a portfolio of securities with a dollar weighted
average maturity of five years or less.

Principal Tax-Exempt Bond Fund, Inc. ("Tax-Exempt Bond Fund") seeks as high a
level of current income exempt from federal income tax as is consistent with
preservation of capital. The Fund seeks to achieve its objective primarily
through the purchase of investment grade quality, tax-exempt fixed income
obligations.

Investment Restrictions

Bond Fund, High Yield Fund and Limited Term Bond Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Bond Fund, High Yield
Fund and Limited Term Bond Fund each may not:

(2) Purchase or retain in its portfolio securities of any issuer if those
officers or directors of the fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

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

(4) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.

(5) Borrow money, except for temporary or emergency purposes, in an amount not
to exceed 5% of the value of the Fund's total assets at the time of the
borrowing.

(8) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

(9) Concentrate its investments in any particular industry or industries,
except that the Fund may invest not more than 25% of the value of its total
assets in a single industry.

(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.

Each of these Funds has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:

(2) Purchase warrants in excess of 5% of its total assets, of which 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange.

(4) Purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization or by purchase in the
open market of securities of closed-end companies where no underwriter or
dealer's commission or profit, other than a customary broker's commission,
is involved, and if immediately thereafter not more than 10% of the value
of the Fund's total assets would be invested in such securities.

(5) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.

(6) Invest in companies for the purpose of exercising control or management.

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

(8) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts. Options on financial futures
contracts and options on securities indices will be used solely for hedging
purposes; not for speculation.

(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.

(10) Invest in arbitrage transactions.

(11) Invest in real estate limited partnership interests.

Government Securities Income Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Government Securities
Income Fund may not:

(1) Issue any senior securities.

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

(3) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of GNMA
certificates held in its portfolio.

(4) Engage in the purchase and sale of interests in real estate, including
interests in real estate investment trusts (although it will invest in
securities secured by real estate or interests therein, such as
mortgage-backed securities) or invest in commodities or commodity
contracts, oil and gas interests, or mineral exploration or development
programs.

(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

(6) Sell securities short or purchase any securities on margin, except it may
obtain such short-term credits as are necessary for the clearance of
transactions. The deposit or payment of margin in connection with
transactions in options and financial futures contracts is not considered
the purchase of securities on margin.

(7) Invest in companies for the purpose of exercising control or management.

(8) Make loans, except that the Fund may purchase or hold debt obligations in
accordance with the investment restrictions set forth in paragraph (2) and
may enter into repurchase agreements for such securities, and may lend its
portfolio securities without limitation against collateral consisting of
cash, or securities issued or guaranteed by the United States Government or
its agencies or instrumentalities, which is equal at all times to 100% of
the value of the securities loaned.

(9) Borrow money, except for temporary or emergency purposes, in an amount not
to exceed 5% of the value of the Fund's total assets.

(10) Enter into repurchase agreements maturing in more than seven days if, as a
result, thereof, more than 10% of the Fund's total assets would be invested
in such repurchase agreements and other assets without readily available
market quotations.

(11) Invest more than 5% of its total assets in the purchase of covered spread
options and the purchase of put and call options on securities, securities
indices and financial futures contracts.

(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.

The Fund has also adopted the following restrictions which are not fundamental
policies and may be changed without shareholder approval. It is contrary to the
Fund's current policy to:

(2) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in escrow
and other collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures contracts are
not deemed to be pledges or other encumbrances.

(3) Invest in real estate limited partnership interests.

(4) Invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any
one investment company, or acquire more than 3% of the outstanding voting
securities of any one investment company except in connection with a
merger, consolidation or plan of reorganization.

Tax-Exempt Bond Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Tax-Exempt Bond Fund
may not:

(1) Issue any senior securities as defined in the Act except insofar as the
Fund may be deemed to have issued a senior security by reason of: (a)
purchasing any securities on a when-issued or delayed delivery basis; or
(b) borrowing money in accordance with restrictions described below.

(2) Purchase any securities other than Municipal Obligations and Taxable
Investments as defined in the Prospectus and Statement of Additional
Information.

(3) Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

(5) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning more than one-half
of 1% (0.5%) of the securities of the issuer together own beneficially more
than 5% of such securities.

(6) Invest in companies for the purpose of exercising control or management.

(7) Invest more than:
(a) 5% of its total assets in the securities of any one issuer (other than
obligations issued or guaranteed by the United States Government or its
agencies or instrumentalities).
(b) 15% of its total assets in securities that are not readily marketable
and in repurchase agreements maturing in more than seven days.

(8) Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate.

(9) Invest in commodities or commodity futures contracts.

(10) Write, purchase or sell puts, calls or combinations thereof.

(11) Invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in securities of issuers which invest in
or sponsor such programs.

(12) Make short sales of securities.

(13) Purchase any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions.

(14) Make loans, except that the Fund may purchase and hold debt obligations in
accordance with its investment objective and policies, enter into
repurchase agreements, and may lend its portfolio securities without
limitation against collateral, consisting of cash or securities issued or
guaranteed by the United States Government or its agencies or
instrumentalities, which is equal at all times to 100% of the value of the
securities loaned.

(15) Borrow money, except for temporary or emergency purposes from banks in an
amount not to exceed 5% of the value of the Fund's total assets at the time
the loan is made.

(16) Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.

The Fund has also adopted the following restriction which is not fundamental and
may be changed without shareholder approval. It is contrary to the Fund's
current policy to invest in real estate limited partnership interests.

The identification of the issuer of a Municipal Obligation depends on the terms
and conditions of the security. When the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed only
by the assets and revenues of the subdivision, the subdivision is deemed the
sole issuer. Similarly, in the case of an industrial development bond, if that
bond is backed only by the assets and revenues of the non-governmental user,
then such non-governmental user is deemed the sole issuer. If, in either case,
the creating government or some other entity guarantees a security, the
guarantee is considered a separate security and is treated as an issue of such
government or other entity. However, that guarantee is not deemed a security
issued by the guarantor if the value of all securities issued or guaranteed by
the guarantor and owned by the Fund does not exceed 10% of the value of the
Fund's total assets.

The Fund may invest without limit in debt obligations of issuers located in the
same state and in debt obligations which are repayable out of revenue sources
generated from economically related projects or facilities. Sizable investments
in such obligations could increase the risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others. The Fund may also invest without limit in industrial development
bonds, but it will not invest more than 20% of its total assets in any Municipal
Obligation the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax.

MONEY MARKET FUND

Investment Objectives

Principal Cash Management Fund, Inc. ("Cash Management Fund") seeks as high a
level of income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing in a
portfolio of money market instruments.

Investment Restrictions

Cash Management Fund

Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Cash Management Fund
may not:

(1) Concentrate its investments in any one industry. No more than 25% of the
value of its total assets will be invested in securities of issuers having
their principal activities in any one industry, other than securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, or obligations of domestic branches of U.S. banks and
savings institutions. (See "Bank Obligations").

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

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

(4) Act as an underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under the federal securities laws.

(5) Purchase securities of any company with a record of less than 3 years
continuous operation (including that of predecessors) if the purchase would
cause the value of the Fund's aggregate investments in all such companies
to exceed 5% of the value of the Fund's total assets.

(6) Engage in the purchase and sale of illiquid interests in real estate,
including interests in real estate investment trusts (although it may
invest in securities secured by real estate or interests therein) or invest
in commodities or commodity contracts, oil and gas interests, or mineral
exploration or development programs.

(7) Purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization.

(8) Purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning beneficially more
than one-half of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.

(9) Purchase securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The Fund will not
effect a short sale of any security. The Fund will not issue or acquire put
and call options, straddles or spreads or any combination thereof.

(10) Invest in companies for the purpose of exercising control or management.

(11) Make loans to others except through the purchase of debt obligations in
which the Fund is authorized to invest and by entering into repurchase
agreements (see "Fund Investments").

(12) Borrow money except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require
the untimely disposition of securities, in an amount not to exceed the
lesser of (i) 5% of the value of the Fund's assets, or (ii) 10% of the
value of the Fund's net assets taken at cost at the time such borrowing is
made. The Fund will not issue senior securities except in connection with
such borrowings. The Fund may not pledge, mortgage, or hypothecate its
assets (at value) to an extent greater than 10% of the net assets.

(13) Invest in time deposits maturing in more than seven days; time deposits
maturing from two business days through seven calendar days may not exceed
10% of the value of the Fund's total assets.

(14) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.

The Fund has also adopted the following restriction which is not fundamental and
may be changed without shareholder approval. It is contrary to the Fund's
current policy to:

(1) Invest in real estate limited partnership interests.

FUNDS' INVESTMENTS

The following information supplements the discussion of the Funds' investment
objectives and policies in the Prospectuses under the caption "CERTAIN
INVESTMENT STRATEGIES AND RELATED RISKS."

In making selections of equity securities for the Funds, the Manager uses an
approach described broadly as fundamental analysis. Three basic steps are
involved in this analysis.

o First is the continuing study of basic economic factors in an effort to
conclude what the future general economic climate is likely to be over the
next one to two years.
o Second, given some conviction as to the likely economic climate, the
Manager attempts to identify the prospects for the major industrial,
commercial and financial segments of the economy. By looking at such
factors as demand for products, capacity to produce, operating costs,
pricing structure, marketing techniques, adequacy of raw materials and
components, domestic and foreign competition, and research productivity,
the Manager evaluates the prospects for each industry for the near and
intermediate term.
o Finally, determinations are made regarding earnings prospects for
individual companies within each industry by considering the same types of
factors described above. These earnings prospects are evaluated in relation
to the current price of the securities of each company.

Although the Funds may pursue the investment practices described below, none of
the funds either committed during the last fiscal year or currently intends to
commit during the present fiscal year more than 5% of its net assets to any of
the practices, with the following exceptions: (1) the High Yield Fund's
investments in restricted securities are expected to exceed 5% of the Fund's net
assets; and (2) the International, International Emerging Markets and
International SmallCap Funds' investments in foreign securities are expected to
continue to exceed 5% of each Fund's net assets.

Restricted Securities

Each of the Funds has adopted investment restrictions that limit its investments
in restricted securities or other illiquid securities to 15% (10% for the
Government Securities Income Fund and the Money Market Fund and not more than 5%
in equity securities) of its assets. The Board of Directors of each of the
Growth-Oriented and Income-Oriented Funds has adopted procedures to determine
the liquidity of Rule 4(2) short-term paper and of restricted securities under
Rule 144A. Securities determined to be liquid under these procedures are
excluded from other restricted securities when applying the preceding investment
restrictions.

Generally, restricted securities are not readily marketable because they are
subject to legal or contractual restrictions upon resale. They are sold only in
a public offering with an effective registration statement or in a transaction
which is exempt from the registration requirements of the Securities Act of
1933. When registration is required, a Fund may be obligated to pay all or part
of the registration expenses and a considerable period may elapse between the
time of the decision to sell and the time the Fund may be permitted to sell a
security. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than existed when it decided to
sell. Restricted securities and other securities not readily marketable are
priced at fair value as determined in good faith by or under the direction of
the Board of Directors.

Foreign Securities

Each of the following Principal Funds may invest in foreign securities to the
indicated percentage of its assets:
o International, International Emerging Markets and International SmallCap
Funds - 100%;
o Real Estate Fund - 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited Term
Bond, MidCap, SmallCap and Utilities Funds - 20%.
o The Cash Management Fund does not invest in foreign securities other than
those that are United States dollar denominated. All principal and interest
payments for the security are payable in U.S. dollars. The interest rate,
the principal amount to be repaid and the timing of payments related to the
securities 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.

Debt securities issued in the United States pursuant to a registration statement
filed with the Securities and Exchange Commission are not treated as foreign
securities for purposes of these limitations.

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

Securities of Smaller Companies

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

Unseasoned Issuers

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

Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts

The Balanced, Blue Chip, Bond, Government Securities Income, High Yield,
International, International Emerging Markets, International SmallCap, Limited
Term Bond, MidCap, Real Estate, SmallCap and Utilities Funds may each engage in
the practices described under this heading. The Tax-Exempt Bond Fund may invest
in financial futures contracts as described under this heading. In the following
discussion, the terms "the Fund," "each Fund" or "the Funds" refer to each of
these Funds.

Spread Transactions

Each Fund may purchase covered spread options. Such covered spread options
are not presently exchange listed or traded. The purchase of a spread
option gives the Fund the right to put, or sell, a security that it owns at
a fixed dollar spread or fixed yield spread in relationship to another
security that the Fund does not own, but which is used as a benchmark. The
risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition,
there is no assurance that closing transactions will be available. The
purchase of spread options can be used to protect each Fund against adverse
changes in prevailing credit quality spreads, i.e., the yield spread
between high quality and lower quality securities. The security covering
the spread option is maintained in a segregated account by each Fund's
custodian. The Funds do not consider a security covered by a spread option
to be "pledged" as that term is used in the Funds' policy limiting the
pledging or mortgaging of assets.

Options on Securities and Securities Indices

Each Fund's Manager has the discretion (but is under no requirement) to
write (sell) and purchase call and put options on securities in which it
invests and on securities indices based on securities in which the Fund
invests. The International Fund would only write covered call options on
its portfolio securities; it does not write or purchase put options. The
Funds may write call and put options to generate additional revenue, and
may write and purchase call and put options in seeking to hedge against a
decline in the value of securities owned or an increase in the price of
securities which the Fund plans to purchase.

Writing Covered Call and Put Options. When a Fund writes a call option, it
gives the purchaser of the option the right to buy a specific security at a
specified price at any time before the option expires. When a Fund writes a
put option, it gives the purchaser of the option the right to sell to the
Fund a specific security at a specified price at any time before the option
expires. In both situations, the Fund receives a premium from the purchaser
of the option.

The premium received by a Fund reflects, among other factors, the current
market price of the underlying security, the relationship of the exercise
price to the market price, the time period until the expiration of the
option and interest rates. The premium generates additional income for the
Fund if the option expires unexercised or is closed out at a profit. By
writing a call, a Fund limits its opportunity to profit from any increase
in the market value of the underlying security above the exercise price of
the option, but it retains the risk of loss if the price of the security
should decline. By writing a put, a Fund assumes the risk that it may have
to purchase the underlying security at a price that may be higher than its
market value at time of exercise.

The Funds write only covered options and comply with applicable regulatory
and exchange cover requirements. The Funds usually (and the International
Fund must) own the underlying security covered by any outstanding call
option. With respect to an outstanding put option, each Fund deposits and
maintains with its custodian cash, U.S. Government securities or other
liquid securities with a value at least equal to the exercise price of the
option.

Once a Fund has written an option, it may terminate its obligation, before
the option is exercised. The Fund executes a closing transaction by
purchasing an option of the same series as the option previously written.
The Fund has a gain or loss depending on whether the premium received when
the option was written exceeds the closing purchase price plus related
transaction costs.

Purchasing Call and Put Options. When a Fund purchases a call option, it
receives, in return for the premium it pays, the right to buy from the
writer of the option the underlying security at a specified price at any
time before the option expires. A Fund purchases call options in
anticipation of an increase in the market value of securities that it
intends ultimately to buy. During the life of the call option, the Fund is
able to buy the underlying security at the exercise price regardless of any
increase in the market price of the underlying security. In order for a
call option to result in a gain, the market price of the underlying
security must exceed the sum of the exercise price, the premium paid and
transaction costs.

When a Fund purchases a put option, it receives, in return for the premium
it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. A Fund
purchases put options in anticipation of a decline in the market value of
the underlying security. During the life of the put option, the Fund is
able to sell the underlying security at the exercise price regardless of
any decline in the market price of the underlying security. In order for a
put option to result in a gain, the market price of the underlying security
must decline, during the option period, below the exercise price enough to
cover the premium and transaction costs.

Once a Fund purchases an option, it may close out its position by selling
an option of the same series as the option previously purchased. The Fund
has a gain or loss depending on whether the closing sale price exceeds the
initial purchase price plus related transaction costs.

None of the Funds will invest more than 5% of its assets in the purchase of
call and put options on individual securities, securities indices and
futures contracts.

Options on Securities Indices. Each Fund may purchase and sell put and call
options on any securities index based on securities in which the Fund may
invest. Securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than
price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities
index options requires cash payments and does not involve the actual
purchase or sale of securities. The Funds engage in transactions in put and
call options on securities indices for the same purposes as they engage in
transactions in options on securities. When a Fund writes call options on
securities indices, it holds in its portfolio underlying securities which,
in the judgment of the Manager, correlate closely with the securities index
and which have a value at least equal to the aggregate amount of the
securities index options.

Risks Associated with Options Transactions. An options position may be
closed out only on an exchange which provides a secondary market for an
option of the same series. The Funds generally purchase or write only those
options for which there appears to be an active secondary market. However,
there is no assurance that a liquid secondary market on an exchange exists
for any particular option, or at any particular time. If a Fund is unable
to effect closing sale transactions in options it has purchased, it has to
exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities. If a
Fund is unable to effect a closing purchase transaction for a covered
option that it has written, it is not able to sell the underlying
securities, or dispose of the assets held in a segregated account, until
the option expires or is exercised. A Fund's ability to terminate option
positions established in the over-the-counter market may be more limited
than for exchange-traded options and may also involve the risk that
broker-dealers participating in such transactions might fail to meet their
obligations.

Futures Contracts and Options on Futures Contracts

Each Fund may purchase and sell financial futures contracts and options on
those contracts. Financial futures contracts are commodities contracts
based on financial instruments such as U.S. Treasury bonds or bills or on
securities indices such as the S&P 500 Index. Futures contracts, options on
futures contracts and the commodity exchanges on which they are traded are
regulated by the Commodity Futures Trading Commission ("CFTC"). Through the
purchase and sale of futures contracts and related options, a Fund seeks to
hedge against a decline in securities owned by the Fund or an increase in
the price of securities which the Fund plans to purchase.

Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund is obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it is obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date. The Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction
costs are less or more than the price of the initial sale or on whether the
price of an offsetting sale is more or less than the price of the initial
purchase plus transaction costs. Although the Funds usually liquidate
futures contracts on financial instruments in this manner, they may make or
take delivery of the underlying securities when it appears economically
advantageous to do so.

A futures contract based on a securities index provides for the purchase or
sale of a group of securities at a specified future time for a specified
price. These contracts do not require actual delivery of securities but
result in a cash settlement. The amount of the settlement is based on the
difference in value of the index between the time the contract was entered
into and the time it is liquidated (at its expiration or earlier if it is
closed out by entering into an offsetting transaction).

When a futures contract is purchased or sold a brokerage commission is
paid. Unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities (generally about 5% of the contract amount) is deposited by the
Fund with its custodian for the benefit of the futures commission merchant
through which the Fund engages in the transaction. This amount is known as
"initial margin." It does not involve the borrowing of funds by the Fund to
finance the transaction. It instead represents a "good faith" deposit
assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Fund upon termination of the
futures contract if all the Fund's contractual obligations have been
satisfied.

Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures
contract fluctuates, a process known as "marking to market." The
fluctuations make the long or short positions in the futures contract more
or less valuable. If the position is closed out by taking an opposite
position prior to the settlement date of the futures contract, a final
determination of variation margin is made. Any additional cash is required
to be paid to or released by the broker and the Fund realizes a loss or
gain.

In using futures contracts, the Fund seeks to establish more certainly than
would otherwise be possible the effective price of or rate of return on
portfolio securities or securities that the Fund proposes to acquire. A
Fund, for example, sells futures contracts in anticipation of a rise in
interest rates which would cause a decline in the value of its debt
investments. When this kind of hedging is successful, the futures contract
increases in value when the Fund's debt securities decline in value and
thereby keep the Fund's net asset value from declining as much as it
otherwise would. A Fund also sells futures contracts on securities indices
in anticipation of or during a stock market decline in an endeavor to
offset a decrease in the market value of its equity investments. When a
Fund is not fully invested and anticipates an increase in the cost of
securities it intends to purchase, it may purchase financial futures
contracts. When increases in the prices of equities are expected, a Fund
purchases futures contracts on securities indices in order to gain rapid
market exposure that may partially or entirely offset increases in the cost
of the equity securities it intends to purchase.

Options on Futures Contracts. The Funds may also purchase and write call
and put options on futures contracts. A call option on a futures contract
gives the purchaser the right, in return for the premium paid, to purchase
a futures contract (assume a long position) at a specified exercise price
at any time before the option expires. A put option gives the purchaser the
right, in return for the premium paid, to sell a futures contract (assume a
short position), for a specified exercise price, at any time before the
option expires.

Upon the exercise of a call, the writer of the option is obligated to sell
the futures contract (to deliver a long position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put,
the writer of the option is obligated to purchase the futures contract
(deliver a short position to the option holder) at the option exercise
price, which will presumably be higher than the current market price of the
contract in the futures market. However, as with the trading of futures,
most options are closed out prior to their expiration by the purchase or
sale of an offsetting option at a market price that reflects an increase or
a decrease from the premium originally paid. Options on futures can be used
to hedge substantially the same risks addressed by the direct purchase or
sale of the underlying futures contracts. For example, if a Fund
anticipates a rise in interest rates and a decline in the market value of
the debt securities in its portfolio, it might purchase put options or
write call options on futures contracts instead of selling futures
contracts.

If a Fund purchases an option on a futures contract, it may obtain benefits
similar to those that would result if it held the futures position itself.
But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the
event of an adverse market movement, however, the Fund is not subject to a
risk of loss on the option transaction beyond the price of the premium it
paid plus its transaction costs.

When a Fund writes an option on a futures contract, the premium paid by the
purchaser is deposited with the Fund's custodian. The Fund must maintain
with its custodian all or a portion of the initial margin requirement on
the underlying futures contract. It assumes a risk of adverse movement in
the price of the underlying futures contract comparable to that involved in
holding a futures position. Subsequent payments to and from the broker,
similar to variation margin payments, are made as the premium and the
initial margin requirement are marked to market daily. The premium may
partially offset an unfavorable change in the value of portfolio
securities, if the option is not exercised, or it may reduce the amount of
any loss incurred by the Fund if the option is exercised.

Risks Associated with Futures Transactions. There are a number of risks
associated with transactions in futures contracts and related options. A
Fund's successful use of futures contracts is subject to the Manager's
ability to predict correctly the factors affecting the market values of the
Fund's portfolio securities. For example, if a Fund is hedged against the
possibility of an increase in interest rates which would adversely affect
debt securities held by the Fund and the prices of those debt securities
instead increases, the Fund loses part or all of the benefit of the
increased value of its securities it hedged because it has offsetting
losses in its futures positions. Other risks include imperfect correlation
between price movements in the financial instrument or securities index
underlying the futures contract, on the one hand, and the price movements
of either the futures contract itself or the securities held by the Fund,
on the other hand. If the prices do not move in the same direction or to
the same extent, the transaction may result in trading losses.

Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires
a secondary market on the relevant contract market. The Fund enters into a
futures contract or related option only if there appears to be a liquid
secondary market. There can be no assurance, however, that such a liquid
secondary market exists for any particular futures contract or related
option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances,
the Fund continues to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Fund has insufficient cash, it may be required to sell portfolio securities
to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to perform
under the terms of the futures contracts it holds. The inability to close
out futures positions also could have an adverse impact on the Fund's
ability effectively to hedge its portfolio.

Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This
daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been
reached in a particular type of contract, no more trades may be made on
that day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to
the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.

Limitations on the Use of Futures and Options on Futures Contracts. Each
Fund intends to come within an exclusion from the definition of "commodity
pool operator" provided by CFTC regulations by complying with certain
limitations on the use of futures and related options prescribed by those
regulations.

None of the Funds will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it
has entered into (except that in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount generally may be excluded
in computing the 5%).

The Funds enter into futures contracts and related options transactions
only for bona fide hedging purposes as permitted by the CFTC and for other
appropriate risk management purposes, if any, which the CFTC deems
appropriate for mutual funds excluded from the regulations governing
commodity pool operators. The Funds are not permitted to engage in
speculative futures trading. Each Fund determines that the price
fluctuations in the futures contracts and options on futures used for
hedging or risk management purposes are substantially related to price
fluctuations in securities held by the Fund or which it expects to
purchase. In pursuing traditional hedging activities, each Fund sells
futures contracts or acquires puts to protect against a decline in the
price of securities that the Fund owns. Each Fund purchases futures
contracts or calls on futures contracts to protect the Fund against an
increase in the price of securities the Fund intends to purchase before it
is in a position to do so.

When a Fund purchases a futures contract, or purchases a call option on a
futures contract, it places any asset, including equity securities and
non-investment grade debt in a segregated account, so long as the asset is
liquid and marked to the market daily. The amount so segregated plus the
amount of initial margin held for the account of its broker equals the
market value of the futures contract.

The Funds do not maintain open short positions in futures contracts, call
options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions
(marked to market) exceeds the current market value of that portion of its
securities portfolio being hedged by those futures and options plus or
minus the unrealized gain or loss on those open positions, adjusted for the
historical volatility relationship between that portion of the portfolio
and the contracts (i.e., the Beta volatility factor). To the extent a Fund
writes call options on specific securities in that portion of its
portfolio, the value of those securities is deducted from the current
market value of that portion of the securities portfolio. If this
limitation is exceeded at any time, the Fund takes prompt action to close
out the appropriate number of open short positions to bring its open
futures and options positions within this limitation.

Forward Foreign Currency Exchange Contracts

The International, International Emerging Markets and International SmallCap
Funds may, but are not obligated to, enter into forward foreign currency
exchange contracts only under two circumstances. First, when a Fund is entering
into a contract for the purchase or sale of a security denominated in a foreign
currency and wants to "lock-in" the U.S. dollar price of the security. Second,
when the Manager believes that the currency of a particular foreign country in
which a portion of a Fund's securities are denominated may suffer a substantial
decline against the U.S. dollar. A Fund generally does not enter into a forward
contract with a term of greater than one year.

The International, International Emerging Markets and International SmallCap
Funds enter into forward foreign currency exchange contracts only for the
purpose of "hedging," that is limiting the risks associated with changes in the
relative rates of exchange between the U.S. dollar and foreign currencies in
which securities owned by a Fund are denominated. They do not enter into such
forward contracts for speculative purposes. A Fund sets up a separate account
with the Custodian to place foreign securities denominated in the currency for
which the Fund has entered into forward contracts under the second circumstance,
as set forth above, for the term of the forward contract. It should be noted
that the use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange between the currencies which can be achieved at some future
point in time. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they also tend to
limit any potential gain which might result if the value of the currency
increases.

Repurchase Agreements

All Principal Funds may invest in repurchase agreements. None of the
Growth-Oriented or Income-Oriented Funds enter into repurchase agreements that
do not mature within seven days if any such investment, together with other
illiquid securities held by the Fund, amount to more than 15% of its assets. The
Money Market Fund does not enter into repurchase agreements that do not mature
within seven days of such investment together with other illiquid securities
held by the Fund, amount to more than 10% of its assets. Repurchase agreements
typically involve the acquisition by the Fund of debt securities from a selling
financial institution such as a bank, savings and loan association or
broker-dealer. A repurchase agreement provides that the Fund sells back to the
seller and that the seller repurchases the underlying securities at a specified
price and at a fixed time in the future. Repurchase agreements may be viewed as
loans by a Fund collateralized by the underlying securities. This arrangement
results in a fixed rate of return that is not subject to market fluctuation
during the Fund's holding period. Although repurchase agreements involve certain
risks not associated with direct investments in debt securities, each of the
Funds follows procedures established by its Board of Directors which are
designed to minimize such risks. These procedures include entering into
repurchase agreements only with large, well-capitalized and well-established
financial institutions which the Fund's Manager, or Sub-Advisor, believes
present minimum credit risks. In addition, the value of the collateral
underlying the repurchase agreement is always at least equal to the repurchase
price, including accrued interest. In the event of a default or bankruptcy by a
selling financial institution, the affected Fund bears a risk of loss. In
seeking to liquidate the collateral, a Fund may be delayed in or prevented from
exercising its rights and may incur certain costs. Further to the extent that
proceeds from any sale upon a default of the obligation to repurchase are less
than the repurchase price, the Fund could suffer a loss.

Lending of Portfolio Securities

All Principal Funds, except the Capital Value, Growth and Cash Management Funds,
may lend their portfolio securities. None of the Principal Funds intends to lend
its portfolio securities if as a result the aggregate of such loans made by the
Fund would exceed 30% of its total assets. Portfolio securities may be lent to
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions provided that such loans are callable at any time on not more than
five business days' notice and that cash or government securities equal to at
least 100% of the market value of the securities loaned, determined daily, is
deposited by the borrower with the Fund and is maintained each business day in a
segregated account. While such securities are on loan, the borrower pays the
Fund any income accruing thereon. The Fund may invest any cash collateral,
thereby earning additional income, or may receive an agreed-upon fee from the
borrower. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs during
the term of the loan belongs to the Fund and its shareholders. A Fund pays
reasonable administrative, custodial and other fees in connection with such
loans and may pay a negotiated portion of the interest earned on the cash or
government securities pledged as collateral to the borrower or placing broker. A
Fund does not vote securities that have been loaned, but it will call a loan of
securities in anticipation of an important vote.

When-Issued and Delayed Delivery Securities

Each of the Principal Funds may from time to time purchase securities on a
when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period. The securities are subject to market fluctuation
which involve the risk for the purchaser that yields available in the market at
the time of delivery are higher than those obtained in the transaction. Each
Fund only purchases securities on a when-issued or delayed delivery basis with
the intention of acquiring the securities. However, a Fund may sell the
securities before the settlement date, if such action is deemed advisable. At
the time a Fund commits to purchase securities on a when-issued or delayed
delivery basis, it records the transaction and reflects the value of the
securities in determining its net asset value. Each Fund also establishes a
segregated account with its custodian bank in which it maintains cash or cash
equivalents, United States Government securities, other high grade debt
obligations and equity securities equal in value to the Fund's commitments for
when-issued or delayed delivery securities. The availability of liquid assets
for this purpose and the effect of asset segregation on a Fund's ability to meet
its current obligations, to honor requests for redemption and to have its
investment portfolio managed properly limit the extent to which the Fund may
engage in forward commitment agreements. Except as may be imposed by these
factors, there is no limit on the percent of a Fund's total assets that may be
committed to transactions in such agreements.

Money Market Instruments

The Cash Management Fund invests all of its available assets in money market
instruments maturing in 397 days or less. The types of instruments which this
Fund purchases are described below.

(1) U.S. Government Securities -- Securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.

(2) U.S. Government Agency Securities -- Obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government.
o U.S. agency obligations include, but are not limited to, the Bank for
Co-operatives, Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
o U.S. instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration.

Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality. Still others, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality.

(3) Bank Obligations -- Certificates of deposit, time deposits and bankers'
acceptances of U.S. commercial banks having total assets of at least one
billion dollars and overseas branches of U.S. commercial banks and foreign
banks, which in the Manager's opinion, are of comparable quality. However,
each such bank with its branches has total assets of at least five billion
dollars, and certificates, including time deposits of domestic savings and
loan associations having at least one billion dollars in assets which are
insured by the Federal Savings and Loan Insurance Corporation. The Fund may
acquire obligations of U.S. banks which are not members of the Federal
Reserve System or of the Federal Deposit Insurance Corporation.

Any obligations of foreign banks must be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of U.S.
banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. For example, an issuing bank may be able to maintain
that the liability for an investment is solely that of the overseas branch
which could expose the Fund to a greater risk of loss. In addition,
obligations of foreign banks or of overseas branches of U.S. banks may be
affected by governmental action in the country of domicile of the branch or
parent bank. Examples of adverse foreign governmental actions include the
imposition of currency controls, the imposition of withholding taxes on
interest income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium. Deposits
in foreign banks or foreign branches of U.S. banks are not covered by the
Federal Deposit Insurance Corporation. The Fund only buys short-term
instruments where the risks of adverse governmental action are believed by
the Manager to be minimal. The Fund considers these factors along with
other appropriate factors in making an investment decision to acquire such
obligations. It only acquires those which, in the opinion of management,
are of an investment quality comparable to other debt securities bought by
the Fund. The Fund invests in certificates of deposit of selected banks
having less than one billion dollars of assets providing the certificates
do not exceed the level of insurance (currently $100,000) provided by the
applicable government agency.

A certificate of deposit is issued against funds deposited in a bank or
savings and loan association for a definite period of time, at a specified
rate of return. Normally they are negotiable. However, the Fund
occasionally invests in certificates of deposit which are not negotiable.
Such certificates may provide for interest penalties in the event of
withdrawal prior to their maturity. A bankers' acceptance is a short-term
credit instrument issued by corporations to finance the import, export,
transfer or storage of goods. They are termed "accepted" when a bank
guarantees their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at maturity.

(4) Commercial Paper -- Short-term promissory notes issued by U.S. or foreign
corporations.

(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures which at
the time of purchase have 397 days or less remaining to maturity.

(6) Repurchase Agreements -- Instruments under which securities are purchased
from a bank or securities dealer with an agreement by the seller to
repurchase the securities at the same price plus interest at a specified
rate. (See "FUND INVESTMENTS - Repurchase Agreements.")

(7) Taxable Municipal Obligations -- Short-term obligations issued or
guaranteed by state and municipal issuers which generate taxable income.

The ratings of nationally recognized statistical rating organization (NRSRO),
such as Moody's Investor Services, Inc. ("Moody's") and Standard and Poor's
("S&P"), which are described in Appendix A, represent their opinions as to the
quality of the money market instruments which they undertake to rate. It should
be emphasized, however, that ratings are general and are not absolute standards
of quality. These ratings, including ratings of NRSROs other than Moody's and
S&P, are the initial criteria for selection of portfolio investments, but the
Manager further evaluates these securities.

Municipal Obligations

The Tax-Exempt Bond Fund can each invest in "Municipal Obligations." Municipal
Obligations are obligations issued by or on behalf of states, territories, and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, including municipal
utilities, or multi-state agencies or authorities. The interest on Municipal
Obligations is exempt from federal income tax in the opinion of bond counsel to
the issuer. Three major classifications of Municipal Obligations are: Municipal
Bonds, which generally have a maturity at the time of issue of one year or more,
Municipal Notes, which generally have a maturity at the time of issue of six
months to three years, and Municipal Commercial Paper, which generally has a
maturity at the time of issue of 30 to 270 days.

The term "Municipal Obligations" includes debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets, water and sewer works, and electric utilities.
Other public purposes for which Municipal Obligations are issued include
refunding outstanding obligations, obtaining funds for general operating
expenses and lending such funds to other public institutions and facilities.

Industrial development bonds are issued by or on behalf of public authorities to
obtain funds to provide for the construction, equipment, repair or improvement
of privately operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, industrial, port or parking facilities,
air or water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal. They are considered
to be Municipal Obligations if the interest paid thereon qualifies as exempt
from federal income tax in the opinion of bond counsel to the issuer, even
though the interest may be subject to the federal alternative minimum tax.

Municipal Bonds. Municipal Bonds may be either "general obligation" or "revenue"
issues. General obligation bonds are secured by the issuer's pledge of its
faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source (e.g., the user of the facilities being
financed), but not from the general taxing power. Industrial development bonds
and pollution control bonds in most cases are revenue bonds and generally do not
carry the pledge of the credit of the issuing municipality. The payment of the
principal and interest on industrial revenue bonds depends solely on the ability
of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. The Fund may also invest in "moral obligation" bonds
which are normally issued by special purpose public authorities. If an issuer of
moral obligation bonds is unable to meet its obligations, the repayment of the
bonds becomes a moral commitment but not a legal obligation of the state or
municipality in question.

Municipal Notes. Municipal Notes usually are general obligations of the issuer
and are sold in anticipation of a bond sale, collection of taxes or receipt of
other revenues. Payment of these notes is primarily dependent upon the issuer's
receipt of the anticipated revenues. Other notes include "Construction Loan
Notes" issued to provide construction financing for specific projects, and "Bank
Notes" issued by local governmental bodies and agencies to commercial banks as
evidence of borrowings. Some notes ("Project Notes") are issued by local
agencies under a program administered by the United States Department of Housing
and Urban Development.
Project Notes are secured by the full faith and credit of the United States.

Bond Anticipation Notes (BANs) are usually general obligations of state and
local governmental issuers which are sold to obtain interim financing for
projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term municipal
bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.

Tax Anticipation Notes (TANs) are issued by state and local governments to
finance the current operations of such governments. Repayment is generally to be
derived from specific future tax revenues. TANs are usually general obligations
of the issuer. A weakness in an issuer's capacity to raise taxes due to, among
other things, a decline in its tax base or a rise in delinquencies, could
adversely affect the issuer's ability to meet its obligations on outstanding
TANs.

Revenue Anticipation Notes (RANs) are issued by governments or governmental
bodies with the expectation that future revenues from a designated source will
be used to repay the notes. In general they also constitute general obligations
of the issuer. A decline in the receipt of projected revenues, such as
anticipated revenues from another level of government, could adversely affect an
issuer's ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.

Construction Loan Notes are issued to provide construction financing for
specific projects. Frequently, these notes are redeemed with funds obtained from
the Federal Housing Administration.

Bank Notes are notes issued by local governmental bodies and agencies such as
those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working-capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.

Municipal Commercial Paper. Municipal Commercial Paper refers to short-term
obligations of municipalities which may be issued at a discount and may be
referred to as Short-Term Discount Notes. Municipal Commercial Paper is likely
to be used to meet seasonal working capital needs of a municipality or interim
construction financing. Generally they are repaid from general revenues of the
municipality or refinanced with long-term debt. In most cases Municipal
Commercial Paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.

Variable and Floating Rate Obligations. Certain Municipal Obligations,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities and debt instruments issued by domestic banks or corporations
may carry variable or floating rates of interest. Such instruments bear interest
at rates which are not fixed, but which vary with changes in specified market
rates or indices, such as a bank prime rate or tax-exempt money market index.
Variable rate notes are adjusted to current interest rate levels at certain
specified times, such as every 30 days. A floating rate note adjusts
automatically whenever there is a change in its base interest rate adjustor,
e.g., a change in the prime lending rate or specified interest rate indices.
Typically such instruments carry demand features permitting the Fund to redeem
at par.

A Fund's right to obtain payment at par on a demand instrument upon demand could
be affected by events occurring between the date the Fund elects to redeem the
instrument and the date redemption proceeds are due which affects the ability of
the issuer to pay the instrument at par value. The Manager monitors on an
ongoing basis the pricing, quality and liquidity of such instruments and
similarly monitors the ability of an issuer of a demand instrument, including
those supported by bank letters of credit or guarantees, to pay principal and
interest on demand. Although the ultimate maturity of such variable rate
obligations may exceed one year, the Funds treat the maturity of each variable
rate demand obligation as the longer of (i) the notice period required before
the Fund is entitled to payment of the principal amount through demand, or (ii)
the period remaining until the next interest rate adjustment. Floating rate
instruments with demand features are deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through demand.

The Funds may purchase participation interests in variable rate Municipal
Obligations (such as industrial development bonds). A participation interest
gives the purchaser an undivided interest in the Municipal Obligation in the
proportion that its participation interest bears to the total principal amount
of the Municipal Obligation. A Fund has the right to demand payment on seven
days' notice, for all or any part of the Fund's participation interest in the
Municipal Obligation, plus accrued interest. Each participation interest is
backed by an irrevocable letter of credit or guarantee of a bank. Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank. Banks will retain a service and letter of credit fee and a fee for
issuing repurchase commitments in an amount equal to the excess of the interest
paid on the Municipal Obligations over the negotiated yield at which the
instruments were purchased by the Funds. No Fund committed during the last
fiscal year or intends to commit during the present fiscal year more than 5% of
its net assets to participation interests.

Other Municipal Obligations. Other kinds of Municipal Obligations are
occasionally available in the marketplace, and a Fund may invest in such other
kinds of obligations to the extent consistent with its investment objective and
limitations. Such obligations may be issued for different purposes and with
different security than those mentioned above.

Risks of Municipal Obligations. The yields on Municipal Obligations are
dependent on a variety of factors, including general economic and monetary
conditions, money market factors, conditions in the Municipal Obligations
market, size of a particular offering, maturity of the obligation, and rating of
the issue. Each Fund's ability to achieve its investment objective also depends
on the continuing ability of the issuers of the Municipal Obligations in which
it invests to meet their obligation for the payment of interest and principal
when due.

Municipal Obligations are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
Federal Bankruptcy Act. They are also subject to federal or state laws, if any,
which extend the time for payment of principal or interest, or both, or impose
other constraints upon enforcement of such obligations or upon municipalities to
levy taxes. The power or ability of issuers to pay, when due, principal of and
interest on Municipal Obligations may also be materially affected by the results
of litigation or other conditions.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. It may be expected that similar proposals
will be introduced in the future. If such a proposal was enacted, the ability of
the Funds to pay "exempt interest" dividends may be adversely affected. Each
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.

Taxable Investments of the Tax-Exempt Bond Fund

The Tax-Exempt Bond Fund may invest up to 20% of its assets in taxable
short-term investments consisting of: Obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities; domestic bank
certificates of deposit and bankers' acceptances; short-term corporate debt
securities such as commercial paper; and repurchase agreements ("Taxable
Investments"). These investments must have a stated maturity of one year or less
at the time of purchase and must meet the following standards: banks must have
assets of at least $1 billion; commercial paper must be rated at least "A" by
S&P or "Prime" by Moody's or, if not rated, must be issued by companies having
an outstanding debt issue rated at least "A" by S&P or Moody's; corporate bonds
and debentures must be rated at least "A" by S&P or Moody's. Interest earned
from Taxable Investments is taxable to investors. When, in the opinion of the
Fund's Manager, it is advisable to maintain a temporary "defensive" posture, the
Fund may invest more than 20% of its total assets in Taxable Investments. At
other times, Taxable Investments, Municipal Obligations that do not meet the
quality standards required for the 80% portion of the portfolio and Municipal
Obligations the interest on which is treated as a tax preference item for
purposes of the federal alternative minimum tax will not exceed 20% of the
Fund's total assets.

Portfolio Turnover

Portfolio turnover normally differs for each Fund, varies from year to year (as
well as within a year) and is affected by portfolio sales necessary to meet cash
requirements for redemptions of Fund shares. This requirement may in some cases
limit the ability of a Fund to effect certain portfolio transactions. The
portfolio turnover rate for a Fund is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses which are paid by
the Fund.

No portfolio turnover rate can be calculated for the Money Market Fund because
of the short maturities of the securities in which it invests.

The portfolio turnover rates for each of the other Funds for its most recent and
immediately preceding fiscal periods were as follows (annualized when reporting
period is less than one year):

Balanced Fund 57.0% and 27.6%
Blue Chip Fund 0.5% and 55.4%
Bond Fund 15.2% and12.8%
Capital Value Fund 23.2% and 30.8%
Government Securities Income Fund 17.1% and 10.8%
Growth Fund 21.9% and16.5%
High Yield Fund 65.9% and 39.2%
International Emerging Markets Fund 45.2% and 21.4%
International Fund 38.7% and 26.6%
International SmallCap Fund 99.8% and10.4%
Limited Term Bond Fund 23.8% and 17.4%
MidCap Fund 25.1% and 9.5%
Real Estate Fund 60.4%
SmallCap Fund 20.5%
Tax-Exempt Bond Fund 6.6% and 8.9%
Utilities Fund 11.9% and 22.5%

Fund History

The Funds were incorporated in Maryland on the following dates:

Balanced Fund November 26, 1986
Blue Chip Fund December 10, 1990
Bond Fund December 2, 1986
Capital Value Fund May 26, 1989*
Cash Management Fund June 10, 1982
International Emerging Markets Fund May 27, 1997
Government Securities Income Fund September 5, 1984
Growth Fund May 26, 1989*
High Yield Fund November 26, 1986
International Fund May 12, 1981
International SmallCap Fund May 27, 1997
Limited Term Bond Fund August 9, 1995
MidCap Fund February 20, 1987
Real Estate Fund May 27, 1997
SmallCap Fund August 13, 1997
Tax-Exempt Bond Fund June 7, 1985
Utilities Fund September 3, 1992

* Effective November 1, 1989 the Fund succeeded to the business of a
predecessor Fund that had been incorporated in Delaware on February 6,
1969.

MANAGEMENT OF THE FUND

Board of Directors

Under Maryland law, a Board of Directors oversees each of the Funds. The
Directors have financial or other relevant experience and meet several times
during the year to review contracts, Fund activities and the quality of services
provided to the Funds. Other than serving as Directors, most of the Board
members have no affiliation with the Funds or service providers.

The current Directors and Officers are shown below. Each person also has the
same position with the Principal Variable Contracts Fund, Inc. which is also
sponsored by Principal Life Insurance Company. Unless an address is shown, the
mailing address for the Directors and Officers is Principal Financial Group, Des
Moines, Iowa 50392.

* John E. Aschenbrenner, 49, Director. Senior Vice President, Principal Life
Insurance Company since 1996; Vice President - Individual Markets
1990-1996. Director, Principal Management Corporation and Princor Financial
Services Corporation.

@ James D. Davis, 64, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.

*& Ralph C. Eucher, 47, Director and President. Vice President, Principal Life
Insurance Company since 1999. Director and President, Princor Financial
Services Corporation and Principal Management Corporation since 1999. Prior
thereto, Second Vice President, Principal Life Insurance Company.

Pamela A. Ferguson, 55, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto,
President, Grinnell College.

* Dennis P. Francis, 55, Director. Senior Vice President, Principal Life
Insurance Company since 1998; Vice President - Commercial Real Estate
1990-1998.

@ Richard W. Gilbert, 58, Director. 1357 Asbury Avenue, Winnetka, Illinois.
President, Gilbert Communications, Inc. since 1993. Prior thereto,
President and Publisher, Pioneer Press.

*& J. Barry Griswell, 49, Director and Chairman of the Board. President,
Principal Life Insurance Company since 1998; Executive Vice President,
1996-1998; Senior Vice President, 1991-1996. Director and Chairman of the
Board, Principal Management Corporation and Princor Financial Services
Corporation.

Barbara A. Lukavsky, 58, Director. 13731 Bay Hill Court, Clive, Iowa.
President and CEO, Barbican Enterprises, Inc. since 1997. President and
CEO, Lu San ELITE USA, L.C. 1985-1998.

@& Richard G. Peebler, 69, Director. 1916 79th Street, Des Moines, Iowa. Dean
and Professor Emeritus, Drake University, College of Business and Public
Administration, since 1996. Prior thereto, Professor, Drake University,
College of Business and Public Administration.

* Craig L. Bassett, 46, Treasurer. Second Vice President and Treasurer,
Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
Prior thereto, Associate Treasurer.

* Michael J. Beer , 38, Financial Officer. Executive Vice President, Princor
Financial Services Corporation and Principal Management Corporation since
1999. Senior Vice President and Chief Operating Officer, 1997-1999. Vice
President and Chief Operating Officer, 1995-1997. Prior thereto, Financial
Officer.

Michael W. Cumings, 47, Assistant Counsel. Counsel, Principal Life
Insurance Company since 1989.

* Arthur S. Filean, 60, Vice President and Secretary. Vice President, Princor
Financial Services Corporation, since 1990. Vice President, Principal
Management Corporation, since 1996.

* Ernest H. Gillum, 43, Assistant Secretary. Vice President - Compliance and
Product Development, Princor Financial Services Corporation and Principal
Management Corporation, since 1998. Prior thereto, Assistant Vice
President, Registered Products, 1995-1998. Prior thereto, Product
Development and Compliance Officer.

Jane E. Karli, 41, Assistant Treasurer. Assistant Treasurer, Principal Life
Insurance Company since 1998; Senior Accounting and Custody Administrator
1994-1998; Prior thereto, Senior Investment Cost Accountant.

* Michael D. Roughton, 47, Counsel. Counsel, Principal Life Insurance Company
since 1994. Prior thereto, Assistant Counsel. Counsel, Invista Capital
Management, Inc., Princor Financial Services Corporation, Principal
Investors Corporation and Principal Management Corporation.

* Considered to be "Interested Persons" as defined in the Investment Company
Act of 1940, as amended, because of current or former affiliation with the
Manager or Principal Life.

@ Member of Audit and Nominating Committee

& Member of Executive Committee (which is selected by the Board and which may
exercise all the powers of the Board, with certain exceptions, when the
Board is not in session. The Committee must report its actions to the
Board.)
<TABLE>
<CAPTION>
COMPENSATION TABLE*
fiscal year ended October 31, 1998
Director Compensation from Each Principal Fund Compensation from Fund Complex
<S> <C> <C>
James D. Davis $21,450 $50,775
Pamela A. Ferguson 20,100 43,950
Richard W. Gilbert 21,450 48,825
Barbara A. Lukavsky 21,450 50,775
Richard G. Peebler** 21,000 44,400
<FN>

* None of the Funds provide retirement benefits for any of the directors.

** Richard G. Peebler received $1,200 from each of the Principal Funds. In
addition, he received fees as a result of services on the Executive
Committee of the following funds:

Principal Capital Value Fund, Inc. $225
Principal Growth Fund, Inc. 225
Principal International Fund, Inc. 150
Principal International Emerging Markets Fund, Inc. 75
Principal International SmallCap Fund, Inc. 75
Principal MidCap Fund, Inc. 150
</FN>
</TABLE>

As of May 21, 1999, Principal Life Insurance Company, a life insurance company
organized in 1879 under the laws of Iowa, its subsidiaries and affiliates owned
of record a percentage of the outstanding voting shares of each Fund:
% of Outstanding
Fund Shares Owned

Balanced Fund 0.08%
Blue Chip Fund 0.61
Bond Fund 0.58
Capital Value Fund 23.49
Cash Management Fund 6.76
Government Securities Income Fund 0.04
Growth Fund 0.40
High Yield Fund 7.00
International Emerging Markets Fund 23.38
International Fund 45.18
International SmallCap Fund 41.68
Limited Term Bond Fund 7.16
MidCap Fund 0.46
Real Estate Fund 66.83
SmallCap Fund 20.40
Tax-Exempt Bond Fund 0.05
Utilities Fund 0.90

As of December 31, 1998, the Officers and Directors of each Fund as a group
owned less than 1% of the outstanding shares of any of the Funds.

As of June 23, 1999, the following shareholders of the Funds owned 5% or more of
the outstanding shares of the Funds:
<TABLE>
<CAPTION>
Percentage
Name Address of Ownership
<S> <C> <C>
Principal Cash Management Fund, Inc.
Class A
Delaware Charter Guarantee & Trust Co. PO Box 8704 8.1%
Attn: Thomas R. Kline, CFO Wilmington, DE 19899-8704

Class B
Patricia L. Hokkanen 8598 French Curv 8.7
2nd Account Eden Prairie, MN 55347-5362

Principal High Yield Fund, Inc.
Class R
Principal Life Insurance Company Custodian 1313 Little Blue Heron Ct. 6.1
IRA of William Flatley Naples, FL 34108-3311

Principal International Emerging Markets Fund, Inc.
Class R
Principal Life Insurance Company Custodian 24 B ST, RR 4 6.5
Roth Conversion IRA of Gordon F. Reabe Jr. Lake Lotawana, MO 64086-9804

Principal Limited Term Bond Fund, Inc.
Class R
Principal Life Insurance Company Custodian 632 Palm View Pl 8.0%
Conduit IRA of Pasadena, CA 91101-3496
Blain Hightower

Principal Life Insurance Company Custodian 349 W State St. 5.0
Rollover IRA of South Elgin, IL 60177-1930
Alvin Horn

Principal Tax-Exempt Bond Fund, Inc.
Class B
Allan S. Noddle The Grand Oudezijds Voorburgawal 197 8.8
Amsterdam Netherlands 1012 Ex
Netherlands
</TABLE>

MANAGER AND SUB-ADVISOR

The Manager of each of the Funds is Principal Management Corporation, a
wholly-owned subsidiary of Princor Financial Services Corporation which is a
wholly-owned subsidiary of Principal Financial Services, Inc. Principal
Financial Services, Inc. is a holding company which is a wholly-owned subsidiary
of Principal Financial Group, Inc. The Principal Financial Group, Inc. is a
holding company which is a wholly-owned subsidiary of Principal Mutual Holding
Company. The address of the Manager is the Principal Financial Group, Des
Moines, Iowa 50392-0200. The Manager was organized on January 10, 1969 and since
that time has managed various mutual funds sponsored by Principal Life Insurance
Company.

The Manager has executed an agreement with Invista Capital Management, LLC
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for each of the Growth-Oriented
Funds (except the Real Estate Fund), the Government Securities Income Fund and
the Limited Term Bond Fund. The Manager reimburses Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Life Insurance Company and an affiliate of the Manager, was founded in
1985 and manages investments for institutional investors, including Principal
Life Insurance Company. Assets under management at December 31, 1998 were
approximately $31 billion. Invista's address is 1800 Hub Tower, 699 Walnut, Des
Moines, Iowa 50309.

The Manager, Invista and each of the Funds have adopted a Code of Ethics
designed to prevent persons with access to information regarding the portfolio
trading activity of the Funds from using that information for their personal
benefit. In certain circumstances personal securities trading is permitted in
accordance with procedures established by the Code of Ethics. The Boards of
Directors for the Manager, Invista and each of the Funds periodically review the
Code of Ethics.

Each of the persons affiliated with a Fund who is also an affiliated person of
the Manager or Sub-Advisor is named below, together with the capacities in which
such person is affiliated:
<TABLE>
<CAPTION>
Name Office Held With Each Fund Office Held With The Manager/Invista

<S> <C> <C>
John E. Aschenbrenner Director Director (Manager)
Michael J. Beer Financial Officer Vice President and Chief Operating Officer (Manager)
Ralph C. Eucher Director and President Director and President (Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Ernest H. Gillum Assistant Secretary Vice President, Compliance and Product Development (Manager)
J. Barry Griswell Director and Chairman of the Board Director and Chairman of the Board (Manager)
Michael D. Roughton Counsel Counsel (Manager; Invista)
</TABLE>

COST OF MANAGER'S SERVICES

For providing the investment advisory services, and specified other services,
the Manager, under the terms of the Management Agreement for each Fund, is
entitled to receive a fee computed and accrued daily and payable monthly, at the
following annual rates:
<TABLE>
<CAPTION>
Net Asset Value of Fund

First Next Next Next Over
$100,000,000 $100,000,000 $100,000,000 $100,000,000 $400,000,000

<S> <C> <C> <C> <C> <C>
Balanced, High Yield, and Utilities Funds .60% .55% .50% .45% .40%
International Emerging Markets Fund 1.25 1.20 1.15 1.10 1.05
International Fund .75 .70 .65 .60 .55
International SmallCap Fund 1.20 1.15 1.10 1.05 1.00
MidCap Fund .65 .60 .55 .50 .45
Real Estate Fund .90 .85 .80 .75 .70
SmallCap Fund .85 .80 .75 .70 .65
All Other Funds .50 .45 .40 .35 .30
</TABLE>

There is no assurance that any of the Funds' net assets will reach sufficient
amounts to be able to take advantage of the rate decreases. The net assets of
each Fund on October 31, 1998 and the rate of the fee for each Fund for
investment management services as provided in the Management Agreement for the
fiscal year then ended were as follows:
Management Fee
For Fiscal
Net Assets as of Year Ended
Fund October 31, 1998 October 31, 1998

Balanced Fund $142,777,667 .59%
Blue Chip Fund 193,834,531 .48
Bond Fund 182,742,664 .48*
Capital Value Fund 647,492,207 .38
Cash Management Fund 308,933,585 .38*
Government Securities Income Fund 283,981,376 .46
Growth Fund 491,320,149 .41
High Yield Fund 44,734,802 .60
International Fund 362,172,335 .68
International Emerging Markets Fund 12,789,905 1.25
International SmallCap Fund 21,667,242 1.20
Limited Term Bond Fund 31,370,705 .50*
MidCap Fund 424,839,839 .56
Real Estate Fund 11,537,737 .89
SmallCap Fund 29,776,443 .75
Tax-Exempt Bond Fund 216,283,905 .47
Utilities Fund 98,928,795 .60*

* Before waiver.

Under a Sub-Advisory Agreement between Invista and the Manager, Invista performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the Growth-Oriented Funds (except the Real Estate Fund), the
Government Securities Income Fund, the Limited Term Bond Fund and the Utilities
Fund. The Manager compensates Invista for its sub-advisory services as provided
in the Sub-Advisory Agreement between Invista and the Manager. The Manager may
periodically reallocate management fees between itself and Invista.

The Manager pays for office space, facilities and simple business equipment and
the costs of keeping the books of the Fund. The Manager also compensates all
personnel who are officers and directors, if such officers and directors are
also affiliated with the Manager.

Each Fund pays all its other corporate expenses incurred in the operation of the
Fund and the continuous public offering of its shares, but not selling expenses.
Among other expenses, the Fund pays its taxes (if any), brokerage commissions on
portfolio transactions, interest, the cost of stock issue and transfer and
dividend disbursement, administration of shareholder accounts, custodial fees,
expenses of registering and qualifying shares for sale after the initial
registration, auditing and legal expenses, fees and expenses of unaffiliated
directors, and costs of shareholder meetings. The Manager pays most of these
expenses in the first instance, and is reimbursed for them by the Fund as
provided in the Management Agreement. The Manager also is responsible for the
performance of certain of the functions described above, such as transfer and
dividend disbursement and administration of shareholder accounts, the cost of
which the Manager is reimbursed by the Fund.

Fees paid for investment management services during the periods indicated were
as follows:
<TABLE>
<CAPTION>
Management Fees For Fiscal Years Ended October 31,

Fund 1998 1997 1996
<S> <C> <C> <C>
Balanced Fund $ 750,616 $ 556,009 $ 404,461
Blue Chip Fund 764,784 417,958 212,845
Bond Fund 782,241(1) 636,217(1) 534,366(1)
Capital Value Fund 2,349,118 2,031,143 1,671,502
Cash Management Fund 2,127,595(1) 2,864,916(1) 2,555,687(1)
Government Securities Income Fund 1,239,644 1,227,604 1,223,631
Growth Fund 1,863,070 1,443,120 1,040,897
High Yield Fund 287,858 230,667 159,773
International Emerging Markets Fund 157,324 28,487(3) N/A
International Fund 2,492,037 1,882,664 1,154,783
International SmallCap Fund 242,403 30,283(3) N/A
Limited Term Bond Fund 133,825(1) 97,039(1) 18,619(1)(2)
MidCap Fund 2,548,924 2,004,305 1,293,848
Real Estate Fund 87,653(4) N/A N/A
SmallCap Fund 147,083(4) N/A N/A
Tax-Exempt Bond Fund 974,740 941,387 888,967
Utilities Fund 531,644(1) 436,296(1) 375,780(1)

<FN>
(1) Before waiver.
(2) Period from February 29, 1996 (Date Operations Commenced) through October
31, 1996.
(3) Period from August 29, 1997 (Date Operations Commenced) through October 31,
1997.
(4) Period from January 1, 1998 (Date Operations Commenced) through October 31,
1998.
</FN>
</TABLE>

The Manager waived $100,270, $59,630 and $25,970 of its fee for the Limited Term
Bond Fund for the years ended October 31, 1998, 1997 and the period ended
October 31, 1996, respectively. The Manager waived $172,366, $60,665, and
$28,413 of its fee for the Bond Fund for the years ended October 31, 1998, 1997
and 1996, respectively. The Manager also waived $1,343, $7,933 and $13,242 of
its fee for the Cash Management Fund for the years ended October 31, 1998, 1997
and 1996, respectively. The Manager also waived $82,515, $79,048, and $61,622 of
its fee for the Utilities Fund for the years ended October 31, 1998, 1997 and
1996, respectively.

Costs reimbursed to the Manager during the periods indicated for providing other
services pursuant to the Management Agreement were as follows:
<TABLE>
<CAPTION>
Reimbursement by Fund
of Certain Costs For
Fund Fiscal Years Ended October 31,

1998 1997 1996

<S> <C> <C> <C>
Balanced Fund $ 521,852 $ 364,442 $ 251,542
Blue Chip Fund 832,394 402,003 206,942
Bond Fund 482,817 278,385 221,648
Capital Value Fund 1,247,865 837,825 567,786
Cash Management Fund 854,575 1,833,423 1,762,455
Government Securities Income Fund 499,207 407,146 394,360
Growth Fund 1,421,948 1,121,832 837,917
High Yield Fund 217,020 98,481 66,305
International Emerging Markets Fund 119,948 4,116(2) N/A
International Fund 1,168,106 906,359 598,305
International SmallCap Fund 153,320 4,283(2) N/A
Limited Term Bond Fund 90,187 44,634 32,982(1)
MidCap Fund 1,840,474 1,308,608 942,986
Real Estate Fund 76,546(3) N/A N/A
SmallCap Fund 199,807(3) N/A N/A
Tax-Exempt Bond Fund 199,780 135,553 145,931
Utilities Fund 304,813 230,151 288,489

<FN>
(1) Period from February 13, 1996 (Date Operations Commenced) through October
31, 1996.
(2) Period from August 14, 1997 (Date Operations Commenced) through October 31,
1997.
(3) Period from December 10, 1997 (Date Operations Commenced) through October
31, 1998.
</FN>
</TABLE>

NOTE: The Manager voluntarily waived a portion of its fee for the Limited
Term Bond Fund from the date operations commenced and intends to
continue such waiver and, if necessary, pay expenses normally payable
by the Limited Term Bond Fund through the period ending October 31,
1999 in an amount that will maintain a total level of operating
expenses, which as a percent of average net assets attributable to a
class on an annualized basis will not exceed 1.00% for the Class A
shares, 1.35% for the Class B shares, 1.35% for the Class C shares and
1.60% for the Class R shares. The effect of the waiver was and will be
to reduce the Fund's annual operating expenses and increase the Fund's
yield and effective yield.

The Management Agreements and the Investment Service Agreements, pursuant to
which Principal Capital Management, a subsidiary of Principal Life Insurance
Company has agreed to furnish certain personnel, services and facilities
required by the Manager, and the Sub-Advisory Agreements for each of the
Growth-Oriented Funds (except the Real Estate Fund), the Government Securities
Income Fund and the Limited Term Bond Fund were last approved by the Board of
Directors for each of the Funds on September 14, 1998 (Management Agreement) and
December 14, 1998 (Investment Service Agreement). Each of these agreements
provides for continuation in effect from year to year only so long as such
continuation is specifically approved at least annually either by the Board of
Directors of the Fund or by vote of a majority of the outstanding voting
securities of the Fund, provided that in either event such continuation shall be
approved by vote of a majority of the Directors who are not "interested persons"
(as defined in the Investment Company Act of 1940) of the Manager, Principal
Life Insurance Company or its subsidiaries or the Fund, cast in person at a
meeting called for the purpose of voting on such approval. The Agreements may be
terminated at any time on 60 days written notice to the Manager by the Board of
Directors of the Fund or by a vote of a majority of the outstanding securities
of the Fund and by the Manager, Invista or Principal Life Insurance Company, as
the case may be, on 60 days written notice to the Fund. The Agreements will
automatically terminate in the event of their assignment.

BROKERAGE ON PURCHASES AND SALES OF SECURITIES

In distributing brokerage business arising out of the placement of orders for
the purchase and sale of securities for any Fund, the objective of the Fund's
Manager or Sub-Advisor is to obtain the best overall terms. In pursuing this
objective, the Manager or Sub-Advisor considers all matters it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and executing capability of the broker or dealer and the
reasonableness of the commission, if any (for the specific transaction and on a
continuing basis). This may mean in some instances that the Manager or
Sub-Advisor will pay a broker commissions that are in excess of the amount of
commission another broker might have charged for executing the same transaction
when the Manager or Sub-Advisor believes that such commissions are reasonable in
light of (a) the size and difficulty of transactions (b) the quality of the
execution provided and (c) the level of commissions paid relative to commissions
paid by other institutional investors. (Such factors are viewed both in terms of
that particular transaction and in terms of all transactions that broker
executes for accounts over which the Manager or Sub-Advisor exercises investment
discretion. The Manager or Sub-Advisor may purchase securities in the
over-the-counter market, utilizing the services of principal market makers,
unless better terms can be obtained by purchases through brokers or dealers, and
may purchase securities listed on the New York Stock Exchange from non-Exchange
members in transactions off the Exchange.)

The Manager or Sub-Advisor gives consideration in the allocation of business to
services performed by a broker (e.g. the furnishing of statistical data and
research generally consisting of information of the following types: analyses
and reports concerning issuers, industries, economic factors and trends,
portfolio strategy and performance of client accounts). If any such allocation
is made, the primary criteria used will be to obtain the best overall terms for
such transactions. The Manager or Sub-Advisor may pay additional commission
amounts for research services. Such statistical data and research information
received from brokers or dealers may be useful in varying degrees and the
Manager or Sub-Advisor may use it in servicing some or all of the accounts it
manages. Some statistical data and research information may not be useful to the
Manager or Sub-Advisor in managing the client account, brokerage for which
resulted in the Manager's or Sub-Advisor's receipt of the statistical data and
research information. However, in the Manager's or Sub-Advisor's opinion, the
value thereof is not determinable and it is not expected that the Manager's or
Sub-Advisor's expenses will be significantly reduced since the receipt of such
statistical data and research information is only supplementary to the Manager's
or Sub-Advisor's own research efforts. The Manager or Sub-Advisor allocated
portfolio transactions for the Funds indicated in the following table to certain
brokers during the fiscal year ended October 31, 1998 due to research services
provided by such brokers. The table also indicates the commissions paid to such
brokers as a result of these portfolio transactions.

Fund Commissions Paid
---- ----------------
Balanced $ 70,261
Blue Chip 41,024
Capital Value 331,316
Growth 276,004
International Emerging Markets 51,821
International 758,808
International SmallCap 101,485
MidCap 242,311
Real Estate* 40,791
SmallCap* 46,957
Utilities 39,470

* Period from December 11, 1997 (date operations commenced)
through October 31, 1998.

Purchases and sales of debt securities and money market instruments usually are
principal transactions; portfolio securities are normally purchased directly
from the issuer or from an underwriter or marketmaker for the securities. Such
transactions are usually conducted on a net basis with the Fund paying no
brokerage commissions. Purchases from underwriters include a commission or
concession paid by the issuer to the underwriter, and the purchases from dealers
serving as marketmakers include the spread between the bid and asked prices.

The following table shows the brokerage commissions paid during the periods
indicated. In each year, 100% of the commissions paid by each Fund went to
broker-dealers which provided research, statistical or other factual
information.

Total Brokerage Commissions Paid

Fund 1998 1997 1996

Balanced Fund $ 70,261 $ 47,096 $ 41,537
Blue Chip Fund 41,024 113,923 17,198
Capital Value Fund 331,316 339,994 375,742
Growth Fund 276,004 43,018 64,704
International Emerging Markets Fund 51,821 45,140* N/A
International Fund 758,808 708,333 338,670
International SmallCap Fund 101,485 46,970* N/A
MidCap Fund 242,311 98,217 99,466
Real Estate Fund 40,791** N/A N/A
SmallCap Fund 46,957** N/A N/A
Utilities Fund 39,470 58,450 70,140

* Period from August 14, 1997 (date operations commenced) through October 31,
1997.
** Period from January 1, 1998 (date operations commenced) through October 31,
1998.

Brokerage commissions paid to affiliates during the fiscal year ending October
31 were as follows:
<TABLE>
<CAPTION>
Commissions Paid to Goldman Sachs Co.
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Balanced Fund
1998 $ 2,950 4.20% 1.87%
Growth Fund
1998 5,000 1.81% 1.87%
International Emerging Markets Fund
1998 662 1.28% 1.54%
International Fund
1998 41,600 5.48% 5.79%
International SmallCap Fund
1998 2,326 2.29% 2.96%
SmallCap Fund
1998 210 0.45% 0.61%
Utilities Fund
1998 1,500 3.80% 3.71%
<CAPTION>
Commissions Paid to J.P. Morgan Securities
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<C> <C> <C> <C> <C>
Balanced Fund
1998 $ 500 0.71% 1.03%
Blue Chip Fund
1998 1,950 4.75% 5.35%
Capital Value Fund
1998 18,935 5.72% 6.27%
Growth Fund
1998 1,250 0.45% 0.39%
International Emerging Markets Fund
1998 2,570 4.96% 6.77%
International Fund
1998 17,961 2.37% 1.80%
Real Estate Fund
1998 3,205 7.86% 7.67%
<CAPTION>
Commissions Paid to Morgan Stanley& Co.
Total Dollar As Percent of Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
<C> <C> <C> <C> <C>
Balanced Fund
1998 $ 2,630 3.74% 2.27%
1997 45 - 0.1%
1996 555 1.3% 1.0%
Blue Chip Fund
1998 365 0.89% 0.99%
1997 4,602 4.0% 2.4%
1996 420 3.0% 3.0%
Capital Value Fund
1998 13,740 4.15% 3.78%
1997 9,900 2.9% 2.4%
1996 9,400 2.5% 1.9%
Growth Fund
1998 12,500 4.53% 4.92%
1997 3,250 7.6% 8.5%
International Emerging Markets Fund
1998* 1,499 2.89% 3.64%
1997 1,586 3.5% 9.3%
International Fund
1998 78,938 10.40% 10.03%
1997 20,595 2.9% 2.7%
1996 4,038 1.2% 3.2%
International SmallCap Fund
1998* 4,284 4.22% 7.42%
1997 1,502 3.2% 4.2%
MidCap Fund
1998 7,716 3.18% 4.19%
1997 3,750 3.8% 2.8%
1996 500 .5% .9%
Real Estate Fund
1998 11,540 28.29% 28.36%
SmallCap Fund
1998 840 1.79% 1.65%
Utilities Fund
1998 1,735 4.40% 5.95%
</TABLE>

Morgan Stanley & Co. is affiliated with Morgan Stanley Asset Management, Inc.,
which acts as sub-advisor to two Accounts included in the Fund complex. On
December 1, 1998 Morgan Stanley Asset Management, Inc. changed its name to
Morgan Stanley Dean Witter Investment Management, Inc. but continues to do
business in certain instances using the name Morgan Stanley Asset Management.

The Manager acts as investment advisor for each of the funds sponsored by
Principal Life Insurance Company and it, or Invista where Invista acts as
sub-advisor, places orders to trade portfolio securities for each of these
Funds. If, in carrying out the investment objectives of the Funds, occasions
arise when purchases or sales of the same equity securities are to be made for
two or more of the Funds at the same time (or, in the case of accounts managed
by Invista, for two or more Funds and any other accounts managed by Invista),
the Manager or Invista may submit the orders to purchase or, whenever possible,
to sell, to a broker/dealer for execution on an aggregate or "bunched" basis.
The Manager (or, in the case of accounts managed by Invista, Invista) may create
several aggregate or "bunched" orders relating to a single security at different
times during the same day. On such occasions, the Manager (or, in the case of
accounts managed by Invista, Invista) will employ a computer program to randomly
order the accounts whose individual orders for purchase or sale make up each
aggregate or "bunched" order. Securities purchased or proceeds of sales received
on each trading day with respect to each such aggregate or "bunched" order shall
be allocated to the various funds (or, in the case of Invista, the various Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Fund's (or, in the case of
Invista, each Fund's or other client account's) order in the sequence arrived at
by the random ordering. Securities purchased for funds (or, in the case of
Invista, Funds and other client accounts) participating in an aggregate or
"bunched" order will be placed into those Funds and where applicable, other
client accounts at a price equal to the average of the prices achieved in the
course of filling that aggregate or "bunched" order.

If purchases or sales of the same debt securities are to be made for two or more
of the Funds at the same time, the securities will be purchased or sold
proportionately in accordance with the amount of such security sought to be
purchased or sold at that time for each Fund.

HOW TO PURCHASE SHARES

Each Fund, except the Tax-Exempt Bond Fund, offers investors four classes of
shares which bear sales charges in different forms and amounts: Class A, Class
B, Class C and Class R shares. The Tax-Exempt Bond Fund offers only Class A,
Class B and Class C shares.

Class A Shares. An investor who purchases less than $1 million of Class A shares
(except Class A shares of the Money Market Fund) pays a sales charge at the time
of purchase. As a result, such shares are not subject to any charges when they
are redeemed. An investor who purchases $1 million or more of Class A shares
does not pay a sales charge at the time of purchase. However, a redemption of
such shares occurring within 18 months from the date of purchase will be subject
to a contingent deferred sales charge ("CDSC") at the rate of .75% (.25% for the
Limited Term Bond Fund) the lesser of the value of the shares redeemed
(exclusive of reinvested dividend and capital gain distributions) or the total
cost of such shares. Shares subject to the CDSC which are exchanged into another
Principal Fund will continue to be subject to the CDSC until the original 18
month period expires. However no CDSC is payable with respect to redemption of
Class A shares used to fund a Principal Mutual Fund 401(a) or Principal Mutual
Fund 401(k) retirement plan, except redemptions resulting from the termination
of the plan or transfer of plan assets. In addition, the CDSC will be waived in
connection with 1) redemption of shares from retirement plans to satisfy minimum
distribution rules under the Code or 2) shares redeemed through a systematic
withdrawal plan that permits up to 10% of the value of a shareholder's Class A
shares of a particular Fund on the last business day of December of each year to
be withdrawn automatically in equal monthly installments throughout the year.
Certain purchases of Class A shares qualify for reduced sales charges. Class A
shares for each Fund, except the Money Market Fund, currently bear a 12b-1 fee
at the annual rate of up to 0.25% (0.15% for the Limited Term Bond Fund) of the
Fund's average net assets attributable to Class A shares. See "Distribution
Plan."

Class B Shares. Class B shares are purchased without an initial sales charge,
but are subject to a declining CDSC of up to 4% (1.25% for the Limited Term Bond
Fund) if redeemed within six years. Class B shares purchased under certain
sponsored Principal Mutual Fund plans established after February 1, 1998, are
subject to a CDSC of up to 3% if redeemed within five years of purchase. (See
"Plans Other than Administered Employee Benefit Plans" ("AEBP") for discussion
of sponsored Principal Mutual Fund plans.) See "Offering Price of Funds'
Shares." Class B shares bear a higher 12b-1 fee than Class A shares, currently
at the annual rate of up to 1.00% (.50% for the Limited Term Bond Fund) of the
Fund's average net assets attributable to Class B shares. See "Distribution
Plan." Class B shares provide an investor the benefit of putting all of the
investor's dollars to work from the time the investment is made, but (until
conversion to Class A shares) have a higher expense ratio and pay lower
dividends than Class A shares due to the higher 12b-1 fee. Class B shares
automatically convert into Class A shares, based on relative net asset value
(without a sales charge), on the first business day of the 85th month after the
purchase date. Class B shares acquired by exchange from Class B shares of
another Principal Fund convert into Class A shares based on the time of the
initial purchase. At the same time, a pro rata portion of all shares purchased
through reinvestment of dividends and distributions convert into Class A shares,
with that portion determined by the ratio that the shareholder's Class B shares
converting into Class A shares bears to the shareholder's total Class B shares
that were not acquired through dividends and distributions. The conversion of
Class B shares to Class A shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for Federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class B shares to Class A shares will not occur if such ruling or
opinion is not available. In such event, Class B shares would continue to be
subject to higher expenses than Class A shares for an indefinite period.

Class C Shares. Class C shares are sold without the imposition of an initial
sales charge; however, Class C shares redeemed within one year of purchase are
subject to a CDSC of 1% (.5% for Limited Term Bond Fund). The charge is assessed
on the amount equal to the lesser of the current market value or the original
purchase cost of the shares being redeemed. No CDSC is imposed on increases in
account value above the initial purchase price, including shares derived from
the reinvestment of dividends or capital gains distributions. Class C shares do
not convert to any other class of Fund shares.

Class C shares bear a higher 12b-1 fee than other Class shares. Currently Class
C share 12b-1 fees are set at the annual rate of up to 1.00% (.50% for the
Limited Term Bond Fund) of the Fund's average net assets. See "Distribution
Plan." Class C shares provide an investor the benefit of putting all of the
investor's dollars to work from the time the investment is made, but have a
higher expense ratio and pay lower dividends than other Class shares due to the
higher 12b-1 fee. Class C shares do not convert into other Class shares. Class C
shares are subject to higher expenses than other Class shares for an indefinte
period.

Which arrangement between Class A, Class B and Class C Shares is better for an
investor? The decision as to which class of shares provides a more suitable
investment for an investor depends on a number of factors, including the amount
and intended length of the investment. Investors making investments that qualify
for reduced sales charges might consider Class A shares. Investors who prefer
not to pay an initial sales charge and who plan to hold their investment for
more than seven years might consider Class B shares. Orders from individuals for
Class B shares for $250,000 or more will be treated as orders for Class A shares
unless the shareholder provides written acknowledgment that the order should be
treated as an order for Class B shares. Sales personnel may receive different
compensation depending on which class of shares are purchased. If you prefer not
to pay an initial sales charge and you plan to hold your investment for greater
than one but less than seven years, you may prefer Class C shares.

Class R Shares. Class R shares are purchased without an initial sales charge or
a contingent deferred sales charge ("CDSC"). Class R shares bear a higher 12b-1
fee than Class A shares, currently at the annual rate of up to .75% of the
Fund's average net assets attributable to Class R shares. See "Distribution and
Shareholder Servicing Plans and Fees." Class R shares provide an investor the
benefit of putting all of the investor's dollars to work from the time the
investment is made, but (until conversion to Class A shares) have a higher
expense ratio and pay lower dividends than Class A shares due to the higher
12b-1 fee. Class R shares automatically convert to Class A shares, based on
relative net asset value (without a sales charge), on the first business day of
the 49th month after the purchase date. Class R shares acquired by exchange from
Class R shares of another Principal Fund convert into Class A shares based on
the time of the initial purchase. (See "To Exchange Shares" in the Prospectus.)
At the same time, a pro rata portion of all shares purchased through
reinvestment of dividends and distributions convert into Class A shares, with
that portion determined by the ratio that the shareholder's Class R shares
converting into Class A shares bears to the shareholder's total Class R shares
that were not acquired through dividends and distributions. The conversion of
Class R shares to Class A shares is subject to the continuing availability of a
ruling from the Internal Revenue Service or an opinion of counsel that such
conversions will not constitute taxable events for Federal tax purposes. There
can be no assurance that such ruling or opinion will be available, and the
conversion of Class R shares to Class A shares will not occur if such ruling or
opinion is not available. In such event, Class R shares would continue to be
subject to higher expenses that Class A shares for an indefinite period.

Purchasing Class R Shares. Class R shares are offered only to individuals (and
his/her spouse, child, parent, grandchild and trusts primarily for their
benefit) who: receive lump sum distributions from retirement plans serviced by
Principal Life Insurance Company; or are participants in retirement plans
serviced by Principal Life Insurance Company; or own individual life or
disability insurance policies issued by Principal Life Insurance Company that do
not have an insurance agent licensed to sell such policies assigned to the
policies; or have mortgages which are serviced by Principal Life Insurance
Company; or have existing Principal Mutual Fund Class R Share accounts.

Purchases are generally made by completing an Account Application or a Principal
Mutual Fund IRA Application and mailing it to Princor. Shares are issued at the
offering price next computed after the application is received at Princor's main
office and Princor receives the amount to be invested. Generally, the initial
amount to be invested in a Principal Mutual Fund IRA is directly transferred to
Princor from the AEBP. However, in some cases the investor purchases shares by
check. If investing by check, shares are issued at the offering price next
computed after the completed application and check are received at Princor's
main office. Subsequent purchases are executed at the price next computed after
receipt of the investor's check at Princor's main office. All orders are subject
to acceptance by the Fund or Funds and Princor. Orders from individuals for
Class R shares that equal or exceed $500,000 are treated as orders for Class A
shares, unless accompanied by a written acknowledgment that the order should be
treated as an order for Class R shares.

Redemptions by shareholders investing by check will be effected only after
payment has been collected on the check, which may take up to 8 business days or
more. Investors considering redeeming or exchanging shares shortly after
purchase should pay for those shares with a certified check, bank cashier's
check or money order to avoid any delay in redemption, exchange or transfer.

OFFERING PRICE OF FUNDS' SHARES

The Funds offer their respective shares continuously through Princor, which is
the principal underwriter for the Funds and sells shares as agent on behalf of
the Funds. Princor may select other dealers through which shares of the Funds
may be sold. Certain dealers may not sell all classes of shares.

Class A shares
Class A shares of the Money Market Fund is sold to the public at net asset
value; no sales charge applies to purchases of the Money Market Fund. Class A
shares of the Growth-Oriented and Income-Oriented Funds, except the Limited Term
Bond Fund, are sold to the public at the net asset value plus a sales charge
which ranges from a high 4.75% to a low of 0% of the offering price (equivalent
to a range of 4.99% to 0% of the net amount invested) according to the schedule
below. Class A shares of the Limited Term Bond Fund are sold to the public at
the net asset value plus a sales charge which ranges from a high of 1.50% to a
low of 0% of the offering price according to the schedule below. Selected
dealers are allowed a concession as shown. At Princor's discretion, the entire
sales charge may at times be reallowed to dealers. In some situations, depending
on the services provided by the dealer, the concession may be less. Any dealer
allowance on purchases not involving a sales charge is determined by Princor.
Upon notice to all broker-dealers with whom it has a selling agreement, Princor
may allow to broker-dealers electing to participate up to the full applicable
sales charge, as shown in the table below, during periods and for transactions
specified in such notice, and such reallowances may be based in whole or in part
upon attainment of minimum sales levels. Certain commercial banks may make
shares of the Funds available to their customers on an agency basis. Pursuant to
the agreements between Princor and such banks all or a portion of the sales
charge paid by a bank customer in connection with a purchase of Fund shares may
be retained by or remitted to the bank. The Glass-Steagall Act prohibits banks
from underwriting securities, including fund shares; the Act does, however,
permit certain agency transactions and banking regulators have ruled that these
particular agency transactions are not prohibited under the Act.
<TABLE>
<CAPTION>
Sales Charge for
All Funds Except Sales Charge for Dealer Allowance as
Limited Term Bond Fund Limited Term Bond Fund % of Offering Price
Sales Charge as % of: Sales Charge as % of: All Funds Limited
Offering Amount Offering Amount Except Limited Term
Amount of Purchase Price Invested Price Invested Term Bond Fund Bond Fund
------------------ ----- -------- ----- -------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Less than $50,000 4.75% 4.99% 1.50% 1.52% 4.00% 1.25%
$50,000 but less than $100,000 4.25 4.44 1.25 1.27 3.75 1.00
$100,000 but less than $250,000 3.75 3.90 1.00 1.01 3.25 0.75
$250,000 but less than $500,000 2.50 2.56 0.75 0.76 2.00 0.50
$500,000 but less than $1,000,000 1.50 1.52 0.50 0.50 1.25 0.25
$1,000,000 or more No Sales Charge 0.00 No Sales Charge 0.00 0.75 0.25
</TABLE>

Rights of Accumulation. The applicable sales charge is determined by adding the
current net asset value of any Class A shares and Class B shares already owned
by the investor to the amount of the new purchase. The corresponding percentage
factor in the schedule is then applied to the entire amount of the new purchase.
For example, if an investor currently owns Class A or Class B shares with a
value of $5,000 and makes an additional investment of $45,000 in Class A shares
of a Growth-Oriented Fund (the total of which equals $50,000), the charge
applicable to the $45,000 investment would be 4.25% of the offering price. If
the investor purchases shares of more than one Principal Fund at the same time,
those purchases are aggregated and added to the net asset value of the shares of
Principal Funds already owned by the investor to determine the sales charge for
the new purchase. Class A shares of the Cash Management Fund are not counted in
determining either the amount of a new purchase or the current net asset value
of shares already owned, unless the shares of the Cash Management Fund were
acquired in exchange for shares of other Principal Funds. If the investor
purchases shares from a broker/dealer other than Princor, the dealer should be
advised of any shares already owned.

Investments made by an individual, or by an individual's spouse and dependent
children purchasing shares for their own account or by a trust primarily for the
benefit of such persons, or by a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a pension,
profit-sharing, or other employee-benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code) will be treated as
investments made by a single investor in calculating the sales charge. In
addition, investments made through an employer by or on behalf of an employee
(including independent contractors) by means of payroll deductions or otherwise,
are also considered investments by a single investor in calculating the sales
charge. Other groups (as allowed by rules of the Securities and Exchange
Commission) may be considered for a reduced sales charge. An investor whose new
account qualifies for a reduced charge on the basis of other accounts owned by
the individual, spouse or children, should be certain to identify those accounts
at the time of the new application.

Statement of Intention (SOI). Another method is available by which a purchaser
may qualify for a reduced sales charge on the purchase of Class A shares of the
Funds. A purchaser may execute an SOI indicating the total amount (excluding
reinvested dividends and capital gains distributions) intended to be invested
(including all investments for the account of the spouse and dependent children
or trusts for the benefit of such persons) in Class A shares (except Class A
shares of the Cash Managment Fund) and Class B shares of the Funds within a
thirteen-month period (two-year period if the intended investment is made by a
trustee of a Section 401(a) plan or is equal to or greater than $1 million). The
SOI may be submitted by a shareholder other than a trustee of a Principal Mutual
Fund 401(a) plan, within 90 days after the date of the first purchase to be
included within the SOI period. A trustee of a Principal Mutual Fund 401(a) plan
must submit the SOI at the time the first plan purchase is made; the SOI may not
be submitted after the initial plan purchase and the 90 day backdating is not
available. The SOI period begins on the date of the first purchase included for
purposes of satisfying the statement. When an existing shareholder submits an
SOI, the net asset value of all Class A shares (except Class A shares of the
Cash Management Fund) and Class B shares in that shareholder's account or
accounts combined for rights of accumulation purposes, is added to the amount
that has been indicated will be invested during the applicable period, and the
sales charge applicable to all purchases of Class A shares made under the SOI is
the sales charge which applies to a single purchase of this total amount.

An SOI may be entered into for any amount provided such amount, when added to
the net asset value of any shares already held, equals or is in excess of the
amount needed to qualify for a reduced sales charge. In the event a shareholder
invests an amount in excess of the indicated amount, such excess is allowed any
further reduced sales charge for which it qualifies.

The SOI provides for a price adjustment if the amount actually invested is less
than the amount specified therein. Sufficient Class A shares belonging to the
shareholder, other than a shareholder that is 401(a) qualified plan trustee, are
held in escrow in the shareholder's account by Princor to make up any difference
in sales charges based on the amount actually purchased. If the intended
investment is completed within the thirteen-month period (or two-year period),
such shares are released to the shareholder. If the total intended investment is
not completed within that period shares are, to the extent necessary, redeemed
and the proceeds used to pay the additional sales charge due. A shareholder that
is 401(a) qualified plan trustee is billed by Princor Financial Services
Corporation for any additional sales charge due at the end of the two-year
period. In any event, the sales charge applicable to these purchases is no more
than the applicable sales charge had the shareholder made all of such purchases
at one time. The SOI does not constitute an obligation on the shareholder to
purchase, nor the Funds to sell, the amount indicated.

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

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

Each of the Funds, except Principal Tax-Exempt Bond Fund, have obtained an
exemptive order from the Securities and Exchange Commission ("SEC") to permit
each Fund to offer its shares at net asset value to participants of certain
annuity contracts issued by Principal Life Insurance Company. In addition, each
of these Funds are available at net asset value to the extent the investment
represents the proceeds from a total surrender of certain unregistered annuity
contracts issued by Principal Life Insurance Company and for which Principal
Life Insurance Company waives any applicable contingent deferred sales charges
or other contract surrender charges.

In addition, investors who are clients of a registered representative of Princor
or other dealers through which shares of the Funds are distributed and who has
become affiliated with Princor or such other dealer within 180 days of the date
of the purchase of Class A shares of the Funds may purchase such shares at net
asset value provided that (i) the purchase is made within the first 180 days of
the registered representative's affiliation with the firm involved (as certified
by an officer or partner of the firm); and (ii) the investment represents the
proceeds of a redemption within that 180 day period of shares of another
investment company the purchase of which included a front-end sales charge or
the redemption of which included a contingent deferred sales charge; and (iii)
the investor indicates on the account application that the purchase qualifies
for a net asset value purchase and forwards to Princor either (a) the redemption
check representing the proceeds of the shares redeemed, endorsed to the order of
Princor, or (b) a copy of the confirmation from the other investment company
showing the redemption transaction. In the case of a wire purchase pursuant to
this provision, a copy of the confirmation from the other investment company
showing the redemption must be forwarded to and received by Princor within 21
days following the date of purchase. If the confirmation is not provided within
the 21-day period, a sufficient number of shares is redeemed from the
shareholder's account to pay the otherwise applicable sales charge. Investors
availing themselves of this option should be aware that a redemption from
another mutual fund is a taxable event and may be subject to a surrender charge
imposed by that fund.

Also during the period beginning December 1, 1999 and ending January 31, 2000,
investors may purchase Class A shares of the Funds at net asset value to the
extent that this investment represents the proceeds of a redemption, within the
preceding 60 days, of shares (the purchase price of which shares included a
front-end sales charge on the redemption of which was subject to a contingent
deferred sales charge) of another investment company. This provision does not
apply to purchase of Class A shares used to fund a defined contribution plan.
When making a purchase at net asset value pursuant to this provision, the
investor must indicate on the account application that the purchase qualifies
for a net asset value purchase and must forward to Princor either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Princor Financial Services Corporation, or (ii) a copy of the
confirmation from the other investment company showing the redemption
transactions. In the case of a wire purchase pursuant to this provision, a copy
of the confirmation from the other investment company showing the redemption
must be forwarded to and received by Princor within 21 days following the date
of purchase. If the confirmation is not provided within the 21-day period, a
sufficient number of shares will be redeemed from the shareholder's account to
pay the otherwise applicable sales charge.

Purchases at a Reduced Sales Charge. A reduced sales charge is also available
for purchases of Class A shares of the Funds, except the Limited Term Bond Fund,
to the extent that the investment represents the death benefit proceeds of one
or more life insurance policies or annuity contracts (other than an annuity
contract issued to fund an employer-sponsored retirement plan that is not an
SEP, salary deferral 403(b) plan or HR-10 plan) of which the shareholder is a
beneficiary if one or more of such policies or contracts is issued by Principal
Life Insurance Company, or any directly or indirectly owned subsidiary of
Principal Life Insurance Company, and such investment is made in any Principal
Fund within one year after the date of death of the insured. (Shareholders
should seek advice from their tax advisors regarding the tax consequences of
distributions from annuity contracts.) Such shares may be purchased at net asset
value plus a sales charge which ranges from a high of 2.50% to a low of 0% of
the offering price (equivalent to a range of 2.56% to 0% of the net amount
invested) according to the schedule below:
<TABLE>
<CAPTION>
Sales Charge as a % of:
Net Dealer Allowance as %
Offering Amount of Offering
Amount of Purchase Price Invested Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than $1,000,000 1.50 1.52 1.25
$1,000,000 or more No Sales Charge 0.00 0.75
</TABLE>

Sales Charges for Employer-Sponsored Plans

Administered Employee Benefit Plans. Class A shares of the Growth-Oriented Funds
and Income-Oriented Funds, except Principal Limited Term Bond Fund and, in
certain circumstances, Principal Tax-Exempt Bond Fund which is not available for
certain retirement plans, are sold at net asset value to stock bonus, pension or
profit sharing plans that meet the requirements for qualification under Section
401 of the Internal Revenue Code of 1986, as amended, certain Section 403(b)
Plans, Section 457 Plans and other Non-qualified Plans administered by Principal
Life Insurance Company pursuant to a written service agreement ("Administered
Employee Benefit Plans"). The service agreement between Principal Life Insurance
Company and the employer relating to the administration of the plan includes a
charge payable by the employer for any commissions which Princor is authorized
to pay in connection with such sales. Principal Life Insurance Company in turn
pays the amount of these charges to Princor. The commission payable by Princor
in connection with any such sale will be determined in accordance with one of
the following schedules:
<TABLE>
<CAPTION>
Schedule 1
Amount Payable by Employer as a Percent
Amount of Plan Contributions* in Each Year of Plan Contributions

<S> <C>
The first $5,000 4.50%
The next $5,000 3.00
The next $5,000 1.70
The next $35,000 1.40
The next $50,000 0.90
The next $400,000 0.60
Excess over $500,000 0.25

Schedule 2
The first $50,000 3.00%
The next $50,000 2.00
The next $400,000 1.00
The next $2,500,000 0.50
Excess over $3,000,000 0.25
</TABLE>

* Plan contributions directed to an annuity contract issued by Principal Life
Insurance Company to fund the plan are combined with contributions directed
to the Funds to determine the applicable commission charge.

Generally, the commission level described in Schedule 2 apply for salary
deferral Plans and the commission level described in Schedule 1 apply to other
plans. No commission will be payable by the employer if shares of the Funds used
to fund an Administered Employee Benefit Plan are purchased through a registered
representative of Princor Financial Services Corporation who is also a Group
Insurance Representative employee of Principal Life Insurance Company.

Plans Other Than Administered Employee Benefit Plans. Shares of the Funds are
offered to fund certain sponsored Princor plans. These plans can be divided into
three categories: Retirement plans meeting the requirements of Section 401 of
the Internal Revenue Code (e.g. 401(k) Plans, Profit Sharing Plans and Money
Purchase Pension Plans); Group Solicited Plan Terminations; and other
employer-sponsored retirement plans (SIMPLE IRA Plans, Simplified Employee
Pension Plans, Salary Reduction Simplified Employee Pension Plans, Non-Qualified
Deferred Compensation Plans, Payroll Deduction Plans ("PDP") and certain
Association Plan.

Princor 401 Plans
When establishing a Princor Section 401 Plan, the employer chooses whether
to fund the plan with either Class A shares or Class B shares. If Class A
shares are used to fund the plan, all plan investments are treated as made
by a single investor to determine whether a reduced sales charge is
available. The sales charge for purchases of less than $250,000 is 3.75% as
a percentage of the offering price and 3.90% of the net amount invested.
The regular sales charge table for Class A shares applies to purchases
$250,000 or more. If Class B shares are used to fund the plan,
contributions into the plan after the plan assets amount to $250,000 or
more, are used to purchase Class A shares unless the plan trustee directs
otherwise. Plan assets are not combined with investments made outside of
the plan to determine the sales charge applicable to such investments.
Investments made by plan participants outside of the plan are not included
with plan assets to determine the sales charge applicable to the plan.

Group Solicited Plan Terminations
Occasionally, an employer terminates a Section 401 Plan. If the employer or
plan trustee enters into a written agreement with Princor permitting the
group solicitation of the employees/plan participants, the proceeds of
distributions from such plans are eligible to purchase shares of the funds
at net asset value. A redemption of such shares within 18 months after
purchase are subject to a contingent deferred sales charge ("CDSC") at the
rate of .75% (.25% for the Limited Term Bond Fund) of the lesser of the
value of the shares redeemed (exclusive of reinvested dividends and capital
gain distributions) or the total cost of such shares. The CDSC is waived in
connection with (1) redemption of shares to satisfy IRS minimum
distribution rules or (2) shares redeemed through a systematic withdrawal
plan that permits up to 10% of the value of the shareholder's Class A
shares of a Fund on the last business day of December each year to be
withdrawn automatically in equal monthly installments throughout the year.

Other Employer Sponsored Princor Plans
When establishing an employer-sponsored Princor plan, the employer chooses
whether to fund the plan with either Class A shares, Class B shares or
Class C shares. If Class A shares are used to fund the plan, all plan
investments are treated as made by a single investor to determine whether a
reduced sales charge is available. The sales charge for purchases of less
than $250,000 is 3.75% as a percentage of the offering price and 3.90% of
the net amount invested. The regular sales charge table for Class A shares
applies to purchases of $250,000 or more. If Class B shares are used to
fund the plan and a plan participant has $250,000 or more invested in Class
B shares, Class A shares are purchased with plan contributions attributable
to the plan participant, unless the plan participant elects otherwise. Plan
assets are not combined with investments made outside of the plan to
determine the sales charge applicable to such investments. Investments made
by plan participants outside of the plan are not included with plan assets
to determine the sales charge applicable to the plan.

Shares of the funds are also available to participants of Princor 403(b) plans
at the same sales charge levels available to other employer-sponsored Princor
plans described above. However, contributions by plan participants are not
combined to determine sales charges.

The Funds reserve the right to discontinue offering shares at net asset value
and/or at a reduced sales charge at any time for new accounts and upon 60-days
notice to shareholders of existing accounts. Other types of sponsored plans may
be added in the future.

Class B shares
Class B shares are sold without an initial sales charge, although a CDSC is
imposed if you redeem shares within six years of purchase. Class B shares
purchased under certain sponsored Princor plans established after February 1,
1998, are subject to a CDSC of up to 3% if redeemed within five years of
purchase. (See "Plans Other than Administered Employee Benefit Plans" above for
discussion of sponsored Princor plans.) The following types of shares may be
redeemed without charge at any time: (i) shares acquired by reinvestment of
distributions and (ii) shares otherwise exempt from the CDSC, as described
below. Subject to the foregoing exclusions, the amount of the charge is
determined as a percentage of the lesser of the current market value or the cost
of the shares being redeemed. Therefore, when a share is redeemed, any increase
in its value above the initial purchase price is not subject to any CDSC. The
amount of the CDSC will depend on the number of years since you invested and the
dollar amount being redeemed, according to the following table:

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

All Funds All Funds
Years Since Purchase Except Limited Term Limited Term Except Limited Term Limited Term
Payments Made Bond Fund Bond Fund Bond Fund Bond Fund
<S> <C> <C> <C> <C>
2 years or less 4.0% 1.25% 3.00% .75%
more than 2 years, up to 4 years 3.0 0.75 2.00 .50
more than 4 years, up to 5 years 2.0 0.50 1.00 .25
more than 5 years, up to 6 years 1.0 0.25 None None
more than 6 years None None None None
</TABLE>

In determining whether a CDSC is payable on any redemption, the Fund first
redeems shares not subject to any charge, and then shares held longest during
the six (five) year period. For information on how sales charges are calculated
if shares are exchanged, see "How To Exchange Shares" in the Prospectus.

The CDSC is waived on redemptions of Class B shares in connection with the
following types of transactions:

a. Shares redeemed due to a shareholder's death;
b. Shares redeemed due to the shareholder's disability, as defined in the
Internal Revenue Code of 1986 (the "Code"), as amended;
c. Shares redeemed from retirement plans to satisfy minimum distribution rules
or to satisfy substantially equal periodic payment calculation rules under
the Code;
d. Shares redeemed to pay surrender charges;
e. Shares redeemed to pay retirement plan fees;
f. Shares redeemed involuntarily from small balance accounts (values of less
than $300);
g. Shares redeemed through a systematic withdrawal plan that permits up to 10%
of the value of a shareholder's Class B shares of a particular Fund on the
last business day of December of each year to be withdrawn automatically in
equal monthly installments throughout the year;
h. Shares redeemed from a retirement plan to assure the plan complies with
Sections 401(k), 401(m), 408(k) and 415 of the Code; or
i. Shares redeemed from retirement plans qualified under Section 401(a) of the
Code due to the plan participant's death, disability, retirement or
separation from service after attaining age 55.

As principal underwriter, Princor received underwriting fees from the sale of
shares for the periods indicated as follows:
<TABLE>
Underwriting Fees for
Fiscal Years Ended October 31,
<CAPTION>
1998 1997 1996

<S> <C> <C> <C>
Balanced Fund $ 716,315 $ 518,345 $ 448,584
Blue Chip Fund 1,230,098 816,203 469,388
Bond Fund 887,870 582,903 637,949
Capital Value Fund 1,769,043 1,383,995 988,680
Cash Management Fund 19,171 14,123 1,013
Government Securities Income Fund 846,821 737,229 1,233,811
Growth Fund 2,079,726 1,548,696 1,813,439
High Yield Fund 335,156 321,051 164,687
International Emerging Markets Fund 114,325 33,588(2) N/A
International Fund 1,369,016 1,524,740 951,553
International SmallCap Fund 197,039 38,421(2) N/A
Limited Term Bond Fund 77,191 50,773 56,766(1)
MidCap Fund 2,447,638 2,152,664 2,112,480
Real Estate Fund 53,280(3) N/A N/A
SmallCap Fund 398,391(3) N/A N/A
Tax-Exempt Bond Fund 667,756 558,697 698,730
Utilities Fund 339,353 169,904 370,724
<FN>
(1) Period from February 29, 1996 (Date Operations Commenced) through October
31, 1996.
(2) Period from August 29, 1997 (Date Operations Commenced) through October 31,
1997.
(3) Period from January 1, 1998 (Date Operations Commenced) through October 31,
1998.
</FN>
</TABLE>

Class C Shares
Class C shares are sold without a sales charge; however, Class C shares redeemed
within one year of purchase are subject to a CDSC of 1% (.5% for Limited Term
Bond Fund). The charge is assessed on the amount equal to the lesser of the
current market value or the original purchase cost of the shares being redeemed.
The amount of the CDSC, if any, is calculated as a percentage of the amount
being redeemed according to the following table.
<TABLE>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
<CAPTION>
For Certain Sponsored Plans
Commenced After 2/1/98

Years Since Purchase All Funds All Funds
Payments Made Except Limited Term Limited Term Except Limited Term Limited Term
Bond Fund Bond Fund Bond Fund Bond Fund

For the purpose of determining the holding period of Class C shares, all
payments during a month are aggregated and considered to have be made on the
first day of that month. In processing redemptions of Class C shares, the Fund
first redeems shares not subject to any CDSC, and then shares held for the
shortest period of time during the one-year period. As a result, you pay the
lowest possible CDSC.

The CDSC on Class C shares may be waived or reduced as follows:

o for automatic redemptions (Periodic Withdrawal Plans) (limited to 10% of
the value of the account);
o if the redemption results from the death or a total and permanent
disability (as defined in Section 72 of the Internal Revenue Code)
occurring after the purchase of the shares being redeemed of a shareholder
or participant in an employer-sponsored retirement plan;
o if the distribution is part of a series of substantially equal payments
made over the life expectancy of the participant or the joint life
expectancy of the participant and his or her beneficiary; or
o if the distribution is to a participant in an employer-sponsored retirement
plan and is
o a return of excess employee deferrals or contributions,
o a qualifying hardship distribution as defined by the Code,
o from a termination of employment,
o in the form of a loan to a participant in a plan which permits loans,
or
o from qualified defined contribution plan and represents a
participant's directed transfer (provided that this privilege has been
pre-authorized through a prior agreement with PFD regarding
participant directed transfers).

The CDSC may be waived or reduced for either non-retirement or retirement plan
accounts if the redemption is made pursuant to the Fund's right to liquidate or
involuntarily redeem shares in a shareholder's account. The CDSC is not
applicable if the selling broker-dealer elects, with Princor's approval, to
waive receipt of the commission normally paid at the time of the sale.

DISTRIBUTION PLAN

Rule 12b-1 of the Investment Company Act of 1940 (the "Act"), as amended,
permits a mutual fund to finance distribution activities and bear expenses
associated with the distribution of its shares provided that any payments made
by the Fund are made pursuant to a written plan adopted in accordance with the
Rule. A majority of the Board of Directors of each Fund, including a majority of
the Directors who have no direct or indirect financial interest in the operation
of the Plan or any agreements related to the Plan and who are not "interested
persons" as defined in the Act, adopted the Distribution Plans as described
below. No such Plan was adopted for Class A shares of the Money Market Fund.
Shareholders of each class of shares of each Fund approved the adoption of the
Plan for their respective class of shares.

Class A Distribution Plan. Each of the Funds, except the Money Market Fund, has
adopted a distribution plan for the Class A shares. The Class A Plan provides
that the Fund makes payments from its assets to Princor pursuant to this Plan to
compensate Princor and other selling Dealers for providing shareholder services
to existing Fund shareholders and rendering assistance in the distribution and
promotion of the Fund Class A shares to the public. The Fund pays Princor a fee
after the end of each month at an annual rate no greater than 0.25% (.15% for
the Limited Term Bond Fund) of the daily net asset value of the Fund. Princor
retains such amounts as are appropriate to compensate for actual expenses
incurred in distributing and promoting the sale of the Fund shares to the public
but may remit on a continuous basis up to .25% (.15% for the Limited Term Bond
Fund) to Registered Representatives and other selected Dealers (including for
this purpose, certain financial institutions) as a trail fee in recognition of
their services and assistance.

Class B Distribution Plan. Each Class B Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the Limited Term Bond
Fund) of the Fund's average net asset attributable to Class B shares. Princor
also receives the proceeds of any CDSC imposed on redemptions of such shares.

Although Class B shares are sold without an initial sales charge, Princor pays a
sales commission equal to 4.00% (3.00% for certain sponsored plans or 1.25% for
the Limited Term Bond Fund) of the amount invested to dealers who sell such
shares. These commissions are not paid on exchanges from other Principal Funds.
In addition, Princor may remit on a continuous basis up to .25% (.15% for the
Limited Term Bond Fund) to the Registered Representatives and other selected
Dealers (including for this purpose, certain financial institutions) as a trail
fee in recognition of their services and assistance.

Class C Distribution Plan. Each Class C Plan provides for payments by the Fund
to Princor at the annual rate of up to 1.00% (.50% for the Limited Term Bond
Fund) of the Fund's average net asset attributable to Class C shares. Princor
also receives the proceeds of any CDSC imposed on redemptions of such shares.

Class C shares are sold without an initial sales charge. Princor may remit on a
continuous basis up to 1.00% (.50% for the Limited Term Bond Fund) to the
Registered Representatives and other selected Dealers (including for this
purpose, certain financial institutions) as a trail fee in recognition of their
services and assistance.

Class R Distribution Plan. Each of the Funds, except the Tax-Exempt Bond Fund,
has adopted a distribution plan for the Class R shares. Each Class R Plan
provides for payments by the Fund to Princor at the annual rate of up to .75% of
the Fund's average net assets attributable to Class R shares.

Although Class R shares are sold without an initial sales charge, Princor incurs
certain distribution expenses. In addition, Princor may remit on a continuous
basis up to .25% to Registered Representatives and other selected Dealers
(including, for this purpose, certain financial institutions) as a trail fee in
recognition of their ongoing services and assistance.

General Information Regarding Distribution Plans. A representative of Princor
provides to the Fund's Board of Directors, and the Board reviews, at least
quarterly, a written report of the amounts expended pursuant to the Plans and
the purposes for which such expenditures were made.

If expenses under a Plan exceed the compensation limit for Princor described in
the Plan in any one fiscal year, the Fund does not carry over such expenses to
the next fiscal year. The Funds have no legal obligation to pay any amount
pursuant to this Plan that exceeds the compensation limit. The Funds do not pay,
directly or indirectly, interest, carrying charges, or other financing costs in
connection with the Plans. If the aggregate payments received by Princor under a
Plan in any fiscal year exceed the expenditures made by Princor in that year
pursuant to the Plan, Princor promptly reimburses the Fund for the amount of the
excess.

The amount received from each Fund and retained by Princor during the year ended
October 31, 1998 and the manner in which such amounts were spent pursuant to the
Class A Distribution Plan for the last fiscal period of each of the Funds were
as follows:
<TABLE>
Expenditures
<CAPTION>
Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Expenditures
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $241,795 $ 5,132 $12,151 $ 77,012 $22,538 $124,963 $241,795
Blue Chip 265,449 7,358 17,096 96,066 27,270 117,660 265,449
Bond 341,013 5,951 14,278 84,649 24,871 211,263 341,013
Capital Value 817,936 10,797 25,099 144,595 39,870 597,575 817,936
Government Securities Income 487,256 5,039 12,500 78,969 22,778 367,970 487,256
Growth 795,083 11,128 26,652 150,363 42,246 564,693 795,083
High Yield 89,054 2,785 6,537 38,731 11,783 29,218 89,054
International Emerging Markets 17,129 652 1,722 8,539 5,466 750 17,129
International 611,261 11,751 27,044 147,012 65,397 360,057 611,261
International SmallCap 26,334 951 2,562 12,557 8,429 1,835 26,334
Limited Term Bond 36,351 1,083 2,739 18,632 7,771 6,125 36,351
MidCap 889,082 15,834 36,047 195,886 71,288 570,027 889,082
Real Estate 12,146 672 1,617 6,642 2,985 231 12,146
SmallCap 27,412 1,097 2,961 14,157 7,117 2,080 27,412
Tax-Exempt Bond 441,425 5,536 13,272 78,378 23,523 320,715 441,425
Utilities 191,411 3,401 8,922 55,013 17,158 106,918 191,411
</TABLE>

The amount received from each Fund and retained by Princor during the period
ended October 31, 1998 and the manner in which such amounts were spent pursuant
to the Class B Distribution Plan for the last fiscal period of each of the Funds
were as follows:
<TABLE>
Expenditures
<CAPTION>
Prospectus and Registered
Shareholder Salaries Representative
Amount Report Sales & Sales Service Total
Fund Retained Printing Brochures Overhead Materials Fees Commissions Expenditures
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced $141,265.21 $2,337 $ 5,394 $35,418 $ 7,315 $25,346 $ 65,455 $141,265
Blue Chip 251,374.65 4,239 9,752 56,565 13,111 45,518 122,191 251,375
Bond 164,902.96 2,670 6,125 37,369 8,256 30,246 80,238 164,903
Capital Value 298,016.25 4,573 10,244 58,181 13,698 64,745 146,575 298,016
Cash Management 4,546.23 193 443 2,179 611 1,121 0 4,546
Government Securities Income 162,933.40 2,087 4,955 32,057 6,769 33,255 83,810 162,933
Growth 370,747.74 4,758 11,146 61,237 15,109 94,760 183,737 370,748
High Yield 73,761.52 1,752 4,273 24,628 6,383 16,226 20,499 73,762
International Emerging Markets 24,803.94 872 2,068 11,905 2,831 2,196 4,932 24,804
International 289,325.03 4,999 11,241 65,109 15,177 73,543 119,257 289,325
International SmallCap 43,155.53 1,286 3,176 18,253 4,401 6,700 9,338 43,156
Limited Term Bond 5,183.75 129 304 2,222 415 1,634 478 5,184
MidCap 448,415.93 6,402 14,780 81,509 19,963 122,285 203,478 448,416
Real Estate 20,673.68 864 1,969 11,743 2,460 452 3,187 20,674
SmallCap 38,517.72 1,252 2,367 9,014 3,047 2,190 20,647 38,518
Tax-Exempt Bond 68,657.74 1,160 2,530 13,107 3,419 16,992 31,449 68,658
Utilities 85,830.39 1,988 4,786 31,228 6,588 17,146 24,095 85,830
</TABLE>

The amount received from each Fund and retained by Princor during the period
ended October 31, 1998 and the manner in which such amounts were spent pursuant
to the Class R Distribution Plan for the last fiscal period of each of the Funds
were as follows:
<TABLE>
Expenditures
<CAPTION>
Prospectus and Registered
Shareholder Representative Underwriter's
Amount Report Sales Sales Service Salaries and Total
Fund Retained Printing Brochures Materials Fees Overhead Expenditures
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced $112,833.63 $3,402 $7,377 $ 9,888 $38,345 $53,821 $112,834
Blue Chip 190,876.08 4,153 9,181 12,360 63,625 101,557 190,876
Bond 66,915.15 2,082 4,498 6,029 23,372 30,933 66,915
Capital Value 214,972.97 4,898 10,641 14,216 75,565 109,653 214,973
Cash Management 21,021.11 500 1,163 1,628 7,239 10,491 21,021
Government Securities Income 45,977.69 2,524 4,925 6,265 15,539 16,725 45,978
Growth 183,597.70 4,050 8,755 11,710 62,722 96,361 183,598
High Yield 17,845.34 1,051 2,147 2,777 5,948 5,921 17,845
International Emerging Markets 5,973.07 200 518 715 501 4,039 5,973
International 120,268.60 3,519 7,400 9,761 40,089 59,499 120,269
International SmallCap 5,512.27 175 437 595 776 3,530 5,512
Limited Term Bond 10,624.85 783 1,574 2,024 3,835 2,409 10,625
MidCap 171,905.63 4,242 9,012 11,946 57,302 89,404 171,906
Real Estate 6,190.11 439 988 1,171 271 3,321 6,190
SmallCap 10,183.89 58 247 384 2,301 7,195 10,184
Utilities 20,866.73 983 1,980 2,655 6,955 8,293 20,867
</TABLE>

A Plan may be terminated at any time by vote of a majority of the Directors who
are not interested persons (as defined in the Act), or by vote of a majority of
the outstanding voting securities of the class of shares of a Fund to which the
Plan relates. Any change in a Plan that would materially increase the
distribution expenses of a class of shares of a Fund provided for in the Plan
requires approval of the shareholders of the class of shares to which such
increase would relate.

While a Distribution Plan is in effect for a Fund, the selection and nomination
of Directors who are not interested persons of that Fund will be committed to
the discretion of the Directors who are not interested persons.

Each Plan continues in effect from year to year as long as its continuance is
specifically approved at least annually by a majority vote of the directors of
the Fund including a majority of the non-interested directors. The Plans for all
Classes of shares were last approved by each Fund's Board of Directors,
including a majority of the non-interested directors, on September 14, 1998.

DETERMINATION OF NET ASSET VALUE OF FUNDS' SHARES

Growth-Oriented and Income-Oriented Funds

The share price of each class of the Growth-Oriented and Income-Oriented Funds
is calculated each day that the New York Stock Exchange is open. The Funds treat
as customary national business holidays the days when the New York Stock
Exchange is closed (New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day).

The share price for each class of shares for each Fund is determined by dividing
the value of securities in the Fund's investment portfolio plus all other assets
attributable to that class, less all liabilities attributable to that class, by
the number of Fund shares of that class outstanding. Securities for which market
quotations are readily available, including options and futures traded on an
exchange, are valued at market value, which is for exchanged-listed securities,
the closing price; for United Kingdom-listed securities, the market-maker
provided price; and for non-listed equity securities, the bid price. Non-listed
corporate debt securities, government securities and municipal securities are
usually valued using an evaluated bid price provided by a pricing service. If
closing prices are unavailable for exchange-listed securities, generally the bid
price, or in the case of debt securities an evaluated bid price, is used to
value such securities. When reliable market quotations are not considered to be
readily available, which may be the case, for example, with respect to certain
debt securities, preferred stocks, foreign securities and over-the-counter
options, the investments are valued by using market quotations considered
reliable, prices provided by market makers, which may include dealers with which
the Fund has executed transactions, or estimates of market values obtained from
yield data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith through procedures established by the Board of Directors of the Fund.

Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
foreign securities used to compute the share prices are usually determined when
the foreign market closes. Occasionally, events which affect the values of such
securities and foreign currency exchange rates occur between the times at which
the values are generally determined and the close of the New York Stock Exchange
and would therefore not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of securities occur during such
period, the securities are valued at their fair value as determined in good
faith by the Manager under procedures established and regularly reviewed by the
Board of Directors. To the extent a Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.

Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Emerging Markets Fund, International Fund and International SmallCap Fund to
value such securities at prices at which it is expected those shares may be
sold, and the Manager or any sub-adviser is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.

Money Market Fund

The share price of each class of shares of the Money Market Fund is determined
at the same time and on the same days as the Growth-Oriented and Income-Oriented
Funds as described above. The share price for each class of shares of the Fund
is computed by dividing the total value of the Fund's securities and other
assets, less liabilities, by the number of Fund shares outstanding.

All securities held by the Money Market Fund are valued on an amortized cost
basis. Under this method of valuation, a security is initially valued at cost;
thereafter, the Fund assumes a constant proportionate amortization in value
until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price that
would be received upon sale of the security.

Use of the amortized cost valuation method by the Money Market Fund requires the
Fund to maintain a dollar weighted average maturity of 90 days or less and to
purchase only obligations that have remaining maturities of 397 days or less or
have a variable or floating rate of interest. In addition, the Fund invests only
in obligations determined by its Board of Directors to be of high quality with
minimal credit risks.

The Board of Directors for the Money Market Fund has established procedures
designed to stabilize, to the extent reasonably possible, the Fund's price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures include a directive to the Manager to test price the portfolio or
specific securities on a weekly basis using a mark-to-market method of valuation
to determine possible deviations in the net asset value from $1.00 per share. If
such deviation exceeds 1/2 of 1%, the Board promptly considers what action, if
any, will be initiated. In the event the Board determines that a deviation
exists which may result in material dilution or other unfair results to
shareholders, the Board takes such corrective action as it regards as
appropriate, including: sale of portfolio instruments prior to maturity; the
withholding of dividends; redemptions of shares in kind; the establishment of a
net asset value per share based upon available market quotations; or splitting,
combining or otherwise recapitalizing outstanding shares. The Fund may also
reduce the number of shares outstanding by redeeming proportionately from
shareholders, without the payment of any monetary compensation, such number of
full and fractional shares as is necessary to maintain the net asset value at
$1.00 per share.

PERFORMANCE CALCULATION

The Principal Funds advertise their performance in terms of total return or
yield for each class of shares. The figures used for total return and yield are
based on the past performance of a Fund. They show the performance of a
hypothetical investment and are not intended to indicate future performance.
Total return and yield vary from time to time depending upon:
o market conditions
o the composition of a Fund's portfolio
o operating expenses

These factors and differences in the methods used in calculating performance
figures should be considered when comparing a Fund's performance to the
performance of other investments.

A Fund may include in its advertisements performance rankings and other
performance-related information published by independent statistical services or
publishers, such as
o Baron's, Changing Times
o Forbes
o Fortune
o Investment Advisor
o Lipper Analytical Services
o Money Magazine
o Stanger's Investment Advisor
o The Wall Street Journal
o USA Today
o U.S. News
o Weisenberger Investment Companies Services
o W. R. Kipplinger's Personal Finance

A Fund may also include in its advertisements comparisons of the performance of
a Fund to that of various market indices, such as:
o Bond Buyer Municipal Index
o Dow Jones Industrials Index
o Dow Jones Utility Index with Income
o Lehman Brothers BAA Corporate Index
o Lehman Brothers GNMA Index
o Lehman Brothers High Yield Index
o Lehman Brothers Municipal Bond Index
o Lehman Brothers Revenue Bond Index
o Brothers Mutual Fund Short Government/Corporate Index
o Lehman Brothers Government Corporate Intermediate Index
o Lehman Brothers Government/Corporate Bond Index
o Merrill Lynch Corporate Government Bond Index
o Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index
o Morgan Stanley Capital International EMF (Emerging Markets) Index
o Salomon Brothers Investment Grade Bond Index
o S&P 500 Index
o Valueline
o World Index

Total Return

The Growth-Oriented and Income-Oriented Funds include its average annual total
return for the one-, five- and ten-year periods as of the last day of the most
recent calendar quarter when advertising total return figures. If the Fund or
class has been in existence for a shorter time period, it uses the time from the
beginning of the Fund (or class) to the end of the most recent calendar quarter.

Average annual total return is calculated by comparing an initial $1,000
investment to the redeemable value of the Fund at the end of 1, 5 or 10 years
(or from the Fund's inception date).

Initial Investment - $1,000 less maximum front-end sales charge (in the
case of Class A shares)
Ending redeemable value - assumes the reinvestment of all dividends and
capital gains at net asset value less the applicable contingent
deferred sales charge (in the case of Class B shares).

A Fund may also include in its advertising average annual total return for some
other period or cumulative total return for a specified period. These returns
may include reduced sales charges, reflect no sales charge or CDSC in order to
illustrate the change in a Fund's net asset value over time. Cumulative total
return is calculated:

(Ending redeemable value less the initial investment)
Initial investment

The following table shows as of October 31, 1998 average annual returns for
Class A shares for each of the Funds for the periods indicated:
<TABLE>
<CAPTION>
Fund 1-Year 5-Year 10-Year
<S> <C> <C> <C>
Balanced Fund 5.78% 10.21% 10.43%
Blue Chip Fund 13.87 16.61 13.63(1)
Bond Fund 2.69 5.92 8.61
Capital Value Fund 10.16 17.04 13.55
Government Securities Income Fund 2.33 5.47 8.09
Growth Fund 9.75 16.32 16.44
High Yield Fund (7.73) 5.62 6.35
International Emerging Markets Fund (24.82) (28.45)(3) N/A
International Fund (2.86) 8.93 9.97
International SmallCap Fund (4.41) (3.36)(3) N/A
Limited Term Bond Fund 4.98 5.76(4) N/A
MidCap Fund (14.02) 12.25 14.58
Real Estate Fund (19.43)(5) N/A N/A
SmallCap Fund (19.90)(5) N/A N/A
Tax-Exempt Bond Fund 1.74 4.74 7.27
Utilities Fund 25.89 10.40 11.56(2)

<FN>
(1)Period beginning March 1, 1991 and ending October 31, 1998.
(2)Period beginning December 16, 1992 and ending October 31, 1998.
(3)Period beginning August 29, 1997 and ending October 31, 1998.
(4)Period beginning February 29, 1996 and ending October 31, 1998.
(5)Period beginning December 31, 1997 and ending October 31, 1998.
</FN>
</TABLE>

The following table shows as of October 31, 1998 average annual returns for
Class B shares for each of the Funds for the period indicated:

Fund 1-Year 5-Year

Balanced Fund 6.18% 14.35%(1)
Blue Chip Fund 14.59 21.21(1)
Bond Fund 3.04 9.09(1)
Capital Value Fund 10.71 22.44(1)
Government Securities Income Fund 2.60 8.70(1)
Growth Fund 10.58 21.03(1)
High Yield (7.52) 6.87(1)
International Emerging Markets Fund (24.41) (28.20)(2)
International Fund (2.68) 11.50(1)
International SmallCap Fund (3.90) (2.90)(2)
Limited Term Bond Fund (4.99) 5.70(3)
MidCap Fund (13.75) 16.57(1)
Real Estate Fund (18.98)(4) N/A
SmallCap Fund (19.51)(4) N/A
Tax-Exempt Bond Fund 2.01 8.87(1)
Utilities Fund 27.23 18.74(1)

(1) Period beginning December 9, 1994 and ending October 31, 1998.
(2) Period beginning August 29, 1997 and ending October 31, 1998.
(3) Period beginning February 29, 1996 and ending October 31, 1998.
(4) Period beginning December 31, 1997 and ending October 31, 1998.

The following table shows as of October 31, 1998 average annual returns for
Class R shares for each of the Funds for the period indicated:

Fund 1-Year 5-Year

Balanced Fund 10.43% 12.44%(1)
Blue Chip Fund 19.01 17.89(1)
Bond Fund 7.05 7.60(1)
Capital Value Fund 14.77 19.51(1)
Government Securities Income Fund 6.66 6.98(1)
Growth Fund 14.46 16.11(1)
High Yield Fund (3.97) 4.59(1)
International Emerging Markets Fund (21.14) (25.55)(2)
International Fund 1.13 11.04(1)
International SmallCap Fund 0.50 0.86(2)
Limited Term Bond Fund 6.12 5.77(1)
MidCap Fund (10.37) 8.48(1)
Real Estate Fund (15.37)(3) N/A
SmallCap Fund (15.75)(3) N/A
Tax-Exempt Bond Fund N/A N/A
Utilities Fund 31.47 16.13(1)

(1) Period beginning February 29, 1996 and ending October 31, 1998.
(2) Period beginning August 29, 1997 and ending October 31, 1998.
(3) Period beginning December 31, 1997 and ending October 31, 1998.

Yield

Income-Oriented Funds
Each Income-Oriented Fund computes a yield by:

1. calculating net investment income per share for a 30 day (or one month)
period
2. annualizing net investment income per share, assuming semi-annual
compounding
3. dividing the annualized net investment income by the maximum public
offering price for Class A shares or the net asset value for Class B and
Class R shares for the last day of the same period.

The following table shows as of October 31, 1998 the yield for each class of
shares for each of the Income-Oriented Funds:

Yield as of October 31, 1998

Fund Class A Class B Class R

Bond Fund 5.16% 4.66% 4.92%
Government Securities Income Fund 6.01 5.56 5.44
High Yield Fund 8.58 6.96 8.14
Limited Term Bond Fund 5.62 4.71 4.74
Tax-Exempt Bond Fund 3.59 3.35 N/A

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

[(Tax-exempt portion of the yield) divided by (1 minus your tax rate)] plus
[any portion of the yield which is not tax-exempt]

As of October 31, 1998 the Fund's tax-equivalent yields for Class A and Class B
shares were as follows:

Tax-Equivalent Yield Assumed
Class A Class B Tax Rate

4.99% 4.65% 28.0%
5.61 5.23 36.0
5.94 5.55 39.6

Money Market Fund

The Money Market Fund advertises its yield and its effective yield.

Yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return
o multiplying the base period return by (365/7) with the resulting yield
figure carried to at least the nearest hundredth of one percent.

The following table shows as of October 31, 1998 the yield for each class of
shares for the Money Market Fund:

Yield as of October 31, 1998

Fund Class A Class B Class R

Cash Management Fund 4.92% 4.23% 4.50%

There may be a difference in the net investment income per share used to
calculate yield and the net investment income per share used for dividend
purposes. This is because the calculation for yield purposes does not include
net short-term realized gains or losses on the Fund's investment, which are
included in the calculation for dividend purposes.

Effective yield is computed by:
o determining the net change (excluding shareholder purchases and
redemptions) in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period
o dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return compounding the base period
return by adding 1, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result.

The resulting effective yield figure is carried to at least the nearest
hundredth of one percent.

The following table shows as of October 31, 1998 the effective yield for each
class of shares for the Money Market Fund:

Effective Yield as of October 31, 1998

Fund Class A Class B Class R

Cash Management Fund 5.04% 4.31% 4.60%

The yield quoted at any time for the Money Market Fund represents the amount
that has earned during a specific, recent seven-day period and is a function of:
o the quality of investments in the Fund's portfolio
o types of investments in the Fund's portfolio
o length of maturity of investments in the Fund's portfolio
o Fund's operating expenses.

The length of maturity for the portfolio is calculated using the average dollar
weighted maturity of all investments. This means that the portfolio has an
average maturity of a stated number of days for its investments. The calculation
is weighted by the relative value of each investment.

The yield for the Money Market Fund will fluctuate daily as the income earned on
the investments of the Fund fluctuates. There is no assurance the yield quoted
on any given occasion will remain in effect for any period of time. It should
also be emphasized that the Funds are open-end investment companies. There is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Fund is not insured. Investors
comparing results of the Money Market Fund with investment results and yields
from other sources such as banks or savings and loan associations should
understand these distinctions. Historical and comparative yield information may
be presented by the Funds.

A Fund may include in its advertisements the compounding effect of reinvested
dividends over an extended period of time as illustrated below.

The Power of Compounding

Fund shareholders who reinvest their distributions get the advantage of
compounding. Here's what happens to a $10,000 investment with monthly income
reinvested at 6 percent, 8 percent and 10 percent over 20 years.

These figures assume no change in the value of principal. This chart is for
illustration purposes only and is not an indication of the results a shareholder
may receive as a shareholder of a specific Fund. The return and capital value of
an investment in a Fund vary so that the value, when redeemed, may be worth more
or less than the original cost.

(chart)
Year 6% 8% 10%
0 $10,000 $10,000 $10,000
20 $32,071 $46,610 $67,275

A Fund may also include in its advertisements an illustration of the impact of
income taxes and inflation on earnings from bank certificates of deposit
("CD's"). The interest rate on the hypothetical CD will be based upon average CD
rates for a stated period as reported in the Federal Reserve Bulletin. The
illustrated annual rate of inflation will be the core inflation rate as measured
by the Consumer Price Index for the 12-month period ended as of the most recent
month prior to the advertisement's publication. The illustrated income tax rate
may include any federal income tax rate that may apply to individuals at the
time the advertisement is published. Any such advertisement will indicate that,
unlike bank CD's, an investment in the Fund is not insured nor is there any
guarantee that the Fund's net asset value or any stated rate of return will
remain constant.

An example of a typical calculation included in such advertisements is as
follows: the after-tax and inflation-adjusted earnings on a bank CD, assuming a
$10,000 investment in a six-month bank CD with an annual interest rate of 4.99%
(monthly average six-month CD rate for the month of October, 1998, as reported
in the Federal Reserve Bulletin) and an inflation rate of 1.5% (rate of
inflation for the 12-month period ended October 31, 1998 as measured by the
Consumer Price Index) and an income tax bracket of 28% would be $(105).

($10,000 x 4.99%) / 2 = $250 Interest for six-month period
- 70 Federal income taxes (28%)
- 75 Inflation's impact on invested principal
$(10,000 x 1.5%) / 2
($105) After-tax, inflation-adjusted earnings

A Fund may also include in its advertisements an illustration of tax-deferred
accumulation versus currently taxable accumulation in conjunction with the
Fund's use as a funding vehicle for 403(b) plans, IRAs or other retirement
plans. The illustration set forth below assumes a monthly investment of $200, an
annual return of 8% compounded monthly, and a 28% tax bracket.

The information is for illustrative purposes only and is not meant to represent
the performance of any of the Principal Funds. An investment in the Principal
Funds is not guaranteed; values and returns generally vary with changes in
market conditions.

Tax-deferred vs. taxable savings plan

_______________________________________ - $300,059

---------------------------------------

_______________________________________ --- $192,844

---------------------------------------

---------------------------------------
Years: 5 10 15 20 25 30

- With a tax-deferred savings plan
--- Without a tax-deferred savings plan

TAX TREATMENT OF FUNDS, DIVIDENDS AND DISTRIBUTIONS

It is the policy of each Fund to distribute substantially all net investment
income and net realized gains. Through such distributions, and by satisfying
certain other requirements, each Fund intends to qualify for the tax treatment
accorded to regulated investment companies under the applicable provisions of
the Internal Revenue Code. This means that in each year in which a Fund
qualifies, it is exempt from federal income tax upon the amount distributed to
investors. The Tax Reform Act of 1986 imposed an excise tax on mutual funds
which fail to distribute net investment income and capital gains by the end of
the calendar year in accordance with the provisions of the Act. Each Fund
intends to comply with the Act's requirements and to avoid this excise tax.

Dividends from net investment income will be eligible for a 70% dividends
received deduction generally available to corporations to the extent of the
amount of qualifying dividends received by the Funds from domestic corporations
for the taxable year. Distributions from the Money Market Fund and
Income-Oriented Funds are generally not eligible for the corporate dividend
received deduction.

All taxable dividends and capital gains are taxable in the year in which
distributed, whether received in cash or reinvested in additional shares.
Dividends declared with a record date in December and paid in January are deemed
to be distributed to shareholders in December. Each Fund informs its
shareholders of the amount and nature of their taxable income dividends and
capital gain distributions. Dividends from a Fund's net income and distributions
of capital gains, if any, may also be subject to state and local taxation.

The Fund is required in certain cases to withhold and remit to the U.S. Treasury
31% of ordinary income dividends and capital gain dividends, and the proceeds of
redemption of shares, paid to any shareholder (1) who has provided either an
incorrect tax identification number or no number at all, (2) who is subject to
backup withholding by the Internal Revenue Service for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."

A shareholder recognizes gain or loss on the sale or redemption of shares of the
Fund in an amount equal to the difference between the proceeds of the sales or
redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of the Fund within 30 days before or after the sale or redemption.
In general, any gain or loss arising from (or treated as arising from) the sale
or redemption of shares of the Fund is considered capital gain or loss
(long-term capital gain or loss if the shares were held for longer than one
year). However, any capital loss arising from the sales or redemption of shares
held for six months or less is disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) is treated as a long-term capital loss to the extent of the amount
of capital gain dividends received on such shares. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.

If a shareholder (i) incurs a sales load in acquiring shares of the Fund, (ii)
disposes of such shares less than 91 days after they are acquired and (iii)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right to reinvest at such reduced sales load acquired in
connection with the acquisition of the shares disposed of, then the sales load
on the shares disposed of (to the extent of the reduction in the sales load on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.

Shareholders should consult their own tax advisors as to the federal, state and
local tax consequences of ownership of shares of the Funds in their particular
circumstances.

Special Tax Considerations

Tax-Exempt Bond Fund

The Tax-Exempt Bond Fund also intends to qualify to pay "exempt-interest
dividends" to its shareholders. An exempt-interest dividend is that part of
dividend distributions made by the Fund which consist of interest received
by that Fund on tax-exempt Municipal Obligations. Shareholders incur no
federal income taxes on exempt-interest dividends. However, these
exempt-interest dividends may be taxable under state or local law. Fund
shareholders that are corporations must include exempt-interest dividends
in determining whether they are subject to the corporate alternative
minimum tax. Exempt-interest dividends that derive from certain private
activity bonds must be included by individuals as a preference item in
determining whether they are subject to the alternative minimum tax. The
Fund may also pay ordinary income dividends and distribute capital gains
from time to time. Ordinary income dividends and distributions of capital
gains, if any, are taxable for federal purposes.

If a shareholder receives an exempt-interest dividend with respect to
shares of the Funds held for six months or less, then any loss on the sale
or exchange of such shares, to the extent of the amount of such dividend,
is disallowed. If a shareholder receives a capital gain dividend with
respect to shares held for six months or less, then any loss on the sale or
exchange of such shares is treated as a long term capital loss to the
extent the loss exceeds any exempt-interest dividend received with respect
to such shares, and is disallowed to the extent of such exempt-interest
dividend.

Interest on indebtedness incurred or continued by a shareholder to purchase
or carry shares of this Fund is not deductible. Furthermore, entities or
persons who are "substantial users" (or related persons) under Section
147(a) of the Code of facilities financed by private activity bonds should
consult their tax advisors before purchasing shares of the Fund.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Obligations. If legislation is enacted that
eliminates or significantly reduces the availability of Municipal
Obligations, it could adversely affect the ability of the Fund to continue
to pursue its investment objectives and policies. In such event, the Fund
would reevaluate its investment objectives and policies.

International Emerging Markets, International and International SmallCap
Funds

In each fiscal year when, at the close of such year, more than 50% of the
value of the total assets of the International Emerging Market,
International or the International SmallCap Funds are invested in
securities of foreign corporations, the Fund may elect pursuant to Section
853 of the Code to permit shareholders to take a credit (or a deduction)
for foreign income taxes paid by the Fund. In that case, shareholders
should include in their report of gross income in their federal income tax
returns both cash dividends received from the Fund and the amount which the
Fund advises is their pro rata portion of foreign income taxes paid with
respect to, or withheld from, dividends and interest paid to the Fund from
its foreign investments. Shareholders are then entitled to subtract from
their federal income taxes the amount of such taxes withheld, or treat such
foreign taxes as a deduction from gross income, if that should be more
advantageous. As in the case of individuals receiving income directly from
foreign sources, the above-described tax credit or tax deduction is subject
to certain limitations. Shareholders or prospective shareholders should
consult their tax advisors on how these provisions apply to them.

Futures Contracts and Options

As previously discussed, some of the Principal Funds invest in futures
contracts or options thereon, index options or options traded on qualified
exchanges. For federal income tax purposes, capital gains and losses on
futures contracts or options thereon, index options or options traded on
qualified exchanges are generally treated as 60% long-term and 40%
short-term. In addition, the Funds must recognize any unrealized gains and
losses on such positions held at the end of the fiscal year. A Fund may
elect out of such tax treatment, however, for a futures or options position
that is part of an "identified mixed straddle" such as a put option
purchased with respect to a portfolio security. Gains and losses on futures
and options included in an identified mixed straddle are considered 100%
short-term and unrealized gain or loss on such positions are not realized
at year end. The straddle provisions of the Code may require the deferral
of realized losses to the extent that a Fund has unrealized gains in
certain offsetting positions at the end of the fiscal year. The Code may
also require recharacterization of all or a part of losses on certain
offsetting positions from short-term to long-term, as well as adjustment of
the holding periods of straddle positions.

GENERAL INFORMATION AND HISTORY

Effective January 1, 1998, the following changes were made to the names of the
Funds:
<TABLE>
<CAPTION>
Old Fund Name New Fund Name
<S> <C>
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Government Securities Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
Princor World Fund, Inc. Principal International Fund, Inc.
</TABLE>

FINANCIAL STATEMENTS

The financial statements for each of the Principal Funds for the year ended
October 31, 1998 are a part of this Statement of Additional Information. The
financial statements appear in the Annual Reports to Shareholders. Reports on
those statements from Ernst & Young LLP, independent auditors, are included in
the Annual Report and are also a part of this Statement of Additional
Information. The Annual Reports are furnished, without charge, to investors who
request copies of the Statement of Additional Information.

APPENDIX A

Description of Bond Ratings:

Moody's Investors Service, Inc. Bond Ratings

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.

A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.

Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.

CONDITIONAL RATING: Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.

RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG 1,
MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong protection
from established cash flows"; MIG 2 denotes "high quality" with "ample margins
of protection"; MIG 3 notes are of "favorable quality...but lacking the
undeniable strength of the preceding grades"; MIG 4 notes are of "adequate
quality, carrying specific risk for having protection...and not distinctly or
predominantly speculative."

Description of Moody's Commercial Paper Ratings

Moody's Commercial Paper ratings are opinions of the ability to repay punctually
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:

Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.

Issuers rated Prime-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

Description of Standard & Poor's Corporation's Debt Ratings:

A Standard & Poor's debt rating is a current assessment of the creditworthiness
of an obligor with respect to a specific obligation. This assessment may take
into consideration obligors such as guarantors, insurers, or lessees.

The debt rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.

The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources Standard & Poor's considers reliable.
Standard & Poor's does not perform an audit in connection with any rating and
may, on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in, or unavailability of,
such information, or for other circumstances.

The ratings are based, in varying degrees, on the following considerations:

I. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;

II. Nature of and provisions of the obligation;

III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.

AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.

A: Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.

BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.

BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

C: The rating "C" is reserved for income bonds on which no interest is
being paid.

D: Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.

Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

Provisional Ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the bonds being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.

NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.

Standard & Poor's, Commercial Paper Ratings

A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:

A: Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.

A-1: This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Issues that possess
overwhelming safety characteristics will be given a "+" designation.

A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1".

A-3: Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the highest designations.

B: Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.

C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.

D: This rating indicates that the issue is either in default or is
expected to be in default upon maturity.

The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.

Standard & Poor's rates notes with a maturity of less than three years as
follows:

SP-1: A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given a
"+" designation.

SP-2: A satisfactory capacity to pay principal and interest.

SP-3: A speculative capacity to pay principal and interest.

<PAGE>

PART C
OTHER INFORMATION

Item 23. Financial Statements and Exhibits

(a) Financial Statements included in the Registration
Statement
(1) Part A:
Financial Highlights for the six months ended
April 30, 1999 and each of the five years in
the period ended October 31, 1998.
(2) Part B:
None
(b) Exhibits
(1a) Articles Supplementary (Filed 2/26/96)
(1b) Articles of Amendment and Restatement(Filed 12/30/98)
(2) Bylaws (Filed 4/30/99)
(5a) Management Agreement (Filed 12/30/98)
(5b) Investment Service Agreement (Filed 2/26/96)
(6a) Distribution Agreement (Filed 2/26/96)
(6b) Account Application-A/B shares (Filed 2/23/99)
(6c) Account Application-R shares (Filed 2/23/99)
(8a) Custody Agreement (Filed 2/26/96)
(9a) Dealer Selling Agreement(Filed 12/30/98)
(10) Opinion of Counsel (Filed 2/26/96)
(11) Consent of Independent Auditors
(12) Unaudited Financial Statements as of April 30, 1999
(13) Investment Letter (Filed 2/26/96)
(14a) Principal Mutual IRA Plan (filed 12/23/97)
(14b) Principal Mutual SEP Plan (Filed 12/14/95)
(14c) Principal Mutual 403(b) Plan (Filed 12/14/95)
(14d) Principal Mutual IRA Plan - R Shares
(Filed 2/26/96)
(15a) 12b-1 Plan - Class A Shares (Filed 12/14/95)
(15b) 12b-1 Plan - Class B Shares (Filed 12/14/95)
(15r) 12b-1 Plan - Class R Shares (Filed 12/14/95)
(16) Total Return Performance Quotations-Class B
Shares (Filed 12/14/95)
(16a) Performance Quotations-Class A Shares
(Filed 2/26/96)
(16b) Performance Quotations-Class B Shares
(Filed 2/26/96)
(16c) Performance Quotations-Class R Shares
(Filed 12/12/96)
(18) Multiple Class Distribution Plan (Filed 12/30/98)
(27a) Financial Data Schedule-Class A Shares
(27b) Financial Data Schedule-Class B Shares
(27c) Financial Data Schedule-Class R Shares

Item 24. Persons Controlled by or Under Common Control with Registrant

Principal Financial Services, Inc. (an Iowa corporation) an
intermediate holding company organized pursuant to Section 512A.14 of
the Iowa Code.

Subsidiaries wholly-owned by Principal Financial Services, Inc.

a. Princor Financial Services Corporation (an Iowa Corporation) a
registered broker-dealer.

b. Principal Life Insurance Company (an Iowa corporation) a life
group, pension and individual insurance company.

Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:

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

Principal Life Insurance Company sponsored the organization of the
following mutual funds, some of which it controls by virtue of owning
voting securities:

Principal Balanced Fund, Inc.(a Maryland Corporation) 0.08% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on May 21, 1999.

Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.61% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on May 21, 1999.

Principal Bond Fund, Inc.(a Maryland Corporation) 0.58% of shares
outstanding owned by Principal Life Insurance Company (including
subsidiaries and affiliates) on May 21, 1999.

Principal Capital Value Fund, Inc. (a Maryland Corporation)
23.49% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on May 21, 1999.

Principal Cash Management Fund, Inc. (a Maryland Corporation)
6.76% of outstanding shares owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on May 21,
1999.

Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.04% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
May 21, 1999.

Principal Growth Fund, Inc. (a Maryland Corporation) 0.40% of
outstanding shares owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on May 21, 1999.

Principal High Yield Fund, Inc. (a Maryland Corporation) 7.00%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on May 21, 1999.

Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 45.18% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
May 21, 1999.

Principal International Fund, Inc. (a Maryland Corporation)
23.38% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on May 21,
1999.

Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 41.68% of shares outstanding owned by Principal Life
Insurance Company (including subsidiaries and affiliates) on
May 21, 1999.

Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
7.16% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on May 21,
1999.

Principal MidCap Fund, Inc. (a Maryland Corporation) 0.46% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on May 21, 1999

Principal Real Estate Fund, Inc. (a Maryland Corporation) 66.83%
of shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on May 21, 1999

Principal SmallCap Fund, Inc.(a Maryland Corporation) 20.40% of
shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on May 21,
1999

Principal Special Markets Fund, Inc. (a Maryland Corporation)
83.30% of shares outstanding of the International Emerging
Markets Portfolio, 44.18% of the shares outstanding of the
International Securities Portfolio, 98.66% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Life Insurance Company (including subsidiaries
and affiliates) on May 21, 1999

Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.05% of shares outstanding owned by Principal Life Insurance
Company (including subsidiaries and affiliates) on May 21,
1999.

Principal Utilities Fund, Inc. (a Maryland Corporation) 0.09% of
shares outstanding owned by Principal Life Insurance Company
(including subsidiaries and affiliates) on May 21, 1999.

Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Life Insurance Company and its Separate Accounts on May
21, 1999: Aggressive Growth, Asset Allocation, Balanced, Blue
Chip, Bond, Capital Value, Government Securities, Growth, High
Yield, International, International SmallCap, LargeCap Growth,
MicroCap, MidCap, MidCap Growth, MidCap Value, Money Market, Real
Estate, SmallCap, SmallCap Growth, SmallCap Value Stock Index
500, and Utilities.

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

a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Life Insurance
Company.

b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)

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

d. Principal Capital Management, LLC (a Delaware Corporation) A
limited liability company that provides investment
management services.

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

Subsidiaries wholly-owned by Principal Capital Management, LLC:

a. Principal Structured Investments, LLC (a Delaware
Corporation) a limited liability company that provides
product development administration, marketing and asset
management services associated with stable value products
together with other related institutional financial services
including derivatives, asset-liability management, fixed
income investment management and ancillary money management
products.

b. Principal Enterprise Capital, LLC (a Delaware Corporation) a
company engaged in the operation of nonresidential
buildings.

c. Principal Commercial Acceptance, LLC (a Delaware
Corporation) a limited liability company involved in
purchasing, managing and selling commercial real estate
assets in the secondary market.

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

e. Principal Commercial Funding, LLC (a Delaware
Corporation) a correspondent lender and service provider for
loans.

f. Principal Real Estate Services, LLC (a Delaware Corporation)
a limited liability company which acts as a property manager
and real estate service provider.

Subsidiaries wholly-owned by Principal Holding Company:

a. Principal Bank (a Federal Corporation) a Federally chartered
direct delivery savings bank.

b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.

c. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.

d. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.

e. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.

f. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.

g. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.

h. HealthRisk Resource Group, Inc. (an Iowa Corporation) a
management services organization.

i. Invista Capital Management, LLC (an Iowa Corporation) a
registered investment adviser.

j. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.

k. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.

l. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.

m. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that develops and manages
preferred provider organizations.

n. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection
with the new corporate identity. It is not currently active.

o. Principal Marketing Services, Inc. (a Delaware Corporation)
a corporation formed to serve as an interface between
marketers and manufacturers of financial services products.

p. Principal Health Care, Inc. (an Iowa Corporation) a
developer and administrator of managed care systems.

q. Dental-Net, Inc. (an Arizona Corporation) holding company
of Employers Dental Services; a managed dental care services
organization. HMO and dental group practice.

r. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.

s. Delaware Charter Guarantee & Trust Company, d/b/a Trustar
Retirement Services (a Delaware Corporation) a nondepository
trust company.

t. Professional Pensions, Inc. (a Connecticut Corporation) a
corporation engaged in sales, marketing and administration
of group insurance plans and serves as a record keeper and
third party administrator for various clients' defined
contribution plans.

u. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.

v. Principal International, Inc. (an Iowa Corporation) a
company formed for the purpose of international business
development.

Subsidiary owned by Petula Associates, Ltd.

a. Magnus Properties, Inc. (an Iowa Corporation) which owns
real estate.

Subsidiary owned by Principal Residential Mortgage, Inc.:

a. Principal Wholesale Mortgage, Inc. (an Iowa Corporation) a
brokerage and servicer of residential mortgages.

Subsidiaries owned by The Admar Group, Inc.:

a. Admar Corporation (a California Corporation) a managed care
services organization.

b. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.

c. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.

d. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.

e. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.

f. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.

Subsidiaries owned by Dental-Net, Inc.

a. Employers Dental Services, Inc. (an Arizona corporation)
a prepaid dental plan organization.

Subsidiaries wholly-owned by Professional Pensions, Inc.:

a. Benefit Fiduciary Corporation (a Rhode Island corporation)
serves as a corporate trustee for retirement trusts.

b. PPI Employee Benefits Corporation (a Connecticut
corporation) a registered broker-dealer pursuant to Section
15(b) of the Securities Exchange Act an a member of the
National Association of Securities Dealers (NASD), limited
to the sale of open-end mutual funds and variable insurance
products.

c. Boston Insurance Trust, Inc. (a Massachusetts corporation)
authorized by charter to serve as a trustee in connection
with multiple-employer group life insurance trusts or
arrangements, and to generally participate in the
administration of insurance trusts.

Subsidiaries owned by Principal International, Inc.:

a. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company (individual
group), annuities and pension.

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

c. Principal International Argentina, S.A. (an Argentina
services corporation).

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

e. Principal Asset Management Company (Asia) Ltd. (Hong Kong)
a corporation which manages pension funds.

f. Principal Insurance Company (Hong Kong) Limited (a Hong Kong
Corporation) group life and group pension products.

g. Principal Trust Company (Asia) Limited (an Asia trust
company).

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

i. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and
group), personal accidents.

j. Principal Pensiones, S.A. de C.V. (a Mexico Corporation)
a single premium annuity.

k. Principal Afore, S.A. de C.V. (a Mexico Corporation),
pension.

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

Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:

a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.

Subsidiaries owned by Principal International Argentina, S.A.:

a. Principal Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.

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

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

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

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

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

Item 25. Indemnification

Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:

(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and

1. Was committed in bad faith; or

2. Was the result of active and deliberate dishonesty; or

(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or

(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.

If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.

The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.

Item 26. Business or Other Connection of Investment Adviser

A complete list of the officers and directors of the investment adviser,
Principal Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.

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

Craig R. Barnes Same President & Chief Executive
Vice President Officer, Invista Capital
Management, Inc.

*Craig L. Bassett Same See Part B
Treasurer

*Michael J. Beer Same See Part B
Executive Vice President

Mary L. Bricker Same Counsel and Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Life
Insurance Company

David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Life
Insurance Company

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

*Arthur S. Filean Same See Part B
Vice President

Dennis P. Francis Same Senior Vice President
Director Principal Life
Insurance Company

Paul N. Germain Same Vice President -
Vice President - Mutual Fund Operations
Mutual Fund Operations Princor Financial Services
Corporation

*Ernest H. Gillum Same See Part B
Vice President - Compliance
& Product Development

Thomas J. Graf Same Senior Vice President
Director Principal Life
Insurance Company

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

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

Ellen Z. Lamale Same Vice President & Chief Actuary
Director Principal Life Insurance
Company

Julia M. Lawler Same Second Vice President
Director Principal Life Insurance
Company

Gregg R. Narber Same Senior Vice President and
Director General Counsel
Principal Life
Insurance Company

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

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

Elizabeth R. Ring Same Controller- Broker Dealer
Controller Operations
Princor Financial Services
Corporation

*Michael D. Roughton Same See Part B
Counsel

Jean B. Schustek Same Product Compliance Officer -
Product Compliance Officer - Princor Financial Services
Registered Products Corporation

Dewain A. Sparrgrove Same Vice President -
Vice President Investment Securities
Principal Life
Insurance Company

Principal Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Balanced Fund, Inc., Principal Blue
Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc.,
Principal Cash Management Fund, Inc., Principal Government Securities Income
Fund, Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal International
Fund, Inc., Principal International SmallCap Fund, Inc., Principal Limited Term
Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate Fund, Inc.,
Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc., Principal
Tax-Exempt Bond Fund, Inc., Principal Utilities Fund, Inc., Principal Variable
Contracts Fund, Inc. - funds sponsored by Principal Life Insurance Company.

Item 27. Principal Underwriters

(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal Government
Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield
Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal
International Fund, Inc., Principal International SmallCap Fund, Inc., Principal
Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate
Fund, Inc., Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc.,
Principal Tax-Exempt Bond Fund, Inc., Principal Utilities Fund, Inc., Principal
Variable Contracts Fund, Inc. and for variable annuity contracts participating
in Principal Life Insurance Company Separate Account B, a registered unit
investment trust for retirement plans adopted by public school systems or
certain tax-exempt organizations pursuant to Section 403(b) of the Internal
Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans,
certain non- qualified deferred compensation plans and Individual Retirement
Annuity Plans adopted pursuant to Section 408 of the Internal Revenue Code, and
for variable life insurance contracts issued by Principal Life Insurance Company
Variable Life Separate Account, a registered unit investment trust.

(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant

(b) (1) (2)
Positions
and offices
Name and principal with principal
business address underwriter

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

Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392

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

Michael J. Beer Executive Vice President Financial Officer
The Principal
Financial Group
Des Moines, IA 50392

Jerald L. Bogart Insurance License Officer None
The Principal
Financial Group
Des Moines, IA 50392

Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392

Lynn A. Brones Vice President Sales, None
The Principal Princor Investment Network
Financial Group
Des Moines, IA 50392

David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392

Ralph C. Eucher Director and President and
The Principal President Director
Financial Group
Des Moines, IA 50392

Arthur S. Filean Vice President Vice President and
The Principal Secretary
Financial Group
Des Moines, IA 50392

Dennis P. Francis Director Director
The Principal
Financial Group
Des Moines, IA 50392

Paul N. Germain Vice President- None
The Principal Mutual Fund Operations
Financial Group
Des Moines, IA 50392

Ernest H. Gillum Vice President- Assistant Vice
The Principal Compliance and Product President
Financial Group Development
Des Moines, IA 50392

Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392

J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392

Susan R. Haupts Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392

Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392

Kraig L. Kuhlers Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392

Ellen Z. Lamale Director None
The Principal
Financial Group
Des Moines, IA 50392

Julia M. Lawler Director None
The Principal
Financial Group
Des Moines, IA 50392

John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392

Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392

Kelly A. Paul Systems & Technology None
The Principal Officer
Financial Group
Des Moines, IA 50392

Elise M. Pilkington Assistant Director - None
The Principal Retirement Consulting
Financial Group
Des Moines, IA 50392

Richard L. Prey Director None
The Principal
Financial Group
Des Moines, IA 50392

Layne A. Rasmussen Controller-Mutual Funds None
The Principal
Financial Group
Des Moines, IA 50392

Martin R. Richardson Operations Officer- None
The Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392

Elizabeth R. Ring Controller None
The Principal
Financial Group
Des Moines, IA 50392

Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392

Jean B. Schustek Product Compliance Officer- None
The Principal Registered Products
Financial Group
Des Moines, IA 50392

Kyle R. Selberg Vice President- None
The Principal Marketing
Financial Group
Des Moines, IA 50392

Minoo Spellerberg Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392

Roger C. Stroud Assistant Director- None
The Principal Marketing
Financial Group
Des Moines, IA 50392

Item 28. Location of Accounts and Records

All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Life
Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.

Item 29. Management Services

Inapplicable.

Item 30. Undertakings

Indemnification

Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.

Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue

Shareholder Communications

Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications

Delivery of Annual Report to Shareholders

The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Des Moines and State of Iowa, on the 28th day of
June, 1999.

Principal Balanced Fund, Inc.

(Registrant)

By /s/ R. C. Eucher
--------------------------------------
R. C. Eucher
President and Director

Attest:

/s/ A. S. Filean
- --------------------------------------
A. S. Filean
Vice President and Secretary

Pursuant to the requirement of the Securities Act of 1933, this Amendment to the
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

Signature Title Date

/s/ R. C. Eucher
_____________________________ President and Director 6/28/99
R. C. Eucher (Principal Executive Officer) __________

(J. B. Griswell)*
_____________________________ Director and 6/28/99
J. B. Griswell Chairman of the Board __________

/s/ M. J. Beer
_____________________________ Financial Officer (Principal 6/28/99
M. J. Beer Financial and Accounting Officer) __________

(J. E. Aschenbrenner)*
_____________________________ Director 6/28/99
J. E. Aschenbrenner __________

(J. D. Davis)*
_____________________________ Director 6/28/99
J. D. Davis __________

(P. A. Ferguson)*
_____________________________ Director 6/28/99
P. A. Ferguson __________

(D. P. Francis)*
_____________________________ Director 6/28/99
D. P. Francis __________

(R. W. Gilbert)*
_____________________________ Director 6/28/99
R. W. Gilbert __________

(B. A. Lukavsky)*
_____________________________ Director 6/28/99
B. A. Lukavsky __________

(R. G. Peebler)*
_____________________________ Director 6/28/99
R. G. Peebler __________

By /s/ R. C. Eucher
-------------------------------------
R. C. Eucher
President and Director

*Pursuant to Powers of Attorney
Previously Filed or Included

Consent of Independent Auditors

We consent to the reference to our firm under the captions "Financial
Statements" in the Prospectus in Part A and "Financial Statements" in Part B and
to the incorporation by reference in Part B of our report dated November 25,
1998 on the financial statements and financial highlights of Principal Bond
Fund, Inc. in this Post Effective Amendment No. 24 to Form N-1A Registration
Statement under the Securities Act of 1933 (Registration No. 33-14536) and
related prospectus of Principal Bond Fund, Inc.

/s/Ernst & Young, LLP

ERNST & YOUNG LLP

Des Moines, Iowa
June 24, 1999

A Message to Shareholders

Dear Shareholder:

At a time when successful investing appears as easy as buying the latest hot
stocks, some individual investors may consider "going it alone." Despite
convenient new methods of trading securities, we firmly believe in the
importance of seeking professional assistance, diversifying, developing a
long-term investment strategy and having the patience to stick with it.

By diversifying your investments into a variety of asset classes, you help
spread the risk in your portfolio. Diversification improves the chances that
some of your investments will perform well, even when others don't. By
maintaining a long-term perspective, you stay focused on the big picture. This
helps you to avoid falling prey to natural emotional reactions which can cause
you to become alternately overly aggressive or conservative, typically at
exactly the wrong time in the market cycle.

Another key element to developing a successful investment plan is the expertise
of an investment professional. We're certain you have witnessed the media hype
surrounding the market gyrations of the past several months. This frequently
comes in the form of conflicting advice which leaves investors confused and
concerned. We caution our shareholders to ignore media speculation and instead
focus on the sound advice of a known and trusted registered representative.

Of course, patience is a virtue when it comes to investing. Though recent equity
mutual fund performance may have trailed that of the most widely recognized
indices, we think patient shareholders will receive their rewards as investor
confidence--lost during the international financial crises of 1998 and the
corresponding market fluctuations--is regained.

On a final note, you may already have noticed this letter comes to you under
different signature. In March, Stephan Jones retired as President. Named as the
new President of Principal Management Corporation and Principal Mutual Funds was
Ralph Eucher. At the same time, Mike Beer was named Executive Vice President of
Principal Management Corporation.

Ralph joins Principal Mutual Funds after spending five years with the Investment
operations of the Principal Financial Group. Ralph has a broad range of prior
investment and business leadership experience. Mike has been with the company
since 1990, and continues in his role of Chief Operating Officer.

Our home office staff's dedication combined with the strength of our field
organization makes us confident that the top notch customer service and quality
investment products our shareholders now enjoy will carry on uninterrupted. We
look forward to the continued success of the Principal Mutual Funds and our
shareholders.

Sincerely,

/s/Ralph C. Eucher /s/Mike Beer

Ralph C. Eucher Mike Beer
President Executive Vice President &
Chief Operating Officer

Table of Contents

Page
Portfolio Managers' Comments............................................... 3

Domestic Growth-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities.................................... 12
Statements of Operations................................................ 14
Statements of Changes in Net Assets..................................... 16
Notes to Financial Statements........................................... 18
Schedules of Investments
Balanced Fund......................................................... 24
Blue Chip Fund........................................................ 27
Capital Value Fund.................................................... 28
Growth Fund........................................................... 29
MidCap Fund........................................................... 31
Real Estate Fund...................................................... 33
SmallCap Fund......................................................... 34
Utilities Fund........................................................ 36
Financial Highlights.................................................... 38

International Growth-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities.................................... 48
Statements of Operations................................................ 49
Statements of Changes in Net Assets..................................... 50
Notes to Financial Statements........................................... 52
Schedules of Investments
International Emerging Markets Fund................................... 60
International Fund.................................................... 62
International SmallCap Fund........................................... 64
Financial Highlights.................................................... 68

Income-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities.................................... 72
Statements of Operations................................................ 74
Statements of Changes in Net Assets..................................... 76
Notes to Financial Statements........................................... 78
Schedules of Investments
Bond Fund............................................................. 86
Government Securities Income Fund..................................... 89
High Yield Fund....................................................... 89
Limited Term Bond Fund................................................ 91
Tax-Exempt Bond Fund.................................................. 93
Financial Highlights.................................................... 98

Money Market Fund Financial Statements and Highlights
Statements of Assets and Liabilities.................................... 106
Statements of Operations................................................ 107
Statements of Changes in Net Assets..................................... 108
Notes to Financial Statements........................................... 110
Schedules of Investments
Cash Management Fund.................................................. 114
Financial Highlights.................................................... 118

Principal Mutual Funds..................................................... 120

Principal Funds Performance
<TABLE>
<CAPTION>
Average Annual Total Returns
As of March 31, 1999
<S> <C> <C> <C>
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C> <C> <C>
with without with without with without
sales sales sales sales sales sales
A Shares of: charge charge charge charge charge charge
Balanced (1.37)% 3.50% 11.36% 12.44% 10.16% 10.69%
Blue Chip 3.32 8.41 19.72 20.88 14.26(a) 14.94(a)
Bond (0.21) 4.71 7.00 8.04 8.66 9.18
Capital Value (4.09) 0.64 18.45 19.60 13.49 14.04
Government Securities Income 1.10 6.09 6.73 7.77 8.41 8.93
Growth 3.25 8.34 18.76 19.90 17.39 17.96
High Yield (7.83) (3.29) 6.54 7.57 6.47 6.99
International (8.36) (3.84) 9.81 10.87 10.55 11.09
International Emerging Markets (23.16) (19.37) (17.63)(b) (15.09)(b)
International SmallCap (4.22) 0.50 9.04(b) 12.40(b)
Limited Term Bond 4.08 5.66 5.43(c) 5.95(c)
MidCap (17.97) (13.93) 13.09 14.19 14.44 15.00
Real Estate (22.73) (18.92) (18.90)(d) (15.70)(d)
SmallCap (23.25) (19.47) (11.02)(d) (7.51)(d)
Tax-Exempt Bond (0.05) 4.88 6.29 7.32 7.26 7.78
Utilities 1.20 6.19 14.15 15.25 11.17(e) 12.02(e)
</TABLE>

1 Year 5 Years
with without with without
B Shares of: CDSC* CDSC* CDSC* CDSC*
Balanced (1.18)% 2.73% 13.88%(f) 14.18%(f)
Blue Chip 3.62 7.62 21.79(f) 22.03(f)
Bond (0.01) 3.93 8.34(f) 8.69(f)
Capital Value (3.83) (0.10) 21.43(f) 21.68(f)
Government Securities Income 1.35 5.34 8.27(f) 8.63(f)
Growth 3.85 7.85 22.76(f) 23.00(f)
High Yield (7.58) (4.00) 7.19(f) 7.55(f)
International (8.11) (4.49) 12.44(f) 12.75(f)
International Emerging Markets (23.14) (19.93) (17.62)(b) (15.47)(b)
International SmallCap (4.06) (0.09) 9.55(b) 11.93(b)
Limited Term Bond 3.96 5.21 5.29(c) 5.51(c)
MidCap (17.70) (14.27) 16.42(f) 16.70(f)
Real Estate (22.47) (19.34) (18.69)(d) (16.08)(d)
SmallCap (23.38) (20.18) (11.12)(d) (8.16)(d)
Tax-Exempt Bond 0.24 4.24 8.44(f) 8.79(f)
Utilities 1.42 5.42 17.49(f) 17.76(f)
* Contingent Deferred Sales Charge

R Shares of: 1 Year 5 Years

Balanced 2.99% 11.87%(c)
Blue Chip 7.90 18.92(c)
Bond 4.06 6.57(c)
Capital Value (0.08) 18.34(c)
Government Securities Income 5.28 6.36(c)
Growth 7.67 18.85(c)
High Yield (4.09) 5.02(c)
International (4.60) 12.13(c)
International Emerging Markets (19.59) (15.25)(b)
International SmallCap 0.67 12.52(b)
Limited Term Bond 5.06 5.33(c)
MidCap (14.52) 9.09(c)
Real Estate (18.76) 15.59(d)
SmallCap (19.47) (7.51)(d)
Utilities 5.63 14.57(c)

(a)Partial period,
from effective date 3/1/91
(b) Partial period,
from effective date 8/29/97
(c)Partial period,
from effective date 2/29/96
(d) Partial period,
from effective date 12/31/97
(e) Partial period, from effective date 12/16/92
(f) Partial period, from effective date 12/9/94

Total return represents the overall perfor-mance of an investment for a
specific period of time, assuming the reinvestment of dividends and capital
gains and after applicable expenses. Average annual total returns for A
shares are with and without maximum 4.75% sales charge. Average annual total
returns for B shares are with and without maximum 4.0% contingent deferred
sales charge. Total returns reflect past performance. Past performance does
not predict future performance. The investment return and principal value of
an investment will fluctuate so that shares, when redeemed, may be worth more
or less than their original cost.

MANAGER'S COMMENTS

Principal Management Corporation, the adviser to the Principal funds, is staffed
with investment professionals who manage each individual fund. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and recent results of each fund over the past six months. We believe
any Principal fund should, under normal circumstances, represent only a portion
of an investor's total investments. For most investors a portfolio should be
balanced among stocks, bonds, and cash reserves to fit their own needs and risk
tolerance. Those who maintain this balanced approach should be aware of the
short-term results, but focus on the long term. Past performance is no guarantee
of future results. Fund values will fluctuate so that the shares, upon
redemption, may be worth more or less than their original cost.

Growth-Oriented Funds

DOMESTIC GROWTH FUNDS

Principal Balanced Fund

Marty Schafer Judi Vogel
[ Photo ] [ Photo ]

For five of the past six months earnings momentum and large capitalization
growth stocks were the drivers of results in the financial markets. It was a
short list of very large cap, high P/E, "glamour growth" stocks (such as
Microsoft, MCI WorldCom, Cisco Systems, America On Line) that drove the gains in
major stock indices. Small companies and value stocks drastically underperformed
this select group. The tables turned in April, however, when a rotation out of
growth stocks and into smaller, more economically sensitive cyclical stocks
began in earnest. With the price of oil up 50% from its lows a few months
earlier, and foreign economies showing signs of stabilization, the specter of
global economic risk dissipated. In a very short time the consensus view shifted
from that of a muddle along economy to one of stronger than expected global
growth and concerns about commodity price inflation. Interest rates moved higher
in response to inflation fears, causing bond prices to decline. Investors began
taking note of the attractive prices of the heretofore beaten down value stocks,
stocks valued at a discount to the overall market, and shifted funds out of
large cap growth and into cheaper small cap and value stocks.

For most of the last six months, the Fund's returns suffered from lack of
exposure to the market leading mega-cap growth companies. Specifically, the Fund
did not hold enough technology and communications services stocks because the
Fund's managers felt their lofty valuations already fully reflected the most
optimistic of sales and earnings forecasts. The Fund's equity portfolio is
positioned primarily in mid- to large-cap value stocks, which have been
outperforming since the end of March. Returns of the fixed income portfolio have
hovered near breakeven, in line with bond market indices and other fixed income
funds. With interest rates up over 0.75% in the last six months, only the more
risky, high-yield instruments have mustered positive returns. The Fund continues
to be well diversified among corporate bonds, mortgage-backed securities, and
reasonably priced common stocks. It is designed to preserve shareholders'
capital while providing long term growth.

Principal Blue Chip Fund

Mark Williams The Dow Jones Industrial Average crossed into
[ Photo ] celebrated territory as it passed 10,000 for the
first time on March 29 and then shot past 11,000
a scant 24 trading days later. These historic
accomplishments were in part due to stronger than
expected earnings released in March and April
following some rather cautious utterances by the
Fed's Alan Greenspan and many economists earlier in
the year.

The Fund turned in a +15.21% return for the six months ended April 30 by
continuing to focus on high quality companies with rising earnings. It is
difficult or impossible to match the euphoria of the Dow during periods like the
one just past and maintain a defensive posture toward the growing downside
exposure that looms behind record highs. The Fund's managers believe they have
struck a good balance within the Fund to participate in the upside while being
mindful of the downside should the markets settle back in the coming months.

Principal Capital Value Fund

Catherine Zaharis The market has seen two distinctly different periods
[ Photo ] during the past six months. The beginning of this
period was a bounce off the October lows, and an
easing of the worries that surrounded the market
with the Russian crisis last year. In January, the
market quickly bounced back from the concerns in
South America. Growth stocks were continuing their strong march throughout this
period as the notion was that people will pay anything for a growth stock. In
the last two months that mentality has changed as investors have begun to
realize that cyclical companies have some sustainable earnings strength.
Cyclical stocks have been ignored for an extended duration and became so
inexpensive that the market could no longer ignore valuations. Since March, the
value sector, companies valued at a discount to the overall market, has strongly
outperformed growth stocks, helping the performance of the Principal Capital
Value Fund. However, the tide has not totally changed. There has been a
sustained period where growth stocks have done substantially better than value,
and the Fund's managers have just begun to retrace this trend. The market is
assuming all positives when determining what growth companies are worth. Any
disappointment causes a dramatic fall in the price and that is seen in the daily
volatility trends within the market. To the extent there are high expectations
for growth companies and low expectations for value companies, the Fund's
managers continue to find many opportunities within the value area.

The Fund's portfolio continues to have a solid focus on value investing and
companies added to this portfolio exhibit many of the traditional value
attributes. The Fund managers are looking for companies with valuations below
average but have specific opportunities that are unique for that firm.

Value Investing has been an underperforming style the past six months with the
primary reason being the size of companies in the portfolio. During more recent
periods, the larger the company, the better the stock price has performed. Since
the Fund's portfolio holds several companies that would be defined as mid cap in
size, these companies have not helped near term performance. The Fund managers
feel these are solid investments with strong future opportunities.

Principal Growth Fund

Mike Hamilton The five fundamental factors that have been the
[ Photo ] foundation of this bull market powered the market to
record highs again. The five factors are:moderate but
sustainable economic growth, low inflation, low
interest rates, financial liquidity and corporate
profit growth.

The Fund performed quite strongly over the past six months, with a total return
of over 20%. Highlights for the past six months include: Linear Technology +91%,
Citigroup +60%, Boston Scientific +56%, Cendant +56%, Marriott International
+56%, Amvescap +50%, MCI Worldcom +49%, Chase Manhattan +47%. A common theme
among these standouts is that although the market called these companies into
question last fall, the Fund managers stuck with them and were eventually
rewarded.

Despite several strong performing stocks, the Fund slightly trailed the strong
return of the S&P 500 Stock Index. This can be attributed to 1) Technology - not
owning AOL and not owning enough of Cisco, 2) Healthcare - the Fund's large
position here did not help because healthcare stocks lagged the overall market
due to less fear of an economic slow-down, 3) Consumer Staples - Ralston
Purina's Energizer Battery Division was weak and pulled the stock down 8%.

Going forward the Fund's managers continue to see good prospectus in the
healthcare and financial sectors. Healthcare companies are benefiting from
strong demand as the population ages and from spectacular new products that make
life better. In financials, managers see companies that are more prudently
managing their capital, taking advantage of deregulation and which can be
purchased at very reasonable valuations. Few opportunities are found in the
utility, energy and transportation sectors and thus the portfolio has little to
no exposure in these sectors. As always, the Fund's managers continue to pursue
companies that possess competitive advantages, have the potential for good
growth and can be purchased at a reasonable price.

Principal MidCap Fund

Mike Hamilton Stock market returns for the first six months of the
[ Photo ] Fund's 1999 fiscal year have continued their
divergence between the various market
capitalization ranges. Large caps stocks have
outdistanced their mid and smallcap counterparts by a
considerable margin as investors gravitate to
companies with assumed stable and visible earnings
streams.

The Principal MidCap Fund's performance relative to the S&P 500 Stock Index
lagged due to its emphasis on the smaller end of midcap companies. The
communication services and consumer staples sectors outperformed relative to the
S&P 500, while the technology, financial, healthcare and consumer cyclicals
sectors were the largest negative contributors to Fund performance relative to
the Index.

Over the course of the current economic cycle, the U.S. consumer has been
dominant. This is evidenced by the tremendous spending on durable goods. In
addition to the strong consumer, capital spending has continued on a strong
uptrend. Business continues to invest in capital to drive the productivity
increases necessary to compete on a global basis. Both profits and incomes have
been strong, giving both business and the consumer confidence to maintain the
high level of spending. Many analysts are raising earning estimates of the
companies they follow and the top down projections for the indexes are being
raised along with them, implying growth in corporate profits. If strong economic
growth continues, many of the mid cap and small cap companies will do well given
the economic sensitivity of their underlying businesses.

Looking ahead to the second half of fiscal year 1999, the same factors driving
the slow, sustainable growth in the U.S. economy appear to be very much in
place--low inflation, low interest rates, financial liquidity and high consumer
confidence. The Fund's managers continue to look for companies that possess
competitive advantages, have the potential for above average growth and can be
purchased at a reasonable price. The technology, financial, consumer cyclical
and healthcare economic sectors continue to be the top four highest weighted
economic sectors in the portfolio.

Principal Real Estate Fund

Kelly Rush Strong returns in April boosted the Fund's
[ Photo ] six-month performance into positive territory. Real
estate stocks provided negative returns from October
1998 through March 1999. A sharp reversal was
experienced in April where each class of shares
enjoyed a return between 9.6 and 9.8 percent.

Nearly all income-oriented and value stocks experienced weak performance from
October through March. Investors narrowly focused on stocks that were expected
to deliver a high level of earnings growth even in the face of a weakening
economy. This led to strong performance by large capitalization growth stocks
and internet-related stocks.

In April, signs of the economy's persistent strength led investors to reassess
the merits of cyclical and value stocks. Attractive relative valuations of these
stocks led to a powerful broad market rally. Value and income stocks were
sluggish in 1998 and real estate stocks were one of the worst within the group.
During the April rally, this relationship reversed as real estate stocks
outperformed other value and income stocks.

Prior to the recent rally, the Fund managers commented that real estate stocks
looked cheap. Now, following the rally, the question is "where are we headed
from here?" Valuations look reasonable today, suggesting price appreciation will
slow from April's torrid pace, but remain positive as earnings grow. Coupled
with the high level of current income real estate stocks offer, the Fund is
poised to provide a competitive level of total return in the months ahead.
However, short-term momentum is almost impossible to predict as both upward and
downward surprises may occur.

Principal SmallCap Fund

John McClain Mark Williams
[ Photo ] [ Photo ]

The economy that many thought would stall out late last year continued to fly
high through the six-month period ended April 30. At the same time, worries
about how long this expansion will continue, combined with market volatility,
resulted in continued investor interest in large-cap companies. The S&P 500
Stock Index finished the period at +22.32% while the S&P Small-Cap 600 Index
stood at +9.03%.

The Fund outperformed most small-cap indexes with a +19.22% return for the six
months ended April 30. Since its inception at the start of 1997, the Fund has
maintained 60% of its holdings in growth stocks and the remainder in value
stocks. During this time, the Fund has benefited as the growth segment
outperformed the value segment in a manner similar to the market as a whole.
Fund managers continue to believe the Fund will benefit from this allocation as
the trend toward superior growth performance continues and better opportunities
for stock selection are available in the growth sector.

Principal Utilities Fund

Catherine Zaharis The Utilities sector is one that has continued to see
[ Photo ] much change in the last six months. Several states
continue their progress to deregulation of the
electric industry. Although many are not finalized,
it is clear there are additional states that will
complete this legislation by year end. Also, for the
first time, a foreign utility company has offered to
merge with a domestic utility company. Certainly the
trend of global energy services will move forward as the globalization of
telecommunications is seen. The electric utility industry is also making inroads
at determining strategies to go from a regulated business to one where growth
into related businesses can become part of the focus. Telecommunication
continues to be possessed by two trends - unit growth and consolidation. Mergers
continue as each company tries to expose themselves to the platforms they
believe will be successful in the future. Usage also remains a positive force
with data, commercial, residential, internet and cellular all exhibiting growth.

The Principal Utilities Fund outperformed the index in this latest period as the
growth perspective certainly aided many of the portfolio holdings. The Fund
manager's process for selecting stocks has focused on those companies where it
is felt their strategy best fits their strengths. Managers are looking for those
companies who will either be long term winners or have set a change of strategy
that has not yet been realized by the market.

INTERNATIONAL GROWTH FUNDS

Principal International Emerging Markets

Kurt Spieler Emerging markets have rallied sharply with the MSCI
[ Photo ] Emerging Markets Free Index up 35% in U.S. dollars
over the last six months. Underlying economies show
signs of stabilization and favorable earnings growth
reinvigorates the markets. During this time period, the asset class outperformed
all regions except Japan. The key reasons behind the rally are: 1) a decline in
emerging bond yields which lowered the cost of capital and reduced equity market
volatility; 2) the beneficial fundamental impact of lower global interest rates
on Asian stocks and structural change in that region, including debt and bank
restructuring; 3) attractive valuation and moderate economic and earnings growth
in Latin America; and 4) continued favorable momentum in global liquidity flows
caused by sizable underexposure to emerging markets in non-dedicated portfolios.

Last fall, the Fund's portfolio was overweight Eastern Europe as those economies
began to prepare for European Union inclusion. As stocks approached full
valuation the Fund was transitioned out of this overweight position. The Fund's
portfolio was also underweight in Latin America as investors expected a
deterioration of macroeconomic fundamentals. As expected, Brazil devalued their
currency in February. Investors separated this devaluation from other emerging
economies, limiting the impact in Latin America and Asia. The Fund's weighting
in Latin America increased slightly as it appears cheap on a valuation basis,
which is offset by slower economic growth. Recently, the Fund's repositioned
exposure to Asia was increased as this region is showing signs of economic
recovery.

The Fund's performance lagged the benchmark in the first quarter of 1999. The
Fund's managers focused on quality and cheap valuations which led the Fund to
owning smaller export companies with strong balance sheets in Asia. The
underperformance is due to underweighting Asian companies and the Asian
companies the Fund does own are smaller companies. These small stocks were
underperformers over the last two quarters as large Asian companies led the
market returning 58% compared to 15% for the average Asian small company. Fund
managers continue to increase Asian weighting by purchasing companies with
attractive domestic growth stories. These include banks in Korea, Singapore,
Taiwan and India.

Principal International Fund

Scott Opsal The international markets recovered during the first
[ Photo ] half of the fiscal year as the global growth outlook
for the world economy improved and the risk of global
recession declined. The main contribution to this
turn-around was global monetary ease, which occurred
in the fourth quarter of 1998 and resulted in higher
equity prices. Commodity prices, other than oil,
remained at very low levels indicating that world
trade continues to be weak.

The Euro was introduced as Europe's official currency in January and has been
weak versus the U.S. dollar since its introduction. The combination of strong
economic data coming out of the United States with sluggish growth persisting in
Europe is the primary reason behind the currency weakness. Although the European
Monetary Union's local equity markets performed well (+22% in the first half of
the fiscal year), the change in currency value resulted in a lower return for
U.S. investors (+9.3%). The strongest market performance in the period was in
emerging markets, which had suffered from very poor performance in the prior
period when global risk seemed to be very high. Japan also performed well due to
restructuring at the corporate level and very strong Yen performance.

The Fund was positioned somewhat defensively during the first half of the fiscal
year, with large positions in food and household product companies. These stocks
performed well early in the period and began to underperform at the end of the
six months as the global growth outlook improved. Outperforming industries in
the portfolio throughout the period were business services and media. Corporate
merger and acquisition activity in Europe was strong during the performance
period and several stocks in the portfolio benefited from involvement in this
corporate activity. The Fund has approximately 9% in emerging markets which
helped performance as these regions recovered.

The Japanese equity market performed well, up 30% on a local currency basis,
however, the economy continued to languish. There has been a shift in investor
perceptions as bad economic and corporate news in Japan is being viewed less
negatively and the market appears to believe there is a way out of the current
crisis. The fundamental outlook remains weak, therefore, the Fund remains
underweighted in Japan.

Looking forward, in Europe the Fund managers believe de-regulation and increased
competition will sustain the current disinflationary trend. Economic growth
looks to remain below U.S. levels but may be helped by easy monetary conditions.
The current Euro weakness should benefit domestic producers and exporters.

The Fund remains underweight Japan because business conditions remain weak and
banks have not solved their bad loan problems. The Fund managers believe there
are select companies which may be fairly valued if restructuring on the
corporate level is successful and analysts are spending significant time
researching possible ideas.

The Fund's managers are maintaining the weighting in Latin America where GDP
revisions continue on the upside and recessions are not as bad as expected. The
Fund's weighting is being increased in Asia where signs of economic recovery and
corporate restructuring are emerging and positive GDP growth for 1999 is now
expected for most of the countries in the region.

Principal International SmallCap

Darren Sleister "And the last shall become the first" accurately
[ Photo ] describes the six month period ending April 30.
Although Asian economies have shown only slight
indications of possible growth, the end to the sudden
decline in economic activity was enough to send the
region's equity markets rocketing skyward. Even
the "black sheep" Japanese small cap market managed a near 60% increase in the
first quarter of 1999. Many of the region's gains were the result of falling
interest rates and increased capital flows. In case anyone doubts the power of
liquidity- driven market rallies, many Korean equities have increased by five to
tenfold since their lows in October. In short, the laggards became leaders and
vice versa. The broad-based rally in Japanese small cap companies confirms our
current stance that Japan is finally taking measures that will nurse the economy
back to health. The Fund's managers have picked up many undervalued companies in
Japan that will prosper even if the healing process takes longer than expected.
These stocks have impacted the portfolio with several up 50-100% since the
initial purchase. Many purchases in Japan are "category killers" in the retail
industry that benefit regardless of what happens in the macroeconomic
environment. It is highly probable the Fund's managers will increase the total
Asian exposure as the region is showing definite evidence of economic repair and
valuations are attractive enough to warrant further exposure.

The Fund remains heavily exposed to European markets but by definition is
decreasing exposure here. The Euro has weakened from its initial inception in
January, slightly biasing returns downward. There are signs of funds shifting
liquidity from Europe into Eastern Asia as the Asian economies once again show
signs of life. The Fund's managers favor cheap European growth stocks and focus
on high returns on capital as well as globally attractive business models.
Global valuation levels and liquidity flows lend themselves to volatile
conditions in the future. However, the Fund's managers are still convinced that
by choosing the best businesses with the highest rates of forward-looking
returns investors will be well rewarded over the long run in this asset class.
The resource countries of Canada and Australia have become large weightings, but
the Fund's holdings are generally in non-commodity companies in these countries.
In Europe some of the Fund's marginal purchases have been in specialty chemical
companies with attractive valuations and high probabilities of either
restructuring or takeovers to help realize their inherent value. The Fund
continues to be heavily exposed to telecoms, technology and service companies.

Important Notes for Growth-Oriented Funds

The values of these indexes will vary according to the aggregate value of the
common equity of each of the securities included. The indexes represent asset
types which are subject to risk, including possible loss of principal. These are
unmanaged indexes into which direct investment is not possible.

Investments in Principal MidCap, Principal SmallCap and Principal International
SmallCap Funds involve more abrupt or erratic market movements and greater risk
than other larger company stock fund investments.

The International Growth Funds are subject to volatility caused by exchange
rates, foreign economies and foreign taxes.

Dow Jones Industrial Index: This average is a price-weighted average of 30
actively traded blue chip stocks.

Morgan Stanley EMF (Emerging Markets Free) Index: This average is capitalization
weighted and consists of stocks from 26 countries. These countries include:
Argentina, Brazil, Chile, China Free, Columbia, Czech Republic, Greece, Hungary,
India, Indonesia Free, Israel, Jordan, Korea at 50%, Malaysia Free, Mexico Free,
Pakistan, Peru, Philippines Free, Poland, Portugal, South Africa, Sri Lanka,
Taiwan at 50%, Thailand Free, Turkey and Venezuela.

Standard & Poor's 500 Stock Index: An unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.

Standard & Poor's Small-Cap 600 Index: This is a market-value index consisting
of 600 domestic stocks chosen for market size, liquidity and industry group
representation.

Income-Oriented Funds

Principal Bond Fund

Scott Bennett During the last six months the Fund has experienced
[ Photo ] two very different operating environments in the
fixed income market. The emerging market financial
crisis reasserted itself in June and early October
but was eased in mid-October by Federal Reserve rate
cuts. These cuts helped to restore confidence and
liquidity to the markets, which continued to improve from month to month in 1999
with fairly normal market conditions present today. Specifically, as confidence
increased, investors returned to purchasing securities with more financial risk
than U.S. Treasuries and were rewarded with greater returns. This benefited the
Principal Bond Fund, which is primarily invested in BBB-rated corporate bonds,
the best performing part of the investment grade market in 1999.

The Fund's investment strategy during this time period was to be somewhat
conservative with investing new cash flows until the October Fed cuts when Fund
managers became confident the financial markets would improve. Since that time
Fund managers have concentrated on adding good companies with somewhat higher
risk, gradually increasing the overall risk profile of the Fund. This has been
the correct strategy so far in 1999. Given an expectation of a continued strong
U.S. economy and a bottoming world economy this strategy should continue to
prove correct.

Principal Government Securities Income Fund

Marty Schafer Many fixed income fund portfolio managers, in mid to
[ Photo ] late 1998 positioned their portfolios based on a
market perception of continued global risk and an
expectation of a slowing of the U.S. economy.
Portfolio durations were generally longer than their
normal performance benchmarks, and continued fewer
holdings of corporate, mortgage and asset backed securities. During February,
1999 the market perception changed dramatically as portfolio managers began to
realize that 1999 economic growth would be stronger than expected and the
Federal Reserve would not need to cut short-term interest rates to stimulate the
economy. Thus, the better performing portfolios in the last few months have been
those where portfolio managers had durations shorter than their normal
benchmarks, and where a significant number of corporate, mortgage and asset
backed securities were held.

By not changing interest rates in late 1998, the Federal Reserve signaled that
the U.S. economy was still very strong, and likely to experience continued
growth, low inflation and low employment. This Fund's performance was generally
disappointing relative to its benchmark target, however a shortening of duration
during the latter part of 1998 did help add some strength to the Fund's
position. The portfolio management concern early in 1999 was that the U.S.
economy would continue its growth position or even strengthen, which would be
favorable for many of the Fund's portfolio securities but would produce low
absolute returns relative to money market funds. The Fund's manager anticipates
interest rates being channeled into a fairly narrow range for the foreseeable
future, with a slight bias upwards for U.S. interest rates. For U.S. investors
the strong U.S. economic climate will act as an offset for what can be described
as a global economic weakness elsewhere in the world.

Principal High Yield Fund

Mark Denkinger The high market continued to perform well for the six
[ Photo ] months ended April 30. This comes on the heels of a
very difficult and volatile third quarter of 1998,
which experienced the collapse of Long Term Capital,
a well-publicized and highly leveraged hedge fund,
and Russia defaulting. Nevertheless, the high yield
market quickly recovered as the strength of the domestic economy and stock
market continued to remain strong. The Principal High Yield Fund outperformed
all other fixed income sectors. The Fund's performance has been impacted during
this period by the poor performance of several bonds that are having severe
financial difficulties. Default rates are still below historical averages but
have been gradually increasing.

The Principal High Yield Fund maintains a B+ average quality, comprised
primarily of BB and B bonds. This is a relatively conservative risk position
compared to other funds in the high yield market. At the end of April the
account was well diversified among 47 bonds of various sectors. The Fund's
managers are currently overweighting the media, telecom and service industries.

The high yield market is responding well to the strength of the U.S. economy.
Spreads, the amount of additional yield investors require relative to Treasuries
(risk-free) have tightened, new issues have been well received and investors are
pouring money into high yield mutual funds. With most fixed income products
offering inadequate yields in this low interest rate environment, investors have
been turning to the high yield market for its double-digit yields. Given what
looks to be a strong year for economic growth and a strong stock market, high
yield is well positioned to post strong returns in the coming quarters.

Principal Limited Term Bond Fund

Marty Schafer At the beginning of the current fiscal year of the
[ Photo ] Fund, many fixed income portfolio managers were
positioning their portfolios based on a view that
there would be a slowing of the U.S. economy and
continued risk in the global investment markets.
They were anticipating a likely cut in interest
rates and had positioned their portfolios accordingly. However, as things have
turned out, the best performing portfolios were those that were positioned for
the opposite to occur. Generally these were portfolios with shorter than average
durations and a large number of holdings in mortgage and asset backed securities
as well as intermediate term corporate securities.

Relative to its benchmark, the Fund's recent performance has been competitive
among peers but disappointing on absolute basis. In the near term the economic
outlook is that interest rates are expected in continue on a fairly narrow
range, with a slight upward bias for U.S. interest rates. The strong U.S.
economic climate continues to act as an offset for global economic weakness
elsewhere in the world.

Principal Tax-Exempt Bond Fund

Dan Garrett Principal Tax-Exempt Bond Fund continued to provide
[ Photo ] steady results for shareholders over the past six
months. The strategy of a long-term disciplined
focus of value-priced investments within the
industrial and utility revenue bond sectors, with
managed exposure to interest rate and prepayment
risk, has delivered steady results.

Revenue bonds tend to provide higher income than the average municipal bond in
the broader Lehman Municipal Bond Index or the Lipper peer group with only a
slightly higher risk. As credit market fears have been reduced through prudent
moves by the U.S. Fed and other global banks, risk premiums have returned to
more reasonable levels and resulted in favorable performance relative to Lipper
peers. Municipal bond values were steadier than other bond sectors during this
turmoil supported by strong local and state budget surpluses and ongoing growth
in the domestic economy.

Looking forward, the U.S. economy shows signs of continued low inflation with
steady growth. The Fund remains fully invested in revenue bonds to provide
positive relative return compared to the broader municipal market and the Fund's
peers. Fund strategy continues to focus on solid credit quality evaluation to
seek out the best value among municipal securities that deliver competitive
levels of income free from federal tax.

Important Notes for Income-Oriented Funds

Greater credit risks are inherent in a fund which invests primarily in high
yield bonds.

* Duration is the dollar weighted, present value of cash flows, principal and
interest, expressed in time.

** The Fed Funds rate is the rate at which banks lend to each other on an
overnight basis.

Lehman Brothers Municipal Bond Index: An unmanaged index of investment-grade,
tax-exempt bonds which have been issued within the last five years and at least
one year or more to maturity. This index is classified into four main sectors:
General Obligation, Revenue, Insured and Prerefunded.

Money Market Funds

Principal Cash Management Fund

Mike Johnson Steve Schneider
[ Photo ] [ Photo ]

On November 17, 1998, at the Federal Open Market Committee (FOMC) meeting, the
Federal Reserve cut its targeted Fed Funds rate** by .25% to 4.75%. This was the
third in a series of three rate cuts that took place between September and
November of 1998. These cuts were the first to come about since January of 1996
and were aimed at easing the effects of a global slowdown on the U.S. economy.
Since that latter cut, Fed sentiment appeared to be moving toward a more neutral
stance or possibly in the direction of a rate hike somewhere down the line. The
industry average maturity for the majority of the past six months was in the
60-65+ day area. Principal Cash Management Fund strives to stay at or near the
industry average. Fund management actively monitors industry averages in order
to keep both yields and average maturities in line. The Fund continues to invest
from a list of high credit quality investments that is carefully monitored.

An investment in a money market fund is neither insured nor guaranteed by the
U.S. Government. While money market funds strive to maintain a $1.00 per share
net asset value, it is possible to lose money in this type of investment.

* The Fed Funds rate is the rate at which banks lend to each other on an
overnight basis.

April 30, 1999

STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)
<TABLE>
<CAPTION>
Principal Principal Principal
Balanced Blue Chip Capital Value
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost............ $139,708,013 $195,710,448 $522,617,096

Assets
Investment in securities -- at value (Note 4).. $161,433,476 $258,190,801 $730,673,134
Cash........................................ 73,227 39,865 10,001
Receivables:
Dividends and interest...................... 763,447 147,571 1,046,294
Investment securities sold.................. -- -- 900,005
Capital Shares sold......................... 94,185 657,625 564,831
Prepaid Expenses............................... -- -- --
Other assets................................... 6,789 5,267 37,374

Total Assets 162,371,124 259,041,129 733,231,639
Liabilities
Accrued expenses............................... 73,267 39,266 316,414
Payables:
Investment securities purchased............. -- -- --
Capital Shares reacquired................... 79,685 164,294 964,874

Total Liabilities 152,952 203,560 1,281,288

Net Assets Applicable to
Outstanding Shares ............................ $162,218,172 $258,837,569 $731,950,351

Net Assets Consist of:
Capital Stock.................................. $ 102,793 $ 104,118 $ 227,028
Additional paid-in capital..................... 137,024,950 190,249,381 495,086,675
Accumulated undistributed net investment
income (operating loss)..................... 331,940 (49,995) 3,235,011
Accumulated undistributed net realized
gain (loss) on investment transactions...... 3,033,026 6,053,712 25,345,599
Net unrealized appreciation (depreciation)
of investments.............................. 21,725,463 62,480,353 208,056,038

Total Net Assets $162,218,172 $258,837,569 $731,950,351

Capital Stock (par value: $.01 a share):
Shares authorized.............................. 100,000,000 100,000,000 100,000,000

Net Asset Value Per Share:
Class A: Net Assets............................ $116,402,562 $166,447,009 $630,443,125
Shares issued and outstanding..... 7,362,351 6,681,066 19,535,952
Net asset value per share.......... $15.81 $24.91 $32.27
Maximum offering price per share(a) ... $16.60 $26.15 $33.88
Class B: Net Assets........................... $22,844,042 $47,864,103 $56,322,598
Shares issued and outstanding..... 1,451,167 1,936,281 1,754,379
Net asset value per share(b)........... $15.74 $24.72 $32.10
Class R: Net Assets........................... $22,971,568 $44,526,457 $45,184,628
Shares issued and outstanding..... 1,465,827 1,794,425 1,412,466
Net asset value per share.............. $15.67 $24.81 $31.99

<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>

See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal
Growth MidCap Real Estate
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost............ $367,079,847 $329,476,686 $13,631,246

Assets
Investment in securities -- at value (Note 4).. $626,119,293 $454,546,632 $13,251,144
Cash........................................ 134,541 2,450,125 9,981
Receivables:
Dividends and interest...................... 383,890 400,291 16,762
Investment securities sold.................. -- 1,517,477 --
Capital Shares sold......................... 1,047,209 288,365 11,281
Prepaid Expenses............................... -- -- 10,692
Other assets................................... 19,360 11,438 --

Total Assets 627,704,293 459,214,328 13,299,860
Liabilities
Accrued expenses............................... 209,180 459,762 --
Payables:
Investment securities purchased............. -- 2,587,622 --
Capital Shares reacquired................... 748,887 880,577 193

Total Liabilities 958,067 3,927,961 193

Net Assets Applicable to
Outstanding Shares ............................ $626,746,226 $455,286,367 $13,299,667

Net Assets Consist of:
Capital Stock.................................. $ 94,298 $ 101,823 $ 15,412
Additional paid-in capital..................... 341,426,300 307,083,820 14,867,338
Accumulated undistributed net investment
income (operating loss)..................... 621,577 -- 27,003
Accumulated undistributed net realized
gain (loss) on investment transactions...... 25,564,605 23,030,778 (1,229,984)
Net unrealized appreciation (depreciation)
of investments.............................. 259,039,446 125,069,946 (380,102)

Total Net Assets $626,746,226 $455,286,367 $13,299,667

Capital Stock (par value: $.01 a share):
Shares authorized.............................. 100,000,000 100,000,000 100,000,000

Net Asset Value Per Share:
Class A: Net Assets............................ $494,746,625 $353,387,545 $6,697,293
Shares issued and outstanding..... 7,438,967 7,874,017 775,874
Net asset value per share.......... $66.51 $44.88 $8.63
Maximum offering price per share(a) ... $69.83 $47.12 $9.06
Class B: Net Assets........................... $89,660,777 $75,248,145 $3,417,404
Shares issued and outstanding..... 1,350,585 1,705,622 396,901
Net asset value per share(b)........... $66.39 $44.12 $8.61
Class R: Net Assets........................... $42,338,824 $26,650,677 $3,184,970
Shares issued and outstanding..... 640,199 602,700 368,426
Net asset value per share.............. $66.13 $44.22 $8.64

See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Principal Principal
SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.
<S> <C> <C>
Investment in securities -- at cost............ $45,957,382 $82,371,905

Assets
Investment in securities -- at value (Note 4).. $47,916,012 $116,181,701
Cash........................................ 10,001 71,522
Receivables:
Dividends and interest...................... 16,089 347,822
Investment securities sold.................. -- 1,819,295
Capital Shares sold......................... 81,040 181,852
Prepaid Expenses............................... -- --
Other assets................................... 746 2,338

Total Assets 48,023,888 118,604,530
Liabilities
Accrued expenses............................... 9,668 83,479
Payables:
Investment securities purchased............. -- 1,847,351
Capital Shares reacquired................... 18,945 105,578

Total Liabilities 28,613 2,036,408

Net Assets Applicable to
Outstanding Shares ............................ $47,995,275 $116,568,122

Net Assets Consist of:
Capital Stock.................................. $ 47,825 $ 67,561
Additional paid-in capital..................... 45,508,746 77,428,273
Accumulated undistributed net investment
income (operating loss)..................... -- 282,214
Accumulated undistributed net realized
gain (loss) on investment transactions...... 480,074 4,980,278
Net unrealized appreciation (depreciation)
of investments.............................. 1,958,630 33,809,796

Total Net Assets $47,995,275 $116,568,122

Capital Stock (par value: $.01 a share):
Shares authorized.............................. 100,000,000 100,000,000

Net Asset Value Per Share:
Class A: Net Assets............................ $29,844,585 $95,188,520
Shares issued and outstanding..... 2,968,353 5,515,220
Net asset value per share.......... $10.05 $17.26
Maximum offering price per share(a) ... $10.56 $18.12
Class B: Net Assets........................... $10,527,963 $15,220,332
Shares issued and outstanding..... 1,056,195 883,072
Net asset value per share(b)........... $9.97 $17.24
Class R: Net Assets........................... $7,622,727 $6,159,270
Shares issued and outstanding..... 757,925 357,809
Net asset value per share.............. $10.06 $17.21

See accompanying notes.
</TABLE>

Six Months Ended April 30, 1999

STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Principal Principal Principal
Balanced Blue Chip Capital Value
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Net Investment Income
Income:
Dividends................................... $ 835,910 $ 1,977,885 $ 7,918,699
Interest.................................... 2,186,249 182,822 401,869

Total Income 3,022,159 2,160,707 8,320,568
Expenses:
Management and investment advisory
fees (Note 3)............................ 444,522 524,246 1,280,423
Distribution and shareholder servicing
fees (Notes 1 and 3)..................... 308,404 517,945 812,703
Transfer and administrative services
(Notes 1 and 3)......................... 270,801 518,046 631,807
Registration fees (Note 1).................. 26,445 48,442 55,473
Custodian fees.............................. 2,537 1,643 1,682
Auditing and legal fees..................... 3,205 3,673 3,096
Directors' fees............................. 3,369 3,483 3,696
Other....................................... 2,997 3,701 14,789

Total Expenses 1,062,280 1,621,179 2,803,669

Net Investment Income (Operating Loss) 1,959,879 539,528 5,516,899

Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investment transactions 3,034,155 6,072,126 25,333,085
Net realized gains from other investment companies -- -- --
Change in unrealized appreciation/
depreciation of investments................. 6,784,764 24,829,899 44,046,288

Net Realized and Unrealized
Gain on Investments 9,818,919 30,902,025 69,379,373

Net Increase in Net Assets
Resulting from Operations $11,778,798 $31,441,553 $74,896,272

See accompanying notes.

</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal
Growth MidCap Real Estate
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Net Investment Income
Income:
Dividends................................... $ 3,074,272 $ 1,939,882 $ 344,256
Interest.................................... 571,377 651,609 12,930

Total Income 3,645,649 2,591,491 357,186
Expenses:
Management and investment advisory
fees (Note 3)............................ 1,098,114 1,250,320 54,533
Distribution and shareholder servicing
fees (Notes 1 and 3)..................... 879,708 743,990 28,133
Transfer and administrative services
(Notes 1 and 3)......................... 682,642 886,796 39,450
Registration fees (Note 1).................. 43,282 47,763 8,847
Custodian fees.............................. 2,484 2,564 945
Auditing and legal fees..................... 5,314 4,182 1,889
Directors' fees............................. 3,733 3,696 2,386
Other....................................... 10,424 17,835 1,708

Total Expenses 2,725,701 2,957,146 137,891

Net Investment Income (Operating Loss) 919,948 (365,655) 219,295

Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investment transactions 30,035,535 23,428,447 (628,976)
Net realized gains from other investment companies -- -- 12,099
Change in unrealized appreciation/
depreciation of investments................. 64,398,826 28,491,297 1,015,205

Net Realized and Unrealized
Gain on Investments 94,434,361 51,919,744 398,328

Net Increase in Net Assets
Resulting from Operations $95,354,309 $51,554,089 $ 617,623

See accompanying notes.

</TABLE>
<TABLE>
<CAPTION>
Principal Principal
SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.
<S> <C> <C>
Net Investment Income
Income:
Dividends................................... $ 117,847 $ 1,736,554
Interest.................................... 54,662 79,198

Total Income 172,509 1,815,752
Expenses:
Management and investment advisory
fees (Note 3)............................ 166,201 325,064
Distribution and shareholder servicing
fees (Notes 1 and 3)..................... 72,138 196,400
Transfer and administrative services
(Notes 1 and 3)......................... 135,673 160,615
Registration fees (Note 1).................. 13,751 15,850
Custodian fees.............................. 2,378 897
Auditing and legal fees..................... 1,930 2,456
Directors' fees............................. 2,385 3,483
Other....................................... 442 2,954

Total Expenses 394,898 707,719

Net Investment Income (Operating Loss) (222,389) 1,108,033

Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investment transactions 1,706,875 4,979,007
Net realized gains from other investment companies -- --
Change in unrealized appreciation/
depreciation of investments................. 5,346,508 3,856,120

Net Realized and Unrealized
Gain on Investments 7,053,383 8,835,127

Net Increase in Net Assets
Resulting from Operations $ 6,830,994 $9,943,160

See accompanying notes.

</TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
<TABLE>
<CAPTION>
Principal Principal
Balanced Blue Chip
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.

Six Months Year Six Months Year
Ended Ended Ended Ended
April 30, October 31, April 30, October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operations
Net investment income(operating loss)........... $ 1,959,879 $ 3,433,710 $ 539,528 $ 567,773
Net realized gain (loss)
from investment transactions 3,034,155 4,283,465 6,072,126 21,090
Change in unrealized appreciation/
depreciation of investments................ 6,784,764 4,621,248 24,829,899 23,303,399

Net Increase (Decrease) in Net Assets
Resulting from Operations 11,778,798 12,338,423 31,441,553 23,892,262

Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... (1,633,893) (2,435,139) (545,735) (571,140)
Class B ................................... (231,157) (269,151) (17,656) (21,463)
Class R.................................... (254,656) (300,221) (43,333) (42,466)
From net realized gain on investments:
Class A ................................... (3,106,897) (5,882,074) (24,683) (8,442,806)
Class B ................................... (579,595) (842,073) (8,209) (1,993,541)
Class R.................................... (605,230) (725,965) (6,612) (1,692,630)
Tax return of capital distributions:
Class A ................................... -- -- -- --
Class B ................................... -- -- -- --
Class R.................................... -- -- -- --

Total Dividends and Distributions (6,411,428) (10,454,623) (646,228) (12,764,046)

Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 13,835,947 23,880,103 33,638,676 46,354,686
Class B ................................... 4,506,075 8,010,824 11,821,716 15,736,209
Class R.................................... 5,353,248 11,459,488 11,884,381 18,838,628
Shares issued in reinvestment
of dividends and distributions:
Class A.................................... 4,621,874 8,093,981 546,949 8,730,513
Class B ................................... 796,374 1,101,436 26,997 2,000,486
Class R.................................... 858,628 1,026,031 92,076 1,734,897
Shares redeemed:
Class A ................................... (10,349,237) (14,404,904) (14,439,751) (15,983,191)
Class B ................................... (2,132,199) (2,320,820) (3,757,066) (3,609,645)
Class R ................................... (3,417,575) (3,017,907) (5,606,265) (4,847,775)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions 14,073,135 33,828,232 34,207,713 68,954,808

Total Increase 19,440,505 35,712,032 65,003,038 80,083,024

Net Assets
Beginning of period........................... 142,777,667 107,065,635 193,834,531 113,751,507

End of period [including
undistributed (overdistributed)
net investment income as set forth below].. $162,218,172 $142,777,667 $258,837,569 $193,834,531

Undistributed (Overdistributed)
Net Investment Income....................... $ 331,940 $ 500,739 $ (49,995) $ 607

<FN>
(a) Period from December 11, 1997 (date operations commenced) through October
31, 1998.
</FN>

See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Principal Principal
Capital Value Growth
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.

Six Months Year Six Months Year
Ended Ended Ended Ended
April 30, October 31, April 30, October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operations
Net investment income(operating loss)........... $ 5,516,899 $9,784,467 $ 919,948 $2,547,476
Net realized gain (loss)
from investment transactions 25,333,085 40,907,350 30,035,535 (4,470,515)
Change in unrealized appreciation/
depreciation of investments................ 44,046,288 33,306,303 64,398,826 58,299,881

Net Increase (Decrease) in Net Assets
Resulting from Operations 74,896,272 83,998,120 95,354,309 56,376,842

Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... (4,942,284) (9,413,649) (1,249,572) (2,281,014)
Class B ................................... (212,784) (302,359) (31,615) (84,298)
Class R.................................... (193,815) (272,715) -- (5,786)
From net realized gain on investments:
Class A ................................... (35,538,046) (40,827,739) -- (9,421,497)
Class B ................................... (2,882,612) (2,381,772) (416) (1,280,548)
Class R.................................... (2,464,152) (1,697,455) -- (518,291)
Tax return of capital distributions:
Class A ................................... -- -- -- --
Class B ................................... -- -- -- --
Class R.................................... -- -- -- --

Total Dividends and Distributions (46,233,693) (54,895,689) (1,281,603) (13,591,434)

Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 44,150,854 73,344,881 63,819,185 80,738,775
Class B ................................... 11,476,186 17,966,775 19,262,545 23,436,918
Class R.................................... 10,011,201 22,090,590 11,852,588 16,186,162
Shares issued in reinvestment
of dividends and distributions:
Class A.................................... 39,586,582 49,153,586 1,208,675 11,393,839
Class B ................................... 3,051,663 2,633,936 32,010 1,340,964
Class R.................................... 2,662,827 2,028,417 -- 524,005
Shares redeemed:
Class A ................................... (42,968,727) (78,578,133) (41,359,267) (49,829,917)
Class B ................................... (5,267,472) (4,560,133) (7,331,707) (6,849,158)
Class R ................................... (6,907,549) (5,699,984) (6,130,658) (4,298,409)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions 55,795,565 78,379,935 41,353,371 72,643,179

Total Increase 84,458,144 107,482,366 135,426,077 115,428,587

Net Assets
Beginning of period........................... 647,492,207 540,009,841 491,320,149 375,891,562

End of period [including
undistributed (overdistributed)
net investment income as set forth below].. $731,950,351 $647,492,207 $626,746,226 $491,320,149

Undistributed (Overdistributed)
Net Investment Income....................... $ 3,235,011 $3,066,439 $621,577 $ 982,816

<FN>
(a) Period from December 11, 1997 (date operations commenced) through October
31, 1998.
</FN>

See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Principal Principal
MidCap Real Estate
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.

Six Months Year Six Months Period
Ended Ended Ended Ended
April 30, October 31, April 30, October 31,
1999 1998 1999 1998(a)
<S> <C> <C> <C> <C>
Operations
Net investment income(operating loss)........... $(365,655) $(1,167,967) $219,295 $292,169
Net realized gain (loss)
from investment transactions 23,428,447 (397,666) (616,877) (613,107)
Change in unrealized appreciation/
depreciation of investments................ 28,491,297 (47,859,461) 1,015,205 (1,395,307)

Net Increase (Decrease) in Net Assets
Resulting from Operations 51,554,089 (49,425,094) 617,623 (1,716,245)

Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... -- -- (116,561) (118,861)
Class B ................................... -- -- (53,335) (70,429)
Class R.................................... -- -- (58,094) (67,181)
From net realized gain on investments:
Class A ................................... -- (8,489,268) -- --
Class B ................................... -- (1,505,719) -- --
Class R.................................... -- (456,798) -- --
Tax return of capital distributions:
Class A ................................... -- (3,831) -- --
Class B ................................... -- (351) -- --
Class R.................................... -- (114) -- --

Total Dividends and Distributions -- (10,456,081) (227,990) (256,471)

Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 33,838,911 84,673,707 1,270,930 6,657,527
Class B ................................... 11,128,533 26,339,797 279,869 3,740,670
Class R.................................... 5,289,291 14,593,610 305,378 3,419,415
Shares issued in reinvestment
of dividends and distributions:
Class A.................................... 122 8,301,363 114,128 117,899
Class B ................................... 378 1,491,031 53,310 72,055
Class R.................................... -- 456,912 58,149 69,699
Shares redeemed:
Class A ................................... (53,731,951) (60,048,924) (383,275) (394,690)
Class B ................................... (12,569,173) (9,249,916) (129,510) (118,103)
Class R ................................... (5,063,672) (5,504,466) (196,682) (54,019)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions (21,107,561) 61,053,114 1,372,297 13,510,453

Total Increase 30,446,528 1,171,939 1,761,930 11,537,737

Net Assets
Beginning of period........................... 424,839,839 423,667,900 11,537,737 --

End of period [including
undistributed (overdistributed)
net investment income as set forth below].. $455,286,367 $424,839,839 $13,299,667 $11,537,737

Undistributed (Overdistributed)
Net Investment Income....................... $ -- $-- $ 27,003 $ 35,698

<FN>
(a) Period from December 11, 1997 (date operations commenced) through October
31, 1998.
</FN>

See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Principal Principal
SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.

Six Months Period Six Months Year
Ended Ended Ended Ended
April 30, October 31, April 30, October 31,
1999 1998(a) 1999 1998
<S> <C> <C> <C> <C>
Operations
Net investment income(operating loss)........... $(222,389) $(258,265) $1,108,033 $2,339,457
Net realized gain (loss)
from investment transactions 1,706,875 (1,226,801) 4,979,007 1,540,023
Change in unrealized appreciation/
depreciation of investments................ 5,346,508 (3,387,878) 3,856,120 19,641,699

Net Increase (Decrease) in Net Assets
Resulting from Operations 6,830,994 (4,872,944) 9,943,160 23,521,179

Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... -- -- (977,307) (2,238,576)
Class B ................................... -- -- (93,136) (202,869)
Class R.................................... -- -- (35,695) (59,525)
From net realized gain on investments:
Class A ................................... -- -- (1,241,335) --
Class B ................................... -- -- (171,044) --
Class R.................................... -- -- (61,770) --
Tax return of capital distributions:
Class A ................................... -- (4,160) -- --
Class B ................................... -- (3,120) -- --
Class R.................................... -- (3,120) -- --

Total Dividends and Distributions -- (10,400) (2,580,287) (2,500,970)

Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 10,116,310 22,354,702 13,637,669 12,723,975
Class B ................................... 3,245,004 8,073,780 4,521,072 4,293,220
Class R.................................... 2,996,325 5,958,145 2,617,533 2,547,194
Shares issued in reinvestment
of dividends and distributions:
Class A.................................... -- 4,160 2,065,420 1,973,186
Class B ................................... -- 3,120 246,521 182,379
Class R.................................... -- 3,120 97,576 59,486
Shares redeemed:
Class A ................................... (2,970,328) (967,357) (10,191,706) (13,805,582)
Class B ................................... (842,630) (232,397) (1,829,584) (2,155,400)
Class R ................................... (1,156,843) (537,486) (888,047) (725,248)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions 11,387,838 34,659,787 10,276,454 5,093,210

Total Increase 18,218,832 29,776,443 17,639,327 26,113,419

Net Assets
Beginning of period........................... 29,776,443 -- 98,928,795 72,815,376

End of period [including
undistributed (overdistributed)
net investment income as set forth below].. $47,995,275 $29,776,443 $116,568,122 $98,928,795

Undistributed (Overdistributed)
Net Investment Income....................... $ -- $ -- $282,214 $ 280,319

<FN>
(a) Period from December 11, 1997 (date operations commenced) through October
31, 1998.
</FN>

See accompanying notes.
</TABLE>

April 30, 1999

NOTES TO FINANCIAL STATEMENTS
(unaudited)

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

Note 1 -- Significant Accounting Policies

Principal Balanced Fund, Inc., Principal Blue Chip Fund, Inc., Principal Capital
Value Fund, Inc., Principal Growth Fund, Inc., Principal MidCap Fund, Inc.,
Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc. and Principal
Utilities Fund, Inc. (the "Domestic Growth Funds") are registered under the
Investment Company Act of 1940, as amended, as open-end diversified management
investment companies and operate in the mutual fund industry.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC") upon redemption. Class B shares are sold without an
initial sales charge, but are subject to a declining CDSC on certain redemptions
made within six years of purchase. Class R shares are sold without an initial
sales charge and are not subject to a CDSC. Class B shares and Class R shares
bear higher ongoing distribution fees than Class A shares. Class B shares
automatically convert into Class A shares, based on relative net asset value
(without a sales charge) seven years after purchase. Class R shares
automatically convert into Class A shares, based on relative net asset value
(without a sales charge) four years after purchase. All classes of shares for
each fund represent interests in the same portfolio of investments, and will
vote together as a single class except where otherwise required by law or as
determined by each of the Domestic Growth Funds' respective Board of Directors.
In addition, the Board of Directors of each fund declare separate dividends on
each class of shares.

The Domestic Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the period ended April 30, 1999, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees

Class A Class B Class R Class A Class B Class R Class A Class B Class R

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Balanced Fund, Inc. $137,885 $ 92,474 $ 78,045 $ 58,355 $15,500 $14,119 $ 6,434 $ 4,215 $ 4,995
Principal Blue Chip Fund, Inc. 181,596 191,291 145,058 87,700 32,788 26,797 15,642 6,629 7,201
Principal Capital Value Fund, Inc. 479,610 188,081 145,012 172,307 33,299 29,334 18,162 8,200 6,710
Principal Growth Fund, Inc. 492,701 253,537 133,470 203,764 46,349 23,436 14,513 4,719 5,440
Principal MidCap Fund, Inc. 438,577 209,554 95,859 252,571 61,869 29,545 13,351 6,232 5,961
Principal Real Estate Fund, Inc. 5,943 16,459 5,731 2,065 750 268 1,882 2,399 1,698
Principal SmallCap Fund, Inc. 17,065 42,689 12,384 18,206 5,707 2,399 3,554 2,977 2,619
Principal Utilities Fund, Inc. 113,295 64,130 18,975 44,231 7,424 3,901 5,067 3,638 3,527
</TABLE>

The Domestic Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities and preferred stocks,
the investments are valued by using prices provided by market makers or
estimates of market values obtained from yield data and other factors relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.

The Domestic Growth Funds record investment transactions generally one day after
the trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The Domestic Growth
Funds record dividend income on the ex-dividend date. Interest income is
recognized on an accrual basis.

The Domestic Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading account. The order permits the Domestic Growth Funds' cash balances to
be deposited into a single joint account along with the cash of other registered
investment companies managed by Principal Management Corporation (the
"Manager"). These balances may be invested in one or more short-term
instruments.

Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments are determined in accordance with federal tax
regulations, which may differ from generally accepted accounting principles.
Permanent book and tax basis differences are reclassified within the capital
accounts based on their federal tax basis treatment; temporary differences do
not require reclassification. Reclassifications made for Principal MidCap Fund,
Inc. and Principal SmallCap Fund, Inc. for the year ended October 31, 1998
aggregated $1,172,263 and $268,657, respectively. Other reclassifications made
for the year ended October 31, 1998 were not material.

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

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Note 2 -- Federal Income Taxes

No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes approximates that used for financial
reporting purposes.

Note 3 -- Management Agreement and Transactions With Affiliates

The Domestic Growth Funds have agreed to pay investment advisory and management
fees to Principal Management Corporation (wholly owned by Princor Financial
Services Corporation, a subsidiary of Principal Financial Services, Inc.)
computed at an annual percentage rate of each fund's average daily net assets.
The annual rate used in this calculation for the Domestic Growth Funds is as
follows:
<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)

First Next Next Next Over
$100 $100 $100 $100 $400

<S> <C> <C> <C> <C> <C>
Principal Balanced Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
Principal Blue Chip Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal Capital Value Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal Growth Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal MidCap Fund, Inc. 0.65 0.60 0.55 0.50 0.45
Principal Real Estate Fund, Inc. 0.90 0.85 0.80 0.75 0.70
Principal SmallCap Fund, Inc. 0.85 0.80 0.75 0.70 0.65
Principal Utilities Fund, Inc. 0.60 0.55 0.50 0.45 0.40
</TABLE>

The Domestic Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.

For the year ended October 31, 1998, the Manager voluntarily waived a portion of
its fee for the Principal Utilities Fund, Inc. The amounts waived for the
Principal Utilities Fund, Inc. Class A shares, Class B shares and Class R shares
were $60,477, $9,557 and $12,481, respectively. The Manager ceased its waiver of
expenses October 31, 1998.

Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. Princor Financial Services Corporation also
retains sales charges on sales of Class A shares based on declining rates which
begin at 4.75% of the offering price. The aggregate amount of these charges
retained, by fund, for the period ended April 30, 1999 were as follows:

Class A Class B

Principal Balanced Fund, Inc. $ 357,396 $ 40,994
Principal Blue Chip Fund, Inc. 650,671 71,296
Principal Capital Value Fund, Inc. 848,323 84,649
Principal Growth Fund, Inc. 1,206,935 115,928
Principal MidCap Fund, Inc. 770,613 165,849
Principal Real Estate Fund, Inc. 28,091 1,756
Principal SmallCap Fund, Inc. 227,304 7,367
Principal Utilities Fund, Inc. 248,655 28,232

No brokerage commissions were paid by the Domestic Growth Funds to Princor
Financial Services Corporation during the period. Brokerage commissions were
paid to other affiliates by the following funds:

Period Ended Year Ended
April 30, 1999 October 31, 1998

Principal Balanced Fund, Inc. $ 2,965 $ 6,080
Principal Blue Chip Fund, Inc. 16,0152,315
Principal Capital Value Fund, Inc. 36,110 32,675
Principal Growth Fund, Inc. 29,288 18,750
Principal MidCap Fund, Inc. 7,465 7,716
Principal Real Estate Fund, Inc. 7,775 14,745
Principal SmallCap Fund, Inc. 1,695 1,050
Principal Utilities Fund, Inc. 4,255 3,235

The Domestic Growth Funds bear distribution and shareholder servicing fees with
respect to Class A shares computed at an annual rate of up to .25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the Domestic Growth Funds adopted a distribution plan with respect to Class B
shares that provides for distribution and shareholder servicing fees computed at
an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the Domestic Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the respective
Domestic Growth Funds which generated the excess.

At April 30, 1999, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company and benefit plans sponsored on behalf of Principal Life
Insurance Company owned shares of the Domestic Growth Funds as follows:

Class A Class B Class R

Principal Balanced Fund, Inc. 5,467 116 2,774
Principal Blue Chip Fund, Inc. 64,478 99 71
Principal Capital Value Fund, Inc. 5,356,846 76 55
Principal Growth Fund, Inc. 37,577 37 27
Principal MidCap Fund, Inc. 46,739 45 32
Principal Real Estate Fund, Inc. 417,861 312,058 313,166
Principal SmallCap Fund, Inc. 400,425 300,319 300,319
Principal Utilities Fund, Inc. 5,874 126 94

Note 4 -- Investment Transactions

For the period ended April 30, 1999, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Domestic Growth Funds were as
follows:

Purchases Sales

Principal Balanced Fund, Inc. $ 30,555,952 $17,887,154
Principal Blue Chip Fund, Inc. 50,782,538 14,296,937
Principal Capital Value Fund, Inc. 105,976,771 70,624,928
Principal Growth Fund, Inc. 139,026,028 50,593,737
Principal MidCap Fund, Inc. 78,289,364 52,509,623
Principal Real Estate Fund, Inc. 5,122,888 3,304,984
Principal SmallCap Fund, Inc. 27,493,140 14,505,797
Principal Utilities Fund, Inc. 23,913,023 13,804,254

At April 30, 1999, net unrealized appreciation (depreciation) of investments by
the Domestic Growth Funds was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Gross Unrealized (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal Balanced Fund, Inc. $ 25,386,436 $ (3,660,973) $ 21,725,463
Principal Blue Chip Fund, Inc. 70,310,037 (7,829,684) 62,480,353
Principal Capital Value Fund, Inc. 223,207,947 (15,151,909) 208,056,038
Principal Growth Fund, Inc. 269,430,967 (10,391,521) 259,039,446
Principal MidCap Fund, Inc. 160,395,154 (35,325,208) 125,069,946
Principal Real Estate Fund, Inc. 540,502 (920,604) (380,102)
Principal SmallCap Fund, Inc. 7,444,656 (5,486,026) 1,958,630
Principal Utilities Fund, Inc. 35,608,182 (1,798,386) 33,809,796
</TABLE>

The Domestic Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.

Note 5 -- Capital Share Transactions

Transactions in Capital Shares by fund were as follows:
<TABLE>
<CAPTION>
Principal Principal Principal Principal
Balanced Blue Chip Capital Value Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Period Ended April 30, 1999:
Shares sold:
Class A ......................................... 901,835 1,439,982 1,444,883 1,028,045
Class B ......................................... 294,888 508,260 376,602 309,632
Class R ......................................... 351,035 512,807 328,329 192,424
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 301,537 23,622 1,307,207 20,161
Class B ........................................... 52,046 1,213 101,272 536
Class R ......................................... 56,470 3,893 88,532 --
Shares redeemed:
Class A ......................................... (673,912) (619,959) (1,405,195) (668,379)
Class B............................................ (139,717) (161,161) (172,286) (117,275)
Class R ......................................... (224,534) (242,293) (227,705) (100,134)

Net Increase 919,648 1,466,364 1,841,639 665,010

Year Ended October 31, 1998:
Shares sold:
Class A ......................................... 1,578,648 2,196,999 2,383,996 1,435,543
Class B ......................................... 531,549 749,555 582,574 414,689
Class R ......................................... 764,170 893,287 717,506 290,030
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 551,343 445,659 1,687,027 219,136
Class B ........................................... 75,490 102,886 91,259 26,054
Class R ......................................... 70,471 89,024 70,217 10,249
Shares redeemed:
Class A ......................................... (952,391) (760,092) (2,537,205) (888,842)
Class B ......................................... (153,016) (171,471) (148,042) (121,844)
Class R ......................................... (202,139) (231,149) (186,811) (76,609)

Net Increase 2,264,125 3,314,698 2,660,521 1,308,406

</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal Principal
MidCap Real Estate SmallCap Utilities
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Period Ended April 30, 1999:
Shares sold:
Class A ......................................... 805,293 154,085 1,107,547 814,081
Class B ......................................... 268,747 33,815 358,237 270,266
Class R ......................................... 127,716 36,598 329,014 156,127
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 3 14,240 -- 124,254
Class B ........................................... 9 6,641 -- 14,880
Class R ......................................... -- 7,229 -- 5,894
Shares redeemed:
Class A ......................................... (1,276,072) (46,852) (325,365) (606,705)
Class B ......................................... (302,918) (15,750) (93,235) (109,824)
Class R ......................................... (122,007) (23,841) (125,902) (53,422)

Net Increase(Decrease) (499,229) 166,165 1,250,296 615,551

Periods Ended October 31, 1998:
Shares sold:
Class A ......................................... 1,891,397 684,793 2,291,199 853,517
Class B ......................................... 593,857 377,186 817,321 286,360
Class R ......................................... 327,198 346,800 610,143 172,466
Shares issued in reinvestment of
dividends and distributions:
Class A ........................................... 188,881 13,045 425 130,341
Class B ........................................... 34,300 7,946 319 12,065
Class R ......................................... 10,456 7,688 319 3,932
Shares redeemed:
Class A ......................................... (1,383,727) (43,437) (105,453) (928,474)
Class B ......................................... (215,454) (12,937) (26,447) (144,160)
Class R ......................................... (127,550) (6,048) (55,649) (48,307)

Net Increase 1,319,358 1,375,036 3,532,177 337,740

</TABLE>

Note 6 -- Line of Credit

The Domestic Growth Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At April 30, 1999, the Domestic Growth Funds had no
outstanding borrowings under the line of credit.

April 30, 1999

SCHEDULES OF INVESTMENTS

GROWTH FUNDS (DOMESTIC)

PRINCIPAL BALANCED FUND, INC.

Shares
Held Value

Common Stocks (57.69%)

Auto & Home Supply Stores (0.79%)
Autozone, Inc. 42,900(a) $1,287,000

Bakery Products (0.79%)
Sara Lee Corp. 57,400 1,277,150
Beverages (1.15%)
Pepsico, Inc. 50,700 1,872,731

Business Credit Institutions (0.21%)
Associates First Capital `A' 7,680 340,320

Chemicals & Allied Products (0.50%)
Dow Chemical Co. 6,200 813,363

Commercial Banks (5.18%)
Bank of America Corp. 22,000 1,584,000
BankBoston Corp. 19,200 940,800
Bankers Trust Corp. 10,000 900,625
Chase Manhattan Corp. 11,800 976,450
First Union Corp. 20,492 1,134,745
Fleet Financial Group, Inc. 8,800 378,950
PNC Financial Corp. 15,900 920,213
Wells Fargo Co. 36,200 1,563,387

8,399,170
Commercial Printing (0.50%)
R.R. Donnelley & Sons Co. 23,100 817,163

Communications Equipment (0.44%)
General Instrument Corp. 19,600(a) 715,400

Computer & Data Processing
Services (3.13%)
Adobe Systems, Inc. 26,100 1,654,087
Electronic Data Systems Corp. 29,800 1,601,750
First Data Corp. 42,800 1,816,325

5,072,162
Computer & Office Equipment (3.15%)
3COM Corp. 24,100(a) 629,612
Cabletron Systems, Inc. 41,800(a) 394,488
Compaq Computer Corp. 31,900 711,769
Hewlett-Packard Co. 18,600 1,467,075
International Business Machines Corp. 9,100 1,903,606

5,106,550
Consumer Products (2.44%)
Fortune Brands, Inc. 34,300 1,354,850
Philip Morris Cos., Inc. 27,700 971,231
RJR Nabisco Holdings Corp. 31,200 803,400
UST, Inc. 29,500 822,313

3,951,794
Crude Petroleum & Natural Gas (1.07%)
Texaco, Inc. 27,700 1,738,175

Department Stores (0.96%)
Dillard's, Inc., Class A 41,100 $ 1,137,956
Penney (J.C.) Co. 9,300 424,313

1,562,269
Drugs (5.30%)
Abbott Laboratories 18,900 915,469
American Home Products Corp. 27,300 1,665,300
Bristol-Myers Squibb Co. 18,600 1,182,262
Johnson & Johnson 21,200 2,067,000
Merck & Co., Inc. 26,200 1,840,550
Pharmacia & Upjohn, Inc. 16,500 924,000

8,594,581
Electric Services (1.94%)
Central & Southwest Corp. 36,100 895,731
Dominion Resources, Inc. 19,900 818,387
Potomac Electric Power Co. 23,400 684,450
Reliant Energy, Inc. 26,700 755,944
3,154,512
Electrical Industrial Apparatus (1.03%)
Emerson Electric Co. 25,800 1,664,100

Electronic Distribution Equipment (0.72%)
General Electric Co. 11,100 1,171,050

Fats & Oils (0.58%)
Archer Daniels Midland Co. 63,193 947,895

Federal & Federally-Sponsored
Credit (0.28%)
Federal National Mortgage Association 6,400 454,000

Fire, Marine & Casualty Insurance (2.50%)
Berkshire Hathaway, Inc., Class A 17(a) 1,298,800
Berkshire Hathaway, Inc., Class B 25(a) 61,750
Loews Corp. 12,800 936,800
Safeco Corp. 24,300 965,925
St. Paul Cos., Inc. 27,800 797,512

4,060,787
General Industrial Machinery (0.52%)
Pall Corp. 45,500 838,906

Grain Mill Products (0.85%)
Ralston-Ralston Purina Group 45,300 1,381,650

Groceries & Related Materials (0.58%)
Sysco Corp. 31,800 944,063

Grocery Stores (0.87%)
American Stores Co. 44,900 1,417,156

Industrial Inorganic Chemicals (0.94%)
Eastman Chemical Co. 9,050 503,972
Praxair, Inc. 19,700 1,019,475

1,523,447
Jewlery, Silverware & Plated Ware (0.11%)
Jostens, Inc. 8,400 180,075

Life Insurance (0.60%)
Lincoln National Corp. 10,100 970,231

Machinery, Equipment & Supplies (0.79%)
Grainger (W. W.), Inc. 25,600 $ 1,284,800

Management & Public Relations (0.51%)
Dun & Bradstreet Corp. 22,500 826,875

Meat Products (0.39%)
Tyson Foods, Inc. 30,450 629,934

Medical Instruments & Supplies (0.58%)
St. Jude Medical, Inc. 33,850(a) 943,569

Medical Services & Health
Insurance (1.57%)
Aon Corp. 11,400 780,900
Conseco, Inc. 30,400 959,500
Pacificare Health Systems, Inc. 10,100(a) 805,791

2,546,191
Miscellaneous Converted Paper
Products (1.05%)
Minnesota Mining & Mfg. Co. 19,100 1,699,900

Miscellaneous Food & Kindred
Products (0.37%)
Universal Foods Corp. 28,600 600,600

Miscellaneous Furniture & Fixtures (0.54%)
Newell Rubbermaid, Inc. 18,400 872,850

Miscellaneous Shopping Goods (0.33%)
Toys `R' Us, Inc. 24,900(a) 541,575

Miscellaneous Transportation (0.50%)
FMC Corp. 12,400(a) 806,000

Motor Vehicles & Equipment (0.58%)
Ford Motor Co. 14,654 936,940

Oil & Gas Field Services (0.39%)
Diamond Offshore Drilling 18,900 624,881

Paper Mills (1.62%)
Fort James Corp. 28,162 1,070,156
Kimberly Clark Corp. 25,400 1,557,337

2,627,493
Petroleum Refining (2.86%)
Amerada Hess Corp. 17,500 997,500
Atlantic Richfield Co. 19,600 1,645,175
British Petroleum Amoco PLC 7,945 899,275
Exxon Corp. 13,200 1,096,425

4,638,375
Plastic Materials & Synthetics (0.99%)
Du Pont (E.I.) De Nemour 22,800 1,610,250

Pulp Mills (0.18%)
Boise Cascade Corp. 7,400 297,850

Rubber & Plastics Footwear (0.57%)
Nike, Inc. 14,900 926,594

Sanitary Services (2.17%)
Browning-Ferris Industries, Inc. 47,100 $ 1,878,112
Waste Management, Inc. 28,942 1,635,223

3,513,335
Savings Institutions (1.30%)
Citigroup, Inc. 28,100 2,114,525

Security Brokers & Dealers (0.23%)
Bear Stearns Cos., Inc. 7,875 367,172

Telephone Communication (2.68%)
AT&T Corp. 30,850 1,557,925
GTE Corp. 18,600 1,245,038
Motorola, Inc. 19,200 1,538,400

4,341,363
Variety Stores (0.36%)
Wal-Mart Stores, Inc. 12,800 588,800

Total Common Stocks 93,595,572

Preferred Stock (0.72%)

Telephone Communications (0.72%)
Sprint - 8.25% Conv. Pfd. 13,500 1,161,000

Principal
Amount Value
Bonds (24.31%)

Beverages (0.62%)
Seagram Co., Ltd. Notes;
6.50%; 4/1/2003 $1,000,000 $ 1,003,491

Blast Furnace & Basic
Steel Products (0.69%)
Carpenter Technology Corp.
Medium-Term Notes;
6.99%; 4/20/2018 800,000 768,963
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/2007 350,000 350,000

1,118,963
Business Credit Institutions (1.25%)
CIT Group Holdings
Senior Medium-Term Notes;
6.38%; 10/1/2002 1,000,000 1,013,635
Heller Financial, Inc. Notes;
6.44%; 10/6/2002 1,000,000 1,012,375

2,026,010
Commercial Banks (1.68%)
J.P. Morgan & Co., Inc.
Subordinated Notes;
6.70%; 11/1/2007 1,300,000 1,316,886
NationsBank Corp.
Subordinated Notes;
7.80%; 9/15/2016 1,300,000 1,412,052

2,728,938
Communications Equipment (0.85%)
Motorola, Inc. Debentures;
7.50%; 5/15/2025 1,291,000 1,375,793

Computer & Office Equipment (0.45%)
Seagate Technology, Inc.
Senior Notes;
7.37%; 3/1/2007 $ 750,000 $ 733,559

Consumer Products (1.20%)
Philip Morris Cos., Inc. Notes;
7.25%; 9/15/2001 1,500,000 1,540,806
6.15%; 3/15/2010 400,000 401,224

1,942,030
Department Stores (0.70%)
Dillard's, Inc. Notes;
7.38%; 6/1/2006 600,000 614,504
Fred Meyer, Inc. Senior Notes;
7.38%; 3/1/2005 500,000 518,416
1,132,920
Farm & Garden Machinery (0.79%)
Deere & Co. Senior Debentures;
8.50%; 1/9/2022 1,100,000 1,288,819

Fire, Marine & Casualty Insurance (0.73%)
St. Paul Cos., Inc.
Medium-Term Notes, Series C;
6.38%; 12/15/2008 1,200,000 1,178,251

Forest Products (0.61%)
Weyerhaeuser Co.
Debentures;
6.95%; 10/1/2027 1,000,000 987,183

General Government , NEC (1.03%)
Province of Quebec, Canada
Debentures;
7.50%; 7/15/2002 500,000 523,320
7.00%; 1/30/2007 1,100,000 1,149,379

1,672,699
General Industrial Machinery (0.94%)
Ingersoll-Rand
Medium-Term Notes;
6.46%; 11/19/2003 1,000,000 1,012,110
Timken Co. Medium-Term Notes;
7.30%; 8/13/2002 500,000 519,936

1,532,046
Miscellaneous Investing (1.55%)
Federal Realty Investment Trust Notes;
8.88%; 1/15/2000 1,000,000 1,020,645
Kimco Realty Corp. Senior Notes;
6.50%; 10/1/2003 1,500,000 1,490,439

2,511,084
Mortgage Bankers & Brokers (0.62%)
Countrywide Funding Corp.
Medium-Term Notes;
6.54%; 4/14/2000 1,000,000 1,006,511

Motor Vehicles & Equipment (1.60%)
Chrysler Corp. Debentures;
7.45%; 3/1/2027 $1,400,000 $ 1,509,098
General Motors Corp. Debentures;
7.70%; 4/15/2016 1,000,000 1,084,511

2,593,609
Paper & Paper Products (0.30%)
Boise Cascade Office Products Corp.
Notes; 7.05%; 5/15/2005 500,000 489,009

Paper Mills (0.62%)
International Paper Co. Notes;
6.88%; 7/10/2000 1,000,000 1,012,345

Personal Credit Institutions (1.41%)
Associates Corp. of North America
Senior Notes; 6.45%; 10/15/2001 1,200,000 1,219,811
Ford Motor Credit Co. Notes;
7.75%; 3/15/2005 1,000,000 1,063,882

2,283,693
Petroleum & Petroleum Products (0.63%)
Enron Corp. Notes;
6.75%; 9/1/2004 1,000,000 1,023,349

Plumbing & Heating, Except
Electric (0.62%)
Masco Corp. Notes;
6.13%; 9/15/2003 1,000,000 1,002,270

Railroads (1.45%)
Norfolk Southern Debentures;
9.00%; 3/1/2021 1,100,000 1,335,797
Union Pacific Corp. Notes;
7.00%; 6/15/2000 1,000,000 1,014,950

2,350,747
Security Brokers & Dealers (2.12%)
Bear Stearns Cos., Inc. Senior Notes;
6.13%; 2/1/2003 250,000 248,955
Lehman Brothers, Inc. Senior
Subordinated Notes; 6.13%; 2/1/20011,000,000 1,000,091
Morgan Stanley Group, Inc.
Debentures; 8.88%; 10/15/2001 1,000,000 1,071,140
Salomon Smith Barney Holdings, Inc.
Notes; 7.98%; 3/1/2000 1,100,000 1,122,080

3,442,266
Surety Insurance (1.85%)
Allstate Corp. Debentures;
6.75%; 5/15/2018 2,000,000 1,994,460
MBIA, Inc. Debentures;
7.00%; 12/15/2025 1,000,000 998,782

2,993,242
Trucking & Courier Services,
Except Air (0.00%)
Builders Transport, Inc. Convertible
Subordinated Debentures;
6.50%; 5/1/2011 306,000(b) 765

Total Bonds 39,429,591

Description of Issue Principal
Type Rate Maturity Amount Value

Federal Home Loan Mortgage Corporation (FHLMC)
Certificates (3.88%)

FHLMC 6.50% 10/1/2027-1/1/2029 $3,778,021 $3,760,547
FHLMC 7.00 12/1/2027 1,540,182 1,563,450
FHLMC 6.00 1/1/2029 994,177 965,335

Total FHLMC Certificates 6,289,332

Government National Mortgage Association (GNMA)
Certificates (2.56%)

GNMA II 6.00 6/20/2026-9/20/2028 4,293,248 4,145,637

Principal
Amount Value
Asset-Backed Securities (6.54%)

Mortgage Pass-Through Securities (5.92%)
Chase Commercial Mortgage Securities
Corp. Mortgage Pass-Through Cert.,
Series 1998-1, Class B;
6.56%; 5/18/2008 $2,200,000 $ 2,192,322
DLJ Commercial Mortgage Corp.
Mortgage Pass-Through Cert.,
Class A-1B, Series 1998-CF1;
6.41%; 2/18/2008 2,100,000 2,086,392
First Union Commercial Mortgage Trust
Commercial Mortgage Pass-Through
Cert., Series 1999-C1, Class B;
6.22%; 12/15/2008 1,435,000 1,394,217
GMAC Commercial Mortgage Securities,
Inc. Mortgage Pass-Through Cert.,
Series 1998-C2, Class C;
6.50%; 8/15/2008 2,000,000 1,965,540
J.P. Morgan Commercial Mortgage Fin.
Corp. Mortgage Pass-Through Cert.,
Series 1999-C7, Class B;
6.66%; 10/15/2035 450,000 449,446
Morgan Stanley Capital I Inc. Commercial
Mortgage, Series 1999-RM1, Class B;
6.81%; 11/15/2008 1,500,000 1,513,125

9,601,042
Personal Credit Institutions (0.62%)
Chase Manhattan Credit Card Master Trust
Asset-Backed Certificates, Series 97-2,
Class A; 6.30%; 4/15/2003 1,000,000 1,011,460

Total Asset-Backed Securities 10,612,502
Commercial Paper (3.82%)

Personal Credit Institutions (3.82%)
Investment in Joint Trade Account,
Associates Corp.;4.92%; 5/3/1999 $6,199,841 $ 6,199,841

Total Portfolio Investments (99.52%) 161,433,476

Cash, receivables and other assets,
net of liabilities (0.48%) 784,696

Total Net Assets (100.00%) $162,218,172

(a) Non-income producing security - No dividend paid during the period.
(b) Non-income producing - Security in default.

PRINCIPAL BLUE CHIP FUND, INC.

Shares
Held Value
Common Stocks (97.97%)

Bakery Products (2.51%)
Sara Lee Corp. 291,700 $ 6,490,325

Beverages (5.44%)
Anheuser-Busch Cos., Inc. 97,000 7,093,125
PepsiCo, Inc. 189,000 6,981,188

14,074,313
Commercial Banks (5.80%)
Bank One Corp. 124,619 7,352,521
J.P. Morgan & Co., Inc. 56,800 7,653,800

15,006,321
Computer & Office Equipment (6.14%)
Automatic Data Processing, Inc. 176,400 7,849,800
Hewlett-Packard Co. 102,100 8,053,137

15,902,937
Drugs (10.74%)
American Home Products Corp. 111,600 6,807,600
Johnson & Johnson 75,000 7,312,500
Merck & Co., Inc. 95,600 6,715,900
Pharmacia & Upjohn, Inc. 124,200 6,955,200

27,791,200
Eating & Drinking Places (2.62%)
McDonald's Corp. 159,800 6,771,525

Electrical Industrial Apparatus (2.99%)
Emerson Electric Co. 120,100 7,746,450

Electronic Distribution Equipment (2.77%)
General Electric Co. 68,000 7,174,000

Fire, Marine & Casualty Insurance (5.50%)
American International Group, Inc. 60,475 7,102,033
Chubb Corp. 120,300 7,127,775

14,229,808
General Industrial Machinery (1.81%)
Pall Corp. 254,200 4,686,813

Grain Mill Products (2.86%)
Kellogg Co. 199,900 $ 7,396,300

Groceries & Related Products (2.99%)
Sysco Corp. 260,700 7,739,531

Medical Instruments & Supplies (2.84%)
Becton, Dickinson & Co. 198,000 7,363,125

Metal Cans & Shipping Containers (3.00%)
Crown Cork & Seal Co., Inc. 238,600 7,754,500

Miscellaneous Converted Paper
Products (3.43%)
Minnesota Mining & Mfg. Co. 99,900 8,891,100

Miscellaneous Food & Kindred
Products (2.94%)
Bestfoods 151,800 7,618,462

Miscellaneous Shopping Goods
Stores (1.59%)
Toys `R' Us, Inc. 188,700(a) 4,104,225

Petroleum Refining (9.14%)
Exxon Corp. 94,300 7,832,794
Mobil Corp. 75,200 7,877,200
Royal Dutch Petroleum Co. ADR 135,300 7,940,419

23,650,413
Preserved Fruits & Vegetables (2.70%)
Heinz (H.J.) Co. 149,600 6,984,450

Sanitary Services (3.63%)
Browning-Ferris Industries, Inc. 235,400 9,386,575

Sugar & Confectionery Products (2.77%)
Wrigley (Wm.) Jr. Co. 80,800 7,165,950

Telephone Communication (8.41%)
AT&T Corp. 135,750 6,855,375
GTE Corp. 110,800 7,416,675
Motorola, Inc. 93,700 7,507,712

21,779,762
Variety Stores (2.47%)
Wal-Mart Stores, Inc. 139,200 6,403,200

Women's Clothing Stores (2.88%)
The Limited, Inc. 170,500 7,459,375

Total Common Stocks 253,570,660

Principal
Amount Value

Commercial Paper (1.78%)

Personal Credit Institutions (1.78%)
Investment In Joint Trade Account;
Associates Corp.; 4.92%; 05/03/1999 $4,620,141 $ 4,620,141

Total Portfolio Investments (99.75%) 258,190,801

Cash, receivables and other assets,
net of liabilities (0.25%) 646,768

Total Net Assets (100.00%) $258,837,569

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL CAPITAL VALUE FUND, INC.

Shares
Held Value
Common Stocks (98.76%)

Beverages (4.99%)
Anheuser-Busch Cos., Inc. 285,000 $20,840,625
PepsiCo, Inc. 424,100 15,665,194

36,505,819
Commercial Banks (18.45%)
Bank of America Corp. 243,000 17,496,000
Bank One Corp. 324,764 19,161,076
Chase Manhattan Corp. 200,000 16,550,000
Comerica, Inc. 270,000 17,566,875
First Union Corp. 331,160 18,337,985
Keycorp 459,000 14,200,313
Summit Bancorp. 364,500 15,445,687
Union Planters Corp. 380,800 16,303,000

135,060,936
Communications Equipment (2.17%)
Harris Corp. 459,100 15,867,644

Computer & Office Equipment (1.93%)
Hewlett-Packard Co. 82,000 6,467,750
International Business Machines Corp. 36,600 7,656,263

14,124,013
Crude Petroleum & Natural Gas (2.68%)
Texaco, Inc. 312,700 19,621,925

Department Stores (2.50%)
Sears, Roebuck & Co. 397,300 18,275,800

Drug Stores & Proprietary Stores (0.08%)
Rite Aid Corp. 25,000 582,812

Drugs (7.17%)
Abbott Laboratories 372,800 18,057,500
American Home Products Corp. 286,600 17,482,600
Pharmacia & Upjohn, Inc. 303,000 16,968,000
52,508,100
Electric Services (3.26%)
Dominion Resources, Inc. 98,200 $ 4,038,475
FPL Group, Inc. 85,100 4,797,513
Reliant Energy, Inc. 530,000 15,005,625

23,841,613
Electrical Industrial Apparatus (1.07%)
Emerson Electric Co. 121,394 7,829,913

Electronic Distribution Equipment (1.17%)
General Electric Co. 81,000 8,545,500

General Industrial Machinery (0.00%)
Tyco International Ltd. 6 487

Grain Mill Products (2.27%)
Kellogg Co. 448,500 16,594,500

Greeting Cards (2.03%)
American Greetings Corp. 568,500 14,887,594

Groceries & Related Products (1.71%)
Sysco Corp. 421,000 12,498,437

Grocery Stores (1.21%)
American Stores Co. 280,000 8,837,500

Life Insurance (2.21%)
American General Corp. 218,600 16,176,400

Machinery, Equipment & Supplies (2.83%)
Grainger (W. W.), Inc. 412,800 20,717,400

Management & Public Relations (1.36%)
Dun & Bradstreet Corp. 270,600 9,944,550

Medical Services & Health
Insurance (1.05%)
Aon Corp. 111,900 7,665,150

Metal Cans & Shipping Containers (5.04%)
Ball Corp. 311,100 17,091,056
Crown Cork & Seal Co., Inc. 609,800 19,818,500

36,909,556
Miscellaneous Converted Paper
Products (5.66%)
Avery Dennison Corp. 367,000 25,047,750
Minnesota Mining & Mfg. Co. 183,700 16,349,300
41,397,050
Miscellaneous Food & Kindred
Products (0.28%)
Universal Foods Corp. 96,600 2,028,600

Miscellaneous Furniture & Fixtures (2.67%)
Newell Rubbermaid, Inc. 412,700 19,577,456

Paper Mills (2.86%)
Kimberly Clark Corp. 341,200 20,919,825

Petroleum Refining (7.13%)
Atlantic Richfield Co. 273,200 22,931,725
Chevron Corp. 201,400 20,089,650
Exxon Corp. 110,100 9,145,181

52,166,556
Plumbing & Heating, Except
Electrical (2.58%)
Masco Corp. 643,000 $18,888,125
Rental of Railroad Cars (2.25%)
GATX Corp. 480,000 16,500,000

Sanitary Services (2.61%)
Browning-Ferris Industries, Inc. 480,000 19,140,000

Telephone Communications (7.54%)
AT&T Corp. 368,250 18,596,625
SBC Communications, Inc. 350,280 19,615,680
U.S. West, Inc. 325,000 17,001,563

55,213,868

Total Common Stocks 722,827,129

Principal
Amount Value
Commercial Paper (1.07%)

Personal Credit Institutions (1.07%)
Investment in Joint Trade Account,
Associates Corp.; 4.92%; 5/3/99 $7,846,005 $ 7,846,005

Total Portfolio Investments (99.83%) 730,673,134

Cash, receivables and other assets,
net of liabilities (0.17%) 1,277,217

Total Net Assets (100.00%) $731,950,351

PRINCIPAL GROWTH FUND, INC.

Shares
Held Value
Common Stocks (98.87%)

Advertising (0.94%)
Interpublic Group of Cos., Inc. 75,900 $ 5,886,994

Beverages (2.55%)
Coca-Cola Co. 60,000 4,080,000
PepsiCo, Inc. 322,500 11,912,344

15,992,344
Carpets & Rugs (0.58%)
Shaw Industries, Inc. 200,000(a) 3,625,000

Cash Grains (1.20%)
Pioneer Hi-Bred International, Inc. 202,000 7,549,750

Commercial Banks (10.64%)
Bank One Corp. 213,500 12,596,500
Chase Manhattan Corp. 165,500 13,695,125
Firstar Corp. 189,000 5,681,813
FirstMerit Corp. 100,000 2,781,250
Mellon Bank Corp. 150,000 11,146,875
National City Corp. 72,000 5,166,000
US Bancorp 305,000 11,304,062
Wells Fargo Co. 100,000 4,318,750

66,690,375
Communications Equipment (2.75%)
General Instrument Corp. 175,000(a) $6,387,500
Lucent Technologies, Inc. 180,000 10,822,500

17,210,000
Computer & Data Processing
Services (3.12%)
GTECH Holdings Corp. 139,300(a) 3,630,506
Microsoft Corp. 176,000(a) 14,311,000
Network Associates, Inc. 123,000(a) 1,629,750

19,571,256
Computer & Office Equipment (7.21%)
Automatic Data Processing, Inc. 210,000 9,345,000
Ceridian Corp. 350,600(a) 12,840,725
Cisco Systems, Inc. 45,000(a) 5,132,813
Compaq Computer Corp. 67,567 1,507,589
Hewlett-Packard Co. 79,100 6,239,012
International Business Machines Corp. 32,000 6,694,000
Pitney Bowes, Inc. 49,400 3,454,912

45,214,051
Consumer Products (0.85%)
Philip Morris Cos., Inc. 152,200 5,336,513

Drug Stores & Proprietary Stores (1.78%)
CVS Corp. 234,000 11,144,250

Drugs (13.44%)
American Home Products Corp. 217,000 13,237,000
Bristol-Myers Squibb Co. 118,000 7,500,375
Forest Laboratories, Inc. 132,600(a) 5,900,700
Genzyme Corp. - General Division 100,756(a) 3,803,539
Johnson & Johnson 141,000 13,747,500
Lilly (Eli) & Co. 100,000 7,362,500
Merck & Co., Inc. 159,600 11,211,900
Pharmacia & Upjohn, Inc. 220,000 12,320,000
SmithKline Beecham PLC ADR 139,500 9,163,406

84,246,920
Electronic Components &
Accessories (4.21%)
Intel Corp. 264,000 16,153,500
Linear Technology Corp. 180,000 10,237,500

26,391,000
Electronic Distribution Equipment (1.77%)
General Electric Co. 105,000 11,077,500

Engineering & Architectural
Services (1.12%)
Paychex, Inc. 137,000 6,995,562

Federal & Federally Sponsored
Credit (2.25%)
Federal Home Loan Mtg. 124,700 7,824,925
Federal National Mortgage Association 88,600 6,285,063

14,109,988
Fire, Marine & Casualty Insurance (0.90%)
American International Group, Inc. 48,000 5,637,000

General Industrial Machinery (3.87%)
Ingersoll-Rand Co. 105,000 $ 7,264,688
Tyco International Ltd. 209,400 17,013,750

24,278,438
Grain Mill Products (1.66%)
Ralston-Ralston Purina Group 342,000 10,431,000

Groceries & Related Products (1.24%)
Sysco Corp. 262,800 7,801,875

Grocery Stores (0.09%)
Casey's General Stores, Inc. 42,104 557,878

Hospitals (1.43%)
Humana, Inc. 105,000(a) 1,430,625
Universal Health
Services, Inc., Class B 145,400(a) 7,533,537

8,964,162
Hotels & Motels (2.57%)
Marriott International, Inc., Class A 384,700 16,109,313

Investment Offices (1.22%)
AMVESCAP PLC Sponsored ADR 140,000 7,638,750

Lumber & Other Building
Materials (2.30%)
Home Depot, Inc. 240,000 14,385,000

Medical Instruments & Supplies (2.95%)
Becton, Dickinson & Co. 153,000 5,689,687
Boston Scientific Corp. 300,000(a) 12,768,750

18,458,437
Medical Services & Health
Insurance (2.27%)
Aon Corp. 60,000 4,110,000
Foundation Health
Systems, Inc., Class A 147,500(a) 2,037,343
PacifiCare Health
Systems, Inc., Class B 28,540(a) 2,276,957
Torchmark Corp. 71,700 2,451,244
United Healthcare Corp. 60,000 3,367,500

14,243,044
Miscellaneous Converted Paper
Products (0.45%)
Minnesota Mining & Mfg. Co. 31,400 2,794,600

Miscellaneous Fabricated Metal
Products (0.77%)
Parker-Hannifin Corp. 103,350 4,850,991

Miscellaneous Food & Kindred
Products (0.40%)
Bestfoods 50,000 2,509,375

Miscellaneous Investing (1.34%)
Cendant Corp. 465,500(a) 8,379,000

Motor Vehicles & Equipment (0.74%)
Dana Corp. 98,000 4,618,250

Oil & Gas Field Services (1.06%)
Schlumberger Ltd. 104,000 6,643,000

Petroleum Refining (1.90%)
Atlantic Richfield Co. 40,000 $ 3,357,500
Exxon Corp. 102,600 8,522,212

11,879,712
Plumbing & Heating, Except
Electric (0.75%)
Masco Corp. 160,000 4,700,000

Refrigeration & Service Machinery (0.39%)
Tecumseh Products Co. 40,000 2,445,000

Sanitary Services (1.00%)
Browning-Ferris Industries, Inc. 80,000 3,190,000
Waste Management, Inc. 53,945 3,047,893

6,237,893
Savings Institutions (2.62%)
Citigroup, Inc. 218,450 16,438,362

Soap, Cleaners & Toilet Goods (3.09%)
Colgate-Palmolive Co. 80,000 8,195,000
Ecolab, Inc. 266,400 11,172,150

19,367,150
Sugar & Confectionery Products (0.78%)
Wrigley (Wm.) Jr. Co. 55,000 4,877,813

Telephone Communication (6.64%)
Ameritech Corp. 80,000 5,475,000
AT&T Corp. 155,595 7,857,548
GTE Corp. 84,000 5,622,750
MCI WorldCom, Inc. 214,829(a) 17,656,258
Motorola, Inc. 62,700 5,023,837

41,635,393
Variety Stores (1.24%)
Wal-Mart Stores, Inc. 168,600 7,755,600

Women's & Children's
Undergarments (0.79%)
Warnaco Group, Inc. 185,200 4,942,525

Total Common Stocks 619,621,064

Principal
Amount Value

Bond (0.38%)

Electrical Industrial Apparatus (0.38%)
Liebert Co., Convertible Subordinated
Debentures; 8.00%; 11/15/2010 $ 500,000 $ 2,405,000

Commercial Paper (0.65%)

Business Credit Institutions (0.58%)
American Express Credit Corp.;
4.68%; 5/3/1999 3,610,301 3,615,000

Personal Credit Institutions (0.07%)
Investment In Joint Trade Account,
Associates Corp.; 4.92%; 5/3/1999 478,229 478,229

Total Commercial Paper 4,093,229

Total Portfolio Investments (99.90%) 626,119,293

Cash, receivables and other assets,
net of liabilities (0.10%) $ 626,933

Total Net Assets (100.00%) $626,746,226

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL MIDCAP FUND, INC.

Shares
Held Value
Common Stocks (99.68%)

Blast Furnace & Basic Steel (1.03%)
Carpenter Technology Corp. 150,000 $ 4,696,875

Business Credit Institution (1.32%)
C.I.T. Group, Inc., Class A 185,000 6,012,500

Carpets & Rugs (0.79%)
Shaw Industries, Inc. 198,700 3,601,437

Chemicals & Allied Products (0.29%)
Sigma-Aldrich Corp. 40,400 1,313,000

Commercial Banks (10.34%)
Associated Banc-corp. 167,535 6,094,086
First Federal Capital Corp. 328,796 4,685,343
FirstMerit Corp. 81,800 2,275,062
Independent Bank Corp. Michigan 104,265 1,746,439
Mercantile Bancorp, Inc. 179,829 10,250,253
Merchants Bancorp, Inc. 116,200 2,963,100
North Fork Bancorp, Inc. 362,187 8,149,207
Peoples Heritage Financial Group, Inc.224,800 4,355,500
Princeton National Bancorp, Inc. 150,000 2,325,000
Summit Bancorp 99,650 4,222,669

47,066,659
Commercial Printing (0.12%)
Merrill Corp. 35,400 526,575

Computer & Data Processing
Services (5.71%)
American Management Systems, Inc. 101,000(a) 3,471,875
Cadence Design Systems, Inc. 230,100(a) 3,120,731
Cerner Corp. 245,500(a) 4,173,500
ICG Communications, Inc. 129,000(a) 2,846,062
Microsoft Corp. 26,800(a) 2,179,175
Network Associates, Inc. 123,100(a) 1,631,075
Synopsys, Inc. 181,100(a) 8,534,338

25,956,756
Computer & Office Equipment (2.58%)
3COM Corp. 150,000(a) 3,918,750
EMC Corp. 71,700(a) 7,810,819

11,729,569
Construction & Related Machinery (0.64%)
Cooper Cameron Corp. 75,000(a) 2,896,875

Crude Petroleum & Natural Gas (2.39%)
Devon Energy Corp. 165,000 5,486,250
Newfield Exploration Co. 200,000(a) 5,375,000

10,861,250
Dairy Products (0.20%)
Dreyer's Grand Ice Cream, Inc. 65,400 $ 891,075

Department Stores (1.44%)
Saks, Inc. 232,060(a) 6,570,199

Drugs (4.93%)
Centocor, Inc. 140,700(a) 6,243,562
Dura Pharmaceuticals, Inc. 282,000(a) 3,384,000
Genzyme Corp. - General Division 83,000(a) 3,133,250
Pharmacia & Upjohn, Inc. 75,700 4,239,200
Watson Pharmaceuticals 134,000(a) 5,427,000

22,427,012
Drugs, Proprietaries, & Sundries (0.79%)
McKesson HBOC, Inc. 102,120 3,574,200

Electronic Components &
Accessories (5.89%)
Intel Corp. 37,200 2,276,175
Jabil Circuit, Inc. 199,000(a) 9,265,938
Linear Technology Corp. 110,600 6,290,375
Solectron Corp. 64,800(a) 3,142,800
Celestica, Inc. 149,800(a) 5,860,925

26,836,213
Engineering & Architectural
Services (1.32%)
Paychex, Inc. 117,743 6,012,252

Fabricated Rubber Products, NEC (2.34%)
Weatherford International 314,800(a) 10,663,850

Fire, Marine & Casualty Insurance (0.80%)
Berkley W.R. Corp. 132,750 3,650,625

General Industrial Machinery (4.25%)
Kaydon Corp. 181,600 6,129,000
Pentair, Inc. 137,500 6,462,500
Roper Industries, Inc. 237,500 6,768,750

19,360,250
Grocery Stores (0.82%)
Casey's General Stores, Inc. 282,800 3,747,100

Holding Offices (0.49%)
ISB Financial Corp. 109,100 2,236,550

Hospitals (2.39%)
Humana, Inc. 249,300(a) 3,396,712
Universal Health
Services, Inc., Class B 144,800(a) 7,502,450

10,899,162
Hotels & Motels (3.50%)
Four Seasons Hotel, Inc. 201,200 8,400,100
Marriott International, Inc., Class A 179,800 7,529,125

15,929,225
Household Appliances (2.12%)
Maytag Corp. 141,300 9,661,387

Industrial Inorganic Chemicals (0.49%)
ICN Pharmaceuticals, Inc. 67,821 $ 2,242,332

Industrial Machinery, NEC (1.90%)
Coltec Industries 401,000(a) 8,671,625

Insurance Agents, Brokers &
Services (1.79%)
Equifax, Inc. 226,600 8,143,438

Investment Offices (1.60%)
AMVESCAP PLC Sponsored ADR 133,820 7,301,554

Iron & Steel Foundries (1.06%)
Precision Castparts Corp. 112,800 4,822,200

Laundry, Cleaning, & Garment
Services (2.03%)
G&K Services, Inc. 84,600 3,955,050
Stewart Enterprises Inc., Class A 266,700 5,300,663

9,255,713
Measuring & Controlling Devices (1.05%)
Isco, Inc. 1 2
Millipore Corp. 156,400 4,799,525

4,799,527
Meat Products (0.95%)
Michael Foods, Inc. 188,500 4,311,938

Medical Instruments & Supplies (2.52%)
Boston Scientific Corp. 164,000(a) 6,980,250
Steris Corp. 252,600(a) 4,483,650

11,463,900
Medical Services & Health
Insurance (5.85%)
Alternative Living Services 234,200(a) 5,210,950
Foundation Health
Systems, Inc., Class A 422,540(a) 5,836,334
Orthofix International NV 156,200(a) 2,343,000
Pacificare Health
Systems, Inc., Class B 51,391 4,100,038
Torchmark Corp. 127,300 4,352,069
United Healthcare Corp. 85,000 4,770,625

26,613,016
Miscellaneous Chemical Products (1.16%)
Cytec Industries 72,600(a) 2,064,562
Fuller H.B. Co. 47,500 3,235,938

5,300,500
Miscellaneous Investing (0.51%)
Cendant Corp. 129,938(a) 2,338,884

Miscellaneous Furniture & Fixtures (1.18%)
Newell Rubbermaid, Inc. 112,884 5,354,935

Office Furniture (0.48%)
Chromcraft Revington, Inc. 142,800(a) 2,186,625

Oil & Gas Field Services (1.09%)
Diamond Offshore Drilling 150,000 4,959,375

Operative Builders (1.25%)
D. R. Horton, Inc. 294,500 5,687,531

Paints & Allied Products (0.62%)
RPM, Inc. 200,500 $ 2,819,531

Plumbing, Heating &
Air Conditioning (1.34%)
Apogee Enterprises, Inc. 498,200 6,102,950

Public Building & Related Furniture (0.87%)
BE Aerospace, Inc. 231,700(a) 3,953,381

Refrigeration & Service Machinery (0.34%)
Tecumseh Products Co. 25,200 1,540,350

Sanitary Services (3.04%)
Browning-Ferris Industries, Inc. 113,200 4,513,850
Republic Services, Inc., Class A 453,300(a) 9,320,981
13,834,831
Savings Institutions (5.47%)
Greenpoint Financial Corp. 227,900 7,976,500
Sterling Financial Corp. 124,133(a) 1,830,962
TCF Financial Corp. 364,900 10,582,100
WSFS Financial Corp. 290,000 4,531,250
24,920,812
Security Brokers & Dealers (1.34%)
Jefferies Group, Inc. 106,400 2,433,900
Investment Tech Group 106,400 3,684,100
6,118,000
Telephone Communication (4.33%)
Hyperion Telecomm, Inc., Class A 300,000(a) 3,750,000
McLeodUSA, Inc. 193,900(a) 10,870,519
Winstar Communications, Inc. 105,000(a) 5,105,625

19,726,144
Trucking & Courier Services, Except
Air (0.50%)
J.B. Hunt Transport Services, Inc. 109,900 2,287,294

Women's & Children's
Undergarments (0.43%)
Warnaco Group, Inc. 73,612 1,964,520

Total Common Stocks 453,841,502

Principal
Amount Value
Commercial Paper (0.16%)

Personal Credit Institutions (0.16%)
Investment In Joint Trade Account,
Associates Corp.; 4.92%: 5/3/1999 $705,130 $ 705,130

Total Portfolio Investments (99.84%) 454,546,632

Cash, receivables and other assets,
net of liabilities (0.16%) 739,735

Total Net Assets (100.00%) $455,286,367

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL REAL ESTATE FUND, INC.

Shares
Held Value
Common Stocks (99.10%)

Apartment REITs (26.56%)
Apartment Investment & Management Co. 13,000 $ 520,812
Archstone Communities Trust 17,400 394,763
Avalonbay Communities, Inc. 9,987 349,545
Berkshire Realty Company, Inc. 31,300 359,950
Charles E. Smith
Residential Realty, Inc. 2,000 65,000
Equity Residential Properties Trust 14,500 670,625
Gables Residential Trust 16,800 400,050
Irvine Apartment Communities, Inc. 18,300 613,050
Walden Residential Properties, Inc. 8,300 158,738

3,532,533
Factory Outlet REITs (1.74%)
Chelsea GCA Realty, Inc. 7,000 230,562

Hotel REITs (8.49%)
Crestline Capital Corp. 2,430(a) 37,361
Felcor Lodging Trust, Inc. 7,600 181,925
Host Marriott Corp. 26,414 351,636
Meristar Hospitality Corp. 14,700 338,100
Sunstone Hotel Investors, Inc. 24,000 220,500

1,129,522
Mall REITs (12.68%)
CBL & Associates Properties, Inc. 16,300 400,369
General Growth Properties, Inc. 10,900 401,256
Simon Property Group, Inc. 13,000 372,938
The Macerich Co. 20,000 511,250

1,685,813
Manufactured Housing REITs (5.31%)
Manufactured Home Communities, Inc. 17,400 440,438
Sun Communities, Inc. 7,600 266,000

706,438
Mortgage, Mixed Use & Miscellaneous
REITs (3.40%)
Bradley Real Estate, Inc. 22,700 452,581

Net Lease REITs (2.25%)
Trinet Corporate Realty Trust, Inc. 10,900 299,069

Office & Industrial REITs (29.62%)
Arden Realty Group, Inc. 13,200 330,000
Boston Properties, Inc. 5,500 199,719
Cabot Industrial Trust 24,600 501,225
Centerpoint Properties Corp. 2,100 75,469
Equity Office Properties Trust 19,200 529,200
Great Lakes REIT, Inc. 3,900 60,206
Highwoods Properties, Inc. 11,000 283,250
Kilroy Realty Corp. 10,900 256,831
Mack-Cali Realty Corp. 6,700 207,281
Prologis Trust 28,950 607,950
Spieker Properties, Inc. 9,950 390,538
Tower Realty Trust, Inc. 24,300 498,150

3,939,819
Self Storage REITs (2.63%)
Storage USA, Inc. 10,900 350,162

Shopping Center REITs (6.42%)
AMB Property Corp. 3,000 $ 66,000
Developers Diversified Realty Corp. 20,200 319,412
Federal Realty Investment Trust 16,000 382,000
Pan Pacific Retail Properties, Inc. 4,800 86,400

853,812

Total Common Stocks 13,180,311

Principal
Amount Value
Commercial Paper (0.53%)

Personal Credit Institutions (0.53%)
Investment In Joint Trade Account,
Associates Corp.; 4.92%; 05/03/99 $70,833 $ 70,833

Total Portfolio Investments (99.63%) 13,251,144

Cash and receivables, net of liabilities (0.37%) 48,523

Total Net Assets (100.00%) $13,299,667

(a) Non-income producing security - No dividend paid during the period.

PRINCIPAL SMALLCAP FUND, INC.

Shares
Held Value
Common Stocks (98.73%)

Blast Furnace & Basic Steel
Products (1.11%)
Carpenter Technology Corp. 17,000 $ 532,312

Commercial Banks (1.62%)
Cullen Frost Bankers 9,500 512,406
Valley National Bancorp 9,200 265,075
777,481
Commercial Printing (1.52%)
Bowne & Co., Inc. 30,000 562,500
World Color Press, Inc. 6,450(a) 164,878
727,378
Communications Equipment (4.23%)
DSP Communications, Inc. 41,700(a) 1,136,325
Sawtek, Inc. 9,100(a) 320,775
Spectrian Corp. 14,100(a) 193,875
Tekelec 42,000(a) 379,313
2,030,288
Computer & Data Processing
Services (7.11%)
Advanced Communications System, Inc. 45,950(a) $ 574,375
Ciber, Inc. 22,000(a) 415,250
Cotelligent, Inc. 21,000(a) 245,437
Gtech Holdings Corp. 8,250(a) 215,016
Hypercom Corp. 64,500(a) 419,250
ICG Communications, Inc. 25,100(a) 553,769
SPSS, Inc. 9,200(a) 158,700
Structural Dynamics Research Corp. 10,000(a) 194,375
Synopsys, Inc. 6,200(a) 292,175
Unigraphics Solutions, Inc. 23,000(a) 342,125
3,410,472
Computer & Office Equipment (4.68%)
Box Hill Systems Corp. 110,000(a) 666,875
Fore Systems, Inc. 32,000(a) 1,080,000
Neomagic Corp. 25,000(a) 292,187
Smart Modular Technologies, Inc. 15,650(a) 209,319
2,248,381
Construction & Related Machinery (0.79%)
JLG Industries, Inc. 23,500 377,469

Crude Petroleum & Natural Gas (1.21%)
Nuevo Energy Co. 36,500(a) 579,437

Drugs (5.63%)
Chirex, Inc. 16,100(a) 418,600
Dura Pharmaceuticals, Inc. 16,500(a) 198,000
Geltex Pharmaceuticals, Inc. 25,000(a) 428,125
Inhale Therapeutic Systems, Inc. 11,950(a) 343,563
Liposome Co., Inc. 60,000(a) 750,000
Matritech, Inc. 360,900(a) 563,906

2,702,194
Drugs, Proprietaries & Sundries (0.96%)
Bindley Western Industries, Inc. 14,900 460,037

Eating & Drinking Places (2.01%)
CEC Entertainment, Inc. 9,800(a) 367,500
Morton's Restaurant Group, Inc. 35,000(a) 595,000

962,500
Electric Services (1.02%)
TNP Enterprises, Inc. 15,700 490,625

Electronic Components &
Accessories (2.93%)
DII Group, Inc. 35,050(a) 1,086,550
Microchip Technology, Inc. 9,100(a) 318,500
1,405,050
Fabricated Structural Metal
Products (0.99%)
Aavid Thermal Technologies, Inc. 25,000(a) 476,562

Family Clothing Stores (1.87%)
Pacific Sunwear of California, Inc. 13,000(a) 482,219
Ross Stores, Inc. 9,000 413,437
895,656
Fire, Marine & Casualty Insurance (1.00%)
Horace Mann Educators 21,100 480,025
Footwear, Except Rubber (1.17%)
Wolverine World Wide, Inc. 46,900 $ 562,800

Gas Production & Distribution (0.85%)
Piedmont Natural Gas Co. 12,800 408,000

General Industrial Machinery (2.22%)
Kaydon Corp. 15,100 509,625
Regal-Beloit Corp. 25,600 553,600

1,063,225
Grain Mill Products (0.98%)
Ralcorp Holdings, Inc. 25,500(a) 468,562

Greeting Cards (1.04%)
American Greetings Corp. 19,100(a) 500,181

Groceries & Related Products (0.98%)
Universal Corp. 18,400 468,050

Horticultural Specialties (0.92%)
Hines Horticulture, Inc. 52,000(a) 442,000

Hospitals (1.12%)
Universal Health
Services, Inc., Class B 10,400(a) 538,850

Hotels & Motels (0.92%)
Four Seasons Hotel, Inc. 8,000 334,000
Lodgian, Inc. 17,950(a) 108,822

442,822
Industrial Machinery, NEC (0.93%)
Industrial Distribution Group, Inc. 78,750(a) 447,891

Industrial Organic Chemicals (1.74%)
CFC International, Inc. 81,450(a) 834,862

Iron & Steel Foundries (1.07%)
Precision Castparts Corp. 12,000 513,000

Jewlery, Silverware & Plated Ware (0.93%)
Jostens, Inc. 20,900 448,044

Life Insurance (1.04%)
Mony Group, Inc. 18,900 500,850

Measuring & Controlling Devices (0.58%)
Integrated Measurement Systems, Inc. 24,300(a) 279,450

Meat Products (1.08%)
Michael Foods, Inc. 22,700 519,262

Medical Instruments & Supplies (1.77%)
ADAC Laboratories 32,700(a) 237,075
Focal, Inc. 26,850(a) 231,581
Hologic, Inc. 56,000(a) 381,500
850,156
Medical Service & Health
Insurance (0.84%)
Patient Info Systems 162,000(a) $ 405,000

Men's & Boys' Clothing Stores (1.09%)
Hot Topic, Inc. 31,600(a) 525,350

Men's & Boys' Furnishings (2.41%)
Nautica Enterprises, Inc. 31,350(a) 425,184
Tommy Hilfiger Corp. 10,500 733,688
1,158,872
Metal Forgings & Stampings (1.19%)
Varlen Corp. 20,350 569,800

Metalworking Machinery (1.01%)
Riviera Tool Co. 99,000(a) 482,625

Miscellaneous Apparel & Accessory
Stores (2.09%)
Pier 1 Imports, Inc. 28,000 206,500
The Buckle, Inc. 34,100(a) 797,088
1,003,588
Miscellaneous Chemical Products (1.12%)
H.B. Fuller Co. 7,900 538,188

Miscellaneous Converted Paper
Products (1.14%)
Shorewood Packaging Corp. 27,675(a) 546,581

Miscellaneous Electrical Equipment &
Supplies (1.46%)
Motorcar Parts & Accessories 58,550(a) 702,600

Miscellaneous Equipment Rental &
Leasing (0.19%)
T & W Financial Corp. 11,000(a) 90,063

Miscellaneous Fabricated Metal
Products (1.02%)
Watts Industries, Inc. 31,800 488,925

Miscellaneous Manufacturers (1.06%)
Russ Berrie & Co. 18,700 507,238

Miscellaneous Shopping Goods
Stores (0.64%)
Party City Corp. 84,400(a)(b) 305,950

Miscellaneous Textile Goods (1.09%)
Kellwood Co. 20,400 525,300

Motor Vehicles & Equipment (0.99%)
United Auto Group, Inc. 48,500(a) 472,875

Motor Vehicles, Parts & Supplies (0.92%)
Keystone Automotive Industries, Inc. 29,400(a) 441,000

Office Furniture (0.96%)
Kimball International, Inc., Class B 28,800 460,800

Oil & Gas Field Services (2.08%)
Marine Drilling Co., Inc. 20,250(a) $ 348,047
Pride International, Inc. 55,600(a) 649,825

997,872
Personal Credit Institutions (0.01%)
Firstplus Financial Group, Inc. 6,450(a) 5,241

Personnel Supply Services (0.32%)
Remedytemp, Inc. 13,000(a) 151,937

Petroleum Refining (1.51%)
IRI International Corp. 52,000(a) 289,250
Valero Energy Corp. 19,500 435,094
724,344
Photographic Equipment &
Supplies (0.40%)
Imax Corp. 10,100(a) 191,269

Public Building & Related
Furniture (0.37%)
BE Aerospace, Inc. 10,400(a) 177,450

Rubber & Plastics Footwear (0.38%)
Vans, Inc. 22,200(a) 183,150

Savings Institutions (3.87%)
Commercial Federal Corp. 19,400 470,450
Community First Bankshares, Inc. 24,200 494,588
MAF Bancorp, Inc. 19,400 431,650
Reliance Bancorp, Inc. 16,100 458,850
1,855,538
Search & Navigation Equipment (1.02%)
Anaren Microwave, Inc. 24,000(a) 489,000

Soap, Cleaners & Toilet Goods (1.68%)
Carter-Wallace, Inc. 25,600 449,600
Digene Corp. 30,550(a) 358,963
808,563
Special Industry Machinery (0.20%)
GSI Lumonics, Inc. 22,562(a) 95,888

Sugar & Confectionary Products (0.58%)
Sherwood Brands, Inc., Class A 112,000(a) 280,000

Surety Insurance (1.59%)
CMAC Investment Corp. 6,600 302,775
Enhance Financial Services Group, Inc. 22,300 461,331
764,106
Telephone Communication (4.84%)
Audiovox Corp., Class A 73,700(a) 469,838
Intermedia Communications, Inc. 19,000(a) 611,563
McLeodUSA, Inc. 11,000(a) 616,687
Winstar Communications, Inc. 12,900(a) 627,262

2,325,350
Trucking & Courier Services, Except
Air (1.21%)
Werner Enterprises, Inc. 30,100 $ 579,425

Women's Clothing Stores (1.43%)
Wet Seal, Inc., Class A 16,900(a) 688,675

Total Common Stocks 47,386,435

Principal
Amount Value
Commercial Paper (1.10%)

Personal Credit Institutions (1.10%)
Investment In Joint Trading Account
Associates Corp.; 4.92%; 5/3/99 $529,577 $ 529,577

Total Portfolio Investments (99.83%) 47,916,012

Cash, receivables and other assets,
net of liabilities (0.17%) 79,263

Total Net Assets (100.00%) $47,995,275

(a) Non-income producing security - No dividend paid during the period.

(b) On May 10, 1999 Party City Corp.'s stock price per share decreased
significantly due to the delayed filing of the fiscal year 1998 financial
statements.

PRINCIPAL UTILITIES FUND, INC.

Shares
Held Value
Common Stocks (98.07%)

Combination Utility Services (15.77%)
Baltimore Gas & Electric Co. 82,500 $ 2,320,313
Citizens Utilities 364,191 3,664,672
Montana Power Co. 28,200 2,102,662
Nisource, Inc. 122,600 3,402,150
PacifiCorp. 107,600 1,795,575
Scana Corp. 85,600 2,011,600
Utilicorp United, Inc. 126,000 3,079,125
18,376,097
Electric Services (42.77%)
Allegheny Energy 86,000 2,929,375
Avista Corp. 111,500 1,672,500
Carolina Power & Light Co. 60,300 2,430,844
CMS Energy Corp 42,200 1,856,800
Dominion Resources, Inc. 55,800 2,294,775
DQE, Inc. 64,600 2,660,713
Duke Energy Corp. 42,700 2,391,200
Edison International 122,800 3,008,600
Enron Corp. 51,180 3,851,295
Firstenergy Corp. 77,500 2,300,781
FPL Group, Inc. 49,600 2,796,200
GPU, Inc. 84,800 3,233,000
Ipalco Enterprises, Inc. 40,200 927,113
MidAmerican Energy Holdings Co. 27,400 881,937
Peco Energy Co. 48,800 2,314,950
Pinnacle West Capital Corp. 82,700 3,209,794
Reliant Energy, Inc. 94,900 2,686,856
Southern Co. 132,400 3,583,075
Teco Energy, Inc. 122,900 2,619,306
Texas Utilities Holdings 55,600 2,210,100
49,859,214
Gas Production & Distribution (1.97%)
New Jersey Resources Corp. 38,700 1,427,063
Peoples Energy Corp. 23,300 870,837
2,297,900
Telephone Communication (37.56%)
Ameritech Corp. 85,300 5,837,719
AT&T Corp. 82,050 4,143,525
Bell Atlantic Corp. 90,700 5,226,588
BellSouth Corp. 119,000 5,325,250
GTE Corp. 67,400 4,511,587
MCI Worldcom, Inc. 60,824(a) 4,998,973
RCN Corp. 56,800(a) 2,761,900
Sprint Corp. 52,100 5,343,506
Sprint PCS Group 26,700(a) 1,131,412
US West, Inc. 86,000 4,498,875
43,779,335

Total Common Stocks 114,312,546

Principal
Amount Value
Commercial Paper (1.60%)

Personal Credit Institutions (1.60%)
Investment In Joint Trade Account,
Associates Corp.; 4.92%; 5/3/1999 $1,869,155 $ 1,869,155

Total Portfolio Investments (99.67%) 116,181,701

Cash, receivables and other assets,
net of liabilities (0.33%) 386,421
Total Net Assets (100.00%) $116,568,122

(a) Non-income producing security - No dividend paid during the period.

FINANCIAL HIGHLIGHTS
(unaudited)
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL BALANCED FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.28 $15.11 $14.61 $13.74 $12.43
Income from Investment Operations:
Net Investment Income............................... .21 .42 .35 .38 .41
Net Realized and Unrealized Gain (Loss) on Investments 1.00 1.15 1.81 1.59 1.31

Total from Investment Operations 1.21 1.57 2.16 1.97 1.72

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.23) (.37) (.36) (.43) (.36)
Distributions from Capital Gains.................... (.45) (1.03) (1.30) (.67) (.05)

Total Dividends and Distributions (.68) (1.40) (1.66) (1.10) (.41)

Net Asset Value, End of Period......................... $15.81 $15.28 $15.11 $14.61 $13.74

Total Return(b)........................................ 8.12%(c) 11.00% 15.88% 15.10% 14.18%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $116,402 $104,414 $85,436 $70,820 $57,125
Ratio of Expenses to Average Net Assets............. 1.22%(d) 1.28% 1.33% 1.28% 1.37%
Ratio of Net Investment Income to Average Net Assets 2.74%(d) 2.86% 2.42% 2.82% 3.21%
Portfolio Turnover Rate............................. 27.9%(d) 57.0% 27.6% 32.6% 35.8%

<CAPTION>
PRINCIPAL BALANCED FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(e)
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.22 $15.05 $14.56 $13.71 $11.80
Income from Investment Operations:
Net Investment Income............................... .15 .31 .25 .29 .31
Net Realized and Unrealized Gain (Loss) on Investments .99 1.14 1.79 1.55 1.90

Total from Investment Operations 1.14 1.45 2.04 1.84 2.21

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.17) (.25) (.25) (.32) (.30)
Distributions from Capital Gains.................... (.45) (1.03) (1.30) (.67) --

Total Dividends and Distributions (.62) (1.28) (1.55) (.99) (.30)

Net Asset Value, End of Period......................... $15.74 $15.22 $15.05 $14.56 $13.71

Total Return(b)........................................ 7.68%(c) 10.18% 14.96% 14.10% 18.72%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $22,844 $18,930 $11,885 $5,964 $1,263
Ratio of Expenses to Average Net Assets............. 1.93%(d) 2.04% 2.14% 2.13% 1.91%(d)
Ratio of Net Investment Income to Average Net Assets 2.03%(d) 2.08% 1.58% 1.93% 2.53%(d)
Portfolio Turnover Rate............................. 27.9%(d) 57.0% 27.6% 32.6% 35.8%(d)

PRINCIPAL BALANCED FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $15.15 $14.98 $14.52 $13.81
Income from Investment Operations:
Net Investment Income............................... .17 .33 .29 .24
Net Realized and Unrealized Gain (Loss) on Investments .99 1.15 1.76 .73

Total from Investment Operations 1.16 1.48 2.05 .97

Less Dividends and Distributions:......................
Dividends from Net Investment Income................ (.18) (.28) (.30) (.26)
Distributions from Capital Gains.................... (.46) (1.03) (1.29) --

Total Dividends and Distributions (.64) (1.31) (1.59) (.26)

Net Asset Value, End of Period......................... $15.67 $15.15 $14.98 $14.52

Total Return(b)........................................ 7.80%(c) 10.43% 15.16% 7.52%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $22,972 $19,434 $9,745 $875
Ratio of Expenses to Average Net Assets............. 1.76%(d) 1.88% 1.99% 1.49%(d)
Ratio of Net Investment Income to Average Net Assets 2.20%(d) 2.22% 1.66% 2.26%(d)
Portfolio Turnover Rate............................. 27.9%(d) 57.0% 27.6% 32.6%(d)

* Six Months Ended April 30, 1999.

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

<CAPTION>
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $21.71 $20.22 $17.10 $15.03 $12.45
Income from Investment Operations:
Net Investment Income............................... .08 .12 .21 .23 .24
Net Realized and Unrealized Gain (Loss) on Investments 3.21 3.57 3.58 2.45 2.55

Total from Investment Operations 3.29 3.69 3.79 2.68 2.79

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.08) (.12) (.21) (.26) (.21)
Distributions from Capital Gains.................... (.01) (2.08) (.46) (.35) --

Total Dividends and Distributions (.09) (2.20) (.67) (.61) (.21)

Net Asset Value, End of Period......................... $24.91 $21.71 $20.22 $17.10 $15.03

Total Return(b)........................................ 15.20%(c) 19.48% 22.57% 18.20% 22.65%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $166,447 $126,740 $79,985 $44,389 $35,212
Ratio of Expenses to Average Net Assets............. 1.21%(d) 1.31% 1.30% 1.33% 1.38%
Ratio of Net Investment Income to Average Net Assets .71%(d) .57% 1.10% 1.41% 1.83%
Portfolio Turnover Rate............................. 13.2%(d) .5% 55.4% 13.3% 26.1%

<CAPTION>
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(e)
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $21.55 $20.14 $17.03 $14.99 $11.89
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .01 (.02) .07 .11 .15
Net Realized and Unrealized Gain (Loss) on Investments 3.18 3.53 3.54 2.41 3.10

Total from Investment Operations 3.19 3.51 3.61 2.52 3.25

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.01) (.02) (.04) (.13) (.15)
Distributions from Capital Gains.................... (.01) (2.08) (.46) (.35) --

Total Dividends and Distributions (.02) (2.10) (.50) (.48) (.15)

Net Asset Value, End of Period......................... $24.72 $21.55 $20.14 $17.03 $14.99

Total Return(b)........................................ 14.79%(c) 18.59% 21.59% 17.18% 26.20%(c)

PRINCIPAL BLUE CHIP FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $21.63 $20.16 $17.08 $16.21
Income from Investment Operations:
Net Investment Income............................... .03 .02 .13 .12
Net Realized and Unrealized Gain (Loss) on Investments 3.18 3.57 3.53 .90

Total from Investment Operations 3.21 3.59 3.66 1.02

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.02) (.04) (.12) (.15)
Distributions from Capital Gains.................... (.01) (2.08) (.46) --

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

Net Asset Value, End of Period......................... $24.81 $21.63 $20.16 $17.08

Total Return(b)........................................ 14.86%(c) 19.01% 21.82% 7.02%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $44,527 $32,871 $15,502 $1,575
Ratio of Expenses to Average Net Assets............. 1.75%(d) 1.85% 1.89% 1.48%(d)
Ratio of Net Investment Income to Average Net Assets .17%(d) .02% .45% .68%(d)
Portfolio Turnover Rate............................. 13.2%(d) .5% 55.4% 13.3%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.

FINANCIAL HIGHLIGHTS (Continued)
(unaudited)

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

PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $31.07 $29.69 $27.72 $23.69 $20.83
Income from Investment Operations:
Net Investment Income............................... .25 .50 .50 .45 .45
Net Realized and Unrealized Gain (Loss) on Investments 3.16 3.88 5.80 5.48 3.15

Total from Investment Operations 3.41 4.38 6.30 5.93 3.60

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.26) (.53) (.48) (.43) (.39)
Distributions from Capital Gains.................... (1.95) (2.47) (3.85) (1.47) (.35)

Total Dividends and Distributions (2.21) (3.00) (4.33) (1.90) (.74)

Net Asset Value, End of Period......................... $32.27 $31.07 $29.69 $27.72 $23.69

Total Return(b)........................................ 11.48%(c) 15.59% 25.36% 26.41% 17.94%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $630,443 $565,052 $494,444 $435,617 $339,656
Ratio of Expenses to Average Net Assets............. .72%(d) .74% .70% .69% .75%
Ratio of Net Investment Income to Average Net Assets 1.69%(d) 1.67% 1.85% 1.82% 2.08%
Portfolio Turnover Rate............................. 21.2%(d) 23.2% 30.8% 50.2% 46.0%

PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(e)
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $30.90 $29.51 $27.58 $23.61 $19.12
Income from Investment Operations:
Net Investment Income............................... .15 .26 .23 .21 .33
Net Realized and Unrealized Gain (Loss) on Investments 3.14 3.86 5.77 5.45 4.46

Total from Investment Operations 3.29 4.12 6.00 5.66 4.79

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.14) (.26) (.22) (.22) (.30)
Distributions from Capital Gains.................... (1.95) (2.47) (3.85) (1.47) --

Total Dividends and Distributions (2.09) (2.73) (4.07) (1.69) (.30)

Net Asset Value, End of Period......................... $32.10 $30.90 $29.51 $27.58 $23.61

Total Return(b)........................................ 11.11%(c) 14.71% 24.13% 25.19% 25.06%(c)

PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $30.80 $29.44 $27.57 $24.73
Income from Investment Operations:
Net Investment Income............................... .16 .28 .30 .19
Net Realized and Unrealized Gain (Loss) on Investments 3.13 3.84 5.74 2.81

Total from Investment Operations 3.29 4.12 6.04 3.00

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.15) (.29) (.32) (.16)
Distributions from Capital Gains.................... (1.95) (2.47) (3.85) --

Total Dividends and Distributions (2.10) (2.76) (4.17) (.16)

Net Asset Value, End of Period......................... $31.99 $30.80 $29.44 $27.57

Total Return(b)........................................ 11.15%(c) 14.77% 24.36% 12.74%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $45,185 $37,675 $18,326 $1,752
Ratio of Expenses to Average Net Assets............. 1.37%(d) 1.50% 1.50% 1.16%(d)
Ratio of Net Investment Income to Average Net Assets 1.04%(d) .88% .93% 1.18%(d)
Portfolio Turnover Rate............................. 21.2%(d) 23.2% 30.8% 50.2%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.

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

PRINCIPAL GROWTH FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $56.09 $50.43 $39.54 $37.22 $31.14
Income from Investment Operations:
Net Investment Income............................... .13 .35 .31 .35 .35
Net Realized and Unrealized Gain (Loss) on Investments 10.47 7.14 11.26 3.50 6.67

Total from Investment Operations 10.60 7.49 11.57 3.85 7.02

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.18) (.34) (.31) (.35) (.31)
Distributions from Capital Gains.................... -- (1.49) (.37) (1.18) (.63)

Total Dividends and Distributions (.18) (1.83) (.68) (1.53) (.94)

Net Asset Value, End of Period......................... $66.51 $56.09 $50.43 $39.54 $37.22

Total Return(b)........................................ 18.92%(c) 15.17% 29.55% 10.60% 23.29%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $494,746 $395,954 $317,386 $228,361 $174,328
Ratio of Expenses to Average Net Assets............. .86%(d) .95% 1.03% 1.08% 1.16%
Ratio of Net Investment Income to Average Net Assets .43%(d) .66% .68% .95% 1.12%
Portfolio Turnover Rate............................. 18.7%(d) 21.9% 16.5% 1.8% 12.2%

PRINCIPAL GROWTH FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(e)
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $55.98 $50.36 $39.43 $37.10 $28.33
Income from Investment Operations:
Net Investment Income............................... (.02) .06 .09 .08 .21
Net Realized and Unrealized Gain (Loss) on Investments 10.46 7.14 11.23 3.48 8.76

Total from Investment Operations 10.44 7.20 11.32 3.56 8.97

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.03) (.09) (.02) (.05) (.20)
Distributions from Capital Gains.................... -- (1.49) (.37) (1.18) --

Total Dividends and Distributions (.03) (1.58) (.39) (1.23) (.20)

Net Asset Value, End of Period......................... $66.39 $55.98 $50.36 $39.43 $37.10

Total Return(b)........................................ 18.65%(c) 14.58% 28.92% 9.80% 31.48%(c)

PRINCIPAL GROWTH FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $55.77 $50.16 $39.40 $39.27
Income from Investment Operations:
Net Investment Income............................... (.04) .02 .06 .10
Net Realized and Unrealized Gain (Loss) on Investments 10.40 7.09 11.16 .13

Total from Investment Operations 10.36 7.11 11.22 .23

Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.01) (.09) (.10)
Distributions from Capital Gains.................... -- (1.49) (.37) --

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

Net Asset Value, End of Period......................... $66.13 $55.77 $50.16 $39.40

Total Return(b)........................................ 18.58%(c) 14.46% 28.72% 1.12%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $42,339 $30,557 $16,265 $2,014
Ratio of Expenses to Average Net Assets............. 1.43%(d) 1.59% 1.69% 1.42%(d)
Ratio of Net Investment Income to Average Net Assets (.14)%(d) .01% .00% .14%(d)
Portfolio Turnover Rate............................. 18.7%(d) 21.9% 16.5% 1.8%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.

FINANCIAL HIGHLIGHTS (Continued)
(unaudited)

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

PRINCIPAL MIDCAP FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $39.90 $45.33 $35.75 $31.45 $25.08
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .02 (.07) .07 .14 .12
Net Realized and Unrealized Gain (Loss) on Investments 4.96 (4.26) 10.80 5.05 6.45

Total from Investment Operations 4.98 (4.33) 10.87 5.19 6.57

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

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

Net Asset Value, End of Period......................... $44.88 $39.90 $45.33 $35.75 $31.45

Total Return(b)........................................ 12.48%(c) (9.78)% 31.26% 16.89% 26.89%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $353,387 $332,942 $346,666 $229,465 $150,611
Ratio of Expenses to Average Net Assets............. 1.24%(d) 1.22% 1.26% 1.32% 1.47%
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.07)%(d) (.14)% .20% .46% .47%
Portfolio Turnover Rate............................. 25.0%(d) 25.1% 9.5% 12.3% 13.5%

PRINCIPAL MIDCAP FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(e)
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $39.29 $44.88 $35.48 $31.31 $23.15
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .26 (.23) (.05) (.04) --
Net Realized and Unrealized Gain (Loss) on Investments 4.67 (4.26) 10.64 4.97 8.18

Total from Investment Operations 4.93 (4.49) 10.59 4.93 8.18

Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- (.01) (.01) (.02)
Distributions from Capital Gains.................... -- (1.10) (1.18) (.75) --

Total Dividends and Distributions -- (1.10) (1.19) (.76) (.02)

Net Asset Value, End of Period......................... $44.22 $39.29 $44.88 $35.48 $31.31

Total Return(b)........................................ 12.29%(c) (10.24)% 30.64% 16.07% 35.65%(c)

PRINCIPAL MIDCAP FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $39.43 $45.10 $35.67 $33.77
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .24 (.28) (.12) .04
Net Realized and Unrealized Gain (Loss) on Investments 4.55 (4.29) 10.74 1.88

Total from Investment Operations 4.79 (4.57) 10.62 1.92

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

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

Net Asset Value, End of Period......................... $44.22 $39.43 $45.10 $35.67

Total Return(b)........................................ 12.10%(c) (10.37)% 30.56% 6.20%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $26,651 $23,540 $17,448 $2,016
Ratio of Expenses to Average Net Assets............. 1.86%(d) 1.89% 1.87% 1.53%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.69)%(d) (.82)% (.45)% .29%(d)
Portfolio Turnover Rate............................. 25.0%(d) 25.1% 9.5% 12.3%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.

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

PRINCIPAL REAL ESTATE FUND, INC.
Class A shares 1999* 1998(g)
- ------------------------------------------------------------------- ----
<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.39 $10.15
Income from Investment Operations:
Net Investment Income............................... .16 .20
Net Realized and Unrealized Gain (Loss) on Investments .24 (1.76)

Total from Investment Operations .40 (1.56)
Less Dividends:
Dividends from Net Investment Income (.16) (.20)

Total Dividends (.16) (.20)

Net Asset Value, End of Period......................... $8.63 $8.39

Total Return(b)........................................ 4.95%(c) (15.45)%(c)

PRINCIPAL REAL ESTATE FUND, INC.
Class B shares 1999* 1998(g)
- ------------------------------------------------------------------- ----
<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.38 $10.15
Net Investment Income............................... .12 .20
Net Realized and Unrealized Gain (Loss) on Investments .25 (1.78)

Total from Investment Operations .37 (1.58)
Less Dividends:
Dividends from Net Investment Income................ (.14) (.19)

Total Dividends (.14) (.19)

Net Asset Value, End of Period......................... $8.61 $ 8.38

Total Return(b)........................................ 4.54%(c) (15.67)%(c)

PRINCIPAL REAL ESTATE FUND, INC.
Class R shares 1999* 1998(g)
- ------------------------------------------------------------------- ----
<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.40 $10.15
Income from Investment Operations:
Net Investment Income............................... .15 .23
Net Realized and Unrealized Gain (Loss) on Investments .25 (1.78)

Total from Investment Operations .40 (1.55)
Less Dividends:
Dividends from Net Investment Income................ (.16) (.20)

Total Dividends (.16) (.20)

Net Asset Value, End of Period......................... $8.64 $ 8.40

Total Return(b)........................................ 4.90%(c) (15.37)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,185 $2,928
Ratio of Expenses to Average Net Assets............. 2.17%(d) 1.99%(d)
Ratio of Net Investment Income to Average Net Assets 3.72%(d) 3.07%(d)
Portfolio Turnover Rate............................. 59.6%(d) 60.4%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.

FINANCIAL HIGHLIGHTS (Continued)
(unaudited)

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

PRINCIPAL SMALLCAP FUND, INC.
Class A shares 1999* 1998(g)
- ------------------------------------------------------------------- ----
<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.43 $9.92
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) (.08)
Net Realized and Unrealized Gain (Loss) on Investments 1.64 (1.41)

Total from Investment Operations 1.62 (1.49)

Net Asset Value, End of Period......................... $10.05 $8.43

Total Return(b)........................................ 19.22%(c) (15.95)%(c)

PRINCIPAL SMALLCAP FUND, INC.
Class B shares 1999* 1998(g)
- ------------------------------------------------------------------- ----
<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.41 $9.91
Net Investment Income (Operating Loss).............. (.05) (.11)
Net Realized and Unrealized Gain (Loss) on Investments 1.61 (1.39)

Total from Investment Operations 1.56 (1.50)

Net Asset Value, End of Period......................... 9.97 $ 8.41

Total Return(b)........................................ 18.55%(c) (16.15)%(c)

PRINCIPAL SMALLCAP FUND, INC.
Class R shares 1999* 1998(g)
- ------------------------------------------------------------------- ----
<S> <C> <C>
Net Asset Value, Beginning of Period................... $8.45 $9.91
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.03) (.07)
Net Realized and Unrealized Gain (Loss) on Investments 1.64 (1.39)

Total from Investment Operations 1.61 (1.46)

Net Asset Value, End of Period......................... $10.06 $ 8.45

Total Return(b)........................................ 19.05%(c) (15.75)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $7,623 $4,688
Ratio of Expenses to Average Net Assets............. 2.01%(d) 2.07%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.13)%(d) (1.12)%(d)
Portfolio Turnover Rate............................. 78.2%(d) 20.5%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.

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

PRINCIPAL UTILITIES FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.11 $12.55 $11.40 $10.94 $9.25
Income from Investment Operations:
Net Investment Income(h)............................ .18 .41 .48 .44 .48
Net Realized and Unrealized Gain (Loss) on Investments 1.39 3.59 1.12 .45 1.70

Total from Investment Operations 1.57 4.00 1.60 .89 2.18

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.18) (.44) (.45) (.43) (.49)
Distributions from Capital Gains.................... (.24) -- -- -- --

Total Dividends and Distributions (.42) (.44) (.45) (.43) (.49)

Net Asset Value, End of Period......................... $17.26 $16.11 $12.55 $11.40 $10.94

Total Return(b)........................................ 9.85%(c) 32.10% 14.26% 8.13% 24.36%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $95,189 $83,533 $64,366 $66,322 $65,873
Ratio of Expenses to Average Net Assets(h).......... 1.17%(d) 1.15% 1.15% 1.17% 1.04%
Ratio of Net Investment Income to Average Net Assets 2.16%(d) 2.73% 3.90% 3.85% 4.95%
Portfolio Turnover Rate............................. 26.2%(d) 11.9% 22.5% 34.2% 13.0%
<CAPTION>

PRINCIPAL UTILITIES FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(e)
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.09 $12.53 $11.38 $10.93 $9.20
Income from Investment Operations:
Net Investment Income(h)............................ .12 .30 .38 .36 .40
Net Realized and Unrealized Gain (Loss) on Investments 1.38 3.59 1.13 .43 1.77

Total from Investment Operations 1.50 3.89 1.51 .79 2.17

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.11) (.33) (.36) (.34) (.44)
Distributions from Capital Gains.................... (.24) -- -- -- --

Total Dividends and Distributions (.35) (.33) (.36) (.34) (.44)

Net Asset Value, End of Period......................... $17.24 $16.09 $12.53 $11.38 $10.93

Total Return(b)........................................ 9.45%(c) 31.23% 13.41% 7.23% 24.18%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $15,220 $11,391 $6,937 $5,579 $3,952
Ratio of Expenses to Average Net Assets(h).......... 1.93%(d) 1.90% 1.90% 1.93% 1.72%(d)
Ratio of Net Investment Income to Average Net Assets 1.40%(d) 2.04% 3.14% 3.07% 3.84%(d)
Portfolio Turnover Rate............................. 26.2%(d) 11.9% 22.5% 34.2% 13.0%(d)
<CAPTION>

PRINCIPAL UTILITIES FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $16.07 $12.49 $11.33 $11.75
Income from Investment Operations:
Net Investment Income(h)............................ .12 .33 .39 .28
Net Realized and Unrealized Gain (Loss) on Investments 1.38 3.58 1.14 (.41)

Total from Investment Operations 1.50 3.91 1.53 (.13)

Less Dividends and Distributions:
Dividends from Net Investment Income................ (.12) (.33) (.37) (.29)
Distributions from Capital Gains.................... (.24) -- -- --

Total Dividends and Distributions (.36) (.33) (.37) (.29)

Net Asset Value, End of Period......................... $17.21 $16.07 $12.49 $11.33

Total Return(b)........................................ 9.41%(c) 31.47% 13.72% (.31)%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,159 $4,005 $1,512 $311
Ratio of Expenses to Average Net Assets(h).......... 1.84%(d) 1.65% 1.65% 1.47%(d)
Ratio of Net Investment Income to Average Net Assets 1.49%(d) 2.21% 3.35% 3.77%(d)
Portfolio Turnover Rate............................. 26.2%(d) 11.9% 22.5% 34.2%(d)

* Six Months Ended April 30, 1999.

See accompanying notes.

</TABLE>

FINANCIAL HIGHLIGHTS (Continued)
(unaudited)
Notes to Financial Highlights

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

Former Fund Name New Fund Name
- -----------------------------------------------------------------
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.

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

(d) Computed on an annualized basis.

Net Investment
Income

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

Per Share
Net Investment
Income

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

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

Per Share Unrealized
Gain (Loss)

Class Class Class
A B R

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

(h) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, Principal Utilities Fund, Inc. would have had per share net
investment income and the ratios of expenses to average net assets as
shown:

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

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

Class B 1998 .29 2.00%(d) 9,557
1997 .37 1.95% 3,753
1996 .34 2.06% 6,690
1995(e) .40 1.81%(d) 1,338

Class R 1998 .28 2.10%(d) 12,481
1997 .31 2.67% 9,355
1996(f) .28 1.47%(d) --

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

April 30, 1999

STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.

<S> <C> <C> <C>
Investment in securities -- at cost........ $17,128,928 $337,246,551 $25,898,003

Assets
Investment in securities -- at value (Note 4) $17,344,326 $403,279,197 $29,085,843
Cash....................................79,538 13,364 11,581
Receivables:
Dividends and interest.................. 62,264 1,765,733 54,645
Investment securities sold.............. 285,361 7,745,363 712,990
Capital Shares sold..................... 51,999 248,082 80,205
Other assets............................... -- 9,174 --

Total Assets 17,823,488 413,060,913 29,945,264
Liabilities
Accrued expenses........................... 49,326 481,617 49,924
Payables:
Investment securities purchased......... 573,051 3,360,968 288,295
Capital Shares reacquired............... 10,161 443,838 13,947
Indebtedness (Note 6) ..................... -- -- 55,000

Total Liabilities 632,538 4,286,423 407,166

Net Assets Applicable to Outstanding Shares $17,190,950 $408,774,490 $29,538,098

Net Assets Consist of:
Capital Stock.............................. $ 21,598 $ 415,600
$ 23,786
Additional paid-in capital................. 19,307,225 313,487,803 24,945,069
Accumulated undistributed net
investment income ...................... -- 1,855,132 --
Accumulated undistributed net realized
gain (loss) from investment and
foreign currency transactions........... (2,346,505) 26,979,148 1,382,745
Net unrealized appreciation
of investments.......................... 215,398 66,032,646 3,187,840
Net unrealized appreciation (depreciation) on
translation of assets and liabilities in
foreign currencies...................... (6,766) 4,161 (1,342)

Total Net Assets $17,190,950 $408,774,490 $29,538,098

Capital Stock (par value: $.01 a share):
Shares authorized.......................... 100,000,000 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets....................... $9,799,763 $339,889,315 $16,805,423
Shares issued and outstanding. 1,227,807 34,533,746 1,350,891
Net asset value per share...... $7.98 $9.84 $12.44
Maximum offering price per share(a) $8.38 $10.33 $13.06

Class B: Net Assets....................... $4,290,554 $47,800,869 $8,376,251
Shares issued and outstanding. 542,105 4,875,754 678,126
Net asset value per share(b)... $7.91 $9.80 $12.35

Class R: Net Assets....................... $3,100,633 $21,084,306 $4,356,424
Shares issued and outstanding. 389,901 2,150,466 349,567
Net asset value per share.... $7.95 $9.80 $12.46

<FN>

(a) Maximum offering price is equal to net asset value plus a front-end
sales charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</FN>

See accompanying notes.
</TABLE>

Six Months Ended April 30, 1999

STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.

<S> <C> <C> <C>
Net Investment Income
Income:
Dividends............................. $ 204,904 $ 5,018,928 $ 177,138
Withholding tax on foreign dividends... (9,445) (575,919) (20,543)
Interest............................... 17,783 383,270 31,111

Total Income 213,242 4,826,279 187,706

Expenses:
Management and investment advisory
fees (Note 3)....................... 89,891 1,314,211 154,420
Distribution and shareholder servicing
fees (Notes 1 and 3)................ 25,613 559,100 50,488
Transfer and administrative services
(Notes 1 and 3)..................... 61,363 597,511 73,656
Registration fees (Note 1)............. 19,008 49,565 20,123
Custodian fees ........................ 16,249 60,566 8,272
Auditing and legal fees ............... 4,813 5,121 4,627
Directors' fees ....................... 3,553 3,522 3,567
Other ................................. 325 8,471 974

Total Net Expenses 220,815 2,598,067 316,127

Net Investment Income (Operating Loss) (7,573) 2,228,212 (128,421)

Net Realized and Unrealized
Gain (Loss) on Investments and Foreign
Currencies Net realized gain (loss) from:
Investment transactions................ (910,240) 23,278,847 1,382,302
Foreign currency transactions.......... (29,185) (146,496) (6,828)
Change in unrealized appreciation/depreciation of:
Investments............................ 3,953,973 24,709,633 4,458,924
Translation of assets and liabilities in
foreign currencies.................. 12,652 83,279 (2,254)

Net Realized and Unrealized Gain on
Investments and Foreign Currencies 3,027,200 47,925,263 5,832,144

Net Increase in Net Assets
Resulting from Operations $3,019,627 $50,153,475 $5,703,723

See accompanying notes.
</TABLE>

STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.
Six Months Year Six Months Year Six Months Year
Ended Ended Ended Ended Ended Ended
April 30, October 31, April 30, October 31, April 30, October 31,
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income (operating loss).... $ (7,573) $ (62,006) $ 2,228,212 $ 4,898,628 $ (128,421) $ (174,037)
Net realized gain (loss) from investment and
foreign currency transactions.......... (939,425) (1,360,310) 23,132,351 21,565,859 1,375,474 362,866
Change in unrealized appreciation/
depreciation of investments and translation
of assets and liabilities in foreign
currencies 3,966,625 (1,771,953) 24,792,912 (21,851,314) 4,456,670 (1,228,241)

Net Increase (Decrease) in Net
Assets Resulting from Operations 3,019,627 (3,194,269) 50,153,475 4,613,173 5,703,723 (1,039,412)

Dividends and Distributions to Shareholders
From net investment income:
Class A................................ -- -- (3,969,770) (3,230,657) -- --
Class B ............................... -- -- (251,686) (135,323) -- --
Class R ............................... -- -- (86,216) (60,535) -- --

From net realized gain on investments and
foreign currency transactions:
Class A ............................... -- -- (15,023,448) (6,125,804) (93,634) --
Class B ............................... -- -- (2,095,415) (754,887) (51,661) --
Class R................................ -- -- (904,520) (272,111) (25,931) --

Total Dividends and Distributions -- -- (22,331,055) (10,579,317) (171,226) --

Capital Share Transactions (Note 5)
Shares sold:
Class A................................ 1,563,625 4,862,019 45,375,305 61,935,765 5,192,445 8,737,574
Class B ............................... 481,942 1,321,774 6,651,580 14,284,105 968,427 3,023,591
Class R................................ 575,383 609,470 3,758,483 9,941,189 319,836 532,826
Shares issued in reinvestment of dividends
and distributions:
Class A................................ -- -- 18,682,846 9,196,905 93,472 --
Class B ............................... -- -- 2,317,115 870,916 51,577 --
Class R................................ -- -- 994,480 332,448 26,009 --
Shares redeemed:
Class A ............................... (809,033) (797,000) (49,910,302) (44,920,651) (3,362,670) (2,487,754)
Class B ............................... (209,350) (339,033) (6,205,471) (6,478,598) (806,897) (895,810)
Class R ............................... (221,149) (338,015) (2,884,301) (3,796,800) (143,840) (192,387)

Net Increase in Net Assets from
Capital Share Transactions 1,381,418 5,319,215 18,779,735 41,365,279 2,338,359 8,718,040

Total Increase 4,401,045 2,124,946 46,602,155 35,399,135 7,870,856 7,678,628

Net Assets
Beginning of period....................... 12,789,905 10,664,959 362,172,335 326,773,200 21,667,242 13,988,614

End of period (including undistributed net
investment income as set forth below). $17,190,950 $12,789,905 $408,774,490 $362,172,335 $29,538,098 $21,667,242

Undistributed Net Investment Income....... $ -- $ -- $ 1,855,132 $4,262,374 $ -- $ --

See accompanying notes.

</TABLE>

April 30, 1999

NOTES TO FINANCIAL STATEMENTS
(unaudited)

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

Note 1 -- Significant Accounting Policies

Principal International Emerging Markets Fund, Inc., Principal International
Fund, Inc. and Principal International SmallCap Fund, Inc. (the "International
Growth Funds") are registered under the Investment Company Act of 1940, as
amended, as open-end diversified management investment companies and operate in
the mutual fund industry.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC") upon redemption. Class B shares are sold without an
initial sales charge, but are subject to a declining CDSC on certain redemptions
made within six years of purchase. Class R shares are sold without an initial
sales charge and are not subject to a CDSC. Class B shares and Class R shares
bear a higher ongoing distribution fee than Class A shares. Class B shares
automatically convert into Class A shares, based on relative net asset value
(without a sales charge) seven years after purchase. Class R shares
automatically convert into Class A shares, based on relative net asset value
(without a sales charge) four years after purchase. All classes of shares for
each fund represent interests in the same portfolio of investments, and will
vote together as a single class except where otherwise required by law or as
determined by each of the International Growth Funds' respective Board of
Directors. In addition, the Board of Directors of each fund declare separate
dividends on each class of shares.

The International Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the period ended April 30, 1999, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>

Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees

Class A Class B Class R Class A Class B Class R Class A Class B Class R

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal International Emerging Markets Fund, Inc.$ 2,286 $ 19,589 $ 3,738 $ 7,172 $ 1,877 $ 322 $ 4,948 $4,555 $4,812
Principal International Fund, Inc. 316,113 169,135 73,852 172,662 41,648 22,721 10,691 7,160 5,913
Principal International SmallCap Fund, Inc . 11,044 37,567 1,877 7,946 3,297 285 4,510 4,380 3,493
</TABLE>

The International Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities, preferred stocks and
foreign securities, the investments are valued by using prices provided by
market makers or estimates of market values obtained from yield data and other
factors relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by each fund's Board of
Directors. Securities with remaining maturities of 60 days or less are valued at
amortized cost, which approximates market.

Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of the New York Stock Exchange. The values of
such securities used in computing net asset value per share are usually
determined as of such times. Occasionally, events which affect the values of
such securities and foreign currency exchange rates may occur between the times
at which they are generally determined and the close of the New York Stock
Exchange and would therefore not be reflected in the computation of each fund's
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities are valued at their fair value
as determined in good faith by Principal Management Corporation (the "Manager")
under procedures established and regularly reviewed by each fund's Board of
Directors. To the extent each fund invests in foreign securities listed on
foreign exchanges which trade on days on which the fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
holidays, each fund's net asset value could be significantly affected on days
when shareholders do not have access to the International Growth Funds.

Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Growth Funds to value such securities at prices at which it is expected those
shares may be sold, and the Manager or any sub-advisor is authorized to make
such determinations subject to such oversight by each fund's Board of Directors
as may occasionally be necessary.

The value of foreign securities in foreign currency amounts is expressed in U.S.
dollars at the closing daily rate of exchange. The identified cost of the
portfolio holdings is translated at approximate rates prevailing when acquired.
Income and expense amounts are translated at approximate rates prevailing when
received or paid, with daily accruals of such amounts reported at approximate
rates prevailing at the date of valuation. Since the carrying amount of the
foreign securities is determined based on the exchange rate and market values at
the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.

The International Growth Funds record investment transactions generally one day
after the trade date, except for short-term investment transactions which are
recorded generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The International Growth
Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities whereby the ex-dividend date has passed; such dividends
are recorded as soon as the International Growth Funds are informed of the
ex-dividend date. Interest income is recognized on an accrual basis.

Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between trade and
settlement dates on security transactions, and the difference between the amount
of dividends and foreign withholding taxes recorded on the books and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
appreciation on translation of assets and liabilities in foreign currencies
arise from changes in the exchange rate relating to assets and liabilities,
other than investments in securities, purchased and held in non-U.S. denominated
currencies.

The International Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading account. The order permits the International Growth Funds' cash balances
to be deposited into a single joint account along with the cash of other
registered investment companies managed by Principal Management Corporation.
These balances may be invested in one or more short-term instruments.

Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments and foreign currency transactions are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. Permanent book and tax basis
differences are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Reclassifications made for Principal International Emerging Markets Fund, Inc.
and Principal International SmallCap Fund, Inc. for the year ended October 31,
1998 aggregated $75,696 and $181,352 respectively. Other reclassifications made
for the year ended October 31, 1998 were not material.

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

Note 2 -- Federal Income Taxes

Note 3 -- Management Agreement and Transactions With Affiliates

The International Growth Funds have agreed to pay investment advisory and
management fees to Principal Management Corporation (wholly owned by Princor
Financial Services Corporation, a subsidiary of Principal Financial Services,
Inc.) computed at an annual percentage rate of each fund's average daily net
assets. The annual rate used in this calculation for the International Growth
Funds is as follows:

<TABLE>
Net Asset Value of Funds
(in millions)

<CAPTION>
First Next Next Next Over
$100 $100 $100 $100 $400

<S> <C> <C> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. 1.25% 1.20% 1.15% 1.10% 1.05%
Principal International Fund, Inc. 0.75 0.70 0.65 0.60 0.55
Principal International SmallCap Fund, Inc. 1.20 1.15 1.10 1.05 1.00
</TABLE>

The International Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.

Class A Class B

Principal International Emerging Markets Fund, Inc. $ 37,212 $ 3,744
Principal International Fund, Inc. 471,671 106,603
Principal International SmallCap Fund, Inc. 61,002 12,406

No brokerage commissions were paid by the International Growth Funds to Princor
Financial Services Corporation during the periods. Brokerage commissions were
paid to other affiliates by the following funds:

Period Ended Year Ended
April 30,1999 October 31,1998

Principal International Emerging Markets Fund, Inc. $ 6,679 $ 4,730
Principal International Fund, Inc. 115,637 138,499
Principal International SmallCap Fund, Inc. 21,340 6,610

The International Growth Funds bear distribution and shareholder servicing fees
with respect to Class A shares computed at an annual rate of up to .25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the International Growth Funds adopted a distribution plan with respect to Class
B shares that provides for distribution and shareholder servicing fees computed
at an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the International Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the respective
International Growth Fund which generated the excess.

<TABLE>
<CAPTION>
Class A Class B Class R

<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc 400,000 300,000 300,000
Principal International Fund, Inc. 9,669,940 176 152
Principal International SmallCap Fund, Inc. 403,035 302,288 302,272
</TABLE>

Note 4 -- Investment Transactions

Purchases Sales

Principal International Emerging Markets Fund, Inc. $ 8,756,709 $ 6,301,944
Principal International Fund, Inc. 105,038,713 105,433,998
Principal International SmallCap Fund, Inc. 25,125,398 19,758,546

At April 30, 1999, net unrealized appreciation of investments by the
International Growth Funds was composed of the following:

<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation
Appreciation (Depreciation) of Investments

<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 2,495,167 $ (2,279,769) $ 215,398
Principal International Fund, Inc. 87,810,175 (21,777,529) 66,032,646
Principal International SmallCap Fund, Inc. 4,880,884 (1,693,044) 3,187,840
</TABLE>

The International Growth Funds held the following securities which were
purchased in a private placement transaction and may require registration in
order to effect the sale in the ordinary course of business.

<TABLE>
<CAPTION>
Value at Value as a
Date of April 30, Percentage of
Security Description Acquisition Cost 1999 Net Assets

<S> <C> <C> <C> <C> <C>
Principal International Agora SA GDR 2/23/99 $98,474 $121,900 .71%
Emerging Markets Fund, Inc.
Al-Ahram Beverages Co. GDR 8/21/97 56,100 70,125 .41
4/14/98 12,050 12,750 .07
9/28/98 19,350 19,125 .11
11/6/98 44,037 47,812 .28
12/14/98 36,400 44,625 .26
3/19/99 54,485 54,188 .32
4/1/99 57,780 57,375 .33

Bank Handlowy w Warszawie GDR 8/14/97 50,200 47,400 .28
2/23/98 31,100 23,700 .14
4/2/98 16,625 11,850 .07
4/21/98 16,100 11,850 .07
3/29/99 60,000 59,250 .34

Banque Libanaise Pour Le Commerce
SAL ADR 8/14/97 59,930 31,785 .18
2/19/98 7,440 4,890 .03
2/25/99 22,875 18,338 .11

Ceske Radiokomunikace GDR 6/12/98 62,871 141,488 .82

Estonian Telecom GDR 2/11/99 62,730 71,825 .42
Principal International Industrial Credit & Investment Corp. 8/14/97 137,750 46,740 .26%
Emerging Markets Fund, Inc. of India ADR 10/7/97 31,400 12,300 .07
(Continued) 10/20/97 33,400 12,300 .07
11/10/97 15,000 6,150 .04
12/4/97 10,750 6,150 .04
12/17/97 18,675 11,070 .06
1/13/98 13,975 7,995 .05
6/5/98 13,000 6,150 .04
7/14/98 14,365 7,995 .05
8/28/98 20,988 14,145 .08

Mol Magyar Olaj-es Gazipari Rt. ADR 3/20/98 150,000 111,474 .65
4/14/98 16,250 11,147 .06
5/20/98 13,800 11,147 .06
8/4/98 11,950 8,918 .06
9/2/98 18,113 20,065 .12
9/23/98 20,570 24,525 .14
2/25/99 27,335 24,525 .14

Paints & Chemical Industries 9/26/97 25,720 16,511 .10
Co. SAE GDR 10/20/97 11,700 7,179 .04
10/30/97 19,750 14,357 .08
12/4/97 12,155 9,332 .05
1/23/98 3,450 2,871 .02
4/14/98 14,788 9,332 .05
7/20/98 21,390 16,512 .10
9/1/98 17,040 17,229 .10

Pepsi-Gemex SA GDR 7/7/98 37,462 31,500 .18
7/9/98 27,796 23,100 .13
7/14/98 34,223 28,350 .17
7/20/98 31,165 24,150 .14
8/25/98 11,985 12,600 .07
12/8/98 29,920 44,100 .26

Pick Szeged Rt. GDR 7/7/98 26,510 13,966 .08
7/8/98 27,280 13,966 .08
7/14/98 12,950 6,348 .04
9/2/98 20,400 19,045 .11
9/23/98 14,490 19,045 .11
10/22/98 14,200 12,696 .07
10/27/98 20,410 16,505 .10

Reliance Industries Ltd. GDR 8/14/97 72,000 36,186 .21
10/24/97 22,125 12,063 .07
12/12/97 21,750 18,093 .11
1/2/98 17,535 12,665 .07
1/13/98 12,750 10,253 .06
4/6/98 13,800 9,046 .05
7/14/98 13,050 10,856 .06
12/17/98 20,720 24,124 .14
12/22/98 29,150 31,964 .19

Principal International Shinhan Bank GDR 4/9/99 37,593 45,363 .26%
Emerging Markets Fund, Inc. 4/19/99 59,265 64,462 .38
(Continued) 4/22/99 46,475 52,525 .31

Videsh Sanchar Nigam Ltd. GDR 8/14/97 129,440 95,800 .56
11/18/97 28,250 23,950 .14
12/2/97 14,250 11,975 .07
12/12/97 10,720 9,580 .06
1/2/98 15,235 13,173 .08
1/13/98 13,620 14,370 .08
3/5/98 10,440 9,580 .06
4/30/98 21,038 20,358 .12
6/5/98 19,800 21,555 .12
7/14/98 11,750 11,975 .07
7/30/98 10,875 11,975 .07
9/28/98 16,688 17,962 .10
2/11/99 54,575 70,652 .41

2,212,271 12.87

Principal International Neopost SA 2/23/99 26,430 28,912 .10
SmallCap Fund, Inc. 3/24/99 111,325 122,875 .41
3/31/99 67,925 75,893 .26

227,680 .77
</TABLE>

The International Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.

Note 5 -- Capital Share Transactions

Transactions in Capital Shares by fund were as follows:

<TABLE>
<CAPTION>
Principal International Principal Principal International
Emerging Markets International SmallCap
Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Period Ended April 30, 1999:
Shares sold:
Class A ......................................... 225,635 4,894,572 456,355
Class B ......................................... 70,192 720,036 86,478
Class R ......................................... 91,450 406,857 28,177
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- 2,098,492 9,091
Class B ........................................... -- 262,627 5,060
Class R ......................................... -- 112,716 2,530
Shares redeemed:
Class A ......................................... (115,489) (5,353,449) (291,931)
Class B ......................................... (30,198) (667,201) (74,115)
Class R ......................................... (38,838) (311,419) (12,591)

Net Increase 202,752 2,163,231 209,054

Year Ended October 31, 1998:
Shares sold:
Class A ......................................... 620,056 6,434,705 770,054
Class B ......................................... 169,453 1,480,411 260,731
Class R ......................................... 87,602 1,035,347 47,319
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- 1,012,117 --
Class B ........................................... -- 95,849 --
Class R ......................................... -- 36,589 --
Shares redeemed:
Class A ......................................... (110,092) (4,688,589) (216,075)
Class B ......................................... (43,618) (672,121) (79,482)
Class R ......................................... (53,356) (400,191) (17,457)

Net Increase 670,045 4,334,117 765,090

</TABLE>

Note 6 -- Line of Credit

The International Growth Funds participate with other funds and portfolios
managed by Principal Management Corporation in an unsecured joint line of credit
with a bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At April 30, 1999, the Principal International
SmallCap Fund, Inc. had an outstanding borrowing of $55,000 at an annual rate of
5.50%. No other International Growth Fund had outstanding borrowings at April
30, 1999 under the line of credit.

GROWTH FUNDS (INTERNATIONAL)

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.

<TABLE>
<CAPTION>
Shares
Held Value

Common Stocks (89.92%)

<S> <C> <C>
Agricultural Chemicals (0.45%)
Sociedad Quimica Minera De Chile SA
ADR, Class A 115 $ 3,795
Sociedad Quimica Minera De Chile SA
ADR, Class B 2,000 73,750
77,545
Bakery Products (0.92%)
Nong Shim Co. Ltd. 2,800 157,851

Beer, Wine & Distilled Beverages (1.47%)
Hite Brewery Co. Ltd. 2,400(b) 56,543
South African Breweries Ltd. 23,862 196,624
253,167
Beverages (6.77%)
Al-Ahram Beverages Co. GDR 9,600(a)(b) 306,000
Embotelladora Andina SA ADR, Series A 9,800 177,012
Fomento Economico Mexicano SA ADR 10,050 365,569
PanAmerican Beverages, Inc. ADR 6,800 150,875
Pepsi-Gemex SA GDR 15,600(a) 163,800
1,163,256
Blast Furnace & Basic Steel Products (2.38%)
Pohang Iron & Steel ADR 6,600 169,950
Tubos De Acero De Mexico SA ADR 21,700 240,056
410,006
Cable & Other Pay TV Services (1.39%)
@Entertainment, Inc. ADR 10,800(b) 97,200
Ceske Radiokomunikace GDR 3,850(a)(b) 141,488
238,688
Cement, Hydraulic (1.82%)
Apasco SA 24,000 142,342
Uniao De Bancos Brasileiros SA GDR 6,900 171,206
313,548
Central Reserve Depositories (0.87%)
Dao Heng Bank Group Ltd. 37,000 150,377

Commercial Banks (9.85%)
ABSA Group Ltd. 53,000 277,835
Banco Rio De La Plata SA ADR 12,900 166,894
Bank Handlowy w Warazawie GDR 13,000(a) 154,050
Bank Sinopac 300,000(b) 211,016
Banque Libanaise Pour Le Commerce
SAL ADR 4,500(a) 55,013
BOE Ltd. 180,000 176,923
Overseas Union Bank Ltd. 65,000 333,924
Shinhan Bank 14,000 154,317
Shinhan Bank GDR 6,800(a)(b) 162,350
1,692,322
Communications Equipment (1.88%)
ECI Telecommunications Ltd. ADR 6,500 239,688
Gilat Satellite Networks Ltd. 1,600(b) 83,200
322,888
Computer & Data Processing
Services (0.52%)
Tecnomatix Technologies Ltd. ADR 6,000(b)$ 89,250

Computer & Office Equipment (3.33%)
Compal Electronics, Inc. 59,000(b) 203,890
Orbotech Ltd. ADR 5,000(b) 240,000
Sindo Ricoh Co. 3,100 127,812
571,702
Construction & Related Machinery (1.50%)
Barlow Ltd. 43,058 257,459

Consumer Products (1.97%)
Rothmans Industries Ltd. 37,000 194,450
Souza Cruz SA 12,100 80,887
Tabak AS 300 62,474
337,811
Crude Petroleum & Natural Gas (1.23%)
Mol Magyar Olaj-es Gazipari Rt. ADR 9,500(a) 211,801

Department Stores (1.00%)
Shinsegae Department Store Co. 5,000 172,492

Eating & Drinking Places (0.98%)
Cafe De Coral Holdings Ltd. 513,000 168,783

Electric Services (1.15%)
Korean Electric Power ADR 12,000 198,000

Electrical Industrial Apparatus (0.60%)
Guangdong Kelon Electric Holdings Co. Ltd.115,000 103,864

Electronic Components &
Accessories (2.73%)
Elec & Eltek International ADR 40,500 153,900
Flextech Holdings Ltd. 126,000 102,675
Varitronix International Ltd. 124,000 212,786
469,361
Electronic Distribution Equipment (1.07%)
Techtronic Industries Co. 964,000 184,081

Engines & Turbines (0.43%)
First Tractor Co. Ltd. 372,000 74,395

Family Clothing Stores (0.24%)
Giordano International Ltd. 88,000 40,875

Federal & Federally Sponsored
Credit (0.76%)
Industrial Credit & Investment
Corp. of India ADR 21,300(a) 130,995

Finance Services (0.52%)
Grupo Financiero Banorte SA, Series B 69,000(b) 89,613

Fire, Marine & Casualty Insurance (1.86%)
Aksigorta AS 4,914,000 320,013

Foreign Banks, Branches & Agencies (2.11%)
Bank Leumi Le-Israel 59,000 101,079
Credicorp Ltd. ADR 11,050 111,881
Yapi Ve Kredi Bankasi AS 6,260,000 150,278
363,238
Furniture & Home Furnishing
Stores (0.96%)
Grupo Elektra SA CPO 230,000 $ 164,290

Glass & Glassware, Pressed or Blown (1.45%)
Vitro SA ADR 40,000 250,000

Grocery Stores (0.85%)
Blue Square Chain Investments &
Property Ltd. 9,900(b) 146,977

Holding Offices (1.92%)
The India Fund, Inc. ADR 39,400(b) 329,975

Household Appliances (0.36%)
Halla Climate Control Co. 1,900 61,950

Measuring & Controlling Devices (2.56%)
IDT Holdings Singapore Ltd. ADR 195,000 216,450
Moulin International Holding Ltd. 1,910,000 224,257
440,707
Meat Products (0.59%)
Pick Szeged Rt. GDR 16,000(a) 101,571

Medical Instruments & Supplies (0.84%)
Medison Co. Ltd. 12,900 144,363

Miscellaneous Electrical Equipment &
Supplies (0.66%)
G.P. Batteries International Ltd. 67,500 112,799
Miscellaneous Food & Kindred
Products (0.48%)
Thai Union Frozen Products Public Co. Ltd.28,000 82,988

Miscellaneous Investing (1.45%)
Banco Latino Americano
De Exportaciones ADR 7,800 248,625

Miscellaneous Non-Durable Goods(1.71%)
Desc SA, Series B 230,000 294,229

Miscellaneous Textile Goods (2.08%)
Esprit Holdings Ltd. 324,000 192,297
Reliance Industries Ltd. GDR 27,400(a) 165,250
357,547
Newspapers (1.10%)
Agora SA GDR 10,600(a)(b) 121,900
Investec-Consultadoria Internacional SA 2,000 66,418
188,318
Oil & Gas Field Services (0.73%)
Gulf Indonesia Resources Ltd. ADR 12,200(b) 125,813

Paints & Allied Products (0.54%)
Paints&Chemical Industries Co.SAE GDR 13,000(a) 93,323

Paper & Paper Products (0.99%)
Aracruz Celulose SA ADR 8,500 170,000

Paperboard Containers & Boxes (0.56%)
Hung Hing Print Group 228,000 95,607

Petroleum Refining (4.14%)
Sasol Ltd. 40,100 $ 282,471
YPF Sociedad Anonima ADR 10,200 428,400
710,871
Radio & Television Broadcasting (1.43%)
Grupo Televisa SA GDR 6,000(b) 246,000

Search & Navigation Equipment (0.99%)
Elbit Systems Ltd. ADR 11,800 170,363

Security & Commodity Exchanges (0.80%)
OTK Holdings Ltd. ADR 206,000 136,673

Security Brokers & Dealers (1.31%)
G.K. Goh Holdings Ltd. 90,000 62,710
Kay Hian Holdings Ltd. 170,000 104,399
Peregrine Investment Holdings Ltd. 62,000(b)(c) 0
Vickers Ballas Holdings Ltd. 80,000 58,105
225,214
Subdividers & Developers (1.33%)
Allgreen Properties Ltd. 375,000(b) 228,078

Telephone Communication (10.29%)
Compania Anonima Telefonos De
Venezuela ADR 7,000 192,500
Compania De Telecomunicacion
De Chile ADR 2,100 55,519
Hellenic Telecom Organization SA ADR 18,500(b) 220,844
Hellenic Telecommunication 7,011 163,078
Korea Telecom Corp. 4,000 175,016
Matav Tavkozlesi Rt. ADR 9,500 267,187
Philippine Long Distance Telephone
Co. ADR 4,300 138,675
Tele Norte Leste Participacoes SA 3,800,000 36,649
Telefonica De Argentina SA ADR 5,000 186,875
Videsh Sanchar Nigam Ltd. GDR 27,800(a) 332,905
1,769,248
Variety Stores (0.00%)
Edgars Stores Ltd. 1 2

Total Common Stocks 15,458,912
Preferred Stocks (10.97%)
Beverages (1.75%)
Quilmes Industrial SA ADR 27,500 300,781

Blast Furnace & Basic Steel
Products (0.29%)
Gerdau SA 3,200,000 49,187

Cement, Hydraulic (1.49%)
Titan Cement Co. SA 3,600 255,779

Central Reserve Depositories (0.43%)
Banco Ganadero SA ADR 7,700 73,150

Commercial Banks (0.51%)
Banco Estado De Sao Paulo SA 2,000,000 88,007

Electric Services (0.99%)
Centrais Electricas De Santa Catarina SA367,000 170,341

Industrial Inorganic Chemicals (0.28%)
Fertilizantes Fosfatados SA
Fosfertil NPV 13,800,000 48,247

Telephone Communication (5.23%)
Estonian Telecom GDR 3,400(a)(b) 71,825
Tele Celular Sul Participacoes SA ADR 5,200 103,025
Tele Centro Sul Participacoes SA ADR 4,360 231,625
Tele Norte Leste Participacoes ADR 10,600 179,537
Telec De Sao Paulo SA 1,940,000 240,897
Telecommunicacoes Brasileiras SA ADR 800 63
Telecommunicacoes Brasileiras SA ADR 800 72,950
899,922

Total Preferred Stocks 1,885,414

Total Portfolio Investments (100.89%) 17,344,326
Liabilities, net of cash and receivables (-0.89%) (153,376)

Total Net Assets (100.00%) $17,190,950

<FN>

(a) Restricted security - See Note 4 to the financial statements.
(b) Non-income producing security - No dividend paid during the period.
(c) Peregrine Investment Holdings Ltd. has filed a plan of liquidation.
</FN>
</TABLE>

Principal International Emerging Markets Fund, Inc.
Investments by Country

Total Percentage of
Country Value Total Value

Argentina $1,082,950 6.24%
Brazil 1,642,622 9.47
Chile 310,076 1.79
China 178,260 1.03
Colombia 73,150 0.42
Czech Republic 203,961 1.18
Egypt 399,323 2.30
Estonia 71,825 0.41
Greece 639,701 3.69
Hong Kong 1,269,063 7.32
Hungary 580,559 3.35
India 959,125 5.53
Indonesia 125,813 0.73
Israel $1,070,556 6.17%
Korea, Republic Of 1,580,644 9.11
Lebanon 55,013 0.32
Mexico 2,106,774 12.15
Panama 248,625 1.43
Peru 111,881 0.64
Philippines 138,675 0.80
Poland 373,150 2.15
Portugal 66,418 0.38
Singapore 1,567,491 9.04
South Africa 1,327,987 7.66
Taiwan, Province Of China 414,905 2.39
Thailand 82,988 0.48
Turkey 470,291 2.71
Venezuela 192,500 1.11

Total $17,344,326 100.00%

PRINCIPAL INTERNATIONAL FUND, INC.

<TABLE>
<CAPTION>
Shares
Held Value

Common Stocks (94.12%)
<S> <C> <C>
Advertising (1.22%)
WPP Group PLC 563,000 $ 4,990,211
Blast Furnace & Basic Steel
Products (0.36%)
Tubos De Acero De Mexico SA ADR 132,000 1,460,250
Central Reserve Depositories (0.98%)
Union Bank Of Norway 209,660 4,012,098
Commercial Banks (13.13%)
Australia&New Zealand Banking Group 910,000 7,219,207
Bank of Ireland 430,030 8,609,892
Merita PLC, Class A 1,187,670 7,099,231
National Australia Bank Ltd. 326,437 6,364,971
Nordbanken Holding AB 220,000 1,386,316
Royal Bank of Canada
Montreal, Quebec 128,800 6,288,289
San Paolo-IMI SPA 431,585 6,483,683
Shinhan Bank 183,000 2,017,143
Svenska Handelsbanken AB Free 172,750 5,884,457
Svenska Handelsbanken, Class A 62,000 2,329,391
53,682,580
Communications Equipment (1.84%)
ECI Telecommunications Ltd. ADR 204,000 7,522,500

Communications Services, NEC (1.05%)
Koninklijke KPN NV 102,780 4,295,095

Computer & Office Equipment (1.45%)
Orbotech Ltd. ADR 123,200(a) 5,913,600

Concrete, Gypsum & Plaster
Products (1.50%)
Lafarge SA 63,000 6,131,906

Consumer Products (4.90%)
Imasco Ltd. 413,457 $ 9,113,449
Societe Nationale D'Exploitation
Industrielle Des Tabacs et Allumettes 89,000 5,367,005
Swedish Match Co. 1,688,000 5,559,246
20,039,700
Copper Ores (1.35%)
Trelleborg AB, Class B 552,000 5,529,332

Crude Petroleum & Natural Gas (1.56%)
Elf Aquitaine SA 41,000 6,376,293

Drugs (4.22%)
AstraZeneca Group PLC 167,225 6,541,235
Novartis AG 4,423 6,487,271
Takeda Chemical Industries 97,000 4,217,697
17,246,203
Electrical Goods (1.32%)
Smiths Industries PLC 344,000 5,405,818

Electronic Components &
Accessories (0.85%)
Elec & Eltek International ADR 757,400 2,878,120
Varitronix International Ltd. 340,000 583,446
3,461,566
Electronic Distribution Equipment (2.98%)
Philips Electronics 141,100 12,166,109

Engines & Turbines (0.67%)
RHI AG 89,000 2,720,224

Farm & Garden Machinery (0.82%)
New Holland NV 231,000 3,349,500

Finance Services (1.26%)
Takefuji Corp. 62,000 5,142,368

Foreign Banks, Branches &
Agencies (3.03%)
Bank Austria AG 68,000 4,223,651
UBS AG 24,000 8,165,775
12,389,426
Gas Production & Distribution (1.03%)
OMV AG 43,600 4,220,605

Industrial Inorganic Chemicals (1.52%)
Kemira OY 332,000 2,160,132
Rhone-Poulenc SA 85,000 4,046,677
6,206,809
Investment Offices (1.74%)
AMVESCAP PLC 671,400 7,107,719

Life Insurance (1.05%)
QBE Insurance Group Ltd. 959,797 4,300,114

Meat Products (4.89%)
Danisco AS 146,000 6,843,784
Orkla ASA, Class A 111,000 1,867,514
Orkla ASA, Class B 349,600 5,140,988
Unilever NV 89,600 6,142,570
19,994,856
Miscellaneous Chemical Products (1.48%)
Hoechst AG 132,000 $ 6,046,846

Miscellaneous Converted Paper
Products (1.34%)
Bunzl PLC 1,285,000 5,493,142

Miscellaneous Food & Kindred
Products (2.57%)
Greencore Group PLC 991,000 3,853,399
Tomkins PLC 1,576,000 6,660,988
10,514,387
Miscellaneous Non-Durable Goods (3.88%)
Desc SA , Series B 3,140,000 4,016,868
Diageo PLC 716,179 8,314,000
Lagardere SCA 89,000 3,529,041
15,859,909
Miscellaneous Textile Goods (1.03%)
Esprit Holdings Ltd. 7,082,000 4,203,238

Miscellaneous Transportation
Equipment (1.08%)
Autoliv, Inc. 52,000 1,811,485
Autoliv, Inc. ADR 75,000 2,587,500
4,398,985
Motor Vehicles & Equipment (1.57%)
Daimlerchrysler AG 65,700 6,432,931

Newspapers (3.57%)
Publishing & Broadcasting Ltd. 710,000 4,779,448
United News & Media PLC 798,000 9,790,638
14,570,086
Paperboard Containers & Boxes (1.11%)
Buhrmann NV 246,200 4,519,128

Pens, Pencils, Office & Art Supplies (1.07%)
Societe BIC SA 78,000 4,381,837

Personnel Supply Services (1.70%)
Vedior NV 308,265 6,946,578

Petroleum Refining (3.70%)
Sasol Ltd. 424,000 2,986,727
YPF Sociedad Anonima ADR 289,000 12,138,000
15,124,727
Pulp Mills (1.99%)
Lassila & Tikanoja Ltd. OY 164,000 3,903,853
UPM-Kymmene OY 139,980 4,242,850
8,146,703
Radio & Television Broadcasting (0.80%)
Mirror Group PLC 891,000 3,256,542

Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings Ltd. 2,289,000(a)(b) 0

Soap, Cleaners & Toilet Goods (1.38%)
Reckitt & Colman PLC 472,797 5,656,095

Special Industry Machinery (1.85%)
Cookson Group 2,673,200 7,553,735

Telephone Communication (8.24%)
Hellenic Telecom Organization SA ADR 586,000(a) 6,995,375
Nokia Corp.,Class A ADR 100,000 7,418,750
Telecom Corp. of New Zealand Ltd. 1,644,000 8,555,347
Telecom Italia-DI 1,990,200 10,717,206
33,686,678
Trucking & Courier Services,
Except Air (1.04%)
Securicor PLC 451,000 4,258,903

Total Common Stocks 384,715,332

Preferred Stock (0.80%)

Commercial Banks (0.80%)
National Australia Bank ECU 96,000 3,270,000

Principal
Amount Value

Commercial Paper (3.74%)

Business Credit Institutions (2.29%)
American Express Credit Corp.;
4.72%; 5/3/1999 $8,715,000 $ 8,715,000
General Electric Capital Corp.;
4.85%; 5/7/1999 644,653 644,653
9,359,653
Personal Credit Institutions (1.45%)
Household Finance Corp.;
4.78%; 5/4/1999 5,934,212 5,934,212

Total Commercial Paper 15,293,865

Total Portfolio Investments (98.66%) 403,279,197
Cash, receivables and other assets,
net of liabilities (1.34%) 5,495,293

Total Net Assets (100.00%) $408,774,490

<FN>

(a)Non-income producing security - No dividend paid during the period.
(b)Peregrine Investment Holdings Ltd. has filed a plan of liquidation.
</FN>
</TABLE>

Principal International Fund, Inc.
Investments by Country

Total Percentage of
Country Value Total Value

Argentina $ 12,138,000 3.01%
Australia 25,933,740 6.43
Austria 11,164,480 2.77
Canada 15,401,738 3.82
Denmark 6,843,784 1.70
Finland 24,824,817 6.16
France 29,832,758 7.40
Germany 12,479,777 3.10
Greece 6,995,375 1.73
Hong Kong 4,786,685 1.19
Israel 13,436,100 3.33
Italy 17,200,890 4.27
Japan 9,360,065 2.32
Korea, Republic of 2,017,143 0.50
Mexico 5,477,118 1.36
Netherlands 37,418,981 9.28
New Zealand 8,555,347 2.12
Norway 11,020,600 2.73
Singapore 2,878,120 0.71
South Africa 2,986,727 0.74
Sweden 31,628,961 7.84
Switzerland 14,653,046 3.63
United Kingdom 80,951,081 20.07
United States 15,293,864 3.79

Total $403,279,197 100.00%

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.

<TABLE>
<CAPTION>
Shares
Held Value

Common Stocks (96.93%)
<S> <C> <C>

Advertising (1.30%)
United Group Ltd. 199,000 $ 382,477

Air Transportation, Scheduled (1.59%)
Ryanair Holdings PLC ADR 10,500(a) 469,875

Airports, Flying Fields & Services (2.99%)
Auckland International Airport Ltd 271,500 470,960
Virgin Express Holdings ADR 41,600(a) 413,400
884,360
Bakery Products (1.37%)
Kamps AG 11,700 405,382

Beverages (1.47%)
Doosan Corp. 11,500(a) 435,436

Central Reserve Depositories (0.81%)
Union Bank of Norway 12,420 237,672

Commercial Banks (1.00%)
Banco Pastor SA 5,600 $ 295,516

Communications Equipment (1.62%)
Gilat Satellite Networks Ltd. 3,600(a) 187,200
Indra Sistemas SA 14,000 134,784
Teleste OYJ 18,000(a) 157,106
479,090
Communications Services, NEC (3.20%)
RSL Communications Ltd., Class A 28,900(a) 946,475

Computer & Data Processing
Services (7.10%)
CI Technologies Group Ltd. 68,300 237,648
Computacenter PLC 61,000 444,428
Computershare Ltd. 47,000 485,933
Ecsoft Group PLC ADR 15,200(a) 264,100
Equant ADR 3,900(a) 348,075
Ixos Software AG 950(a) 201,012
Telinfo NV 900 114,735
2,095,931
Computer & Office Equipment (2.52%)
Orbotech Ltd. ADR 8,200(a) 393,600
Venture Manufacturing Ltd. 64,000 351,462
745,062
Drug Stores & Proprietary Stores (1.61%)
Tsuruha Co., Ltd. 7,000 475,615

Drugs (1.07%)
Biovail Corp. International 2,900(a) 103,550
Skyepharma PLC 202,000(a) 213,032
316,582
Eating & Drinking Places (0.95%)
Do & Co Restaurants & Catering AG 4,600(a) 279,829

Electric Services (3.14%)
Energy Developments Ltd. 72,000 188,488
Independent Energy Holdings ADR 36,400(a) 389,025
Vestas Wind Systems 5,100(a) 348,786
926,299
Electrical Work (2.22%)
Telesystem International Wireless, Inc. 33,300(a) 656,256

Electronic Components &
Accessories (4.12%)
Celestica, Inc. 25,900(a) 1,013,338
Elec & Eltek International ADR 53,900 204,820
1,218,158
Electronic Distribution Equipment (3.51%)
C/TAC NV 4,000 59,457
JOT Automation Group OYJ 21,200 699,774
Techtronic Industries Co. 1,447,000 276,312
1,035,543
Fabricated Rubber Products, Nec (0.58%)
Tenma Corp. 11,000 171,412

Family Clothing Stores (1.05%)
Fast Retailing Co. Ltd. 6,000 308,643

Freight Transportation
Arrangement (0.66%)
C Two-Network Co. Ltd. 2,200 $ 193,530

Grocery Stores (0.90%)
Superdiplo SA 12,300(a) 266,113

Holding Offices (0.81%)
Lang Corp. Ltd. 73,000(a) 239,971

Hose, Belting, Gaskets & Packing (0.54%)
Phoenix AG 9,400 160,111

Household Appliance Stores (0.31%)
Kojima Co. Ltd. 3,500 90,900

Hunting, Trapping, Game
Propagation (1.13%)
Rapala Normark Corp. 44,400(a) 333,510

Industrial Inorganic Chemicals (1.24%)
Kemira OY 56,300 366,312

Life Insurance (0.41%)
Scor SA 2,400 119,845

Measuring & Controlling Devices (0.29%)
Sensonor ASA 35,900(a) 84,375

Medical & Dental Laboratories (1.18%)
Qiagen NV 4,800(a) 347,856

Medical Instruments & Supplies (1.25%)
Cochlear Ltd. 47,900 369,841

Metalworking Machinery (1.78%)
Mikron Holding AG 2,200 526,716

Miscellaneous Amusement, Recreation
Services (0.99%)
Aristocrat Leisure Ltd. 45,600 292,546

Miscellaneous Durable Goods (0.84%)
Edel Music AG 700(a) 248,090

Miscellaneous Electrical Equipment &
Supplies (1.74%)
Kaba Holding AG, Class B 980 514,959

Miscellaneous General Merchandise
Stores (1.29%)
Japan Airport Terminal 36,000 380,023

Miscellaneous Manufacturers (1.02%)
Austria Haustechnik AG 8,300 302,506

Miscellaneous Non-Durable Goods (1.41%)
Austria Tabakwerke AG 6,800 417,257

Miscellaneous Plastics Products,
NEC (1.43%)
Airspray NV 15,600(a) 420,854

Miscellaneous Primary Metal
Products (0.00%)
YBM Magnex International, Inc. 28,300(a) 194

Motorcycles, Bicycles & Parts (0.89%)
Ducati Motor Holding SPA 89,200(a) 264,235

New & Used Car Dealers (0.94%)
Athlon Groep NV 10,000 277,184

Newspapers (1.24%)
Newsquest PLC 52,100 366,583

Non-Classifiable Establishments (1.00%)
Bure Investment Aktiebolaget AB 48,400 296,358

Non-Residential Building
Construction (0.78%)
Algeco 3,000 229,946

Non-Store Retailers (0.76%)
Simree Co. Ltd. 24,000(a) 225,199

Personnel Supply Services (1.41%)
Unique International NV 15,600 416,728
Pulp Mills (0.68%)
Miquel Y Costas 7,300 200,414

Radio & Television Broadcasting (2.68%)
Modern Times Group Mtg AB, Class B 38,500(a) 791,900

Radio, Television & Computer
Stores (3.32%)
Distefora Holding AG 800(a) 85,126
Yamada Denki 24,000 894,762
979,888
Real Estate Agents & Managers (1.45%)
First Capital Corp. Ltd. 321,800 427,547

Sanitary Services (0.88%)
De Sammensluttede Vognmand AS 3,200 259,424

Security Brokers & Dealers (1.84%)
Kempen & Co. NV 9,612 544,045

Special Industry Machinery (2.64%)
Aixtron 2,300 552,358
Neopost SA 12,600(a)(b) 227,680
780,038
Subdividers & Developers (1.26%)
MCL Land Ltd. 310,000 373,428

Telephone Communication (11.39%)
Aapt Ltd. 213,600(a) 764,450
Esat Telecom Group PLC ADR 19,100(a) 933,512
Global Telesystems Group, Inc. ADR 6,887(a) 455,403
Helsingin Puhelin OYJ, Series E 6,600 278,602
Metronet Communications ADR, Class B 16,800(a) 932,400
3,364,367
Trusts (1.33%)
NHP PLC 131,040 392,437

Total Common Stocks 28,630,843

Principal
Amount Value

Commercial Paper (1.54%)

Business Credit Institutions (1.54%)
General Electric Capital Corp.,
4.94%; 5/3/1999 455,000 $ 455,000

Total Portfolio Investments (98.47%) 29,085,843

Cash and receivables,
net of liabilities (1.53%) 452,255

Total Net Assets (100.00%) $29,538,098

<FN>
(a) Non-income producing security - No dividend paid during the period. (b)
Restricted security - See Note 4 to the financial statements.
</FN>
</TABLE>

Principal International SmallCap Fund, Inc.
Investments by Country

Total Percentage of
Country Value Total Value

Australia $ 2,961,353 10.18%
Austria 999,593 3.44
Belgium 528,135 1.81
Canada 2,705,737 9.30
Czech Repulic 455,403 1.57
Denmark 608,210 2.09
Finland 1,835,303 6.31
France 577,472 1.99
Germany 1,566,953 5.39
Hong Kong 276,312 0.95
Ireland 1,403,388 4.82
Israel 580,800 2.00
Italy 264,235 0.91
Japan 2,740,083 9.42
Korea, Republic Of 435,436 1.50
Netherlands 2,414,199 8.30
New Zealand 470,960 1.62
Norway 322,047 1.11
Singapore 1,357,258 4.67
Spain 896,826 3.08
Sweden 1,088,258 3.74
Switzerland 1,126,801 3.87
United Kingdom 3,016,081 10.37
United States 455,000 1.56

Total $29,085,843 100.00%

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

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class A shares 1999* 1998 1997(a)
- ------------------------------------------------------------------- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $6.54 $8.29 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. -- (.02) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.44 (1.73) (1.21)

Total from Investment Operations 1.44 (1.75) (1.22)

Net Asset Value, End of Period......................... $7.98 $6.54 $8.29

Total Return(b)........................................ 22.02%(c) (21.11)% (10.18)%(c)

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class B shares 1999* 1998 1997(a)
- ------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $6.52 $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.03) (.05) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.42 (1.71) (1.22)

Total from Investment Operations 1.39 (1.76) (1.23)

Net Asset Value, End of Period......................... $7.91 $6.52 $8.28

PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class R shares 1999* 1998 1997(a)
- ------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $6.53 $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. -- (.04) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 1.42 (1.71) (1.22)

Total from Investment Operations 1.42 (1.75) (1.23)

Net Asset Value, End of Period......................... $7.95 $6.53 $8.28

Total Return(b)........................................ 21.75%(c) (21.14)% (10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,101 $2,202 $2,510
Ratio of Expenses to Average Net Assets............. 3.06%(d) 3.47% 2.20%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.10)%(d) (.60)% (.51)%(d)
Portfolio Turnover Rate............................. 91.2%(d) 45.2% 21.4%(d)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

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

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class A shares 1999* 1998 1997 1996 1995
- ------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.20 $9.33 $8.14 $7.28 $7.44
Income from Investment Operations:
Net Investment Income............................... .05 .13 .09 .10 .08
Net Realized and Unrealized Gain (Loss) on Investments 1.16 .04 1.52 1.17 (.02)
Total from Investment Operations 1.21 .17 1.61 1.27 .06
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.11) (.10) (.11) (.08) (.03)
Distributions from Capital Gains.................... (.46) (.20) (.31) (.33) (.19)
Total Dividends and Distributions (.57) (.30) (.42) (.41) (.22)

Net Asset Value, End of Period......................... $9.84 $9.20 $9.33 $8.14 $7.28

Total Return(b)........................................ 13.87%(c) 1.93% 20.46% 18.36% 1.03%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $339,889 $302,757 $281,158 $172,276 $126,554
Ratio of Expenses to Average Net Assets............. 1.23%(d) 1.25% 1.39% 1.45% 1.63%
Ratio of Net Investment Income to Average Net Assets 1.26%(d) 1.45% 1.25% 1.43% 1.10%
Portfolio Turnover Rate............................. 56.4%(d) 38.7% 26.6% 23.8% 35.4%

PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class B shares 1999* 1998 1997 1996 1995(f)
- ------------------------------------------------------------------- ---- ---- ---- ----
Net Asset Value, Beginning of Period................... $9.14 $9.26 $8.07 $7.24 $6.71
Income from Investment Operations:
Net Investment Income............................... .03 .07 .03 .03 .05
Net Realized and Unrealized Gain (Loss) on Investments 1.14 .04 1.51 1.15 .51
Total from Investment Operations 1.17 .11 1.54 1.18 .56
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.05) (.03) (.04) (.02) (.03)
Distributions from Capital Gains.................... (.46) (.20) (.31) (.33) --
Total Dividends and Distributions (.51) (.23) (.35) (.35) (.03)

Net Asset Value, End of Period......................... $9.80 $9.14 $9.26 $8.07 $7.24

Total Return(b)........................................ 13.42%(c) 1.27% 19.62% 17.16% 9.77%(c)

PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class R shares 1999* 1998 1997 1996(g)
- ------------------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $9.13 $9.27 $8.12 $7.48
Income from Investment Operations:
Net Investment Income............................... .03 .06 .07 .01
Net Realized and Unrealized Gain (Loss) on Investments 1.14 .04 1.47 .63
Total from Investment Operations 1.17 .10 1.54 .64
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.04) (.08) --
Distributions from Capital Gains.................... (.46) (.20) (.31) --
Total Dividends and Distributions (.50) (.24) (.39) --

Net Asset Value, End of Period......................... $9.80 $9.13 $9.27 $8.12

Total Return(b)........................................ 13.42%(c) 1.13% 19.65% 9.29%(c)

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $21,084 $17,739 $11,773 $1,057
Ratio of Expenses to Average Net Assets............. 1.95%(d) 2.01% 2.10% 1.59%(d)
Ratio of Net Investment Income to Average Net Assets .54%(d) .67% .44% .78%(d)
Portfolio Turnover Rate............................. 56.4%(d) 38.7% 26.6% 23.8%(d)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

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

<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class A shares 1999* 1998 1997(a)
- ------------------------------------------------------------------- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.99 $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. .03 (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 2.50 .10 (.07)
Total from Investment Operations 2.53 .03 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- --
Distributions from Capital Gains.................... (.08) -- --
Total Dividends and Distributions (.08) -- --

Net Asset Value, End of Period......................... $12.44 $9.99 $9.96

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class B shares 1999* 1998 1997(a)
- ------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $9.97 $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.19) (.10) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 2.65 .11 (.07)
Total from Investment Operations 2.46 .01 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- --
Distributions from Capital Gains.................... (.08) -- --
Total Dividends and Distributions (.08) -- --

Net Asset Value, End of Period......................... $12.35 $9.97 $9.96

PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class R shares 1999* 1998 1997(a)
- ------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $10.01 $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.11) (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments 2.64 .12 (.07)
Total from Investment Operations 2.53 .05 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- -- --
Distributions from Capital Gains.................... (.08) -- --
Total Dividends and Distributions (.08) -- --

Net Asset Value, End of Period......................... $12.46 $10.01 $9.96

Total Return(b)........................................ 25.42%(c) .50% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $4,357 $3,317 $3,004
Ratio of Expenses to Average Net Assets............. 2.17%(d) 2.51% 2.15%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.77)%(d) (.68)% (.54)%(d)
Portfolio Turnover Rate............................. 163.7%(d) 99.8% 10.4%(d)

* Six months ended April 30, 1999

See accompanying notes.
</TABLE>

Notes to Financial Highlights

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

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

Principal International Emerging Markets Fund, Inc.:
Class A $.01 $(.50)
Class B .01 (.50)
Class R .01 (.50)

Principal International SmallCap Fund, Inc.:
Class A .01 .03
Class B .01 .03
Class R .01 .03

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

(d) Computed on an annualized basis.

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

(g) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Principal International
Fund, Inc. Class R shares recognized no net investment income for the
period from the initial purchase by Principal Management Corporation of
Class R shares on February 27, 1996, through February 28, 1996.
Additionally, Class R shares incurred unrealized gains on investments of
$.02 per share during the initial interim period. This represents Class R
share activities of the fund prior to the intial offering of Class R
shares.

April 30, 1999

STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)

<TABLE>
<CAPTION>
Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.
<S> <C> <C>
Investment in securities -- at cost............................... $190,023,265 $287,755,570

Assets
Investment in securities -- at value (Note 4)..................... $193,817,755 $293,683,525
Cash ............................................................ 376,800 12,847
Receivables:
Interest....................................................... 3,122,709 1,668,376
Investment securities sold..................................... 1,082,310 --
Capital Shares sold............................................ 273,017 1,242,549
Prepaid Expenses.................................................. -- --
Other assets...................................................... 6,966 21,983

Total Assets 198,679,557 296,629,280
Liabilities
Accrued expenses.................................................. 126,096 171,282
Payables:
Investment securities purchased................................ 1,747,778 6,105,000
Capital Shares reacquired...................................... 272,179 108,052

Total Liabilities 2,146,053 6,384,334

Net Assets Applicable to Outstanding Shares .................... $196,533,504 $290,244,946

Net Assets Consist of:
Capital Stock..................................................... $ 174,451 $253,002
Additional paid-in capital........................................ 192,273,992 285,967,980
Accumulated undistributed net investment income................... 133,133 124,327
Accumulated net realized gain (loss) on investment transactions .. 157,438 (2,028,318)
Net unrealized appreciation (depreciation) of investments......... 3,794,490 5,927,955

Total Net Assets $196,533,504 $290,244,946

Capital Stock (par value: $.01 a share):
Shares authorized................................................. 100,000,000 100,000,000

Net Asset Value Per Share:
Class A: Net Assets............................................... $155,110,765 $250,496,261
Shares issued and outstanding............................ 13,768,217 21,822,375
Net asset value per share................................ $11.27 $11.48
Maximum offering price per share(a) ................... $11.83 $12.05

Class B: Net Assets .............................................. $26,209,831 $29,190,305
Shares issued and outstanding............................ 2,328,113 2,551,709
Net asset value per share(b)............................. $11.26 $11.44

Class R: Net Assets............................................... $15,212,908 $10,558,380
Shares issued and outstanding............................ 1,348,766 926,074
Net asset value per share................................ $11.28 $11.40

<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% (1.50% with respect to Principal Limited Term Bond Fund,
Inc.) of the offering price or 4.99% of the net asset value (1.52% of net
asset value with respect to Principal Limited Term Bond Fund, Inc.)
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

See accompanying notes.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal
High Yield Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost............................... $46,132,681 $31,586,531 $ 197,091,294

Assets
Investment in securities -- at value (Note 4)..................... $43,161,231 $31,316,322 $ 207,906,407
Cash ............................................................ 134,667 55,000 230,220
Receivables:
Interest....................................................... 919,787 306,966 3,830,644
Investment securities sold..................................... -- 32,258 --
Capital Shares sold............................................ 29,955 35,824 37,802
Prepaid Expenses.................................................. -- 6,417 --
Other assets...................................................... 2,814 236 11,196

Total Assets 44,248,454 31,753,023 212,016,269
Liabilities
Accrued expenses.................................................. 68,126 -- 126,566
Payables:
Investment securities purchased................................ -- -- --
Capital Shares reacquired...................................... 65,338 8,621 137,804

Total Liabilities 133,464 8,621 264,370

Net Assets Applicable to Outstanding Shares .................... $44,114,990 $31,744,402 211,751,899

Net Assets Consist of:
Capital Stock..................................................... $57,547 $ 32,374 $ 169,847
Additional paid-in capital........................................ 49,939,535 31,990,442 198,885,801
Accumulated undistributed net investment income................... 97,313 32,064 129,669
Accumulated net realized gain (loss) on investment transactions .. (3,007,955) (40,269) 1,751,469
Net unrealized appreciation (depreciation) of investments......... (2,971,450) (270,209) 10,815,113

Total Net Assets $44,114,990 $31,744,402 $ 211,751,899

Capital Stock (par value: $.01 a share):
Shares authorized................................................. 100,000,000 100,000,000 100,000,000

Net Asset Value Per Share:
Class A: Net Assets............................................... $32,933,785 $26,187,862 $199,616,702
Shares issued and outstanding............................ 4,287,104 2,671,914 16,011,877
Net asset value per share................................ $7.68 $9.80 $12.47
Maximum offering price per share(a) ................... $8.06 $9.95 $13.09

Class B: Net Assets .............................................. $8,441,628 $2,534,704 $12,135,197
Shares issued and outstanding............................ 1,104,932 257,160 972,793
Net asset value per share(b)............................. $7.64 $9.86 $12.47

Class R: Net Assets............................................... $2,739,577 $3,021,836 N/A
Shares issued and outstanding............................ 362,698 308,309 N/A
Net asset value per share................................ $7.55 $9.80 N/A

See accompanying notes.
</FN>
</TABLE>

Six Months Ended April 30, 1999

STATEMENTS OF OPERATIONS
(unaudited)

<TABLE>
<CAPTION>
Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.

<S> <C> <C>
Net Investment Income
Interest income.................................................... $6,807,039 $9,816,975

Expenses:
Management and investment advisory fees (Note 3)................ 457,367 649,749
Distribution and shareholder servicing fees (Notes 1 and 3)..... 372,147 409,326
Transfer and administrative services (Notes 1 and 3)............ 241,191 250,224
Registration fees (Note 1)...................................... 26,195 21,696
Custodian fees ................................................. 1,501 6,610
Auditing and legal fees ........................................ 4,499 3,698
Directors' fees ................................................ 3,474 3,474
Other .......................................................... 5,554 6,713

Total Gross Expenses 1,111,918 1,351,490
Less: Management and investment
advisory fees waived......................................... -- --

Total Net Expenses 1,111,918 1,351,490

Net Investment Income 5,695,121 8,465,485

Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions.............. 157,610 (20,136)
Change in unrealized appreciation/depreciation
of investments ................................................. (5,203,761) (3,671,572)

Net Realized and Unrealized
Gain (Loss) on Investments (5,046,151) (3,691,708)

Net Increase in Net Assets
Resulting from Operations $ 648,970 $4,773,777

<FN>
See accompanying notes.
</FN>
</TABLE>

<TABLE>
<CAPTION>
Principal Principal Principal
High Yield Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.

<S> <C> <C> <C>
Net Investment Income
Interest income.................................................... $2,262,916 $1,070,005 $5,998,141

Expenses:
Management and investment advisory fees (Note 3)................ 133,805 79,883 492,997
Distribution and shareholder servicing fees (Notes 1 and 3)..... 74,699 35,195 266,987
Transfer and administrative services (Notes 1 and 3)............ 101,283 48,571 93,067
Registration fees (Note 1)...................................... 24,625 21,984 22,958
Custodian fees ................................................. 1,368 1,186 1,334
Auditing and legal fees ........................................ 3,185 2,376 3,423
Directors' fees ................................................ 3,364 3,364 3,470
Other .......................................................... 2,419 1,206 5,771

Total Gross Expenses 344,748 193,765 890,007
Less: Management and investment
advisory fees waived......................................... -- 23,087 --

Total Net Expenses 344,748 170,678 890,007

Net Investment Income 1,918,168 899,327 5,108,134

Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions.............. (1,180,010) 3,293 1,751,791
Change in unrealized appreciation/depreciation
of investments ................................................. 1,338,556 (431,412) (3,776,846)

Net Realized and Unrealized
Gain (Loss) on Investments 158,556 (428,119) (2,025,055)

Net Increase in Net Assets
Resulting from Operations $2,076,714 $ 471,208 $3,083,079

<FN>
See accompanying notes.
</FN>
</TABLE>

STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)

<TABLE>
<CAPTION>
Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.

Six Months Year Six Months Year
Ended Ended Ended Ended
April 30, October 31, April 30, October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 5,695,121 $ 9,903,008 $ 8,465,485 $ 16,370,086
Net realized gain (loss) from investment transactions ........... 157,610 598,317 (20,136) 242,270
Change in unrealized appreciation/depreciation
of investments................................................ (5,203,761) 1,323,899 (3,671,572) 2,717,566

Net Increase (Decrease) in Net Assets
Resulting from Operations 648,970 11,825,224 4,773,777 19,329,922

Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (4,578,653) (8,430,036) (7,591,692) (15,088,625)
Class B....................................................... (646,100) (977,376) (753,541) (1,071,553)
Class R....................................................... (371,072) (530,322) (249,884) (334,428)
Excess distribution of net investment income:
Class A....................................................... -- -- -- --
Class B....................................................... -- -- -- --
Class R....................................................... -- -- -- --
From net realized gain on investments:
Class A....................................................... (424,531) -- -- --
Class B....................................................... (65,282) -- -- --
Class R....................................................... (35,649) -- -- --

Total Dividends and Distributions (6,121,287) (9,937,734) (8,595,117) (16,494,606)

Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 23,405,833 41,289,926 37,340,679 39,967,883
Class B....................................................... 6,241,699 10,554,095 7,864,712 10,634,274
Class R....................................................... 5,263,483 8,716,511 3,976,997 4,770,310
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 4,017,975 6,299,889 6,287,764 12,166,316
Class B....................................................... 635,023 833,944 647,689 882,934
Class R....................................................... 399,673 524,979 246,265 329,918
Shares redeemed:
Class A....................................................... (16,022,575) (27,535,115) (41,278,271) (53,118,031)
Class B....................................................... (2,427,023) (2,514,110) (3,299,984) (2,741,242)
Class R....................................................... (2,250,931) (3,120,947) (1,700,941) (1,161,190)

Net Increase (Decrease) in Net Assets from
Capital Share Transactions 19,263,157 35,049,172 10,084,910 11,731,172
Total Increase (Decrease) 13,790,840 46,874,396 6,263,570 14,566,488

Net Assets
Beginning of period............................................. 182,742,664 145,806,002 283,981,376 269,414,888
End of period (including undistributed (overdistributed)
net investment income as set forth below)..................... $196,533,504 $182,742,664 $290,244,946 $283,981,376

Undistributed (Overdistributed) Net Investment Income........... $ 133,133 $ 33,837 $124,327 $ 254,305

See accompanying notes.

</TABLE>

<TABLE>
<CAPTION>
Principal Principal
High Yield Limited Term Bond
INCOME FUNDS Fund, Inc. Fund, Inc.

Six Months Year Six Months Year
Ended Ended Ended Ended
April 30, October 31, April 30, October 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 1,918,168 $ 3,598,836 $ 899,327 $1,556,035
Net realized gain (loss) from investment transactions ........... (1,180,010) 148,393 3,293 (2,668)
Change in unrealized appreciation/depreciation
of investments................................................ 1,338,556 (5,300,030) (431,412) 172,616

Net Increase (Decrease) in Net Assets
Resulting from Operations 2,076,714 (1,552,801) 471,208 1,725,983

Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (1,356,382) (2,856,403) (778,038) (1,431,290)
Class B....................................................... (311,421) (571,855) (53,428) (53,434)
Class R....................................................... (104,121) (189,231) (60,387) (78,892)
Excess distribution of net investment income:
Class A....................................................... -- (50,532) -- --
Class B....................................................... -- (10,117) -- --
Class R....................................................... -- (3,347) -- --
From net realized gain on investments:
Class A....................................................... -- -- -- --
Class B....................................................... -- -- -- --
Class R....................................................... -- -- -- --

Total Dividends and Distributions (1,771,924) (3,681,485) (891,853) (1,563,616)

Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 3,906,756 11,927,135 8,428,044 12,780,385
Class B....................................................... 1,219,810 4,358,175 1,030,340 1,373,038
Class R....................................................... 367,394 1,736,594 1,294,060 1,710,613
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 844,918 1,574,414 597,770 1,358,983
Class B....................................................... 242,419 427,433 47,923 42,187
Class R....................................................... 103,889 191,997 59,004 77,461
Shares redeemed:
Class A....................................................... (5,509,857) (14,350,135) (10,108,045) (7,216,941)
Class B....................................................... (1,617,993) (1,816,211) (222,802) (344,198)
Class R....................................................... (481,938) (839,238) (331,952) (370,918)

Net Increase (Decrease) in Net Assets from
Capital Share Transactions (924,602) 3,210,164 794,342 9,410,610

Total Increase (Decrease) (619,812) (2,024,122) 373,697 9,572,977

Net Assets
Beginning of period............................................. 44,734,802 46,758,924 31,370,705 21,797,728
End of period (including undistributed (overdistributed) net investment
income as set forth below).................................... $44,114,990 $44,734,802 $31,744,402 $31,370,705

Undistributed (Overdistributed) Net Investment Income........... $ 97,313 $ (48,931) $ 32,064 $24,590

See accompanying notes.

</TABLE>

<TABLE>
<CAPTION>
Principal
Tax-Exempt Bond
INCOME FUNDS Fund, Inc.

Six Months Year
Ended Ended
April 30, October 31,
1999 1998
<S> <C> <C>
Operations
Net investment income............................................ $ 5,108,134 $ 9,965,827
Net realized gain (loss) from investment transactions ........... 1,751,791 919,377
Change in unrealized appreciation/depreciation
of investments................................................ (3,776,846) 2,567,043

Net Increase (Decrease) in Net Assets
Resulting from Operations 3,083,079 13,452,247

Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (4,815,970) (9,655,683)
Class B....................................................... (245,886) (408,929)
Class R....................................................... N/A N/A
Excess distribution of net investment income:
Class A....................................................... -- --
Class B....................................................... -- --
Class R....................................................... -- --
From net realized gain on investments:
Class A....................................................... (81,087) --
Class B....................................................... (4,524) --
Class R....................................................... N/A N/A

Total Dividends and Distributions (5,147,467) (10,064,612)

Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 12,516,055 30,673,603
Class B....................................................... 1,444,921 4,178,912
Class R....................................................... N/A N/A
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 3,374,265 6,533,809
Class B....................................................... 192,229 306,980
Class R....................................................... N/A N/A
Shares redeemed:
Class A....................................................... (19,188,375) (28,581,284)
Class B....................................................... (806,713) (1,005,105)
Class R....................................................... N/A N/A

Net Increase (Decrease) in Net Assets from
Capital Share Transactions (2,467,618) 12,106,915

Total Increase (Decrease) (4,532,006) 15,494,550

Net Assets
Beginning of period............................................. 216,283,905 200,789,355

End of period (including undistributed (overdistributed) net investment
income as set forth below).................................... $211,751,899 $216,283,905

Undistributed (Overdistributed) Net Investment Income........... $ 129,669 $ 83,391

<FN>
See accompanying notes.
</FN>
</TABLE>

NOTES TO FINANCIAL STATEMENTS
(unaudited)

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.

Note 1 -- Significant Accounting Policies

Principal Bond Fund, Inc., Principal Government Securities Income Fund, Inc.,
Principal High Yield Fund, Inc., Principal Limited Term Bond Fund, Inc. and
Principal Tax-Exempt Bond Fund, Inc. (the "Income Funds") are registered under
the Investment Company Act of 1940, as amended, as open-end diversified
management investment companies and operate in the mutual fund industry.

Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC") upon redemptions. Class B shares are sold without an
initial sales charge, but are subject to a declining CDSC on certain redemptions
made within six years of purchase. Class R shares are sold without an initial
sales charge and are not subject to a CDSC. Class B shares and Class R shares
bear higher ongoing distribution fees than Class A shares. Class B shares
automatically convert into Class A shares, based on relative net asset value
(without a sales charge) seven years after purchase. Class R shares
automatically convert into Class A shares, based on relative net asset value
(without a sales charge) four years after purchase. All classes of shares for
each fund represent interests in the same portfolio of investments, and will
vote together as a single class except where otherwise required by law or as
determined by each of the Income Funds' respective Board of Directors. In
addition, the Board of Directors of each fund declare separate dividends on each
class of shares.

The Income Funds allocate daily all income, expenses (other than class-specific
expenses) and realized and unrealized gains or losses to each class of shares
based upon the relative proportion of the value of shares outstanding of each
class. Expenses specifically attributable to a particular class are charged
directly to such class. Class-specific expenses charged to each class during the
period ended April 30, 1999, which are included in the corresponding captions of
the Statement of Operations, were as follows:

<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. $207,213 $115,942 $48,992 $59,838 $14,966 $8,109 $ 6,471 $5,445 $5,166
Principal Government Securities Income Fund, Inc. 259,022 115,811 34,493 80,420 11,312 4,220 6,298 5,241 4,670
Principal High Yield Fund, Inc. 38,191 28,274 8,234 18,773 6,700 2,919 5,891 5,277 3,941
Principal Limited Term Bond Fund, Inc. 20,592 5,360 9,243 3,803 952 1320 6,032 4,843 4,382
Principal Tax-Exempt Bond Fund, Inc. 225,664 41,323 N/A 27,634 1,782 N/A 10,784 6,618 N/A
</TABLE>

The Income Funds value securities for which market quotations are readily
available at market value, which is determined using the last reported sale
price or, if no sales are reported, as is regularly the case for some securities
traded over-the-counter, the last reported bid price. When reliable market
quotations are not considered to be readily available, which may be the case,
for example, with respect to certain debt securities and preferred stocks, the
investments are valued by using prices provided by market makers or estimates of
market values obtained from yield data and other factors relating to instruments
or securities with similar characteristics in accordance with procedures
established in good faith by each fund's Board of Directors. Securities with
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market.

The Income Funds record investment transactions generally one day after the
trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. Interest income is
recognized on an accrual basis.

The Income Funds may, pursuant to an exemptive order issued by the Securities
and Exchange Commission, transfer uninvested funds into a joint trading account.
The order permits the Income Funds' cash balances to be deposited into a single
joint account along with the cash of other registered investment companies
managed by Principal Management Corporation (the "Manager"). These balances may
be invested in one or more short-term instruments.

Note 2 -- Federal Income Taxes

Note 3 -- Management Agreement and Transactions With Affiliates

The Income Funds have agreed to pay investment advisory and management fees to
Principal Management Corporation (wholly owned by Princor Financial Services
Corporation, a subsidiary of Principal Financial Services, Inc.) computed at an
annual percentage rate of each fund's average daily net assets. The annual rate
used in this calculation for the Income Funds is as follows:

<TABLE>
Net Asset Value of Funds
(in millions)
<CAPTION>
First Next Next Next Over
$100 $100 $100 $100 $400

<S> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Government Securities Income Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal High Yield Fund, Inc. 0.60 0.55 0.50 0.45 0.40
Principal Limited Term Bond Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal Tax-Exempt Bond Fund, Inc. 0.50 0.45 0.40 0.35 0.30
</TABLE>

The Income Funds also reimburse the Manager for transfer and administrative
services, including the cost of accounting, data processing, supplies and other
services rendered.
Note 3 -- Management Agreement and Transactions With Affiliates (Continued)

The Manager voluntarily waives a portion of its fee for the Principal Limited
Term Bond Fund, Inc. The waivers are in amounts that maintain total operating
expenses within certain limits. The limits are expressed as a percentage of
average daily net assets attributable to each class on an annualized basis
during the reporting period. The amount waived and the operating expense limit,
which was maintained at or below that shown, are as follows:

<TABLE>
Amount
Waived
<CAPTION>
Period Ended Year Ended Expense
April 30, 1999 October 31, 1998 Limit
<S> <C> <C> <C>
Principal Limited Term Bond Fund, Inc.
Class A $11,013 $76,952 1.00%
Class B 6,021 11,537 1.35
Class R 6,053 11,781 1.60
</TABLE>

The Manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by Principal Limited Term Bond Fund, Inc. through
October 31, 1999.

For the year ended October 31, 1998, the Manager voluntarily waived a portion of
its fee for the Principal Bond Fund, Inc. The amounts waived for Class A shares,
Class B shares and Class R shares were $121,092, $26,130 and $25,144,
respectively. The Manager ceased its waiver of expenses October 31, 1998.

Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00% (.25% and 1.25% for Principal Limited Term Bond
Fund, Inc., respectively), of the lesser of the current market value or the cost
of shares being redeemed. Princor Financial Services Corporation also retains
sales charges on sales of Class A shares based on declining rates which begin at
4.75% of the offering price (1.50% for Principal Limited Term Bond Fund, Inc.).
The aggregate amount of these charges retained, by fund, for the period ended
April 30, 1999 were as follows:

Class A Class B

Principal Bond Fund, Inc. $453,004 $43,373
Principal Government Securities Income Fund, Inc. 471,628 50,753
Principal High Yield Fund, Inc. 90,038 36,918
Principal Limited Term Bond Fund, Inc. 51,799 2,574
Principal Tax-Exempt Bond Fund, Inc. 288,889 17,736

No brokerage commissions were paid by the Income Funds to affiliated broker
dealers during the periods.

The Income Funds bear distribution and shareholder servicing fees with respect
to Class A shares computed at an annual rate of up to .25% (.15% for the
Principal Limited Term Bond Fund, Inc.) of the average daily net assets
attributable to Class A shares of each fund. Each of the Income Funds adopted a
distribution plan with respect to Class B shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to 1.00% of the
average daily net assets attributable to Class B shares of each fund (.50% for
the Principal Limited Term Bond Fund, Inc.). Each of the Income Funds, with the
exception of Principal Tax-Exempt Bond Fund, Inc., adopted a distribution plan
with respect to Class R shares that provides for distribution and shareholder
servicing fees computed at an annual rate of up to .75% of the average daily net
assets attributable to Class R shares of each fund. Distribution and shareholder
servicing fees are paid to Princor Financial Services Corporation; a portion of
the fees are subsequently remitted to retail dealers. Pursuant to the
distribution agreements, fees unused by the principal underwriter at the end of
the fiscal year are returned to the respective Income Fund which generated the
excess.

<TABLE>
<CAPTION>
Class A Class B Class R

<S> <C> <C> <C>
Principal Bond Fund, Inc. 102,217 128 108
Principal Government Securities Income Fund, Inc. 8,605 125 106
Principal High Yield Fund, Inc. 396,345 181 5,248
Principal Limited Term Bond Fund, Inc. 720,910 120 4,849
Principal Tax-Exempt Bond Fund, Inc. 7,981 115 N/A
</TABLE>

Note 4 -- Investment Transactions

For the period ended April 30, 1999, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U. S. government securities) by the Income Funds were as
follows:

Purchases Sales

Principal Bond Fund, Inc. $65,406,716 $46,441,166
Principal High Yield Fund, Inc. 16,633,486 17,056,313
Principal Limited Term Bond Fund, Inc. 4,348,920 3,302,803
Principal Tax-Exempt Bond Fund, Inc. 22,603,395 28,422,365

At April 30, 1999, net unrealized appreciation (depreciation) of investments by
the Income Funds was composed of the following:

<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation (Depreciation)
Appreciation (Depreciation) of Investments

<S> <C> <C> <C>
Principal Bond Fund, Inc. $ 5,298,909 $(1,504,419) $ 3,794,490
Principal Government Securities Income Fund, Inc. 6,767,035 (839,080) 5,927,955
Principal High Yield Fund, Inc. 1,093,963 (4,065,413) (2,971,450)
Principal Limited Term Bond Fund, Inc. 142,751 (412,960) (270,209)
Principal Tax-Exempt Bond Fund, Inc. 11,252,396 (437,283) 10,815,113
</TABLE>

The Income Funds may trade portfolio securities on a "to-be-announced" (TBA)
basis. In a TBA transaction, the fund commits to purchase or sell securities for
which all specific information is not known at the time of the trade. Securities
purchased on a TBA basis are not settled until they are delivered to the fund,
normally 15 to 30 days later. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other portfolio securities. As of April 30, 1999, Principal Government
Securities Income Fund, Inc. had a TBA purchase commitment involving a security
with a face amount of $6,000,000, cost of $6,131,833 and market value of
$6,090,000. The fund has set aside investment securities and other assets in
excess of the commitment to serve as collateral.

At April 30, 1999, the Income Funds held the following securities which may
require registration under the Securities Act of 1933, or an exemption
therefrom, in order to effect a sale in the ordinary course of business.

<TABLE>
<CAPTION>
Value at Value as a
Date of April 30, Percentage of
Security Description Acquisition Cost 1999 Net Assets

<S> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. CE Generation LLC
Senior Secured Notes 2/24/99 $2,000,000 $2,010,240 1.02%

Equistar Chemicals LP Notes 2/9/99 3,999,680 4,096,196 2.08

John Hancock Mutual Life
Insurance Co. Surplus Notes 1/8/97 2,396,100 2,612,513 1.33

Marlin Water Trust
Senior Secured Notes 12/8/98 3,850,000 3,892,908 1.98
12/9/98 1,003,750 1,011,145 .52

Principal Bond Fund, Inc. Marriott International,
(Continued) Inc. Notes 11/10/98 2,495,200 2,498,945 1.27%
12/03/98 1,519,005 1,499,367 .77

Orix Credit Alliance
Short Term Notes 2/26/99 5,000,000 4,997,395 2.54

QWest Communications
International Senior Notes 12/15/98 2,085,000 2,092,500 1.06

Raytheon Co. Notes 12/9/98 995,870 945,835 .48

25,657,044 13.05

Principal High Yield Fund, Inc. California Steel Industries, Inc.
Senior Notes 3/30/99 375,000 383,438 .87

Chancellor Media Corp.
Unsecured Notes 11/11/98 746,633 772,500 1.75

Charter Communications Holding
LLC Senior Notes 3/12/99 1,495,995 1,533,750 3.48

Echostar DBS Corp. Senior Notes 1/15/99 1,500,000 1,565,625 3.55

Equistar Chemicals LP Notes 2/9/99 1,499,880 1,536,073 3.48

Integrated Electrical Services
Senior Subordinated Notes 1/25/99 372,000 381,563 .87
3/3/99 1,129,219 1,144,687 2.59

Level 3 Communications, Inc.
Step-up Senior Discount Notes 12/18/98 828,750 971,250 2.20

QWest Communications International
Senior Notes 4/15/99 731,500 732,375 .66

Special Devices, Inc. Senior
Subordinated Notes 12/11/98 500,000 505,000 1.14
1/26/99 1,017,500 1,010,000 2.29

York Power Funding Ltd. Senior
Secured Bonds 7/31/98 900,000 900,000 2.04

11,436,262 25.92

Principal Limited Term Bond Fund, Inc. Orix Credit Alliance, Inc.
Medium-Term Notes 11/8/96 850,000 849,963 2.68

Principal Tax-Exempt Bond Fund, Inc. Eddyville, Iowa, IDR Ref. Bonds,
Cargill, Inc. Project 1/11/95 859,910 1,036,250 .49
</TABLE>

The Income Funds' investments are with various issuers in various industries.
The Schedules of Investments contained herein summarize concentration of credit
risk by issuer and industry.

Note 5 -- Capital Share Transactions

Transactions in Capital Shares by fund were as follows:

<TABLE>
<CAPTION>
Principal Principal Principal
Bond Government Securities High Yield
Fund, Inc. Income Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Period Ended April 30, 1999:
Shares sold:
Class A ......................................... 2,039,149 3,227,699 504,901
Class B ......................................... 544,835 681,240 158,679
Class R............................................ 458,102 346,332 48,509
Shares issued in reinvestment of dividends and distributions:
Class A ......................................... 350,537 544,416 109,373
Class B ......................................... 55,444 56,240 31,541
Class R............................................ 34,838 21,469 13,664
Shares redeemed:
Class A ......................................... (1,400,302) (3,566,785) (712,163)
Class B ......................................... (212,263) (286,115) (209,376)
Class R............................................ (196,071) (148,101) (63,456)
Net Increase (Decrease) 1,674,269 876,395 (118,328)

Year Ended October 31, 1998:
Shares sold:
Class A ......................................... 3,558,782 3,449,728 1,429,263
Class B ......................................... 911,403 919,042 520,583
Class R............................................ 751,757 414,918 208,702
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... 544,557 1,053,198 190,004
Class B ........................................... 72,083 76,520 51,887
Class R............................................ 45,324 28,745 23,509
Shares redeemed:
Class A ......................................... (2,379,170) (4,587,595) (1,722,188)
Class B ......................................... (216,720) (237,166) (222,473)
Class R............................................ (268,084) (100,699) (101,674)

Net Increase 3,019,932 1,016,691 377,613
</TABLE>

<TABLE>
<CAPTION>
Principal Principal
Limited Term Bond Tax-Exempt Bond
Fund, Inc. Fund, Inc.

Period Ended April 30, 1999:
Shares sold:
<S> <C> <C>
Class A ......................................... 852,170 997,233
Class B ......................................... 103,806 115,099
Class R............................................ 131,006 N/A
Shares issued in reinvestment of dividends and distributions:
Class A ......................................... 60,597 269,649
Class B ......................................... 4,835 15,352
Class R............................................ 5,985 N/A
Shares redeemed:
Class A ......................................... (1,022,543) (1,530,219)
Class B ......................................... (22,395) (64,354)
Class R............................................ (33,596) N/A

Net Increase (Decrease) 79,865 (197,240)

Year Ended October 31, 1998:
Shares sold:
Class A ......................................... 1,291,180 2,447,392
Class B ......................................... 138,167 333,971
Class R............................................ 173,119 N/A
Shares issued in reinvestment of dividends and distributions:
Class A ......................................... 137,689 522,117
Class B ......................................... 4,256 24,507
Class R............................................ 7,859 N/A
Shares redeemed:
Class A ......................................... (729,920) (2,279,032)
Class B ......................................... (34,626) (80,155)
Class R............................................ (37,539) N/A

Net Increase 950,185 968,800

</TABLE>

Note 6 -- Line of Credit

The Income Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At April 30, 1999, the Income Funds had no
outstanding borrowings under the line of credit.

SCHEDULES OF INVESTMENTS

INCOME FUNDS

PRINCIPAL BOND FUND, INC.

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Bonds (94.82%)

Air Transportation, Scheduled (1.87%)
Federal Express Corp. 1994 Pass
Through Cert., Series A310-A3;
8.40%; 3/23/2010 $1,500,000 $ 1,625,985
Federal Express Corp. Pass-Through
Cert.; 7.58%; 7/2/2019 1,000,000 1,056,060
Northwest Airlines Pass-Through Cert.,
Series 1999-1, Class 1A;
6.81%; 2/1/2020 1,000,000 995,490
------------
3,677,535
Beverages (1.15%)
Joseph E. Seagram & Sons
Guaranteed Debentures;
8.38%; 2/15/2007 1,000,000 1,093,625
8.88%; 9/15/2011 1,000,000 1,153,042
------------
2,246,667
Business Credit Institutions (0.51%)
Case Credit Corp. Medium-Term Notes;
5.95%; 8/1/2000 1,000,000 1,000,402

Cable & Other Pay TV Services (1.04%)
CSC Holdings, Inc. Senior Notes;
7.25%; 7/15/2008 2,000,000 2,040,000

Cash Grains (1.31%)
Aktiebolaget SKF Senior Notes;
7.63%; 7/15/2003 2,500,000 2,575,088

Combination Utility Services (3.93%)
MidAmerican Energy Co.
Medium-Term Notes;
6.38%; 6/15/2006 2,000,000 1,979,068
PG Energy, Inc. First Mortgage
Bonds; 8.38%; 12/1/2002 500,000 533,128
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/2009 1,250,000 1,405,428
Puget Sound Power & Light Co.
1st Mortgage Medium-Term Notes,
Series A; 7.75%; 2/1/2007 3,500,000 3,808,374
------------
7,725,998
Communications Equipment (1.06%)
QWest Communications International
Senior Notes; 7.50%; 11/1/2008 2,000,000(a) 2,092,500

Computer & Data Processing
Services Medium-Term Notes (2.61%)
Comdisco, Inc.;
6.65%; 11/13/2001 2,000,000 2,022,486
6.00%; 1/30/2002 3,100,000 3,097,631
------------
5,120,117
Computer & Office Equipment (1.49%)
Seagate Technology, Inc. Senior Notes;
7.37%; 3/1/2007 $3,000,000 $ 2,934,234

Construction & Related
Machinery (0.62%)
Caterpillar, Inc. Global Debentures;
9.38%; 8/15/2011 1,000,000 1,226,157

Consumer Products (0.56%)
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/2004 1,000,000 1,097,500

Credit Reporting & Collection (2.54%)
Orix Credit Alliance Short Term Notes;
7.00%; 3/15/2001 5,000,000(a) 4,997,395

Crude Petroleum & Natural Gas (0.27%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/2001 500,000 528,892

Department Stores (2.68%)
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/2000 400,000 410,013
Fred Meyer, Inc. Senior Notes;
7.38%; 3/1/2005 2,000,000 2,073,662
Penney (J.C.) Co., Inc. Debentures;
7.13%; 11/15/2023 1,000,000 947,024
Sears Roebuck Co.
Medium-Term Notes;
9.05%; 2/6/2012 500,000 606,341
9.12%; 2/13/2012 1,000,000 1,218,869
------------
5,255,909
Drug Stores & Proprietary
Stores (0.97%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/2013 2,000,000 1,903,240

Eating & Drinking Places (2.55%)
Aramark Services, Inc. Notes;
6.75%; 8/1/2004 5,000,000 5,011,505

Electric Services (5.61%)
Calpine Corp. Notes; 7.75%; 4/15/2009 3,000,000 3,007,500
CE Generation LLC Senior Secured
Notes; 7.42%; 12/15/2018 2,000,000(a) 2,010,240
Commonwealth Edison Co.
Debentures; 6.95%; 7/15/2018 1,000,000 1,012,816
East Coast Power, LLC Senior Secured
Notes; 7.54%; 6/30/2017 3,000,000 2,957,670
Southern California Edison Co.
Notes; 6.38%; 1/15/2006 1,000,000 1,007,243
Toledo Edison Co. Debentures;
8.70%; 9/1/2002 1,000,000 1,045,130
------------
11,040,599
Engines & Turbines (0.49%)
Brunswick Corp. Debentures;
7.38%; 9/1/2023 1,000,000 953,574

Fabricated Rubber Products, NEC (0.84%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/2003 $1,500,000 $ 1,654,053

Farm & Garden Machinery (1.29%)
Case Corp. Notes; 7.25%; 1/15/2016 1,000,000 959,488
Tenneco, Inc. Notes;
10.08%; 2/1/2001 500,000 530,877
8.08%; 10/1/2002 1,000,000 1,047,180
------------
2,537,545
Funeral Service & Crematories (1.20%)
Service Corp. International Notes;
6.00%; 12/15/2005 2,500,000 2,361,355

General Government, NEC (2.30%)
Ontario Hydro Debentures;
7.45%; 3/31/2013 2,000,000 2,219,240
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/2013 2,000,000 2,307,800
------------
4,527,040
General Industrial Machinery (0.51%)
Timken Co. Medium-Term
Notes; 6.20%; 1/15/2008 1,000,000 996,793

Gold & Silver Ores (0.62%)
Placer Dome, Inc. Notes;
7.13%; 6/15/2007 1,250,000 1,208,469

Grain Mill Products (0.55%)
Ralston Purina Co. Debentures;
7.75%; 10/1/2015 1,000,000 1,084,143

Grocery Stores (2.54%)
American Stores Co. Bond;
8.00%; 6/1/2026 2,500,000 2,811,455
Food Lion, Inc.
Medium-Term Notes;
8.67%; 8/28/2006 1,000,000 1,115,582
Notes; 7.55%; 4/15/2007 1,000,000 1,063,747
------------
4,990,784
Highway & Street Construction (1.18%)
Foster Wheeler Corp. Notes;
6.75%; 11/15/2005 2,500,000 2,317,588

Hotel & Motels (2.04%)
Marriott International, Inc. Notes;
6.63%; 11/15/2003 4,000,000(a) 3,998,312

Household Furniture (1.02%)
Masco Corp. Debentures;
7.13%; 8/15/2013 2,000,000 2,009,900

Industrial Inorganic Chemicals (2.08%)
Equistar Chemicals LP Notes;
8.50%; 2/15/2004 4,000,000(a) 4,096,196

Life Insurance (1.33%)
John Hancock Mutual Life Insurance Co.
Surplus Notes; 7.38%; 2/15/2024 $2,500,000(a) $ 2,612,513

Machinery, Equipment, & Supplies (0.13%)
AAR Corp. Notes; 7.25%; 10/15/2003 250,000 254,617

Management & Public Relations (0.51%)
Servicemaster Co. Ltd. Notes;
6.95%; 8/15/2007 1,000,000 1,010,353

Medical Instruments & Supplies (0.89%)
Delphi Automotive Systems Corp.
6.13%; 5/1/2004 1,750,000 1,745,188

Millwork, Plywood & Structural
Members (0.37%)
Georgia-Pacific Corp.
Debentures; 9.50%; 12/1/2011 600,000 729,112

Miscellaneous Investing (2.41%)
BRE Properties, Inc. Notes;
7.20%; 6/15/2007 2,000,000 1,950,772
First Industrial LP Medium-Term
Notes; 7.00%; 12/1/2006 1,500,000 1,508,320
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/2005 1,250,000 1,268,273
------------
4,727,365
Miscellaneous Metal Ores (0.35%)
Cyprus Minerals Co. Notes;
10.13%; 4/1/2002 650,000 693,646

Mortgage Bankers & Brokers (1.01%)
Chase Commercial Mortgage Securities
Corp., Class C Notes; 6.60%;
12/19/2007 2,000,000 1,976,600

Motor Vehicles & Equipment (2.21%)
Ford Motor Co. Debentures;
7.50%; 8/1/2026 1,000,000 1,058,588
8.90%; 1/15/2032 1,000,000 1,226,002
Ford Motor Credit Co. Senior Notes;
5.80%; 1/12/2009 1,000,000 956,320
General Motors Corp. Global
Medium-Term Notes;
8.88%; 5/15/2003 1,000,000 1,100,142
------------
4,341,052
Newspapers (1.25%)
News America Holdings, Inc.
Guaranteed Senior Notes;
8.50%; 2/15/2005 2,250,000 2,460,166

Oil & Gas Field Services (1.53%)
Petroleum Geo-Services ASA Notes;
7.50%; 3/31/2007 2,500,000 2,577,548
R&B Falcon Senior Notes;
6.75%; 4/15/2005 500,000 422,500
------------
3,000,048
Operative Builders (1.20%)
Pulte Corp.
Senior Notes; 8.38%; 8/15/2004 $ 500,000 $ 515,449
Notes; 7.63%; 10/15/2017 2,000,000 1,842,326
------------
2,357,775
Paper & Paper Products (1.49%)
Boise Cascade Office Products Corp.;
7.05%; 5/15/2005 3,000,000 2,934,054

Paper Mills (3.04%)
Bowater, Inc. Debentures;
9.50%; 10/15/2012 1,000,000 1,240,625
9.38%; 12/15/2021 1,500,000 1,844,196
Champion International Corp.
Notes; 9.88%; 6/1/2000 750,000 781,715
Chesapeake Corp. Notes;
9.88%; 5/1/2003 1,000,000 1,106,435
James River Corp. Notes;
6.70%; 11/15/2003 1,000,000 1,009,255
------------
5,982,226
Paperboard Mills (0.88%)
Federal Paper Board Co., Inc.
Debentures; 8.88%; 7/1/2012 1,500,000 1,722,829

Personal Credit Institutions (0.55%)
General Motors Acceptance Corp.
Global Notes; 8.50%; 1/1/2003 1,000,000 1,080,703

Petroleum Refining (4.98%)
Ashland, Inc. Medium-Term Notes;
7.71%; 5/11/2007 500,000 527,230
Ashland Oil, Inc. Medium-Term Notes;
7.73%; 7/15/2013 750,000 798,992
7.72%; 7/15/2013 1,000,000 1,064,426
Mapco, Inc. Medium-Term Notes;
8.48%; 8/5/2013 1,000,000 1,156,403
Sun Co., Inc.
Debentures; 9.00%; 11/1/2024 2,000,000 2,316,370
Notes; 7.13%; 3/15/2004 300,000 307,226
Tosco Corp. Notes; 7.25%; 1/1/2007 2,500,000 2,567,118
Ultramar Credit Corp. Guaranteed
Notes; 8.63%; 7/1/2002 1,000,000 1,052,164
------------
9,789,929
Pulp Mills (1.42%)
ITT Rayonier, Inc. Notes;
7.50%; 10/15/2002 1,875,000 1,955,132
International Paper Co.
Medium-Term Notes;
9.70%; 8/15/2000 800,000 835,605
------------
2,790,737
Railroads (1.78%)
Union Pacific Corp.
Debentures; 7.00%; 2/1/2016 2,500,000 2,461,455
Notes; 7.25%; 11/1/2008 1,000,000 1,043,576
------------
3,505,031
Real Estate Operators & Lessors (0.63%)
First Industrial, L.P. Notes;
7.60%; 5/15/2007 $1,250,000 $ 1,238,940

Rental of Railroad Cars (1.33%)
GATX Capital Corp. Medium-Term Notes;
Series B; 9.50%; 1/10/2002 1,500,000 1,613,205
Series C; 6.86%; 10/13/2005 1,000,000 1,005,776
------------
2,618,981
Rubber & Plastics Footwear (1.26%)
Reebok International Ltd. Debentures;
6.75%; 9/15/2005 2,500,000 2,470,282

Sanitary Services (1.69%)
Laidlaw, Inc.
Notes; 7.70%; 8/15/2002 1,000,000 1,012,927
Senior Notes; 7.88%; 4/15/2005 750,000 761,414
WMX Technologies, Inc. Notes;
7.00%; 10/15/2006 1,500,000 1,549,716
------------
3,324,057
Search & Navigation Equipment (0.48%)
Raytheon Co. Notes; 6.40%; 12/15/2018 1,000,000(a) 945,835

Security Brokers & Dealers (3.16%)
Bear Stearns Cos., Inc.
Senior Notes; 7.00%; 3/1/2007 2,500,000 2,551,818
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.38%; 1/15/2007 3,545,000 3,664,218
------------
6,216,036
Telephone Communication (8.38%)
Airtouch Communications, Inc. Notes;
6.65%; 5/1/2008 2,500,000 2,546,518
GTE Corp. Notes; 6.36%; 4/15/2006 2,500,000 2,499,480
Sprint Capital Corp. Notes;
8.13%; 7/15/2002 1,500,000 1,585,683
5.70%; 11/15/2003 4,500,000 4,427,019
Worldcom, Inc. Notes;
7.75%; 4/1/2007 5,000,000 5,414,060
------------
16,472,760
Variety Stores (0.63%)
Dayton-Hudson Corp. Debentures;
9.25%; 8/15/2011 1,000,000 1,233,184

Water Supply (2.50%)
Marlin Water Trust Senior Secured
Notes; 7.09%; 12/15/2001 4,850,000(a) 4,904,053
------------

Total Bonds 186,347,562

Asset-Backed Securities (3.08%)

Investment Offices (1.50%)
Morgan Stanley Capital I, Inc. Comml
Mtg Pass-Through Cert., Ser 99-WF1
CL C; 6.54%; 10/15/2008 3,000,000 2,954,070

Security Brokers & Dealers (1.58%)
Merrill Lynch Mortgage Investors, Inc.
Collateralized Mortgage-Backed
Security, Series 95-C3, 7.37%*
Class C; 12/26/2025 3,000,000 3,108,090
------------

Total Asset-Backed Securities 6,062,160

Commercial Paper (0.72%)

Personal Credit Institutions (0.72%)
Investment in Joint Trade Account,
Associates Corp.; 4.92%; 5/3/1999 $1,408,033 $ 1,408,033
------------

Total Portfolio Investments (98.62%) 193,817,755

Cash, receivables and other assets,
net of liabilities (1.38%) 2,715,749
------------

Total Net Assets (100.00%) $196,533,504
============

(a)Restricted security - See Note 4 to the financial statements.
* Variable rate (monthly)

PRINCIPAL GOVERNMENT SECURITIES INCOME
FUND, INC.

- --------------------------------------------------------------------------------
Description of Issue
- ------------------------------------ Principal
Type Rate Maturity Amount Value
- --------------------------------------------------------------------------------

Government National Mortgage Association (GNMA)
Certificates (99.13%)

GNMA I 6.00% 10/15/2023-4/15/2024 $14,248,522 $ 12,885,540
GNMA I 6.50 7/15/2008-2/15/2029 86,082,114 85,796,332
GNMA I 7.00 10/15/2022-5/15/2029 75,533,035 76,817,495
GNMA I 7.25 9/15/2025-10/15/2025 3,612,919 3,697,069
GNMA I 7.50 4/15/2017-10/15/2027 32,840,373 33,925,785
GNMA I 8.00 8/15/2016-2/15/2022 7,747,784 8,164,630
GNMA II 6.00 1/20/2024-3/20/2029 54,852,329 53,999,462
GNMA II 6.50 3/20/2024-3/20/2027 12,549,984 12,435,867
------------

Total GNMA Certificates 287,722,180

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Federal Agency Short-Term Obligation (2.05%)
Investment in Joint Trade Account,
Federal Home Loan Mortgage Corp.;
4.82%; 5/31/1999 $5,961,345 $ 5,961,345
------------

Total Portfolio Investments (101.18%) 293,683,525

Liabilities, net of cash, receivables and
other assets (-1.18%) (3,438,579)

Total Net Assets (100.00%) $290,244,946
============

PRINCIPAL HIGH YIELD FUND, INC.

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Bonds (95.96%)

Advertising (3.66%)
Lamar Advertising Co.
Senior Subordinated Notes;
9.63%; 12/1/2006 $1,500,000 $ 1,612,500

Aircraft & Parts (1.81%)
BE Aerospace Senior Subordinated
Notes; 9.50%; 11/1/2008 750,000 800,625

Blast Furnace & Basic Steel
Products (0.87%)
California Steel Industries, Inc. Senior
Notes; 8.50%; 4/1/2009 375,000(a) 383,438

Cable & Other Pay TV Services (3.82%)
Century Communications Senior Notes;
8.75%; 10/1/2007 900,000 936,000
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/2002 700,000 747,250
-----------
1,683,250
Cogeneration - Small Power
Producer (5.27%)
AES Corp. Senior Subordinated
Notes; 8.38%; 8/15/2007 1,500,000 1,490,625
Calpine Corp. Senior Notes;
8.75%; 7/15/2007 800,000 834,000
-----------
2,324,625
Communications Equipment (5.39%)
Echostar DBS Corp. Senior Notes;
9.38%; 2/1/2009 1,500,000(a) 1,565,625
FWT, Inc. Senior Subordinated
Notes; 9.88%; 11/15/2007 800,000(b) 79,000
QWest Communications International
Senior Notes; 7.50%; 11/1/2008 700,000(a) 732,375
-----------
2,377,000
Communication Services, NEC (5.68%)
Charter Communications Holdings LLC
Senior Notes; 8.25%; 4/1/2007 1,500,000(a) 1,533,750
Level 3 Communications, Inc. Step-Up*
Senior Discount Notes; 12/1/2008 1,500,000(a)(c) 971,250
-----------
2,505,000
Computer & Data Processing
Services (0.18%)
DecisionOne Corp. Senior Subordinated
Notes; 9.75%; 8/1/2007 1,500,000(b) 76,875

Crude Petroleum & Natural Gas (3.42%)
Chesapeake Energy Corp. Senior
Notes, Series A; 9.63%; 5/1/2005 750,000 686,250
Ocean Energy, Inc. Senior Subordinated
Notes; 8.88%; 7/15/2007 800,000 822,000
-----------
1,508,250
Eating & Drinking Places (5.37%)
Cafeteria Operators LP Senior Secured
Notes; 12.00%; 12/31/2001 $1,500,000 $ 1,488,750
Foodmaker, Inc. Senior Subordinated
Notes; 8.38%; 4/15/2008 900,000 880,875
-----------
2,369,625
Electric Services (2.04%)
York Power Funding Ltd. Senior Secured
Bonds; 12.00%; 10/30/2007 900,000(a) 900,000

Electric Work (3.46%)
Integrated Electrical Services Senior
Subordinated Notes;
9.38%; 2/1/2009 1,500,000(a) 1,526,250

Finance Services (1.78%)
DVI, Inc. Senior Notes;
9.88%; 2/1/2004 800,000 784,000

Funeral Service & Crematories (1.74%)
Loewen Group International, Inc. Senior
Guaranteed Notes; 7.50%; 4/15/20011,500,000 765,000

Grocery Stores (1.92%)
Marsh Supermarkets Senior
Subordinated Notes;
8.88%; 8/1/2007 800,000 846,000

Heavy Construction, Except
Highway (3.32%)
Mastec, Inc. Senior Subordinated
Notes; 7.75%; 2/1/2008 1,500,000 1,466,250

Hotels & Motels (3.13%)
HMH Properties, Inc. Senior Notes;
7.88%; 8/1/2008 750,000 726,563
John Q. Hammons Hotels LP &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/2004 700,000 651,875
-----------
1,378,438
Industrial Inorganic Chemicals (3.48%)
Equistar Chemicals LP Notes;
8.50%; 2/15/2004 1,500,000(a) 1,536,073

Men's & Boys' Clothing Stores (0.47%)
Edison Brothers Stores, Inc. Senior
Notes; 11.00%; 9/26/2007 700,000(b) 209,125

Miscellaneous Amusement, Recreation
Service (3.54%)
Rio Hotel & Casino, Inc. Senior
Subordinated Notes;
9.50%; 4/15/2007 700,000 787,500
Station Casinos, Inc. Senior
Subordinated Notes;
8.88%; 12/1/2008 $ 750,000 $ 776,250
-----------
1,563,750
Miscellaneous Equipment Rental &
Leasing (3.43%)
Rental Service Corp. Senior Subordinated
Notes; 9.00%; 5/15/2008 1,500,000 1,515,000

Miscellaneous Shopping Goods
Stores (2.09%)
Zale Corp. Senior Notes;
8.50%; 10/1/2007 900,000 922,500

Motor Vehicles, Parts & Supplies (3.43%)
Special Devices, Inc. Senior Subordinated
Notes; 11.38%; 12/15/2008 1,500,000(a) 1,515,000

Newspapers (1.90%)
Hollinger International Publishing, Inc.
Senior Subordinated Notes;
9.25%; 3/15/2007 800,000 838,000

Paper Mills (1.22%)
Indah Kiat Finance Mauritius Ltd.
Guaranteed Senior Notes;
10.00%; 7/1/2007 800,000 540,000

Personal Credit Institutions (1.27%)
MacSaver Financial Services, Inc.
Notes; 7.60%; 8/1/2007 800,000 560,000

Petroleum Refining (1.46%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/2005 700,000 644,000

Pulp Mills (1.56%)
Pen-Tab Industries, Inc. Senior
Subordinated Notes;
10.88%; 2/1/2007 800,000 688,000

Radio & Television Broadcasting (3.73%)
Antenna TV S.A. Senior Notes;
9.00%; 8/1/2007 900,000 874,125
Chancellor Media Corp. Unsecured
Notes; 8.00%; 11/1/2008 750,000(a) 772,500
-----------
1,646,625
Residential Building Construction (1.68%)
D.R. Horton, Inc. Senior Notes;
8.00%; 2/1/2009 750,000 740,625

Retail Stores, NEC (1.88%)
Cole National Group, Inc.
Senior Subordinated Notes;
9.88%; 12/31/2006 800,000 828,000

Telephone Communication (8.85%)
Clearnet Communications Step-Up*
Senior Discount Notes; 12/15/2005 750,000(c) 697,500
Intermedia Communications, Inc. Senior
Notes; 8.50%; 1/15/2008 $ 800,000 $ 798,000
NEXTLINK Communications, Inc.
Senior Notes; 9.00%; 3/15/2008 800,000 792,000
Rogers Cablesystems, Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/2002 750,000 810,000
Rogers Cantel, Inc. Senior Secured
Debentures; 9.75%; 6/1/2016 700,000 806,750
-----------
3,904,250
Water Transportation of Freight,
NEC (3.11%)
Cenargo International PLC First
Mortgage Notes; 9.75%; 6/15/2008 1,500,000 1,372,500
-----------

Total Bonds 42,330,574

- --------------------------------------------------------------------------------
Shares
Held Value
- --------------------------------------------------------------------------------

Preferred Stock (0.01%)

Fuel Dealers (0.01%)
Star Gas Partners LP 308 $ 4,684

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Commercial Paper (1.87%)

Personal Credit Institutions (1.87%)
Investment in Joint Trade Account,
Associates Corp; 4.92%; 5/3/1999 $ 825,973 $ 825,973
-----------

Total Portfolio Investments (97.84%) 43,161,231

Cash and receivables, net of liabilities (2.16%) 953,759
-----------

Total Net Assets (100.00%) $44,114,990
============

(a) Restricted security - See Note 4 to the financial statements.
(b) Non-income producing security - Security in default.
(c) Non-income producing security - Zero-step coupon bond.
* Variable rate

PRINCIPAL LIMITED TERM BOND FUND, INC.

- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------

Bonds (53.92%)

Business Credit Institutions (5.87%)
CIT Group Holdings
Senior Medium-Term Notes;
6.38%; 10/1/2002 $1,000,000 $ 1,013,635
Orix Credit Alliance, Inc.
Medium-Term Notes;
6.46%; 5/17/1999 $ 850,000(a) $ 849,963
-----------
1,863,598
Combination Utility Services (0.79%)
Pacificorp First Mortgage Medium-Term
Notes; 9.50%; 5/20/1999 250,000 250,408

Department Stores (5.05%)
J.C. Penney Co., Inc. Notes;
9.05%; 3/1/2001 1,000,000 1,046,016
Sears Roebuck Acceptance Corp.
Medium-Term Notes, Series II;
6.69%; 8/13/2001 450,000 456,892
Sears Roebuck Co. Medium-Term
Notes; 6.46%; 5/12/2000 100,000 100,550
-----------
1,603,458
Federal & Federally Sponsored
Credit (0.43%)
Federal Home Loan Mortgage
Corporation Debentures;
6.57%; 2/27/2007 130,000 135,065

General Industrial Machinery (3.28%)
Timken Co. Medium-Term Notes;
7.30%; 8/13/2002 1,000,000 1,039,872

Medical Service & Health
Insurance (1.56%)
Aetna Services, Inc. Notes;
6.38%; 8/15/2003 500,000 494,628

Mortgage Bankers & Brokers (2.71%)
Countrywide Funding Corp.
Medium-Term Notes;
6.05%; 3/1/2001 860,000 859,955

Motor Vehicles & Equipment (1.68%)
General Motors Corp. Medium-Term
Notes; 9.20%; 7/2/2001 500,000 534,286

Paper Mills (3.21%)
International Paper Co. Notes;
7.00%; 6/1/2001 1,000,000 1,018,849

Paperboard Mills (3.32%)
Temple-Inland, Inc. Notes;
9.00%; 5/1/2001 1,000,000 1,053,278

Personal Credit Institutions (12.73%)
American General Finance Corp.
Medium-Term Notes, Series D;
7.46%; 3/28/2000 350,000 355,755
Associates Corp. of North America
Notes; 5.75%; 10/15/2003 1,000,000 985,824
Chrysler Financial Corp.
Medium-Term Notes;
8.45%; 1/28/2000 500,000 510,783
Personal Credit Institutions (Continued)
Ford Motor Credit Co. Notes;
7.50%; 1/15/2003 $1,117,000 $ 1,169,156
General Motors Acceptance Corp.
Notes; 6.63%; 10/1/2002 1,000,000 1,019,214
-----------
4,040,732
Plumbing & Heating, Except
Electric (3.27%)
Masco Corp. Notes; 6.13%; 9/15/2003 1,035,000 1,037,349

Security Brokers & Dealers (7.84%)
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.25%; 4/15/2003 1,200,000 1,231,289
Merrill Lynch & Co., Inc. Notes;
6.55%; 8/1/2004 1,230,000 1,257,568
-----------
2,488,857
Telephone Communication (2.19%)
Nynex Capital Funding Medium-Term
Notes, Series A; 9.40%; 6/1/2000 670,000 694,891

Total Bonds 17,115,226

Description of Issue Principal

Type Rate Maturity Amount Value

Federal Home Loan Mortgage Corporation (FHLMC) Certificates (8.36%)

FHLMC 7.00% 12/1/2022 $ 510,754 $ 519,943
FHLMC 7.00 3/1/2028 487,626 495,963
FHLMC 7.25 12/1/2007 389,000 394,716
FHLMC 8.00 12/1/2011-10/1/2022 416,031 433,896
FHLMC 8.25 1/1/2012 74,617 76,694
FHLMC 8.50 1/1/2000-4/1/2000 464,356 473,808
FHLMC 9.00 9/1/2009 240,360 257,840

Total FHLMC Certificates 2,652,860

Federal National Mortgage Association (FNMA)
Certificates (5.62%)

FNMA 6.00 7/1/2028 994,228 964,439
FNMA 8.00 10/1/2006-5/1/2027 346,659 359,113
FNMA 8.50 5/1/2022 281,918 298,287
FNMA 9.00 2/1/2025 151,592 162,191

Total FNMA Certificates 1,784,030

Government National Mortgage Association (GNMA)
Certificates (8.64%)

GNMA I 6.50% 6/15/2028-9/15/2028 $1,978,167 $1,967,420
GNMA I 8.00 1/20/2016 213,464 223,622
GNMA I 9.00 7/15/2017 75,414 81,240
GNMA II 6.00 7/20/2028 487,940 470,762

Total GNMA Certificates 2,743,044

Asset-Backed Securities (20.90%)

Personal Credit Institutions (0.89%)
Union Acceptance Corp. 1996-B Auto
Trust Pass-Through Certificates,
Class A; 6.45%; 7/8/2003 281,379 283,597

Mortgage Pass-Through Securities (20.00%)
DLJ Commercial Mortgage Corp.
Pass-Through Certificates, Class A1A,
Series 1998-CF1; 6.14%; 10/15/2006 647,466 646,346
Series 1999-CG1; 6.08%; 7/10/2008 1,493,936 1,488,976
GMAC Commercial Mortgage Securities,
Inc. Mortgage Pass-Through
Certificates, Series 1998-C2 CL C;
6.50%; 8/15/2008 1,000,000 982,770
J.P. Morgan Commercial Mortgage
Finance Corp. Mortgage
Pass-Through, Series 97-C5,
Class A-2; 7.06%; 9/15/2029 1,445,000 1,503,638
Prudential Securities Secured Financing
Corp. Mortgage Pass-Through
Certificates, Series 1998-C1,
Class A1A1; 6.11%; 11/15/2002 216,968 217,408
Lehman Large Loan, Class A1,
Series 1997-LLI; 6.79%; 6/12/2004 1,472,746 1,511,038

6,350,176

Total Asset-Backed Securities 6,633,772

Commercial Paper (1.22%)

Personal Credit Institutions (1.22%)
Investment in Joint Trade Account,
Associates Corp.; 4.92%; 5/3/1999 387,390 387,390

Total Portfolio Investments (98.65%) 31,316,322

Cash, receivables and other assets,
net of liabilities (1.35%) 428,080

Total Net Assets (100.00%) $31,744,402

(a) Restricted security - See Note 4 to the financial statements.

PRINCIPAL TAX-EXEMPT BOND FUND, INC.

Principal
Amount Value

Long-Term Tax-Exempt Bonds (96.46%)

Alabama (0.45%)
Phenix County, Alabama IDB
Environmental Improvement Rev.
Bonds, Mead Coated Board, Inc.,
Series B; 5.25%; 4/1/2028 $1,000,000 $ 961,250

Arizona (1.99%)
Navajo County, Arizona Pollution
Control Corp. Rev. Ref. Bonds,
Arizona Public Service Co.,
Series 1993A; 5.88%; 8/15/2028 4,100,000 4,217,875

Arkansas (2.56%)
City of Blytheville, Arkansas Solid Waste
Recycling & Sewer Treatment Rev.
Bonds, Series 1992, Nucor Corp.
Project; 6.90%; 12/1/2021 4,610,000 4,926,937
Little River County, Arkansas Rev.
Georgia Pacific Corp. Project;
5.60%; 10/1/2026 500,000 500,625

5,427,562
California (4.01%)
ABAG Finance Authority for Nonprofit
Corp., Cert. of Participation,
Stanford University Hospital;
5.00%; 11/1/2004 750,000 796,875
5.25%; 11/1/2020 1,750,000 1,780,625
California Pollution Control Funding
Authority Pollution Control Rev. Ref.
Bonds for San Diego Gas & Electric,
Series A; 5.90%; 6/1/2014 1,000,000 1,123,750
California Pollution Control Funding
Authority Rev. Bonds, Atlantic
Richfield Co. Project; 5.00%; 4/1/2008 2,500,000 2,615,625
City of Upland, California San Antonio
Comm. Hospital Cert. of Participation;
5.25%; 1/1/2004 2,080,000 2,165,800

8,482,675
Colorado (2.61%)
City & County of Denver, Colorado
Airport System Rev. Bonds,
Series 1991D; 7.75%; 11/15/2013 3,185,000 4,005,138
Colorado Health Fac. Authority Rev.
Bonds for Sisters of Charity
Healthcare Systems, Series 1994;
5.25%; 5/15/2014 1,500,000 1,520,625

5,525,763
Florida (1.11%)
Nassau County, Florida Pollution
Control Rev. Ref. Bonds; ITT
Rayonier, Inc. Project;
6.10%; 6/1/2005 1,000,000 1,057,500
7.65%; 6/1/2006 1,265,000 1,286,657

2,344,157
Georgia (2.44%)
Effingham County, Georgia Dev.
Authority Waste Disposal Rev. for
Fort James Project; 5.63%; 7/1/2018 $3,000,000 $3,037,500
Fulco, Georgia Hospital Authority Rev.
Anticipation Cert. for St. Joseph's
Hospital of Atlanta, Inc.;
5.50%; 10/1/2014 2,000,000 2,137,500

5,175,000
Illinois (14.34%)
Chicago, Illinois Midway Airport Rev.
Bonds, Series A, MBIA Insured;
5.50%; 1/1/2011 1,500,000 1,586,250
5.50%; 1/1/2013 500,000 525,625
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
American Airlines, Inc. Project-A;
7.88%; 11/1/2025 6,010,000 6,423,187
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
Lufthansa German Airlines Project;
7.13%; 5/1/2018 1,000,000 1,068,750
City of Chicago, Illinois Adj. Rate Gas
Supply Rev. Bonds, Series 1985A,
Peoples Gas Light & Coke Project;
6.88%; 3/1/2015 2,800,000 3,055,500
Illinois Health Fac. Authority Advocate
Health Care Network, Series B;
5.25%; 8/15/2018 2,910,000 2,840,887
Illinois Health Fac. Authority Ref. Rev.
Bonds for OSF Healthcare System;
5.75%; 11/15/2007 1,000,000 1,061,250
6.00%; 11/15/2010 500,000 535,000
6.00%; 11/15/2013 500,000 532,500
Illinois Health Fac. Authority Rev. Bonds,
Northwestern Memorial Hospital,
Series 1994A;
5.60%; 8/15/2006 500,000 538,125
5.75%; 8/15/2008 615,000 660,356
5.80%; 8/15/2009 840,000 898,800
6.10%; 8/15/2014 1,000,000 1,073,750
Illinois Health Fac. Authority Rev.
Bonds for Sarah Bush Lincoln
Health Center;
Series 1992; 7.25%; 5/15/2002 2,950,000 3,300,313
Series 1996B; 6.00%; 2/15/2011 1,000,000 1,077,500
Series 1996B; 5.50%; 2/15/2016 1,000,000 998,750
Illinois Health Fac. Authority Rev.
Bonds for South Suburban Hospital,
Series 1992;
7.00%; 2/15/2009 305,000 353,038
7.00%; 2/15/2018 720,000 870,300
Illinois Health Fac. Authority Rev. Ref.
Bonds for Advocate Healthcare,
Series A; 6.75%; 4/15/2012 680,000 748,000
Regional Transportation Authority,
Illinois General Obligation Bonds,
Series 1994A; 6.25%; 6/1/2015 2,000,000 2,217,500

30,365,381
Indiana (7.65%)
City of Mount Vernon, Indiana
Pollution Control Rev. Bonds for
Southern Indiana Gas & Electric
Co. Project; 7.25%; 3/1/2014 $ 700,000 $ 740,621
City of Petersburg, Indiana Pollution
Control Rev. Bonds, for Indianapolis
Power & Light Co. Project,
Series 1993A; 6.10%; 1/1/2016 4,000,000 4,300,000
Indiana Health Fac. Financing Authority
Hospital Rev. Bonds, Clarian Health
Partners, Inc.; 5.50%; 2/15/2009 2,520,000 2,652,300
Indiana Health Fac. Financing
Authority Hospital Rev. Ref. Bonds,
Schneck Memorial Hospital,
Series 1998;
4.70%; 2/15/2006 500,000 501,250
5.13%; 2/15/2017 500,000 478,125
Indiana Health Fac. Financing
Authority Hospital Rev. Ref. Bonds,
Welborn Memorial Baptist Hospital,
Series 1993; 5.63%; 7/1/2023 1,860,000 1,862,325
Lawrenceburg, Indiana Pollution
Control Rev. Ref. Bonds, Indiana
Michigan Power Co. Project,
Series D; 7.00%; 4/1/2015 1,000,000 1,068,750
Series E; 5.90%; 11/1/2019 3,220,000 3,312,575
Warrick County, Indiana
Environmental Improvement Rev.
Bonds, Southern Indiana Gas &
Electric, Series 1993B;
6.00%; 5/1/2023 1,190,000 1,282,225

16,198,171
Iowa (3.00%)
City of Muscatine, Iowa Electric Rev.
Ref. Bonds, Series 1986;
6.00%; 1/1/2006 150,000 150,364
5.00%; 1/1/2007 1,575,000 1,579,048
Eddyville, Iowa IDR Ref. Bonds,
Cargill, Inc.
Project; 5.63%; 12/1/2013 1,000,000(a) 1,036,250
Iowa Finance Authority Hospital Fac.
Ref. Rev. Bonds for Jennie
Edmundson Memorial Hospital;
7.40%; 11/1/2006 550,000 608,438
Iowa Finance Authority Hospital Fac.
Ref. Rev. Bonds, Iowa Health Systems,
Series A, MBIA Insured;
5.13%; 1/1/2028 3,000,000 2,970,000

6,344,100
Kentucky (0.90%)
City of Ashland, Kentucky Sewage
and Solid Waste Rev. Bonds for
Ashland, Inc. Project, Series 1995;
7.13%; 2/1/2022 750,000 835,312
City of Ashland, Kentucky Solid
Waste Rev. Bonds for Ashland
Oil, Inc. Project, Series 1991;
7.20%; 10/1/2020 $1,000,000 $ 1,073,750

1,909,062
Louisiana (0.98%)
St. Charles Parish, Louisiana Pollution
Control Rev. Bonds for Louisiana
Power & Light Co. Project;
7.50%; 6/1/2021 1,950,000 2,084,063

Michigan (3.59%)
Detroit, Michigan LOC Dev. Financing
Authority Ref. Bonds, Senior Series A
Chrysler Corp; 5.20%; 5/1/2010 1,700,000 1,763,750
Michigan State Hospital Financing
Authority Hospital Rev. Bonds for
Detroit Medical Center, Obligated-A;
5.25%; 8/15/2028 1,500,000 1,365,000
Michigan State Hospital Financing
Authority Hospital Rev. Bonds for
Detroit Medical Center, Series 1993B;
5.75%; 8/15/2013 600,000 594,000
5.50%; 8/15/2023 2,000,000 1,897,500
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity Hospital;
5.25%; 11/1/2015 1,000,000 1,008,750
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity National Health
System; 5.50%; 11/1/2005 900,000 967,500

7,596,500
Minnesota (0.74%)
City of Bass Brook, Minnesota Pollution
Control Rev. Ref. Bonds for
Minnesota Power & Light Project;
6.00%; 7/1/2022 1,500,000 1,567,500

Mississippi (0.24%)
Grenada County, Mississippi Rev. Ref.
Bonds, Georgia Pacific Corp. Project;
5.45%; 9/1/2014 500,000 501,875

Missouri (1.14%)
Missouri State Health & Educational
Fac. Authority Health Fac. Rev.
Bonds, BJC Health System,
Series 1994A; 6.75%; 5/15/2012 2,000,000 2,407,500

Montana (1.00%)
Forsyth, Montana Pollution Control
Rev. Ref. Bonds, Montana Power
Co., Colstrip Project, Series 1993A;
6.13%; 5/1/2023 2,000,000 2,107,500

Nebraska (0.49%)
Dawson County, Nebraska Sanitary &
Improvement General Obligation
Ref. Bonds; 5.55%; 2/1/2017 1,000,000 1,046,250

Nevada (1.85%)
Clark County, Nevada IDR Ref.
Bonds, Nevada Power Co. Project,
Series 1992C; 7.20%; 10/1/2022 $3,600,000 $ 3,919,500

New Mexico (1.10%)
City of Lordsburg, New Mexico
Pollution Control Rev. Bonds
for Phelps Dodge Corp. Project;
6.50%; 4/1/2013 2,150,000 2,322,000

North Carolina (2.26%)
Martin County, North Carolina
Industrial Fac. & Pollution Control
Finance Authority Solid Waste
Rev. Bonds, Weyerhaeuser;
5.65%; 12/1/2023 1,000,000 1,003,750
6.80%; 5/1/2024 2,000,000 2,207,500
Wake County, North Carolina
Industrial Fac. & Pollution Control
Finance Authority Rev. Bond,
Carolina Power & Light Co.;
6.90%; 4/1/2009 1,500,000 1,567,455

4,778,705
North Dakota (0.98%)
Mercer County, North Dakota
Pollution Control Rev. Bonds,
Ottertail Power Co. Project,
Series 1991; 6.90%; 2/1/2019 1,950,000 2,081,625

Ohio (4.73%)
Akron Bath Copley, Ohio JT TWP
Hospital District Rev. Hospital
Facilities, Summa Health
Systems, Series A;
5.38%; 11/15/2018 5,760,000 5,515,200
5.38%; 11/15/2024 1,000,000 945,000
Lorain County, Ohio Hospital Ref.
Bonds, Humility Mary Health
Care, Series A; 5.90%; 12/15/2008 3,270,000 3,552,038

10,012,238
Oklahoma (1.16%)
Tulsa Industrial Authority Rev. Bonds,
St. John Medical Center Project,
Series 1994;
6.25%; 2/15/2014 1,280,000 1,379,200
6.25%; 2/15/2017 1,000,000 1,073,750

2,452,950
Rhode Island (1.49%)
Rhode Island State Industrial Facilities
Corp. Marine Term Rev. Bonds,
Mobil Oil Refining;
6.00%; 11/1/2014 2,900,000 3,146,500

South Carolina (4.72%)
Darlington County, South Carolina
Pollution Control Rev. Bonds for
Carolina Power & Light;
6.60%; 11/1/2010 1,000,000 1,091,250
Greenville Hospital System,
South Carolina Hospital Fac.
Rev. Ref. Bonds; 6.00%; 5/1/2020 $ 230,000 $ 255,587
Series C; 5.50%; 5/1/2016 2,500,000 2,553,125
Oconee County, South Carolina
Pollution Control Rev. Ref. Bonds,
Duke Energy Corp. Project, Series
1993; 5.80%; 4/1/2014 2,000,000 2,132,500
York County, South Carolina Exempt
Fac. Industrial Rev. Bonds for
Hoechst Celanese Project,
Series 1994; 5.70%; 1/1/2024 2,000,000 2,020,000
York County, South Carolina Pollution
Control Rev. Bonds, Bowater, Inc.
Project; 7.63%; 3/1/2006 1,700,000 1,946,500

9,998,962
South Dakota (0.51%)
Pennington County, South Dakota
Pollution Control Rev. Ref. Bonds
for Black Hills Power & Light Co.
Project; 6.70%; 6/1/2010 1,000,000 1,073,750

Tennessee (1.00%)
County of Louden, Tennessee Industrial
Development Solid Waste;
6.20%; 2/1/2023 1,950,000 2,108,437

Texas (11.39%)
Brazos River Authority, Texas Rev.
Industrial Bonds Project-A Houston
Industries, Inc.; 5.13%; 5/1/2019 2,000,000 1,992,500
Cass County, Texas Industrial
Dev. Corp. Pollution Control
Rev. Bonds for International
Paper Co. - Series B
5.35%; 4/1/2012 3,750,000 3,871,875
Guadalupe-Blanco River Authority,
Texas Industrial Dev. Corp.
Pollution Control Rev., E I Du Pont
1982 Series A; 6.35%; 7/1/2022 2,500,000 2,765,625
Gulf Coast Waste Disposal Authority
Texas Waste Disposal Rev., Valero
Energy Corp. Project;
5.70%; 4/1/2032 2,000,000 2,005,000
IDC Port of Corpus Christi Rev. Ref.
Bonds, Port Fac. Rev. Bonds,
Valero Energy Corp.; 5.13%; 4/1/2009 1,000,000 1,002,500
IDC Port of Corpus Christi Rev. Ref.
Bonds, Valero Refining & Marketing
Co. Project; 5.40%; 4/1/2018 2,000,000 1,970,000
Matagorda County, Texas
Navigational District No. 1 Pollution
Control Rev. Bonds for Central
Power & Light Co.;
6.00%; 7/1/2028 1,000,000 1,047,500
Milam County, Texas Industrial Dev.
Corp. Pollution Control Rev. Ref.
Bonds, Alcoa Project;
5.65%; 12/1/2012 2,000,000 2,115,000
Texas (Continued)
Red River Authority, Texas Pollution
Control Rev. Bonds, Hoechst
Celanese Corp. Project;
5.20%; 5/1/2007 $2,825,000 $ 2,863,844
San Antonio Texas Electric & Gas,
Series A; 4.50%; 2/1/2021 3,715,000 3,403,869
Tarrant County, Texas Health Fac.
Dev. Corp., Harris Methodist Health
System Rev. Bonds; 5.90%; 9/1/2006 1,000,000 1,111,250

24,148,963
Utah (0.92%)
Intermountain Power Agency, Utah
Power Supply, Rev. Ref. Bonds,
Series 1996D; 5.00%; 7/1/2021 2,000,000 1,942,500

Virginia (2.80%)
Albemarle County, Virginia IDA
Hospital Rev. Ref. Bonds, Martha
Jefferson Hospital; 5.50%; 10/1/2015 1,900,000 1,942,750
Bedford County, Virginia Industrial Dev.
Nekoosa Packing Corp., Georgia
Pacific; 5.60%; 12/1/2025 2,500,000 2,493,750
Chesapeake, Virginia IDA Rev. Ref.
Bonds for Cargill, Inc. Project;
5.88%; 3/1/2013 1,410,000 1,496,362

5,932,862
Washington (2.76%)
City of Seattle, Washington Municipal
Light and Power Rev. Bonds;
1993; 5.10%; 11/1/2005 1,950,000 2,057,250
1994; 6.63%; 7/1/2016 1,000,000 1,141,250
5.00%; 7/1/2018 1,225,000 1,212,750
1998; 4.88%; 6/1/2021 1,500,000 1,440,000

5,851,250
West Virginia (6.76%)
Braxton County, West Virginia Solid
Waste Disposal Rev. Weyerhaeuser
Co.; 5.40%; 5/1/2025 2,000,000 1,980,000
Marshall County, West Virginia
Pollution Control Rev. Bonds
for Ohio Power Co. Project;
Series C; 6.85%; 6/1/2022 1,200,000 1,293,000
Series D; 5.90%; 4/1/2022 4,500,000 4,764,375
Pleasants County, West Virgina
Pollution Control Rev. Bonds
for Potomac Edison Co.;
6.15%; 5/1/2015 2,000,000 2,150,000
Putnam County, West Virginia
Pollution Control Rev. Bonds for
Appalachian Power Co. Project,
Series C; 6.60%; 7/1/2019 3,875,000 4,131,719

14,319,094
Wisconsin (2.79%)
Kaukauna, Wisconsin Pollution
Control Rev. Ref. Bonds for
International Paper Co. Project,
Series A; 5.40%; 5/1/2004 $3,610,000 $ 3,749,887
Wisconsin Health & Educational
Fac. Authority Rev. Bonds;
Series 1995; Franciscan Skemp
Medical Center, Inc.;
5.88%; 11/15/2010 1,000,000 1,076,250
6.13%; 11/15/2015 1,000,000 1,078,750

5,904,887

Total Long-Term Tax-Exempt Bonds 204,256,407

Other (1.72%)

Municipal Fund for Temporary Investment -
Munifund 3,650,000 3,650,000

Total Portfolio Investments (98.18%) 207,906,407

Cash, receivables and other assets,
net of liabilities (1.82%) 3,845,492

Total Net Assets (100.00%) $211,751,899

(a) Restricted security - See Note 4 to the financial statements.

FINANCIAL HIGHLIGHTS
(unaudited)

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

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.59 $11.44 $11.17 $11.42 $10.27
Income from Investment Operations:
Net Investment Income(b).............................. .35 .71 .75 .76 .78
Net Realized and Unrealized Gain (Loss) on Investments (.29) .16 .33 (.25) 1.16
Total from Investment Operations .06 .87 1.08 .51 1.94
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.35) (.72) (.81) (.76) (.78)
Distributions from Capital Gains...................... (.03) -- -- -- (.01)
Total Dividends and Distributions (.38) (.72) (.81) (.76) (.79)

Net Asset Value, End of Period........................... $11.27 $11.59 $11.44 $11.17 $11.42

Total Return(c).......................................... .47%(d) 7.76% 10.15% 4.74% 19.73%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $155,111 $148,081 $126,427 $113,437 $106,962
Ratio of Expenses to Average Net Assets(b)............ 1.02%(e) .95% .95% .95% .94%
Ratio of Net Investment Income to Average Net Assets.. 6.06%(e) 6.19% 6.70% 6.85% 7.26%
Portfolio Turnover Rate............................... 49.9%(e) 15.2% 12.8% 3.4% 5.1%

PRINCIPAL BOND FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(f)
Net Asset Value, Beginning of Period..................... $11.58 $11.42 $11.15 $11.41 $10.19
Income from Investment Operations:
Net Investment Income(b).............................. .30 .63 .67 .67 .63
Net Realized and Unrealized Gain (Loss) on Investments (.29) .16 .31 (.25) 1.19
Total from Investment Operations .01 .79 .98 .42 1.82
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.30) (.63) (.71) (.68) (.60)
Distributions from Capital Gains...................... (.03) -- -- -- --
Total Dividends and Distributions (.33) (.63) (.71) (.68) (.60)

Net Asset Value, End of Period........................... $11.26 $11.58 $11.42 $11.15 $11.41

PRINCIPAL BOND FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(g)
Net Asset Value, Beginning of Period..................... $11.59 $11.43 $11.16 $11.27
Income from Investment Operations:
Net Investment Income(b).............................. .32 .63 .71 .51
Net Realized and Unrealized Gain (Loss) on Investments (.29) .16 .30 (.13)
Total from Investment Operations .03 .79 1.01 .38
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.31) (.63) (.74) (.49)
Distributions from Capital Gains...................... (.03) -- -- --
Total Dividends and Distributions (.34) (.63) (.74) (.49)

Net Asset Value, End of Period........................... $11.28 $11.59 $11.43 $11.16

Total Return(c).......................................... .22%(d) 7.05% 9.49% 3.75%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $15,213 $12,196 $5,976 $525
Ratio of Expenses to Average Net Assets(b)............ 1.56%(e) 1.45% 1.45% 1.28%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.52%(e) 5.66% 6.11% 6.51%(e)
Portfolio Turnover Rate............................... 49.9%(e) 15.2% 12.8% 3.4%(e)
<FN>

* Six months ended April 30, 1999
</FN>

</TABLE>

See accompanying notes.

Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.63 $11.51 $11.26 $11.31 $10.28
Income from Investment Operations:
Net Investment Income................................. .35 .70 .70 .70 .71
Net Realized and Unrealized Gain (Loss) on Investments (.15) .12 .29 (.05) 1.02
Total from Investment Operations .20 .82 .99 .65 1.73
Less Dividends from Net Investment Income:............... (.35) (.70) (.74) (.70) (.70)

Net Asset Value, End of Period........................... $11.48 $11.63 $11.51 $11.26 $11.31

Total Return(c).......................................... 1.77%(d) 7.38% 9.23% 6.06% 17.46%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $250,496 $251,455 $249,832 $259,029 $261,128
Ratio of Expenses to Average Net Assets............... .85%(e) .86% .84% .81% .87%
Ratio of Net Investment Income to Average Net Assets.. 5.98%(e) 6.07% 6.19% 6.31% 6.57%
Portfolio Turnover Rate............................... 22.7%(e) 17.1% 10.8% 25.9% 10.1%

PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(f)
Net Asset Value, Beginning of Period..................... $11.60 $11.50 $11.23 $11.29 $10.20
Income from Investment Operations:
Net Investment Income................................. .31 .62 .64 .61 .56
Net Realized and Unrealized Gain (Loss) on Investments (.15) .12 .29 (.05) 1.07
Total from Investment Operations .16 .74 .93 .56 1.63
Less Dividends from Net Investment Income:............... (.32) (.64) (.66) (.62) (.54)

Net Asset Value, End of Period........................... $11.44 $11.60 $11.50 $11.23 $11.29

PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(g)
Net Asset Value, Beginning of Period..................... $11.55 $11.42 $11.21 $11.27
Income from Investment Operations:
Net Investment Income................................. .31 .61 .64 .47
Net Realized and Unrealized Gain (Loss) on Investments (.15) .13 .24 (.08)
Total from Investment Operations .16 .74 .88 .39
Less Dividends from Net Investment Income:............... (.31) (.61) (.67) (.45)

Net Asset Value, End of Period........................... $11.40 $11.55 $11.42 $11.21

Total Return(c).......................................... 1.36%(d) 6.66% 8.19% 3.76%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $10,559 $8,156 $4,152 $481
Ratio of Expenses to Average Net Assets............... 1.50%(e) 1.64% 1.79% 1.18%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.33%(e) 5.39% 5.21% 5.84%(e)
Portfolio Turnover Rate............................... 22.7%(e) 17.1% 10.8% 25.9%(e)
<FN>

* Six months ended April 30, 1999
</FN>
</TABLE>

See accompanying notes.

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

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $7.63 $8.52 $8.27 $8.06 $7.83
Income from Investment Operations:
Net Investment Income................................. .34 .64 .67 .68 .68
Net Realized and Unrealized Gain (Loss) on Investments .03 (.88) .31 .23 .20
Total from Investment Operations .37 (.24) .98 .91 .88
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.32) (.64) (.73) (.70) (.65)
Excess Distribution of Net Investment Income(i)....... -- (.01) -- -- --
Total Dividends and Distributions (.32) (.65) (.73) (.70) (.65)

Net Asset Value, End of Period........................... $7.68 $7.63 $8.52 $8.27 $8.06

Total Return(c).......................................... 4.85%(d) (3.18)% 12.33% 11.88% 11.73%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $32,934 $33,474 $38,239 $28,432 $23,396
Ratio of Expenses to Average Net Assets............... 1.39%(e) 1.40% 1.22% 1.26% 1.45%
Ratio of Net Investment Income to Average Net Assets.. 8.76%(e) 7.71% 7.99% 8.49% 8.71%
Portfolio Turnover Rate............................... 78.3%(e) 65.9% 39.2% 18.8% 40.3%

PRINCIPAL HIGH YIELD FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(f)
Net Asset Value, Beginning of Period..................... $7.59 $8.47 $8.22 $8.05 $7.64
Income from Investment Operations:
Net Investment Income................................. .32 .57 .62 .60 .53
Net Realized and Unrealized Gain (Loss) on Investments .02 (.87) .28 .20 .38
Total from Investment Operations .34 (.30) .90 .80 .91
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.29) (.57) (.65) (.63) (.50)
Excess Distribution of Net Investment Income(i)....... -- (.01) -- -- --
Total Dividends and Distributions (.29) (.58) (.65) (.63) (.50)

Net Asset Value, End of Period........................... $7.64 $7.59 $8.47 $8.22 $8.05

Total Return(c).......................................... 4.46%(d) (3.93)% 11.31% 10.46% 12.20%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $8,442 $8,527 $6,558 $2,113 $633
Ratio of Expenses to Average Net Assets............... 1.97%(e) 2.34% 2.13% 2.38% 2.10%(e)
Ratio of Net Investment Income to Average Net Assets.. 8.18%(e) 6.78% 7.03% 7.39% 7.78%(e)
Portfolio Turnover Rate............................... 78.3%(e) 65.9% 39.2% 18.8% 40.3%(e)

PRINCIPAL HIGH YIELD FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(g)
Net Asset Value, Beginning of Period..................... $7.51 $8.40 $8.20 $8.21
Income from Investment Operations:
Net Investment Income................................. .31 .57 .62 .46
Net Realized and Unrealized Gain (Loss) on Investments .02 (.87) .26 (.03)
Total from Investment Operations .33 (.30) .88 .43
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.29) (.58) (.68) (.44)
Excess Distribution of Net Investment Income(i)...... . -- (.01) -- --
Total Dividends and Distributions (.29) (.59) (.68) (.44)

Net Asset Value, End of Period........................... $7.55 $7.51 $8.40 $8.20

Total Return(c).......................................... 4.42%(d) (3.97)% 11.14% 5.60%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,739 $2,734 $1,961 $124
Ratio of Expenses to Average Net Assets............... 2.11%(e) 2.28% 2.42% 1.59%(e)
Ratio of Net Investment Income to Average Net Assets.. 8.04%(e) 6.84% 6.70% 7.84%(e)
Portfolio Turnover Rate............................... 78.3%(e) 65.9% 39.2% 18.8%(e)
<FN>

* Six months ended April 30, 1999
</FN>
</TABLE>

See accompanying notes.

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

<TABLE>
<CAPTION>
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class A shares 1999* 1998 1997 1996(h)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $9.93 $9.88 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .28 .57 .61 .38
Net Realized and Unrealized Gain (Loss) on Investments (.13) .06 .03 (.04)
Total from Investment Operations .15 .63 .64 .34
Less Dividends from Net Investment Income................ (.28) (.58) (.65) (.35)

Net Asset Value, End of Period........................... $9.80 $9.93 $9.88 $9.89

PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class B shares 1999* 1998 1997 1996(h)
Net Asset Value, Beginning of Period..................... $9.98 $9.90 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .26 .54 .56 .36
Net Realized and Unrealized Gain (Loss) on Investments .14 .06 .04 (.05)
Total from Investment Operations .40 .60 .60 .31
Less Dividends from Net Investment Income................ (.52) (.54) (.59) (.32)

Net Asset Value, End of Period........................... $9.86 $9.98 $9.90 $9.89

Total Return(c).......................................... 1.34%(d) 6.24% 6.31% 3.32%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,534 $1,705 $625 $112
Ratio of Expenses to Average Net Assets(b)............ 1.35%(e) 1.22% 1.24% 1.15%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.34%(e) 5.44% 5.84% 5.75%(e)
Portfolio Turnover Rate............................... 23.5%(e) 23.8% 17.4% 16.5%(e)

PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(g)
Net Asset Value, Beginning of Period..................... $9.93 $9.85 $9.88 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .24 .52 .54 .36
Net Realized and Unrealized Gain (Loss) on Investments (.13) .07 .03 (.06)
Total from Investment Operations .11 .59 .57 .30
Less Dividends from Net Investment Income................ (.24) (.51) (.60) (.32)

Net Asset Value, End of Period........................... $9.80 $9.93 $9.85 $9.88

Total Return(c).......................................... 1.16%(d) 6.12% 6.01% 3.24%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $3,022 $2,034 $606 $83
Ratio of Expenses to Average Net Assets(b)............ 1.60%(e) 1.44% 1.48% 1.40%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.09%(e) 5.21% 5.60% 5.64%(e)
Portfolio Turnover Rate............................... 23.5%(e) 23.8% 17.4% 16.5%(e)
<FN>
* Six months ended April 30, 1999
</FN>
</TABLE>

See accompanying notes.
FINANCIAL HIGHLIGHTS (Continued)
(unaudited)
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):

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

<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $12.59 $12.38 $12.04 $11.98 $10.93
Income from Investment Operations:
Net Investment Income................................. .31 .60 .63 .64 .65
Net Realized and Unrealized Gain (Loss) on Investments (.12) .22 .39 .07 1.05
Total from Investment Operations .19 .82 1.02 .71 1.70
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.30) (.61) (.68) (.65) (.65)
Distributions from Capital Gains...................... (.01) -- -- -- --
Total Dividends and Distributions (.31) (.61) (.68) (.65) (.65)

Net Asset Value, End of Period........................... $12.47 $12.59 $12.38 $12.04 $11.98

Total Return(c)......................................... 1.49%(d) 6.76% 8.71% 6.08% 16.03%

Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $199,617 $204,865 $193,007 $187,180 $179,715
Ratio of Expenses to Average Net Assets............... .80%(e) .83% .79% .78% .83%
Ratio of Net Investment Income to Average Net Assets.. 4.80%(e) 4.83% 5.14% 5.34% 5.67%
Portfolio Turnover Rate............................... 21.7%(e) 6.6% 8.9% 9.8% 17.6%

PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(f)
Net Asset Value, Beginning of Period..................... $12.59 $12.39 $12.02 $11.96 $10.56
Income from Investment Operations:
Net Investment Income................................. .27 .53 .55 .55 .50
Net Realized and Unrealized Gain (Loss) on Investments (.12) .20 .40 .06 1.38
Total from Investment Operations .15 .73 .95 .61 1.88
Less Dividends and Distributions:
Dividends from Net Investment Income................. (.26) (.53) (.58) (.55) (.48)
Distributions from Capital Gains..................... (.01) -- -- -- --
Total Dividends and Distributions (.27) (.53) (.58) (.55) (.48)

Net Asset Value, End of Period........................... $12.47 $12.59 $12.39 $12.02 $11.96

* Six months ended April 30, 1999
</FN>
</TABLE>

See accompanying notes.

Notes to Financial Highlights

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

<TABLE>
<CAPTION>
Former Fund Name New Fund Name
<S> <C>
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
</TABLE>

(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the following funds would have had per share net investment
income and the ratios of expenses to average net assets as shown:

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

<S> <C> <C> <C> <C>
Principal Bond Fund, Inc.:**
Class A 1998 $.70 1.04% $121,092
1997 .74 .98 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999

Class B 1998 .62 1.81 26,130
1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(b) .62 1.62(d) 300

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

Principal Limited Term Bond Fund, Inc.:
Class A 1999* .28 1.08(e) 11,013
1998 .55 1.13 76,952
1997 .59 1.15 46,271
1996(f) .37 1.16(d) 22,716

Class B 1999* .23 1.92(e) 6,021
1998 .47 2.36 11,537
1997 .46 3.82 6,528
1996(h) .34 1.94(d) 259

Class R 1999* .23 2.10(e) 6,053
1998 .46 2.22 11,781
1997 .43 2.95 6,831
1996(g) .35 1.79(d) 60

<FN>
* Six Months ended April 30, 1999.
** The Manager ceased its waiver of expenses for Principal Bond Fund, Inc. on
October 31, 1998.
</FN>
</TABLE>

(c) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds' Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Principal
Management Corporation. Additionally, the Income Funds' Class B shares
incurred unrealized losses on investments during the initial interim period
as follows. This represents Class B share activities of each fund prior to
the initial public offering of Class B shares:

Per Share Per Share
Net Investment Unrealized
Income (Loss)

Principal Bond Fund, Inc. $.01 $ --
Principal Government Securities Income Fund, Inc. .01 (.02)
Principal High Yield Fund, Inc. .01 (.03)
Principal Tax-Exempt Bond Fund, Inc. -- (.05)

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

Per Share
Unrealized (Loss)

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

(h) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole shareholder, Principal Life
Insurance Company during the period. Additionally, Class A shares incurred
unrealized losses on investments of $.12 per share during the initial
interim period. With respect to Class B shares, no net investment income
was recognized for the period from initial purchase of shares on February
27, 1996 through February 28, 1996. Additionally, Class B shares incurred
unrealized losses on investments of $.02 per share during the initial
interim period. This represents Class A share and Class B share activities
of the fund prior to the initial public offering of both classes of shares.

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

April 30, 1999

STATEMENT OF ASSETS AND LIABILITIES
(unaudited)

Principal Cash
Management
MONEY MARKET FUND Fund, Inc.

Assets
Investment in securities -- at value
(approximates cost) (Note 1)........... $355,406,774
Cash............................. 3,765,877
Receivables:
Interest .............................. 541,794
Capital Shares sold.................... 2,264,890
Other assets.............................. 27,346

Total Assets 362,006,681

Liabilities
Accrued expenses.......................... 233,622
Payables:
Capital Shares reacquired.............. 3,208,205

Total Liabilities 3,441,827

Net Assets Applicable to
Outstanding Shares ..................... $358,564,854

Net Assets Consist of:
Capital Stock............................. $ 3,585,649
Additional paid-in capital................ 354,979,205

Total Net Assets $358,564,854

Capital Stock (par value: $.01 a share):
Shares authorized......................... 2,000,000,000

Net Asset Value Per Share:
Class A: Net Assets....................... $339,509,079
Shares issued and outstanding.... 339,509,079
Net asset value per share........ $1.000

Class B: Net Assets....................... $4,390,444
Shares issued and outstanding.... 4,390,444
Net asset value per share(a)..... $1.000

Class R: Net Assets....................... $14,665,331
Shares issued and outstanding.... 14,665,331
Net asset value per share........ $1.000

(a) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.

See accompanying notes.

Six Months Ended April 30, 1999

STATEMENT OF OPERATIONS
(unaudited)

Principal Cash Management
MONEY MARKET FUND Fund, Inc.

Net Investment Income
Interest income......................... $8,598,084

Expenses:
Management and investment
advisory fees (Note 3)............ 737,958
Distribution and shareholder
servicing fees (Notes 1 and 3).... 31,346
Transfer and administrative
services (Notes 1 and 3).......... 279,928
Registration fees (Note 1)........... 46,715
Custodian fees....................... 4,038
Auditing and legal fees.............. 2,212
Directors' fees...................... 3,662
Other................................ 22,390

Total Expenses 1,128,249

Net Investment Income $7,469,835

See accompanying notes.

STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)

Principal Cash Management
MONEY MARKET FUND Fund, Inc.

Six Months Year
Ended Ended
April 30, October 31,
1999 1998

Operations
Net investment income .................. $ 7,469,835 $ 28,360,062

Dividends to Shareholders from Net
Investment Income:
Class A.............................. (7,138,135) (28,008,033)
Class B.............................. (73,706) (70,945)
Class R .................... (257,994) (281,084)

Total Dividends (7,469,835) (28,360,062)

Capital Share Transactions (Note 4)
Shares sold:
Class A.............................. 402,263,011 2,363,859,504
Class B.............................. 4,632,247 5,040,642
Class R ..................... 12,655,514 11,918,726

Shares issued in reinvestment of dividends:
Class A.............................. 6,920,075 26,466,497
Class B.............................. 70,654 66,630
Class R ...................... 249,825 273,695

Shares redeemed:
Class A.............................. (364,591,454) (2,931,480,148)
Class B.............................. (3,914,821) (2,497,006)
Class R ............................. (8,653,782) (6,074,611)

Net Increase (Decrease) in Net Assets
from Capital Share Transactions 49,631,269 (532,426,071)

Total Increase (Decrease) 49,631,269 (532,426,071)

Net Assets
Beginning of period..................... 308,933,585 841,359,656

End of period........................... $358,564,854 $ 308,933,585

See accompanying notes.

NOTES TO FINANCIAL STATEMENTS
(unaudited)

Principal Cash Management Fund, Inc.

Note 1 -- Significant Accounting Policies

Principal Cash Management Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as an open-end diversified
management investment company and operates in the mutual fund industry.

A significant portion of the shares issued by Principal Cash Management Fund,
Inc. Class A shares has been issued through Principal Financial Securities, Inc.
("PFS"), a previously affiliated broker-dealer. PFS was sold in January, 1998.
Subsequent to the sale, assets of PFS clients of approximately $536 million were
redeemed.

Shares of the Fund are sold at net asset value; no sales charge applies to
purchases of the Fund. Certain purchases of Class A shares of the Fund may be
subject to a contingent deferred sales charge ("CDSC") if redeemed within
eighteen months of purchase. Class B shares are sold without an initial sales
charge, but are subject to a declining ("CDSC") on certain redemptions made
within six years of purchase. Class R shares are sold without an initial sales
charge and are not subject to a CDSC. Class B shares and Class R shares bear
higher ongoing distribution fees than Class A shares. Class B shares
automatically convert into Class A shares based on relative net asset value
(without a sales charge) seven years after purchase. Class R shares
automatically convert into Class A shares based on relative net asset value
(without a sales charge) four years after purchase. All classes of shares in the
Fund represent interests in the same portfolio of investments, and will vote
together as a single class except where otherwise required by law or as
determined by the Fund's Board of Directors. In addition, the Board of Directors
declares separate dividends on each class.

The Fund allocates daily all income, expenses (other than class-specific
expenses), and realized gains or losses to each class of shares based upon the
relative proportion of the number of settled shares outstanding of each class.
Expenses specifically attributable to a particular class are charged directly to
such class. Class-specific expenses charged to each class during the period
ended April 30, 1999, which are included in the corresponding captions of the
Statement of Operations, were as follows:

<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Cash Management Fund, Inc. N/A $6,415 $24,931 $133,083 $523 $2,076 $9,443 $5,179 $4,393
</TABLE>

The Fund values its securities at amortized cost, which approximates market.
Under the amortized cost method, a security is valued by applying a constant
yield to maturity of the difference between the principal amount due at maturity
and the cost of the security to the fund.

The Fund records investment transactions generally on the trade date. The
identified cost basis has been used in determining the net realized gain or loss
from investment transactions. Interest income is recognized on an accrual basis.

The Fund may, pursuant to an exemptive order issued by the Securities and
Exchange Commission, transfer uninvested funds into a joint trading account. The
order permits the Fund's cash balance to be deposited into a single joint
account along with the cash of other registered investment companies managed by
Principal Management Corporation (the "Manager"). These balances may be invested
in one or more short-term instruments.

The Fund declares all net investment income and any realized gains and losses
from investment transactions as dividends daily to shareholders of record as of
that day. Dividends and distributions to shareholders from net investment income
and net realized gain from investments are determined in accordance with federal
income tax regulations, which may differ from generally accepted accounting
principles. Permanent book and tax basis differences are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Reclassifications made for the year
ended October 31, 1998 were not material.

The Fund's investments are with various issuers in various industries. The
Schedule of Investments contained herein summarizes concentration of credit risk
by issuer and industry.

Note 2 -- Federal Income Taxes

No provision for federal income taxes is considered necessary because the fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes approximates that used for financial
reporting purposes.

Note 3 -- Management Agreement and Transactions With Affiliates

The Fund has agreed to pay investment advisory and management fees to Principal
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Financial Services, Inc.) computed at an annual
percentage rate of the Fund's average daily net assets. The annual rate used in
this calculation for the Fund is as follows:

<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)
First Next Next Next Over
$100 $100 $100 $100 $400

<S> <C> <C> <C> <C> <C>
Principal Cash Management Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
</TABLE>

The Fund also reimburses the Manager for transfer and administrative services,
including the cost of accounting, data processing, supplies and other services
rendered.

For the year ended October 31, 1998, the Manager voluntarily waived a portion of
its fee for Class B shares in the amount of $1,343. The Manager ceased its
waiver of expenses March 1, 1998.

Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. The aggregate amount of these charges retained by
Princor Financial Services Corporation for the period ended April 30, 1999, was
$2,173 and $31,486 for Fund for Class A and Class B shares, respectively.

No brokerage commissions were paid by the Fund to affiliated broker dealers
during the periods.

The Fund adopted a distribution plan with respect to Class B shares that
provides for distribution and shareholder servicing fees computed at an annual
rate of up to 1.00% of the average daily net assets attributable to Class B
shares of the fund. The Fund also adopted a distribution plan with respect to
Class R shares that provides for distribution and shareholder servicing fees
computed at an annual rate of up to .75% of the average daily net assets
attributable to Class R shares of the fund. Distribution and shareholder
servicing fees are paid to Princor Financial Services Corporation; a portion of
the fees are subsequently remitted to retail dealers. Pursuant to the
distribution agreements, fees unused by the principal underwriter at the end of
the fiscal year are returned to the Fund. There are no distribution or
shareholder servicing fees with respect to Class A shares.

Note 3 -- Management Agreement and Transactions With Affiliates (Continued)

At April 30, 1999, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company, benefit plans sponsored on behalf of Principal Life
Insurance Company and several joint ventures (in each of which a subsidiary of
Principal Life Insurance Company is a participant) owned shares of the Fund as
follows:

Class A Class B Class R

Principal Cash Management Fund, Inc. 25,268,242 31,069 28,711

Note 4 -- Capital Share Transactions

Transactions in Capital Shares were as follows:

Principal Cash
Management
Fund, Inc.

Periods Ended April 30, 1999:
Shares sold:
Class A ................................................. 382,756,186
Class B ................................................ 4,632,247
Class R ................................................. 12,655,514
Shares issued in connection with the acquisition of
Principal Tax-Exempt Cash Management Fund, Inc.:
Class A .................................................. 19,506,825
Class B .................................................. N/A
Class R ................................................. N/A
Shares issued in reinvestment of dividends:
Class A ................................................ 6,920,075
Class B ................................................ 70,654
Class R ................................................. 249,825
Shares redeemed:
Class A ................................................ (364,591,454)
Class B ............................................... (3,914,821)
Class R ................................................ (8,653,782)

Net Increase 49,631,269

Year Ended October 31, 1998:
Shares sold:
Class A ................................................. 2,363,859,504
Class B ................................................ 5,040,642
Class R ................................................. 11,918,726
Shares issued in reinvestment of dividends:
Class A .................................................. 26,466,497
Class B .................................................. 66,630
Class R ................................................. 273,695
Shares redeemed:
Class A ................................................ (2,931,480,148)
Class B ................................................ (2,497,006)
Class R ................................................. (6,074,611)

Net Decrease (532,426,071)

Note 5 -- Line of Credit

The Fund participates with other funds and portfolios managed by Principal
Management Corporation in an unsecured joint line of credit with a bank, which
allows the funds to borrow up to $60,000,000, collectively. Borrowings are made
solely to facilitate the handling of unusual and/or unanticipated short-term
cash requirements. Interest is charged to each fund, based on its borrowings, at
a rate equal to the Fed Funds Rate plus .50%. Additionally, a commitment fee is
charged at the annual rate of .08% on the average unused portion of the line of
credit. The commitment fee is allocated among the participating funds and
portfolios in proportion to their average net assets during each quarter. At
April 30, 1999, the Fund had no outstanding borrowings under the line of credit.

Note 6 -- Acquisition of Principal Tax-Exempt Cash Management Fund, Inc.

On April 8, 1999, Principal Cash Management Fund, Inc. acquired all the assets
and assumed all the liabilities of Principal Tax-Exempt Cash Management Fund,
Inc. pursuant to a plan of acquisition approved by shareholders of Principal
Tax-Exempt Cash Management Fund, Inc. on April 7, 1999. The acquisition was
accomplished by a tax-free exchange of 19,506,825 shares to Principal Cash
Management Fund, Inc. (valued at $19,506,825) for the 19,506,825 shares from
Principal Tax-Exempt Cash Management Fund, Inc. outstanding on April 8, 1999.
The aggregate net assets of Principal Cash Management Fund, Inc. immediately
before the acquisition were approximately $355,081,000.

SCHEDULES OF INVESTMENTS

PRINCIPAL CASH MANAGEMENT FUND, INC.

Principal
Amount Value

Commercial Paper (88.70%)

Asset-Backed Securities (13.84%)
CXC, INC.;
4.86%; 5/5/1999 $4,500,000 $ 4,498,785
5.40%; 5/6/1999 1,000,000 999,550
4.85%; 5/10/1999 1,000,000 999,057
4.85%; 5/17/1999 2,000,000 1,996,220
4.81%; 5/20/1999 1,250,000 1,247,161
4.85%; 5/28/1999 3,500,000 3,488,212
4.82%; 6/18/1999 5,250,000 5,217,666
Corporate Asset Funding Co.;
4.85%; 5/3/1999 3,000,000 3,000,000
4.84%; 5/10/1999 2,500,000 2,497,647
4.85%; 5/12/1999 1,125,000 1,123,636
4.85%; 5/13/1999 3,000,000 2,995,958
4.80%; 6/22/1999 2,000,000 1,986,667
4.80%; 7/19/1999 4,275,000 4,231,110
Corporate Receivables Corp.;
4.85%; 5/4/1999 2,000,000 1,999,730
4.83%; 5/7/1999 2,025,000 2,023,913
4.85%; 5/10/1999 4,100,000 4,096,133
4.85%; 5/26/1999 1,000,000 996,901
4.81%; 6/10/1999 5,250,000 5,223,345
4.83%; 6/21/1999 1,002,000 995,413
49,617,104

Business Credit Institutions (7.65%)
American Express Credit Corp.;
4.80%; 12/20/1999 1,250,000 1,211,500
Aon Corp.;
4.86%; 5/13/1999 1,300,000 1,298,245
4.85%; 5/17/1999 4,500,000 4,491,512
4.82%; 5/24/1999 3,000,000 2,991,565
4.85%; 6/1/1999 3,500,000 3,486,326
General Electric Capital Corp.;
4.82%; 6/3/1999 475,000 473,028
4.82%; 6/3/1999 650,000 647,302
4.81%; 8/9/1999 500,000 493,453
4.83%; 8/9/1999 1,175,000 1,159,551
4.80%; 8/27/1999 725,000 713,787
4.79%; 8/31/1999 1,000,000 984,033
4.78%; 9/3/1999 1,200,000 1,180,402
4.81%; 9/10/1999 425,000 417,618
4.83%; 9/10/1999 550,000 540,407
4.82%; 9/13/1999 750,000 736,645
4.83%; 9/14/1999 750,000 736,516
4.79%; 10/19/1999 425,000 415,443
4.81%; 10/19/1999 1,775,000 1,734,826
4.78%; 11/5/1999 1,350,000 1,316,660
4.88%; 11/23/1999 675,000 656,334
4.92%; 11/23/1999 600,000 583,272
4.90%; 11/29/1999 475,000 461,423
4.82%; 12/10/1999 725,000 703,548
27,433,396

Commercial Banks (2.71%)
J.P. Morgan & Co., Inc.;
4.85%; 7/12/1999 $3,625,000 $ 3,590,814
4.78%; 7/13/1999 3,250,000 3,219,361
4.82%; 12/10/1999 2,000,000 1,940,821
4.82%; 12/10/1999 1,000,000 970,411
9,721,407

Computer & Office Equipment (0.33%)
Xerox Credit Corp.;
5.11%; 3/21/2000 1,200,000 1,199,521

Crude Petroleum & Natural Gas (2.44%)
Chevron U.K. Investment PLC;
4.82%; 8/19/1999 3,475,000 3,424,751
4.83%; 8/20/1999 3,000,000 2,956,128
4.83%; 8/23/1999 2,400,000 2,363,936
8,744,815

Crushed & Broken Stone (4.64%)
Vulcan Materials Co.;
4.80%; 6/3/1999 2,000,000 1,991,733
4.80%; 6/17/1999 4,000,000 3,976,000
4.80%; 6/29/1999 5,500,000 5,458,200
4.81%; 6/29/1999 3,680,000 3,651,974
4.80%; 6/30/1999 1,575,000 1,562,820
16,640,727

Cutlery, Handtools &
Hardware (0.62%)
Stanley Works; 4.78%; 6/24/1999 2,250,000 2,234,465

Department Stores (4.32%)
Sears Roebuck Acceptance Corp.;
4.89%; 5/24/1999 4,250,000 4,237,877
4.81%; 5/26/1999 3,300,000 3,289,859
4.79%; 6/3/1999 1,150,000 1,145,257
4.83%; 6/4/1999 1,100,000 1,095,277
4.85%; 6/9/1999 1,750,000 1,741,277
4.85%; 6/11/1999 4,000,000 3,978,983
15,488,530

Drugs (5.17%)
Receivables Capital Corp.;
4.86%; 5/4/1999 2,750,000 2,749,629
4.86%; 5/5/1999 1,300,000 1,299,649
4.86%; 5/5/1999 4,000,000 3,998,920
4.86%; 5/6/1999 4,750,000 4,748,076
4.85%; 5/7/1999 3,750,000 3,747,979
4.82%; 5/21/1999 1,000,000 997,590
4.84%; 6/16/1999 1,000,000 994,085
18,535,928

Electric Services (0.59%)
Southern California Edison;
4.82%; 7/16/1999 2,150,000 2,128,698

Farm & Garden Machinery (2.86%)
Caterpillar Financial Services Corp.;
4.80%; 6/2/1999 825,000 821,700
4.83%; 6/18/1999 2,125,000 2,111,885
4.83%; 6/18/1999 3,000,000 2,981,485
4.83%; 6/25/1999 650,000 645,378
Deere & Co.;
4.80%; 6/14/1999 $1,000,000 $ 994,400
4.78%; 8/3/1999 750,000 740,839
4.80%; 8/13/1999 2,000,000 1,972,800
10,268,487

Federally & Federally Sponsored
Credit (0.42%)
Private Export Funding Corp.;
4.83%; 6/15/1999 1,500,000 1,491,346

Investment Offices (3.46%)
Morgan Stanley Group, Inc.;
4.85%; 6/2/1999 3,000,000 2,987,875
4.83%; 7/8/1999 2,500,000 2,477,863
4.83%; 7/9/1999 5,000,000 4,955,054
4.83%; 7/29/1999 2,000,000 1,976,655
12,397,447

Life Insurance (1.47%)
American General Corp.;
4.79%; 5/19/1999 1,900,000 1,895,955
4.80%; 5/19/1999 1,375,000 1,372,067
4.86%; 6/1/1999 2,000,000 1,992,170
5,260,192

Miscellaneous Converted Paper
Products (3.39%)
Bemis Co., Inc.;
4.83%; 5/3/1999 1,375,000 1,375,000
4.84%; 5/13/1999 3,275,000 3,270,597
4.80%; 6/9/1999 5,000,000 4,975,333
4.80%; 6/11/1999 2,550,000 2,536,740
12,157,670

Miscellaneous Electrical Equipment &
Supplies (5.35%)
General Electric Co.;
4.78%; 5/7/1999 2,500,000 2,498,669
4.84%; 5/11/1999 3,100,000 3,096,666
4.83%; 5/17/1999 2,750,000 2,744,835
4.81%; 6/24/1999 3,100,000 3,078,462
4.80%; 6/25/1999 5,750,000 5,709,113
4.80%; 6/25/1999 1,500,000 1,489,400
4.81%; 11/12/1999 575,000 560,172
19,177,317

Miscellaneous Investing (4.30%)
Delaware Funding Corp.;
4.88%; 5/6/1999 3,459,000 3,457,593
4.81%; 5/18/1999 3,500,000 3,492,985
4.82%; 5/20/1999 3,000,000 2,993,172
4.81%; 6/16/1999 3,000,000 2,982,363
4.80%; 6/21/1999 2,500,000 2,483,667
15,409,780

Miscellaneous Manufacturers (2.43%)
Dover Corp.;
4.82%; 5/11/1999 2,500,000 2,497,322
4.83%; 5/12/1999 4,000,000 3,995,170
4.80%; 5/25/1999 2,225,000 2,218,474
8,710,966

Mortgage Bankers & Brokers (3.44%)
Countrywide Home Loan, Inc.;
4.88%; 5/21/1999 4,500,000 4,489,020
4.87%; 5/24/1999 600,000 598,296
4.81%; 5/26/1999 2,725,000 2,716,626
4.83%; 5/27/1999 $2,000,000 $ 1,993,560
4.86%; 5/27/1999 1,000,000 996,760
4.88%; 5/27/1999 1,550,000 1,544,957
12,339,219

Ordinance & Accessories, NEC (0.56%)
Harsco Corp.; 4.83%; 5/11/1999 2,000,000 1,997,853

Personal Credit Institutions (12.41%)
Associates Corp. of North America;
4.93%; 5/3/1999 2,000,000 2,000,000
4.82%; 6/15/1999 1,150,000 1,143,379
Associates First Capital Corp.;
4.94%; 5/4/1999 1,225,000 1,224,832
4.84%; 5/7/1999 1,500,000 1,499,193
4.83%; 5/13/1999 3,000,000 2,995,975
4.93%; 5/28/1999 475,000 473,374
4.90%; 6/1/1999 800,000 796,842
4.85%; 6/11/1999 450,000 447,636
4.93%; 6/18/1999 2,000,000 1,987,401
4.83%; 7/2/1999 3,000,000 2,975,850
4.75%; 7/20/1999 1,000,000 989,708
Comoloco, Inc.;
5.42%; 5/14/1999 1,200,000 1,198,013
4.72%; 5/20/1999 2,500,000 2,494,428
4.62%; 7/23/1999 1,250,000 1,237,006
4.89%; 8/6/1999 1,500,000 1,480,644
4.88%; 8/27/1999 500,000 492,138
4.80%; 9/17/1999 1,000,000 981,733
4.91%; 9/24/1999 1,500,000 1,470,540
4.72%; 10/12/1999 1,200,000 1,174,512
4.82%; 10/20/1999 800,000 781,791
4.73%; 10/22/1999 700,000 684,181
4.74%; 10/22/1999 700,000 684,147
4.82%; 10/22/1999 350,000 341,940
4.80%; 11/9/1999 1,100,000 1,072,133
4.82%; 11/16/1999 1,000,000 973,624
4.83%; 11/19/1999 1,000,000 973,167
4.87%; 11/19/1999 500,000 486,472
4.91%; 11/22/1999 400,000 388,925
4.85%; 12/3/1999 750,000 728,377
General Motors Acceptance Corp.;
4.82%; 5/10/1999 375,000 374,649
4.87%; 5/25/1999 3,500,000 3,489,584
Norwest Financial, Inc.;
5.40%; 5/7/1999 1,500,000 1,499,100
4.85%; 6/10/1999 5,000,000 4,974,403
44,515,697

Security Brokers & Dealers (5.46%)
Goldman Sachs Group LP;
4.82%; 5/28/1999 5,000,000 4,983,264
4.85%; 5/28/1999 1,750,000 1,744,106
4.90%; 5/28/1999 1,500,000 1,494,896
4.83%; 9/17/1999 2,000,000 1,963,238
4.84%; 9/17/1999 2,500,000 2,453,972
4.83%; 10/14/1999 2,500,000 2,444,991
4.82%; 10/28/1999 800,000 780,934
4.82%; 10/28/1999 750,000 732,126
Merrill Lynch & Co., Inc.;
4.83%; 6/4/1999 3,000,000 2,987,120
19,584,647

Telephone Communication (0.84%)
Ameritech Capital Funding;
4.84%; 5/14/1999 $3,000,000 $ 2,995,563

Total Commercial Paper 318,050,775

Bonds (10.42%)

Business Credit Institutions (4.84%)
American Express Credit Corp.
Debentures; 8.50%; 6/15/1999 490,000 491,497
CIT Group Holdings, Inc.
Notes; 6.25%; 10/25/1999 2,389,000 2,401,464
Medium-Term Notes;
5.87%; 12/9/1999 435,000 436,636
Senior Notes;
6.37%; 5/21/1999 1,000,000 1,000,277
John Deere Capital Corp.
Notes; 6.30%; 6/1/1999 800,000 800,283
Ford Motor Credit Co.
Debentures; 8.87%; 6/15/1999 500,000 501,741
9.50%; 4/15/2000 275,000 285,685
Notes; 7.25%; 5/15/1999 1,500,000 1,500,670
7.47%; 7/29/1999 500,000 502,794
6.37%; 9/15/1999 1,075,000 1,079,498
8.37%; 1/15/2000 739,000 754,595
6.37%; 4/15/2000 325,000 328,137
General Motors Acceptance Corp.
Debentures; 8.40%; 10/15/1999 1,990,000 2,017,484
Notes; 7.12%; 6/1/1999 300,000 300,431
8.62%; 6/15/1999 708,000 710,633
6.15%; 9/20/1999 1,250,000 1,254,666
6.05%; 10/4/1999 450,000 451,423
7.00%; 3/1/2000 1,940,000 1,966,441
9.37%; 4/1/2000 560,000 580,054
17,364,409

Department Stores (0.09%)
Wal-Mart Stores, Inc. Notes;
6.12%; 10/1/1999 325,000 326,201

Fire, Marine & Casualty Insurance (0.34%)
International Lease Finance Corp.
Notes; 6.12%; 11/1/1999 1,200,000 1,205,455

Miscellaneous Chemical Products (0.09%)
Dupont EI de Nemours Co.
Debentures; 9.15%; 4/15/2000 300,000 310,687

Miscellaneous Equipment Rental &
Leasing (0.91%)
International Lease
Finance Corp. Notes;
5.75%; 12/15/1999 2,760,000 2,769,939
6.20%; 5/1/2000 500,000 504,463
3,274,402

Miscellaneous Food & Kindred
Products (0.06%)
Heinz (H.J.) Co.; 6.75%; 10/15/1999 $ 222,000 $ 223,508

Personal Credit Institutions (3.88%)
American General Finance Corp.
Notes; 7.70%; 10/15/1999 475,000 480,344
7.25%; 4/15/2000 776,000 789,480
Senior Notes; 6.87%; 7/1/1999 400,000 400,671
Associates Corp. of North America
Notes; 6.75%; 10/15/1999 250,000 251,687
8.25%; 12/1/1999 1,230,000 1,251,390
6.00%; 3/15/2000 1,710,000 1,720,360
5.25%; 3/30/2000 510,000 509,420
Senior Notes;
7.25%; 9/1/1999 1,320,000 1,328,372
Avco Financial Services, Inc.
Senior Notes;
7.25%; 7/15/1999 2,560,000 2,567,288
8.50%; 10/15/1999 650,000 658,753
Commercial Credit Co. Notes;
6.00%; 4/15/2000 300,000 301,639
Household Finance Corp. Notes;
7.75%; 6/1/1999 1,200,000 1,201,784
8.95%; 9/15/1999 250,000 253,349
Norwest Corp. Notes;
7.62%; 10/15/1999 500,000 505,380
Norwest Financial, Inc. Notes;
6.05%; 11/19/1999 1,500,000 1,507,336
7.25%; 3/15/2000 170,000 172,604
13,899,857

Security Brokers & Dealers (0.21%)
Merrill Lynch & Co. Notes;
8.37%; 2/9/2000 735,000 751,480

Total Bonds 37,355,999

Total Portfolio Investments (99.12%) 355,406,774

Cash, receivables and other assets,
net of liabilities (0.88%) 3,158,080

Total Net Assets (100.00%) $358,564,854

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

<TABLE>
<CAPTION>
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class A shares 1999* 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .023 .051 .050 .049 .052
Total from Investment Operations .023 .051 .050 .049 .052

Less Dividends From Net Investment Income............... (.023) (.051) (.050) (.049) (.052)

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

Total Return(c)......................................... 2.26%(d) 5.10% 4.96% 5.00% 5.36%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $339,509 $294,918 $836,072 $694,962 $623,864
Ratio of Expenses to Average Net Assets(b)........... .65%(f) .56%(e) .63% .66% .72%
Ratio of Net Investment Income to Average Net Assets. 4.47%(f) 5.12% 4.98% 4.88% 5.24%

PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class B shares 1999* 1998 1997 1996 1995(g)
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .020 .042 .041 .041 .041
Total from Investment Operations .020 .042 .041 .041 .041

Less Dividends from Net Investment Income............... (.020) (.042) (.041) (.041) (.041)

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

PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class R shares 1999* 1998 1997 1996(h)

Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .021 .046 .044 .030
Total from Investment Operations .021 .046 .044 .030

Less Dividends from Net Investment Income............... (.021) (.046) (.044) (.030)

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

Total Return(c)......................................... 2.05%(d) 4.56% 4.16% 2.97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $14,665 $10,414 $4,296 $1,639
Ratio of Expenses to Average Net Assets(b)........... 1.06%(f) 1.05%(e) 1.26% .99%(f)
Ratio of Net Investment Income to Average Net Assets. 4.06%(f) 4.62% 4.40% 4.41%(f)
<FN>

* Six months ended April 30, 1999
</FN>
</TABLE>

See accompanying notes.

Notes to Financial Highlights

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

Former Fund Name New Fund Name
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.

(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the Money Market Funds would have had per share net investment
income and the ratios of expenses to average net assets as shown:

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

<S> <C> <C> <C> <C>
Principal Cash Management Fund, Inc.:*
Class A 1998 $.051 .56% $ --(e)
1997 .050 .63 --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343

Class B 1998 .041 1.49 1,343(e)
1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(f) .041 1.63(d) 104

Class R 1998 .046 1.05 --(e)
1997 .043 1.34 2,441

<FN>
* The Manager ceased its waiver of expenses for Principal Cash Management
Fund, Inc. on March 1, 1998.
</FN>
</TABLE>

(d) Total return amounts have not been annualized.

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

(f) Computed on an annualized basis.

(g) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995.

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

PRINCIPAL MUTUAL FUNDS

The Principal Mutual Funds provide a choice of investment objectives through
Domestic Growth-Oriented Funds, Internationl Growth-Oriented Funds,
Income-Oriented Funds and a Money Market Fund. More complete information about
any of the Funds, including charges and expenses, is provided in the Funds'
prospectus. A free copy is available from Princor Financial Services
Corporation, The Principal Financial Group, Des Moines, Iowa 50392-0200
(telephone 1-800-247-4123). Please read it carefully before you invest or send
money.

INVESTMENT OBJECTIVE
DOMESTIC GROWTH FUNDS

Principal Balanced Fund To seek the generation of a total
return consisting of current income and capital
appreciation while assuming reasonable risks in
furtherance of this objective.

Principal Blue Chip Fund To seek growth of capital and
growth of income by investing primarily in
common stocks of well capitalized, established
companies.

Principal Capital Value Fund To seek long-term capital
appreciation and a secondary objective of
growth of investment income.

Principal Growth Fund To seek growth of capital with
realization of current income incidental to the
objective of growth of capital.

Principal MidCap Fund To seek capital appreciation by
investing primarily in securities of emerging
and other growth-oriented companies.

Principal Real Estate Fund To seek the generation of
total return by investing primarily in equity
securities of companies principally engaged in
the real estate industry.

Principal SmallCap Fund To seek long-term growth of
capital by investing primarily in equity
securities of companies with comparatively
smaller market capitalizations.

Principal Utilities Fund To seek current income and
long-term growth of income and capital by
investing primarily in equity and fixed income
securities of companies in the public utilities
industry.

INTERNATIONAL GROWTH FUNDS

Principal International To seek long-term growth of capital by
Emerging Markets Fund investing primarily in equity securities
of issuers in emerging market countries.

Principal International Fund To seek long-term growth of
capital by investing in a portfolio of equity
securities of companies domiciled in any of the
nations of the world.

Principal International To seek long-term growth of capital by
SmallCap Fund investing primarily in equity securities of
non-United States companies with
comparatively smaller market capitalizations.

INCOME FUNDS

Principal Bond Fund To seek as high a level of income as
is consistent with preservation of capital and
prudent investment risk.

Principal Government To seek a high level of current income,
Securities Income Fund liquidity and safety of principal.

Principal High Yield Fund To seek high current income.
Capital growth is a secondary objective when
consistent with seeking high current income.

Principal Limited Term To seek a high level of current
Bond Fund income consistent with a relatively high level
of principal stability by investing
in a portfolio of securities with a dollar
weighted average maturity of five years or
less.

Principal Tax-Exempt To seek as high a level of current
Bond Fund income exempt from federal taxation as is
consistent with preservation of capital.

MONEY MARKET FUND

Principal Cash To seek as high a level of current income
Management Fund 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.

<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> Bond Fund Class A

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> APR-30-1999
<INVESTMENTS-AT-COST> 190,023,265
<INVESTMENTS-AT-VALUE> 193,817,755
<RECEIVABLES> 4,478,036
<ASSETS-OTHER> 6,966
<OTHER-ITEMS-ASSETS> 376,800
<TOTAL-ASSETS> 198,679,557
<PAYABLE-FOR-SECURITIES> 1,747,778
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 398,275
<TOTAL-LIABILITIES> 2,146,053
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,448,443
<SHARES-COMMON-STOCK> 13,768,217
<SHARES-COMMON-PRIOR> 12,778,833
<ACCUMULATED-NII-CURRENT> 133,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 157,438
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,794,490
<NET-ASSETS> 196,533,504
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,807,039
<OTHER-INCOME> 0
<EXPENSES-NET> (1,111,918)
<NET-INVESTMENT-INCOME> 5,695,121
<REALIZED-GAINS-CURRENT> 157,610
<APPREC-INCREASE-CURRENT> (5,203,761)
<NET-CHANGE-FROM-OPS> 648,970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,578,653)
<DISTRIBUTIONS-OF-GAINS> (424,531)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,039,149
<NUMBER-OF-SHARES-REDEEMED> (1,400,302)
<SHARES-REINVESTED> 350,537
<NET-CHANGE-IN-ASSETS> 13,790,840
<ACCUMULATED-NII-PRIOR> 33,837
<ACCUMULATED-GAINS-PRIOR> 525,290
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 457,367
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,111,918
<AVERAGE-NET-ASSETS> 191,629,633
<PER-SHARE-NAV-BEGIN> 11.59
<PER-SHARE-NII> .35
<PER-SHARE-GAIN-APPREC> (.29)
<PER-SHARE-DIVIDEND> (.35)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.27
<EXPENSE-RATIO> 1.02

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> Bond Fund Class B

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> APR-30-1999
<INVESTMENTS-AT-COST> 190,023,265
<INVESTMENTS-AT-VALUE> 193,817,755
<RECEIVABLES> 4,478,036
<ASSETS-OTHER> 6,966
<OTHER-ITEMS-ASSETS> 376,800
<TOTAL-ASSETS> 198,679,557
<PAYABLE-FOR-SECURITIES> 1,747,778
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 398,275
<TOTAL-LIABILITIES> 2,146,053
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,448,443
<SHARES-COMMON-STOCK> 2,328,113
<SHARES-COMMON-PRIOR> 1,940,097
<ACCUMULATED-NII-CURRENT> 133,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 157,438
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,794,490
<NET-ASSETS> 196,533,504
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,807,039
<OTHER-INCOME> 0
<EXPENSES-NET> (1,111,918)
<NET-INVESTMENT-INCOME> 5,695,121
<REALIZED-GAINS-CURRENT> 157,610
<APPREC-INCREASE-CURRENT> (5,203,761)
<NET-CHANGE-FROM-OPS> 648,970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (646,100)
<DISTRIBUTIONS-OF-GAINS> (65,282)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 544,835
<NUMBER-OF-SHARES-REDEEMED> (212,263)
<SHARES-REINVESTED> 55,444
<NET-CHANGE-IN-ASSETS> 13,790,840
<ACCUMULATED-NII-PRIOR> 33,837
<ACCUMULATED-GAINS-PRIOR> 525,290
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 457,367
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,111,918
<AVERAGE-NET-ASSETS> 191,629,633
<PER-SHARE-NAV-BEGIN> 11.58
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> (.29)
<PER-SHARE-DIVIDEND> (.30)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.26
<EXPENSE-RATIO> 1.77

</TABLE>

<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> Bond Fund Class R

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> APR-30-1999
<INVESTMENTS-AT-COST> 190,023,265
<INVESTMENTS-AT-VALUE> 193,817,755
<RECEIVABLES> 4,478,036
<ASSETS-OTHER> 6,966
<OTHER-ITEMS-ASSETS> 376,800
<TOTAL-ASSETS> 198,679,557
<PAYABLE-FOR-SECURITIES> 1,747,778
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 398,275
<TOTAL-LIABILITIES> 2,146,053
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 192,448,443
<SHARES-COMMON-STOCK> 1,348,766
<SHARES-COMMON-PRIOR> 1,051,897
<ACCUMULATED-NII-CURRENT> 133,133
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 157,438
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,794,490
<NET-ASSETS> 196,533,504
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,807,039
<OTHER-INCOME> 0
<EXPENSES-NET> (1,111,918)
<NET-INVESTMENT-INCOME> 5,695,121
<REALIZED-GAINS-CURRENT> 157,610
<APPREC-INCREASE-CURRENT> (5,203,761)
<NET-CHANGE-FROM-OPS> 648,970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (371,072)
<DISTRIBUTIONS-OF-GAINS> (35,649)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 458,102
<NUMBER-OF-SHARES-REDEEMED> (196,071)
<SHARES-REINVESTED> 34,838
<NET-CHANGE-IN-ASSETS> 13,790,840
<ACCUMULATED-NII-PRIOR> 33,837
<ACCUMULATED-GAINS-PRIOR> 525,290
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 457,367
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,111,918
<AVERAGE-NET-ASSETS> 191,629,633
<PER-SHARE-NAV-BEGIN> 11.59
<PER-SHARE-NII> .32
<PER-SHARE-GAIN-APPREC> (.29)
<PER-SHARE-DIVIDEND> (.31)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.28
<EXPENSE-RATIO> 1.56

</TABLE>